Hi Paul - Looking out 18 months, I am concerned about stagflation especially when the Fed begins to increase interest rates. What's your strategy for types of value stocks that you would buy that will benefit from such an environment?
Here is one opinion for what to invest in during a stagflation environment.
articles.moneycentral.msn.com
Jubak's conclusion is pretty much what we discussed.
* The oil drilling and services area, especially companies with big international operations. Worldwide exploration and production spending is set to rise 11% in 2008, according to Lehman Bros.' annual oil-industry capital-spending survey. Take a look at Schlumberger (SLB, news, msgs), Weatherford International (WFT, news, msgs) and FMC Technology (FTI, news, msgs).
* Iron-ore and natural-gas stocks. Iron-ore demand is up, and supply hasn't kept pace. Natural gas is still near a low, and the stocks are just starting to move. Iron-ore plays include Fortescue Metals Group (FSUMF, news, msgs) and Companhia Vale do Rio Doce (RIO, news, msgs), both in Jubak's Picks.
* Jubak's Picks Kinross Gold (KGC, news, msgs) and GoldCorp (GG, news, msgs) will give you good exposure to the classic hedge against rising inflation and a falling dollar.
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I am trying to develop a strategy for shifting my portfolio mix to preserve my capital in a high inflation and low domestic growth environment (perhaps several quarters of negative GDP growth).
As you recall in the late 70's the economy was burdened with loads of debt that needed to be flushed out of the system. Beginning in 1980 Paul Volker increased interest rates (during the Carter administration) that eventually resulted in interest rates peaking at 18%. This restored credibility to the dollar, choked off inflation, and threw the economy into a vicious recession.
I am not sure if this time around it is going to play out the same way, but when interest rates get so low, that when you add back "real" inflation (including energy & housing) you actually achieve a "negative" return on your capital parked in a money market fund. We will be in this position with another rate cut by the Fed! This raises a red flag to me. The loss in purchasing power is further magnified when the dollar continues to fall in value compared to other global currencies.
At some point the Fed must begin to raise rates which will throw our economy into a protracted recession (12 to 18 months out).
One of my best investments in the 80"s was to purchase a significant amount of zero coupon bonds when interest rates peaked at 18%. I structured a zero coupon bond ladder with over 50% of my portfolio which did quite well during this period. I do not think this strategy will work this time around and believe a portfolio of natural resource and foreign growth stocks might be the best place to invest to maintain purchasing power.
Have you given such a scenario some thought?
EKS |
