Email of the day (2)
Comment of the Day

September 28 2012

Commentary by David Fuller

Email of the day (2)

On inflation expectations:
"As someone who lived through 1970's I find it hard not to see Inflation returning. It would solve Government's debt problem - & now that the Government is going to link benefits to earnings rather than inflation the former is bound to overtake the latter (Goodharts law?). Looking at the chart of an inflation proxy eg INXG where would you see an entry point?"

David Fuller's view I also remember that period and Fullermoney has long felt that governments, by hook or by crook, would inflate away as much of their debt as they can get away with.

The question concerns how to protect ourselves against this.

When I look at the iShares GBP Linked Gilt (INXG LN), I am not very interested. There has already been a big move to the upside which has lost momentum this year. Technically, at least a break in the progression of lower rally highs is required to indicate that demand is regaining the upper hand. However, while I agree with Goodhart's Law, I am not convinced that public sector benefits will outstrip inflation, if that is what you are suggesting.

l claim no expertise regarding inflation linked bonds. Nevertheless, when I look at the corresponding yield, I would be in no hurry on seeing it at minus 0.708%. I see these exceptionally low yields, let along negative yields, as evidence of a massive bond bubble, although it would be a different story at 3% to 4% for INXG.

Among bonds, for a UK inflation hedge I would prefer government long-dated paper of countries running budget surpluses rather than deficits. Thereafter, I would prefer the corporate debt of sound companies which trade at attractive yields.

However, if you can stand the volatility, my preferred inflation hedge would be precious metals and Dividend Aristocrats or in-form Autonomies.

Quote of the week - On an educated man:

"It is the mark of an educated man to be able to entertain thought without accepting it."

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