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

By: Reggie Middleton | Fri, Jun 19, 2009
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In continuing with my rant on investing during inflationary periods (see Reggie's take on investing for inflation Parts I, II, III and IV for the background to this article), I am addressing asset performance during periods of stagflation. My team has identified 2 periods of stagflation (high unemployment rate, low GDP growth and high inflation) in the past 40 years - during December 1973-75 and September 1979-82. Although overall asset class correlation results are similar to those observed earlier during periods of high inflation, with real returns from commercial real estate being the highest amongst all asset classes and agricultural commodities being the most volatile and offering the least protection against inflation, there are some notable difference between periods of pure high inflation and stagflation based on the observed empirical evidence.

  1. Although equities as an asset class proved to be a sufficient hedge during periods of rising inflation it has underperformed during stagflation yielding negative real returns. Keep this in mind along with my thesis that we are in a cyclical bear market.
  2. Nearly all the asset classes (except commercial real estate) yielded negative real returns during periods of stagflation suggesting that passive beta strategies during stagflation would not yield and real returns. In other words, you not only have to have your assets actively managed to make enough money to avoid the cost of living from eating into your capital base, the active manager truly must know what he or she is doing. Thus the proliferate and apparently very profitable business of ETFs, mutual funds, hedge funds, mass produced asset management will FAIL to make the average investor money through periods of STAGFLATION! An example of this can be found in the submission of this inflation investment series that I made to a very popular blog aggregating service, which then distributes content to various outlets across the web. It has been filed and categorized under ETF investing, which is ironic, since the findings of my research strongly suggest that it will be very difficult, if not impossible to successfully outrun stagflation through ETF investing. This is particularly true if one were to attempt to capitalize on the use of the one asset class that apparently outperforms during stagflationary times - commercial real estate. This it because many, if not most, of the institutional (and smaller retail) real estate players that sell access to the public have a) taken on imprudent amounts of debt during the bubble which is b) either choking them or c) being deleveraged with highly dilutive equity injections that is significantly reducing gearing at a time when gearing would be most beneficial, and d) most importantly, significantly overpaid for properties during the bubble while simultaneously planning off of highly unrealistic business projections grounded in fantasy land bubble metrics. One will most likely need to either dabble in the class direcly (direct ownership and management of the asset class (definitely not for amateurs), itself) or retain the services of a truly top notch operator that sidestepped the malaise (ex. moi), an apparent minority, the vast majority of which do not sell access to their services through brokerage firms. Just to be clear, I do not offer any investment services to the public, and am not making any solicitations along those lines.
  3. Since Treasury Inflation-Protected Securities came into existence during 1997 there is not enough empirical evidence to determine its performance during stagflation. However TIPS have outperformed other fixed income securities during periods of high inflation and is the only asset class under the fixed income category with negative correlation with inflation (between yield and inflation). (Subscribers, please refer to sheet "All time periods Fixed Income" in the accompanying Excel Attachment -
    Stagflation Data 2009-06-17 04:00:11 3.02 Mb)

 


 

Reggie Middleton

Author: Reggie Middleton

Reggie Middleton
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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.

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.

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