Rob Arnott: 'There May Never Be a Better Time' to Buy Inflation Protection

The market seems to have settled the debate between investors who see deflation as the greatest threat versus others who have warned about inflation–in favor of the former. But that is precisely what leads indexing guru Rob Arnott, a lone inflationista wolf, to howl that today’s market provides a golden opportunity to buy inflation-fighting asset classes at “below retail prices.”

In his latest newsletter to his Research Affiliates clients, Arnott argues that the “3-D” threat of “unending deficits, massive debt and unfavorable demographics” will eventually overwhelm the deflationary impact of our weak, possibly recessionary economy. And prepared investors can protect their portfolios now, cheaply, from the hyperinflation he expects will ensue.

In his subtly argued missive, Arnott asserts that asset classes that serve to fight inflation should be viewed not merely as an important part of a portfolio including stocks and bonds but should actually be seen as the portfolio’s core –“the largest and most central part of one’s portfolio mix.”

Looking back at September’s market performance, Arnott observed that these asset classes got clobbered; indeed, only four periods in recent market history saw worse performance and all of them were associated with major crises–the 2008 global financial crisis; the 1998 Long-Term Capital Management/Russian default market plunge; the 1990 invasion of Kuwait; and the 9/11 terrorist attacks.

So why would the diversified portfolio Arnott recommends perform so poorly (and worse than a 60/40 stock and bond mix) at this juncture in market history? Because, he says, “the markets wholeheartedly abandoned the idea of inflation protection during the third quarter.”

Arnott points out that in crisis periods where his diversified portfolio plummeted, the subsequent three years trounced 60-40 stock-bond portfolios by an impressive 2.7% margin.