Inflation Hedges Warrant Caution
Board: Macro Economics
For those of us who believe that inflation due to money printing is inevitable, take some hedges on those dollar shorts.
I am in the camp that says the value of the dollar will fall, even the Oracle of Omaha has said that the dollar cannot maintain its value when it is being diluted. He said that way back before the 2008 crisis. Of course so far the charts say he is wrong. Both the Dollar Index and the Fed's Trade Weighted index, (Link available in the FAQ's and at the St. Louis Fed) have been surprisingly strong. Additionally, with demographics running against cheap labor world wide, a wage price spiral fed by the increasing velocity of money, (money that is currently is moving at glacial speeds) is possible if not probable.
So, I am leveraged into real estate using the longest time frame possible, a 30 year fixed rate mortgage. However, my idea of leverage is not real leveraged, I have about 220,000 dollars worth of real estate and about 95,000 dollars worth of mortgages against it. I also hold about 30,000 dollars in cash against cash flow interruptions, so one could argue that I am not really leveraged at all.
Which I suppose is a good thing, because, the dollar may never fall in value. If the oil production of the U.S. continues to increase and less dollars flow into the world market, they will become more precious. Additionally, if the battery technology moves ahead, then the demand for motor fuels will not increase with an increase in economic activity. Again, less dollars in the world market making the currency less vulnerable to failure.
This is happening at the same time when the Asian game of manipulating currency for the sake of export is nearing its end. Japan is suffering with the wind down of its currency manipulation game, and China is about to enter the final phase of its currency manipulation. This will not show up on the Dollar Index, but it will show up on the Trade Weighted Index.
And last, and possibly least, the Euro will find its true value, and for most of the Euro Zone, that value will be considerably lower than what it is today. The Dollar Index will show this.
In all of these cases the pressure on the Dollar is not from the top, it is from the bottom. In this environment, I would be very cautious about inflation hedges, especially hedges that have no return.
I mentioned AT&T the other day, it pays a dividend, it has large unreproducible assets, and it is leveraging up with super cheap debt.
If the dollar remains strong and if interest rates stay low for the foreseeable future, AT&T is making 4 cents on the dollar per year for every dollar of debt it takes on to retire dividend paying stock. Additionally, if interest rates rise, the bond market will have a really, really bad day. At which time AT&T can retire that debt out of cash flow for much less than it was issued for.
I think this is a brilliant move, even as I have serious doubts about the wisdom of the CEO of AT&T. (While I understand a lot of complicated things about AT&T, I still do not understand the 4 billion dollar disaster.)
I was worried at one time that if interest rats rose, then the AT&T stock would behave like a bond and tank, but now I think not, I believe the evacuation of the bond market will be rapid and painful for the participants and if there is any wealth left it will make its way into the dividend champions, supporting the value of AT&T stock.
This is not to say that AT&T is the only, or even best, hedge, it is just the one I am familiar with.