I’ve been harping on inflation since September of 2020 – when I began pounding the table on getting OUT of high growth stocks and INTO commodities. You know this if you read my blog regularly, and you are richer for it if you followed my suggestions of adding oil and metals to your portfolio back then. Hey, I’ve always got your backs, folks! It’s no mystery to me why inflation is at a three-decade peak – and likely to test 7% soon – despite the ever-flowing stream of lies and nonsense coming out of the mouths of governments denying its reality and its consequences. After all, they want to continue pounding out their MMT (free money for everyone, worry about the debt later). As I’ve noted in past blogs, there is an urgent need for spendy-governments to propagate the “transitory” theory of inflation. They do this because to admit that inflation is real, is to admit you need to stop the borrow & spend cycle. And left-wing governments like we have in the USA, EU and Canada must live up to their lofty spending promises. So admit it, they will not.
Inflation in this environment is pretty much a done deal: Policymakers are only tepidly tightening money supply. They continue to provide stimulus to juice demand and reduce unemployment at the exact same time that the pandemic is clamping down on supply! Too much demand chasing too few things, and a supply-chain that can’t keep up demand….can you say “inflation escalation”?
But wait….there’s more! The U.S. government delivered half a trillion dollars of rebate CQ’s earlier this year, most to households that never missed a pay cheque in the pandemic! Canada did the same thing with the CERB CQ’s. My son-in law works in a prison. Many prisoners received CERB CQ’s (income replacement for prisoners…. who have a SIN # but don’t have a job….). The prison had to pile their plethora Amazon purchases in a special room. What fun to be a criminal! We have had a labor shortage over the past year where getting a job is more accessible than ever, but the CERB & “stimmi”- CQ’s are only just now ending. Gee – I wonder why we have a labor shortage? The resulting build-up of personal savings, the influx of money supply, and the spending of this “free money” will have a lingering inflationary effects. This – added to the uber-sticky wage inflation that I have noted in past blogs. So – have governments elected to aggressively raise rates from their mega-low crisis levels? Are they making wise decisions to gain control of spending and debt before its too late? Heck no!!!…After all…inflation is transitory…remember?
OK – rant over. Beyond commodities (which I truly hope you own), are there any other instruments to consider for combating inflation? Well, I produced a video on gold and silver last week. I recommend you watch it. But I have another idea for you to consider as well. That is, inflation-protected bonds. These bonds, typically called “Real Return Bonds” (RRB’s) are not so much for growth investors when compared to equities or commodities. But they certainly can fit into a fixed income portfolio. Here’s how they work -according to finki (Wikipedia financial knowledge site):
“At the date of issue, RRBs have a nominal coupon rate plus a base value of the consumer price index. Thereafter, both the principal and the coupon are indexed according to the CPI. The effect is that both the principal and interest pay in constant dollars (as defined by CPI indexing), thus providing protection from future inflation. Because the inflation indexing of the capital results in deemed income from individual bonds with no cash immediately received, they should be held in tax sheltered accounts.”
You can buy the bonds directly, or you can buy an ETF that holds a portfolio of such bonds. iShares has one (XRB) as does BMO (ZBB) for Canadian bonds. The XRB chart, shown below, suggests that RRB’s broke out of a range in 2020, and have entered into another trading range. Current price is in the middle of the range, which isn’t a terrible place to buy. A breakout through $27 would be bullish. A pullback to $25 might represent a place to add to positions. Obviously, the risk of these bonds lies in the potential for inflation to trend substantially lower over the time you hold them – a possibility if you believe in the integrity of your local government’s inflation statements. You know where I stand on that.
8 Comments
US TIPS etf (TIP) has a great weekly chart, a bit overbought Ichimoku daily chart. Looks better than XRB.to.
The TIP etf has a shorter maturity average as I understand it. Is this the only explanation of the different looking charts? Is this because Biden vs Justin? (just kidding…)
Thanks for your great work.
US inflation has trended higher (look at the two charts)–6% vs 4% of late. Thats probably the reason – these bonds track inflation, and rise accordingly….
Tru-duh vs. Forgetful Joe. Hard to say who’s dumber.
What’s your take on the Ishares XMA ETF as a play on the commodity vs inflation. Weighted 50% in the gold space? Any other suggestions for TSX commodity ETFs?
Bit of a mixed bag of base metals, forestry and gold/silver miners. Its been trading sideways–near the top of its range right now. It may be OK–although its ideal buy spot is at the bottom of its range or if it breaks out – problem with buying any stock in that pattern is that you may be buying at top of range
The inflation takes are so interesting. So many differences now compared to when we went through the nasty 1970’s particularly around technology & demographics.
I am still in the camp on long term deflationary trend, including wages. I believe that technology will essentially replace almost all human labour over the coming decades. I believe that mineral exploration will be fully automated, that mining will be fully automated, shipping will be fully automated, manufacturing will be fully automated while population growth slows down.
If one believes the above to be true, hard to imagine how inflation will persist for goods and services. Monetary policy has been loose for well over a decade now, albeit it is really really loose now. But I do believe that the short term (2 – 3 years) effects of the pandemic will be just that. Short term.
If central banks do decide to tighten harshly, look out below in a couple years. It will be extremely ugly.
We shall see.
You may be correct about deflation long term, but I do believe we have about 5 years or so high inflation (given that today is a supply chain spike at 6% CPI that will abate- my point is that we wont see the return of a 2% CPI any time soon)
Hey Keith,
I have had ZRR for about a year now and I am down overall. Inflation is presumably higher than it was a year ago, so is it the expectation that rates are heading higher that is causing this ETF to go nowhere? If rates do move up with inflation, does that cancel out any benefit for holding real return bonds?
They will probably start to trade on expectations of inflation although the government issuer will follow actual CPI – check prospectus to see how often the bond pricing/yield is adjusted on the holdings in your product— Only now is the market recognizing that inflation may not be just transitory (except for a few believers)- so a year ago, RRB’s were not a great idea, as inflation just recently started being reported higher. But now that we are seeing the proof of inflation, I believe it may be a reasonable addition to a fixed income portfolio. I think of inflation linked bonds as a hedge, not so much an outright major position. Its about balance.