Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Indian Stock Market News, Equity Market and Sensex Today in India | Equitymaster
  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Inflation is coming... go buy real assets
Thu, 29 Mar Pre-Open

If you just found out that a storm was on the horizon, what would you do? Most people would buy some essential supplies and wait it out till weather conditions improve. According to Bill Gross, the venerable co-founder of PIMCO, investors should buy commodities and real assets to save themselves from the coming inflationary storm. He believes that the world is likely to face much more monetary and credit inflation before the balloon finally pops.

The primary reason for PIMCO's pessimism is that the world is deleveraging. Since the early 20th century the world has been leveraging itself. In finance, leverage is a general term for a technique to multiply gains and losses. Over the years, besides the traditional banking system, new forms of credit were invented, including derivatives. But this wasn't risk free. There were many causalities along the way including, LTCM, the Asian Financial Crisis, Dot com bust, subprime crisis etc. However, through all this financial institutions and market participants learned that policymakers would try and support the system. They would keep their economies running either by extending credit, lowering interest rates, expanding deficits or deregulating markets. This combined fiscal and monetary leverage produced huge returns that exceeded the ability of real economies to create wealth.

The entire garden was flowering at the same time. PE ratios of stocks rose, bond prices of 30 year US treasuries doubled, real estate boomed. Everything investors touched turned to gold as the financial markets were being constantly levered. However, post 2008 thing have fundamentally changed. Financial markets are selectively deleveraging. This is being mostly seen in the United States and in peripheral Europe. Households are trying to fix their balance sheets and sovereign nations in Europe are also trying to mend their ways. Yet, the total amount of debt in the system is scary. Now real growth is needed as opposed to slick financial engineering. But, this growth is stressed by increased fiscal deficits and high Debt/GDP levels. Continued credit expansion is expected to produce global inflation and slower growth.

So what's the solution and what do investors do in light of inflation, slower growth, and lower leverage. Well, according to Bill Gross, one needs to invest in assets that have the potential to provide the most returns with the least amount of risk. Real assets such as commodities, land, buildings, and machines are a good start. Dividend paying stocks and other financial assets with strong balance sheets are also a good bet. In this case, developing market stocks are preferred over developed market stocks. Financial or real assets that are not burdened by excess debt and that can benefit from favourable fiscal or monetary policies are also preferred.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

Read the latest Market Commentary

Equitymaster requests your view! Post a comment on "Inflation is coming... go buy real assets". Click here!


Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Feb 20, 2018 (Close)