All this talk from A. Gary Shilling and others about the coming danger of deflation? Bleh.
That’s the message delivered in a recent whitepaper from Seth Masters.
The chief investment officer of Bernstein Global Wealth Management says deflation, that “persistent drop in the value of assets,” is unlikely any time soon.
Even if it does, Masters notes that investors already protect themselves from deflation through their bond purchases.
Rather inflation, although dire warnings of which have yet to materialize, is still the threat, Masters argues, and even modest amounts of inflation can be harmful—in some ways, even more so than deflation.
“Inflation-protected assets will always have a place in investor’s portfolios because of heightened uncertainty, the availability of better inflation hedges and reasonable costs for inflation protection,” he writes. “While rare, inflationary periods are notoriously difficult to predict. History shows that major bouts of inflation often strike suddenly and without warning, which is what makes inflation particularly dangerous.”
He sees three key reasons why an allocation to inflation protection is even more compelling today: heightened uncertainty, the availability of better inflation hedges, and reasonable costs for inflation protection.
1). More Uncertainty — “Even in the best of times, there’s no reliable forecast of the future path of inflation,” he writes. “Today, however, uncertainty about economic policy and its impact on the price level have become especially high, mainly because no one can confidently predict exactly what will happen as the enormous monetary expansion since the global financial crisis is ultimately unwound.”