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June 16, 2009

Reggie Middleton's Take on Investing for Inflation: Part III
by Reggie Middleton

The Performance of Inflation Correlated Assets: Reggie Middleton's Opinion

This is part 3 of my thoughts on investing in inflationary times (see Reggie Middleton's Take on Investing for Inflation: Part 1 and Reggie Middleton's Take on Investing for Inflation: Part II). I had my team run independent verification of inflation correlated asset performance, for it appears to me that many investors tend to simply follow what they have heard other say versus looking into what the facts are. In the process of the investigation, we have tracked the performance of asset classes discussed on my blog, including all maturities of treasury, inflation linked treasury, municipal bonds, residential mortgage, other metals and agricultural commodities. We have also computed nominal returns (based on a 255 trading day convention), real returns, asset volatility and Sharpe ratio for each the asset classes across time periods to determine performance of each asset class over a period of time. Below is the summary charts and tables of our findings. (Pro subscribers, please refer to the attached excel document for detailed information for each time period - Q2 2009 Asset Inflation Correlation Datasheet 2009-06-12 14:21:51 2.47 Mb)

Agriculture commodities: Historically, agricultural stocks have not provide sufficient hedge against inflation because of lack of storability and more or less constant demand (which is not linked directly to level of economic activity unlike other commodities). Also due to supply shocks agricultural commodities have one of the highest volatility (in terms of standard deviation) and lowest Sharpe ratio. In addition agriculture commodities have low correlation with inflation, negative real returns (in almost all sub-periods) and low nominal returns.

Emerging markets, real estate and Gold offer one of the highest real returns in that order. However, lower volatility of commercial real estate sector makes this sector one of the most attractive in terms of risk-reward ratio. Within commercial real estate apartments have one of the highest real returns (after emerging markets) and highest Sharpe ratio amongst all asset class.

Treasury yields have declined significantly over a period of time. Except during 1970's (during high inflation) treasury yields have declined over past 3 decades and currently are at an all time low (pls refer to chart below and suscribers may referenced the attached excel file). High inflation coupled with economic recovery could cause yields to increase.

Reggie Middleton
Reggie Middleton, LLC
Perpetual Interests, LLCTM
http://boombustblog.com/

Who am I?

Well, I fancy myself the personification of the free thinking maverick, the ultimate non-conformist as it applies to investment and analysis. I am definitively outside the box - not your typical or stereotypical Wall Street investor. I work out of my home, not a Manhattan office. I build my own technology and perform my own research - in lieu of buying it or following the crowd. I create and follow my own macro strategies and am by definition, a contrarian to the nth degree.

Since I use my research as a tool for my own investing to actually put food on my table, I can stand behind it as doing what it is supposed too - educate, illustrate and elucidate. I do not sell advice, I am not a reporter hence do not sell stories, and I do not sell research. I am an entrepreneur who exists just outside of mainstream corporate America and Wall Street. This allows me freedom to do things that many can not. For instance, I pride myself on developing some of the highest quality research available, regardless of price. No conflicts of interest, no corporate politics, no special favors. Just the hard truth as I have found it - and believe me, my team and I do find it! I welcome any and all to peruse my blog, use my custom hacked collaborative social tools, read the articles, download the files, and make a critical comparison of the opinion referencing the situation at hand and the time stamp on the blog post to the reality both at the time of the post and the present. Hopefully, you will be as impressed with the Boom Bust as I am and our constituency.

I pay for significant information and data, and am well aware of the value of quality research. I find most currently available research lacking, in both quality and quantity. The reason why I had to create my own research staff was due to my dissatisfaction with what was currently available - to both individuals and institutions.

So here I am, creating my own research for my own investment activity. What really sets my actions apart is that I offer much of what I produce to the public without charge - free to distribute and redistribute, as long as it is left unaltered and full attribution is given to the author and owner. Why would I do such a thing when others easily charge 5 and 6 digits annually for what some may consider a lesser product? It is akin to open source analysis! My ideas and implementations are actually improved and fine tuned when bounced off of the collective intellect of the many, in lieu of that of the few - no matter how smart those few may believe themselves to be.

Very recently, I have started charging for the forensics portion of my work, which has freed up the resources to develop the site to deliver even more research for free, particularly on the global macro and opinion front. This move has allowed me to serve an more diverse constituency, which now includes the institutional consumer (ie., investment turned consumer banks, hedge funds, pensions, etc,) as well as the newbie individual investor who is just getting started - basically the two polar opposites of the investing spectrum. I am proud to announce major banks as paying clients, and brand new investors who take my book recommendations and opinions on true wealth and success to heart.

So, this is how I use my background and knowledge in new media, distributed computing, risk management, insurance, financial engineering, real estate, corporate valuation and financial analysis to pursue, analyze and capitalize on global macroeconomic opportunities. I have included a more in depth bio at the bottom of the page for those who really, really need to know more about me.

Visit his blog Boom Bust Blog.

Copyright © 2007-2009 Reggie Middleton

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