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

By: Reggie Middleton | Tue, Jun 16, 2009
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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.

Precious Metals
Gold 6.1% 3.0% 19.6% 0.16 0.68
Silver 3.9% 0.8% 30.8% 0.03 0.23
Non-ferrous metals
Copper 3.7% 0.6% 28.4% 0.03 0.46
Aluminum -0.7% -3.8% 24.4% (0.15) 0.24
Lead 4.1% 1.0% 25.8% 0.04 0.57
Nickel 5.7% 2.6% 41.7% 0.06 0.52
Tin 1.3% -1.8% 21.5% (0.08) 0.61
Steel 0.3% -2.8% 16.4% (0.17) 0.39
Zinc -0.5% -3.6% 24.2% (0.14) 0.46
Agriculture commodities
Live Cattle 1.8% -1.3% 19.6% (0.06) 0.88
Livestock 1.3% -1.8% 19.2% (0.09) 0.73
Sugar 1.0% -2.2% 40.2% (0.05) (0.31)
Heat Oil 0.5% -2.6% 33.4% (0.07) 0.65
Lean Hogs 0.3% -2.8% 31.1% (0.09) (0.19)
Coffee 0.3% -2.8% 37.4% (0.07) (0.37)
Cocoa 0.1% -3.0% 28.8% (0.10) 0.09
Cotton -0.6% -3.7% 28.5% (0.12) (0.36)
Soybean 2.8% -0.3% 30.1% (0.01) 0.37
Wheat 2.6% -0.5% 25.9% (0.01) 0.33
Grains 2.6% -0.6% 22.9% (0.02) 0.34
Corn 2.3% -0.8% 25.7% (0.03) 0.31
WTI Crude 2.1% -1.0% 34.3% (0.03) 0.64
Real Estate Sector
Residential real estate
Residential (S&P Case Shiller) 2.8% -0.3% 3.1% (0.06) 0.87
Commercial real estate
- Total Return (price + income)
NCREIF Property Index 6.5% 3.3% 4.2% 0.81 0.89
NCREIF Property Index
- Apartment
7.4% 4.3% 4.3% 1.03 0.90
NCREIF Property Index - Industrial 6.7% 3.6% 4.2% 0.89 0.89
NCREIF Property Index - Retail 6.7% 3.6% 3.8% 0.98 0.88
NCREIF Property Index - Office 6.0% 2.9% 5.7% 0.52 0.87
Commercial real estate
- Price return
Commercial Price Index 3.2% 0.1% 7.8% 0.03 0.94
Apartment Price Index 4.0% 0.9% 8.7% 0.11 0.96
Industrial Price Index 2.9% -0.2% 10.1% (0.01) 0.95
Retail Price Index 3.0% -0.1% 8.4% 0.00 0.92
Office Price Index 4.0% 0.9% 8.2% 0.13 0.93
Domestic Equities
S&P 500 3.9% 0.8% 15.8% 0.06 0.00
Global Equities
MSCI World Index 4.7% 1.5% 15.3% 0.11 0.84
Emerging Markets
MSCI BRIC EM Index 4.8% 1.7%     0.75
Brazil 24.6% 21.5% 48.6% 0.45 0.92
China 4.7% 1.6% 44.3% 0.04 0.58
Russia 13.8% 10.7% 56.5% 0.19 0.79
India 11.7% 8.6% 29.0% 0.30 0.84
JPM Morgan Emerging
Market Debt Fund
-2.5% -5.6%     (0.25)

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.

  Change in yield  
Fixed Income 2000's 1990's 1980's 1970's Correlation
Treasury Bonds
Short Term
Yield on Treasury (1-month) (357) n/a n/a n/a 0.64
Yield on Treasury (3-month) (534) (254) (504) n/a 0.63
Yield on Treasury (6-month) (541) (228) (609) n/a 0.63
Yield on Treasury (1-yr) (557) (208) (434) 651 0.81
Intermediate Term
Yield on Treasury (2-yr) (551) (199) (372) 433 0.76
Yield on Treasury (3-yr) (517) (199) (311) 247 0.66
Yield on Treasury (5-yr) (472) (193) (299) 359 0.71
Yield on Treasury (7-yr) (423) (182) (292) 269 0.61
Yield on Treasury (10-yr) (373) (193) (296) 300 0.68
Long Term
Yield on Treasury (20-yr) (302) 62 (337) 254 0.66
Yield on Treasury (30-yr) (287) (191) (270) 237  
Inflation Adjusted Bonds
Inflation-indexed Treasury (5-yr) (54) n/a n/a n/a (0.19)
Inflation-indexed Treasury (7-yr) (81) n/a n/a n/a (0.26)
Inflation-indexed Treasury (10-yr) (72) n/a n/a n/a (0.53)
Inflation-indexed Treasury (10-yr) 222 n/a n/a n/a (0.83)
Municipal Bonds
20 yr Municipal Bond (130) (115) (37) 59 0.43
Corporate Bonds
Investment Grade Corporate Bonds Yield (AAA) (239) (144) (223) 283 0.56
High Yield Corporate Bonds Yield (BAA) 6 (175) (260) 320 0.55
Mortgage Bonds
30-yr, Fixed-Rate Conventional Home Mortgage (340) (199) (314) 559 0.60
International Bonds
S&P/Citigroup International Treasury Bond
Index Ex-U.S.
(143) n/a n/a n/a 0.17
Euro Govt Bond 10-15 yr (167) n/a n/a n/a (0.07)
India Sovereign Zero Coupon Yield 10 Year (479) (86) n/a n/a 0.25
USD Brazil Sovereign Zero Coupon Yield 10 Year (774) 128 n/a n/a (0.16)
USD- Euro Russia Sovereign 10 yr (1,076) n/a n/a n/a (0.69)



Reggie Middleton

Author: Reggie Middleton

Reggie Middleton

Reggie Middleton

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.

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