With the FOMC wrapping up their two day meeting on Wednesday and announcing the future outlook of the quantitative easing program, the idea of inflation is particularly elevated in the minds of investors. A quick glance at the overall inflation numbers might suggest there is little reason to worry, but the adage “a dollar today is worth more than a dollar tomorrow” has been around for decades, and economics teaches us that every economy will be challenged by inflation, deflation, and stagflation at some point during its cycle. Currently, the US looks susceptible to an inflationary cycle. The key, however, is not to fear this type of event but rather to identify the current signs of inflation and learn how to profit from the situation.
Scenario 1: The End of Days
With China being the largest buyer of US debt, many people fear that the Chinese government may stop buying US debt securities in the future. This situation, if you believe in it, will be the catalyst that brings down the US government. If you fall into this camp, then you must consider gold as an investment option. In terms of investing in a highly liquid security that correlates well with the hard price of gold, then the
Scenario 2: Hyperinflation
In a hyperinflation scenario, commodities will undoubtedly rise, but oil is likely to outperform all the others. The first security to look at should be deep water sea driller Transocean LTD (NYSE:RIG). It stands to significantly profit as energy companies lease out their platforms to access more difficult to reach oil reserves, which have now become “economically viable” to drill.
It also makes sense to buy oil ETFs such as United States Oil Fund LP (ETF) (NYSEMKT:USO) and PowerShares DB Oil Fund (ETF) (NYSEMKT:DBO). These respective ETFs all accomplish one purpose, which is to provide returns relative to the price and movement of crude oil prices.
Scenario 3: Above Average Inflation
In the last scenario, the expectation is that within the next two years, the US will enter an elevated inflationary environment but will not spiral out of control. Instead, expect that the Federal Reserve will eventually step in and aggressively raise rates to destroy any further increase in US inflation.