Tuesday, March 06, 2012

Short-term Forecast: More Inflation

Three measures of the U.S. money supply (M1, M2 and M3) are resuming their upward trend that began in early-mid 2010. All other things being equal (no war in the Middle East, kicking the Greece problem further down the road, etc.) this forecasts continued deflation and devaluing of the dollar.

The updated money supply graphs from shadowstats.com are always available in the right-hand column of this blog.

Gold is obviously one popular way to hedge against inflation, but for those who fear gold might be in price a bubble and wish to diversify their bets, there's an ETF that moves in the opposite direction of the dollar: the PowerShares US Dollar Bearish Fund (ticker: UDN). I do not recommend this fund as a long-term buy-and-forget investment - instead I think it's better suited as a temporary hedge against inflationary periods. Unfortunately UDN uses derivatives to accomplish its task, but any meltdown of the derivatives market is far more likely to happen during a DEflationary period than an inflationary one.