From Where Can Inflation Come ?

Many doomsayers point to the Fed's large balance sheet and screech, Inflation's A'comin !

Yup, I'm imitating Huck Finn a bit there with the country dialect. I think that's wrong for several reasons. Strict focus on the supply of money ignores the demand for money. What is the correct absolute level of the monetary base now ? That depends on the demand for money in the economy and its velocity. Behavior has changed, mooting much historical data now. Many, many people will certainly hold more cash now that they did in the past. The new level of the monetary base must accommodate that demand for cash or cause stagnation for no purpose.

Inflation is caused by too much money chasing too few goods. Demand and supply both matter. If money is demanded and hoarded simply for safety, then, ipso facto, such money is not used to demand goods or services. Whether the current Fed policy will cause future inflation is not now determined. Simply put, it depends on future actions.

BUT what about supply ? Two major decisions loom that will curtail new growth in the supply for goods and services. Those are ObamaCare and Copenhagen. Both can be major barriers to increasing the supply of goods and services in the US and worldwide. If implemented in a strong manner, long term inflation pressure is certain worldwide. Stagnation could occur alternatively, but I think that governments worldwide will not choose that. They will print more and more money to create a fasçade of prosperity. That would produce worldwide inflation.

What to do ?

Keep some long term money in TIPs and gold (metal, ETFs and mine stocks). Now I keep 12.5% of Krypto Fund in TIPs and 5% in gold. I'll increase those positions in Krypto Fund on dips IF both ObamaCare and Copenhagen move forward. I'll rest easier if they collapse.

Historically, real estate has performed very well in inflation, too. Now I keep 15% of Krypto Fund in real estate, but the share is effectively about 25% due to internal leverage in the funds I must use. I added to those positions a lot when REIT prices were very low. Now I'm shifting some money from the more leveraged REITs [via the Vanguard ETF - "VNQ"] to the real estate fund at TIAA which has less leverage. It invests directly in major buildings and seems rather uncorrelated to REIT stock prices. As they've rallied, the TIAA-RE fund has fallen. I made a shift to "sell high, buy low". I figure the stock market is forecasting higher prices for commercial real estate in the future, hence the higher REIT stock prices. But the TIAA-RE fund is priced off current market values of buildings. So I can sell real estate at higher anticipated prices through selling the REIT ETF and buy actual RE at current low prices, To me, it's an arbitrage - free money - if one has the flexibility to make the trade. I did this trade in a big way in Krypto Fund late last week.

I write this just to say what I am doing and show how I think. I'm not sure if the TIAA real estate fund is open to the public. Mrs. B was a scientist, so put a lot of retirement money into TIAA-CREF retirement funds. That's how we can invest in TIAA-RE fund. Another thing. You cannot withdraw money from TIAA-RE fund for re-allocations, only for true retirement income. That means I keep the money in it at a core level only.

Word of the Day

"Trammel" - noun and verb [$10]; from the card file
Trammel means (noun) a net for catching birds; 2. an adjustable pothook for a fireplace crane; 3. a shackle used for making a horse amble; 4. something impeding activity, progress or freedom: restraint (usually in the plural); (verb) to catch or hold in or as if in a net; 2. to prevent or impede the free play of.
Sentence: ObamaCare and Copenhagen will substantially trammel the US and world economies. By reducing the capability to produce more and more goods and services, both will be a force to increase inflation in both the US and the world.