October 5, 2012

Inflation Boogeyman Will Strike Suddenly—Be Prepared: Merk, Goolgasian

Currency guru Axel Merk, State Street’s Goolgasian consider portfolio protection as the specter of inflation looms

Someday, in the possibly near future, you will suddenly be paying $10 for a gallon of milk and wondering how the heck it happened so fast.

That is the strange and terrible way of inflation, said State Street Global senior portfolio manager Chris Goolgasian in a panel talk on Thursday at Morningstar ETF Invest 2012. Inflation has a way of appearing to be a distant threat before it sneaks up suddenly and starts driving prices through the roof.

Quoting from Ernest Hemingway’s novel “The Sun Also Rises,” Goolgasian took note of a passage where a man is asked how he went bankrupt. “Two ways,” the man answered. “Gradually, then suddenly.”

“The danger is in the future, and it’s important to manage portfolios for the future,” Goolgasian concluded. “Real assets can give you some assurance against that chance.”

Also appearing on “The Inflation Boogeyman—How Do I Protect My Portfolio?” panel was currency guru Axel Merk, who recently spoke with AdvisorOne about his Merk Hard Currency Fund and how the currency sector can be used as an inflation hedge.

Axel MerkOn Thursday at Morningstar ETF Invest, Merk also put forward a case in favor of investing in gold, while acknowledging its volatility.

“It’s the purest indicator of the monetary madness that’s out there,” Merk (left) said. “The rise of gold correlates perfectly with central bank easing around the globe. Gold by all means should do well, but we realize that it’s volatile.”

Like Merk, Northern Trust is overweight gold, said panel speaker Mark Carlson, a fixed income investment strategist for FlexShares exchange traded funds at Northern Trust Global Investments.

Carlson believes that the conditions have been set for inflation given the vast amount of liquidity – to the tune of $6 trillion excess liquidity – that has been unleashed into the marketplace thanks to the Federal Reserve’s quantitative easing program. And regardless of how fast or slow the inflation boogeyman sneaks up, it's best for investors to prepare for inflation in their portfolios now, Carlson said.

“But expectations are still fairly well constrained,” Carlson said. “As long as expectations remain under control, the Fed can continue its program of excess liquidity.”

Looking at QE3, Merk said that the Fed’s extended program to ease monetary conditions has created the concern, and not just among fearmongers, that there is increased inflation risk now in the United States.

His advice to advisors? “If you think there’s a risk of inflation, maybe you have a fiduciary duty to protect your client,” Merk said. “[Fed Chairman Ben] Bernanke thinks tightening is one of the worst things we can do. The problem is that the market can do the tightening for you.”

For investors seeking to hedge against inflation, Goolgasian likes inflation protected bonds, commodities and equities related to commodities, with a goal of beating CPI. He also likes this ETF: WisdomTree Large Cap Growth (ROI).

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Check out complete coverage of Morningstar ETF Invest Conference 2012 and in-depth ETF news at AdvisorOne.

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