Should we worry about inflation?
Friday, September 8th, 2006
Categorized as: Series I US Savings Bonds • TIPS
Investors can use inflation-protected securities – Series I Savings Bonds and TIPS – as a hedge against the risk of runaway inflation. But is that a real risk?
Bill Gross, head of the largest bond fund in the world, the PIMCO Total Return Fund, thinks so. In his September 2006 Investment Outlook, No Cuts, No Butts, No Coconuts, he warns about the upcoming effects of the baby boom generation and its incompetent politicians.
That link goes to Gross’s article on InvestorsInsight.com, a web site which archives and allows you to subscribe (free) to the weekly investment newsletter of John Mauldin, who advises the wealthy about hedge fund managers. I recommend Mauldin’s newsletter to all serious investors. It’s one of the best things I read each week.
The critical paragraph in Gross’s Investment Outlook is the last one.
Too late to have babies, too politically sensitive to import more workers, too daft to recognize that the boomer winter is rapidly approaching and that our assets will not fund our liabilities. Too, too. Too, too. Too, too. What does a government do that is too absorbed in the moment and fails to alert its citizens to the perils ahead? Cut in line, I suppose. It devalues its currency, it reflates/inflates its economy, and because that doesn’t create real wealth, it recites the mythology of a bygone era, of a “shining city on a hill,” so that its citizens believe they’ve never had it so good. Well, as I acknowledged at the start of this Outlook, some of us never have had it so good, but the demographic season is changing and a rebalancing, more equitable distribution of our rather meager stockpile of nuts lies ahead. Corporate profits, nearing a record percentage of GDP will ultimately be taxed at higher levels in order to assuage a populist ballot-box revolt. And U.S. stocks, the present value of which represents the future value of private sector wealth creation, will stutter, perhaps stagger, as investors understand that much future wealth has been spoken for, if not already digested, by a boomer generation acting as consumers of first and last resort.