The document discusses concerns about potential future inflation in the US economy. While current official inflation measures are relatively low, some argue these measures underestimate true inflation. There are also signs that raw material costs are rising, which could eventually flow through to higher consumer prices. The Federal Reserve's stimulus efforts are intended to boost inflation, with some insiders suggesting a target of 4-6% inflation for a couple years. If high inflation returns, it could pose risks to investors not prepared for that environment.
This document is a paper analyzing quantitative easing (QE) policies, specifically examining their use in the United States and Japan. It begins with an overview of QE, defining it as a monetary policy where central banks increase money supply by purchasing assets like treasury bonds. The paper then reviews research on Japan's use of QE in the 1990s, finding it increased money supply and lowered interest rates without significantly raising inflation. Turning to the US, the paper notes the Federal Reserve has enacted two rounds of QE but debates whether it has been effective. It concludes that more study is needed but US inflation may rise, so QE policies should be reined in to avoid hyperinflation.
This document discusses inflation and monetary policy. It begins by defining average inflation over the last 50 years as around 4% according to the Consumer Price Index. It then notes that the market currently expects future inflation to be around 2%, in line with the Federal Reserve's target. However, it expresses concern that monetary policy interventions in response to the financial crisis, which dramatically increased the monetary base, could sow the seeds for higher inflation in the future if banks begin lending out excess reserves more aggressively. Fiscal policy interactions with monetary policy are also flagged as a potential issue to monitor regarding inflation.
1. The portfolio manager discusses the market performance in Q2 2014, with the Canadian equity markets outperforming other global regions.
2. He explains that central bank monetary policies, particularly from the US Federal Reserve and European Central Bank, have been a key driver for the stock market rally over the past few years by keeping interest rates low.
3. The portfolio manager reiterates his advice to investors to stick to their customized plans and not be deterred by short-term market fluctuations, as the plans are designed to navigate periods of volatility.
RESEARCH - The Fairfax Monitor - Edition 2Stephen Martin
The document discusses whether the current economic environment is more likely to lead to inflation or deflation. It analyzes factors influencing the debate such as declining asset prices, falling consumer demand, and aggressive monetary stimulus by central banks. While central banks have taken inflationary actions, the document concludes deflation remains the greater threat due to continued weakness in the banking system, low consumer spending, and lack of signs of rising inflation. The environment favors bonds over stocks and commodities in the near term until the banking system shows more stability.
Agcapita is Canada's only RRSP and TFSA eligible farmland fund and is part of a family of funds with over $100 million in assets under management. Agcapita believes farmland is a safe investment, that supply is shrinking and that unprecedented demand for "food, feed and fuel" will continue to move crop prices higher over the long-term. Agcapita created the Farmland Investment Partnership to allow investors to add professionally managed farmland to their portfolios.
Despite hopes that the anti-QE rhetoric would die down, the noise continued last week, and unfortunately, become more political. One of the key aspects of the Fed is its independence. The Fed is answerable to Congress, and ultimately, to the American people. However, it is not controlled by Congress – nor would we want it to be controlled by Congress. Attacks on the Fed and its latest round of asset purchases aren’t helping.
The stock market has rallied recently even as the economy remains weak, similar to walking up a downward-moving escalator. Some signs suggest parts of the economy may be stabilizing, like improvements in manufacturing and services sectors. While employment and GDP numbers remain poor, consumer spending increased in the first quarter. Inventories fell sharply but this may help future growth. Other positive signs include rising consumer confidence and stabilizing housing. Many companies exceeded low earnings estimates, and rapid responses from corporations, consumers, and governments may help lead to eventual recovery.
This document is a paper analyzing quantitative easing (QE) policies, specifically examining their use in the United States and Japan. It begins with an overview of QE, defining it as a monetary policy where central banks increase money supply by purchasing assets like treasury bonds. The paper then reviews research on Japan's use of QE in the 1990s, finding it increased money supply and lowered interest rates without significantly raising inflation. Turning to the US, the paper notes the Federal Reserve has enacted two rounds of QE but debates whether it has been effective. It concludes that more study is needed but US inflation may rise, so QE policies should be reined in to avoid hyperinflation.
This document discusses inflation and monetary policy. It begins by defining average inflation over the last 50 years as around 4% according to the Consumer Price Index. It then notes that the market currently expects future inflation to be around 2%, in line with the Federal Reserve's target. However, it expresses concern that monetary policy interventions in response to the financial crisis, which dramatically increased the monetary base, could sow the seeds for higher inflation in the future if banks begin lending out excess reserves more aggressively. Fiscal policy interactions with monetary policy are also flagged as a potential issue to monitor regarding inflation.
1. The portfolio manager discusses the market performance in Q2 2014, with the Canadian equity markets outperforming other global regions.
2. He explains that central bank monetary policies, particularly from the US Federal Reserve and European Central Bank, have been a key driver for the stock market rally over the past few years by keeping interest rates low.
3. The portfolio manager reiterates his advice to investors to stick to their customized plans and not be deterred by short-term market fluctuations, as the plans are designed to navigate periods of volatility.
RESEARCH - The Fairfax Monitor - Edition 2Stephen Martin
The document discusses whether the current economic environment is more likely to lead to inflation or deflation. It analyzes factors influencing the debate such as declining asset prices, falling consumer demand, and aggressive monetary stimulus by central banks. While central banks have taken inflationary actions, the document concludes deflation remains the greater threat due to continued weakness in the banking system, low consumer spending, and lack of signs of rising inflation. The environment favors bonds over stocks and commodities in the near term until the banking system shows more stability.
Agcapita is Canada's only RRSP and TFSA eligible farmland fund and is part of a family of funds with over $100 million in assets under management. Agcapita believes farmland is a safe investment, that supply is shrinking and that unprecedented demand for "food, feed and fuel" will continue to move crop prices higher over the long-term. Agcapita created the Farmland Investment Partnership to allow investors to add professionally managed farmland to their portfolios.
Despite hopes that the anti-QE rhetoric would die down, the noise continued last week, and unfortunately, become more political. One of the key aspects of the Fed is its independence. The Fed is answerable to Congress, and ultimately, to the American people. However, it is not controlled by Congress – nor would we want it to be controlled by Congress. Attacks on the Fed and its latest round of asset purchases aren’t helping.
The stock market has rallied recently even as the economy remains weak, similar to walking up a downward-moving escalator. Some signs suggest parts of the economy may be stabilizing, like improvements in manufacturing and services sectors. While employment and GDP numbers remain poor, consumer spending increased in the first quarter. Inventories fell sharply but this may help future growth. Other positive signs include rising consumer confidence and stabilizing housing. Many companies exceeded low earnings estimates, and rapid responses from corporations, consumers, and governments may help lead to eventual recovery.
The document provides an overview and analysis of prevailing market conditions as of late 2009. It discusses signs of continued economic recovery, remaining risks from withdrawing stimulus, and new global economic patterns emerging from the financial crisis. Opportunities are seen in identifying companies and industries that will benefit from these changes. Charts show improved economic indicators, earnings beating estimates, and valuations looking more attractive as earnings recover.
Trekking markets & more with InvestrekkInves Trekk
The report presents a summary of the Indian market activity during the week ended 27 June 2021. It also provides some important insights about the global market trends and Indian Market outlook for the Week beginning 28 June 2021.
As expected, the Federal Open Market Committee has embarked on another round of planned asset purchases. In its November 3 policy statement, the FOMC wrote that it expects to buy another $600 billion in long-term Treasuries by the end of 2Q11 ($75 billion per month), in addition to the $35 billion per month in reinvested principal payments from its portfolio of mortgage-backed securities. There has been much criticism of the move in the financial press. Certainly, there are risks in the Fed’s strategy. However, it’s hardly reckless or ill-advised.
The document contains several articles discussing economic and financial market risks and opportunities. The first section highlights Standard & Poor's downgrading of the UK banking system due to economic weakness, reputational damage to banks, and high dependence on government support. The second section focuses on opportunities in emerging markets such as Brazil, where fundamentals remain positive and growth is expected to be strong. It also notes pension funds pouring funds into emerging market debt and the potential for relatively higher growth in developing economies going forward.
The document discusses the challenges governments face in withdrawing fiscal and monetary stimulus programs as economic recovery takes hold. It notes that withdrawing support too soon could undermine the recovery, but waiting too long risks unsustainable debt levels and inflation. Most developed nations will likely pursue a gradual tightening over the next year or two. Asia is already beginning to tighten policies as some countries see strong growth return. Overall recovery in 2010 may slow as liquidity declines, but the foundations for rising asset prices remain in place, leaving the author cautiously optimistic.
The document contains summaries of macroeconomic commentary from 11 letters to investors between 2005-2008. Key points include:
1) Unprecedented debt levels in Western economies could greatly exacerbate economic downturns. Slow growth or debt reduction could hurt asset returns while inflation may help commodities.
2) A potential deflationary scenario could emerge if a bear market in inflated assets like housing triggers deleveraging, rising risk premiums, and falling wealth/spending. However, the Fed chairman at the time was seen as able to prevent this.
3) Sustainable growth requires a shift away from consumption and debt towards domestic demand and productive capacity in Asia. The current model relies on unsustainable credit growth
The document summarizes the outlook for markets in 2009. It believes the recession will persist through 2009 with a weak recovery. Government stimulus plans aim to boost spending but the effects may be delayed. The Federal Reserve has increased money supply but must remove excess cash to avoid inflation. Consumers are saving more due to debt and falling asset values, which may slow growth but support bond prices. Global trade and capital flows are also slowing. The outlook calls for a challenging year with opportunities in quality companies and bonds offering higher yields. Flexibility will be needed to respond to changing opportunities and risks.
- October proved to be a positive month for global markets, with the Canadian S&P/TSX and U.S. S&P500 seeing impressive year-to-date returns. Investor sentiment continued to improve from the lows seen in the spring.
- Factors contributing to the improved outlook in October included the anticipated second round of U.S. quantitative easing, strong second quarter corporate earnings, and the results of the U.S. midterm elections maintaining political gridlock.
- The materials and information technology sectors performed strongest for the Canadian market in October, driven by gains in commodity prices and Research in Motion's new product announcement respectively.
The document discusses the need for a planned rollback of economic stimulus packages as economies show signs of recovery. It notes that while stimulus was needed to boost economies, prolonged reliance on stimulus can undermine sustainable growth and fiscal stability. A gradual, coordinated reduction in stimulus by governments and central banks is necessary to transition economies off artificial support. However, full recovery is not yet assured given remaining risks, so stimulus withdrawal needs careful management.
The global economy is improving overall, with the U.S. and U.K. leading the way. We expect higher GDP growth from the U.S. to support risk assets in the third quarter. We continue to expect a rise in U.S. interest rates in 2014, though eurozone policy may help slow a near-term increase. We favor credit, prepayment, and liquidity risks, which we express in allocations to mezzanine CMBS, peripheral European sovereigns, select EM sovereigns, and interest-only (IO) CMOs.
The document discusses how the financial crisis was deliberately created by breaking natural economic laws regarding debt and interest rates. It argues that decreasing the money supply through bond sales while raising interest rates upset the banking sector and led to consolidation. Companies, individuals, and banks were all negatively impacted as prices fell but interest rates and costs rose. The crisis allowed major banks to consolidate power through bailouts and buyouts of smaller failing banks.
- Emerging markets have experienced weaker economic growth compared to developed markets in 2013.
- Emerging market equities have significantly underperformed developed market equities since 2010, with the underperformance accumulating prior to recent tapering talk.
- Within emerging markets, BRIC countries like Brazil, Russia, India, and China have particularly underperformed the broader emerging market universe.
Rumpelstiltskin at the Fed by Harley Bassman, PIMCO, executive vice presiden...Nigel Mark Dias
Rumpelstiltskin at the Fed by Harley Bassman, PIMCO, executive vice president & portfolio manager
SUMMARY
Has the Federal Reserve reached the bottom of its policy toolkit? Many things are still possible, at least in theory, including negative interest rates (which we believe would be ineffective and potentially harmful) or a “helicopter drop” of money. Another option is to resurrect a successful plan from 83 years ago: Purchase a tremendous amount of gold at a price substantially higher than market levels.
A massive Fed gold purchase program might finally lift the anchor on inflationary expectations and consumers’ spending habits. It would increase the price of a globally recognized store of value. It almost sounds like a fairy tale – but it’s happened before.
Though it seems incredibly farfetched, a massive Fed gold purchase program could echo a Depression-era effort that effectively boosted the U.S. economy.
Warren Buffett famously railed against the shiny yellow metal in 2012 when he noted all the gold in the world could be swapped for the totality of U.S. cropland and seven ExxonMobils with $1 trillion left over for “walking-around money.” His point was that these assets can generate significant returns while owning gold produces no discernable cash flow.
While this observation is certainly true, the rub is that this is not a fair comparison since gold is not an asset; rather, it should be considered an alternate currency. Pundits often describe the five factors that define “money”:
Its supply is controlled or limited,
It is fungible/uniform – this is why diamonds cannot qualify,
It is portable – this is why land cannot qualify,
It is divisible – thus art cannot be money, and
It is liquid – this means people will readily accept it in exchange.
By this definition, gold is certainly a form of money, and to Mr. Buffett’s point, one also earns no cash flow on paper dollars, euros, yen or yuan.
This document summarizes economic trends from September 2009. It discusses six factors driving economic growth: 1) massive stimulus spending, 2) businesses reversing purges, 3) rising confidence, 4) housing and auto industries stabilizing, 5) improving exports, and 6) stalled increases in mortgage rates and oil prices. It argues the recovery will continue surpassing expectations with 4% GDP growth. It also says the consumer's role is unclear and inflation will likely remain stable.
No bubble trouble; stocks are still reasonably priced. This credit cycle has unique characteristics that continue to make high-yield bonds attractive. Interest-rate volatility poses greater risk than higher rates themselves.
As Fed tapering unfolds, we expect to see stronger growth from developed markets, while emerging markets in aggregate may experience further currency and capital market weakness. In the United States, declining labor participation continues to drive falling unemployment figures, and may harbor the beginning of a wage inflation surprise.
• We expect credit, liquidity, and prepayment risks will continue to
be rewarded by the market in the months ahead, while interestrate
risk remains unattractive due to its asymmetric risk profile.
The document discusses the recent turmoil in global financial markets and argues that governments have failed to address the root causes of the economic crisis. It makes three key points:
1) Stock market declines show that the recovery is fragile and a double-dip recession may be on the horizon.
2) Governments have kicked the can down the road rather than fixing underlying problems, and the global economic landscape now has additional constraints making responses more difficult.
3) The US economy in particular remains weak with high unemployment, stagnant GDP, and a large budget deficit, showing similarities to Japan's "lost decade" raising the risk of prolonged low growth in the US.
The document discusses concerns about future inflation given recent monetary and fiscal policy actions. It provides three key reasons to be wary of inflation:
1) Monetary policy - The Fed has increased the monetary base significantly and its exit strategy from quantitative easing may be difficult. This compromises its independence.
2) Fiscal policy - The US government faces large deficits and debt levels that could put pressure on the Fed to pursue inflationary policies.
3) Interaction of policies - The Fed's actions during the financial crisis reduced its independence, making it harder to maintain low, stable inflation as fiscal pressures rise. Close monitoring of inflation is prudent given these challenges to monetary policy.
Over the past 60 years, there has been significant inflation in the United States as the price of basic goods like bread, cars, and houses have increased substantially. Inflation causes anxiety among the general public even when it is at relatively low levels. The document goes on to provide an introduction to the concept of inflation and signals that the following sections will explain what inflation is, how it is measured, and how it relates to interest rates and investments.
Using cartoons to teach about inflationMike Fladlien
This document provides a summary of several cartoons that use humor and metaphor to explain concepts related to inflation. It discusses topics like the components that make up the Consumer Price Index, the effects of drought on food prices, how higher gas prices can slow economic recovery, and how monetary and fiscal policy tools like interest rates and tax cuts can be used to combat inflation. The document also examines more complex issues like cost-push inflation, the distributional impacts of inflation on debtors and creditors, and the risks of hyperinflation.
The document provides an overview and analysis of prevailing market conditions as of late 2009. It discusses signs of continued economic recovery, remaining risks from withdrawing stimulus, and new global economic patterns emerging from the financial crisis. Opportunities are seen in identifying companies and industries that will benefit from these changes. Charts show improved economic indicators, earnings beating estimates, and valuations looking more attractive as earnings recover.
Trekking markets & more with InvestrekkInves Trekk
The report presents a summary of the Indian market activity during the week ended 27 June 2021. It also provides some important insights about the global market trends and Indian Market outlook for the Week beginning 28 June 2021.
As expected, the Federal Open Market Committee has embarked on another round of planned asset purchases. In its November 3 policy statement, the FOMC wrote that it expects to buy another $600 billion in long-term Treasuries by the end of 2Q11 ($75 billion per month), in addition to the $35 billion per month in reinvested principal payments from its portfolio of mortgage-backed securities. There has been much criticism of the move in the financial press. Certainly, there are risks in the Fed’s strategy. However, it’s hardly reckless or ill-advised.
The document contains several articles discussing economic and financial market risks and opportunities. The first section highlights Standard & Poor's downgrading of the UK banking system due to economic weakness, reputational damage to banks, and high dependence on government support. The second section focuses on opportunities in emerging markets such as Brazil, where fundamentals remain positive and growth is expected to be strong. It also notes pension funds pouring funds into emerging market debt and the potential for relatively higher growth in developing economies going forward.
The document discusses the challenges governments face in withdrawing fiscal and monetary stimulus programs as economic recovery takes hold. It notes that withdrawing support too soon could undermine the recovery, but waiting too long risks unsustainable debt levels and inflation. Most developed nations will likely pursue a gradual tightening over the next year or two. Asia is already beginning to tighten policies as some countries see strong growth return. Overall recovery in 2010 may slow as liquidity declines, but the foundations for rising asset prices remain in place, leaving the author cautiously optimistic.
The document contains summaries of macroeconomic commentary from 11 letters to investors between 2005-2008. Key points include:
1) Unprecedented debt levels in Western economies could greatly exacerbate economic downturns. Slow growth or debt reduction could hurt asset returns while inflation may help commodities.
2) A potential deflationary scenario could emerge if a bear market in inflated assets like housing triggers deleveraging, rising risk premiums, and falling wealth/spending. However, the Fed chairman at the time was seen as able to prevent this.
3) Sustainable growth requires a shift away from consumption and debt towards domestic demand and productive capacity in Asia. The current model relies on unsustainable credit growth
The document summarizes the outlook for markets in 2009. It believes the recession will persist through 2009 with a weak recovery. Government stimulus plans aim to boost spending but the effects may be delayed. The Federal Reserve has increased money supply but must remove excess cash to avoid inflation. Consumers are saving more due to debt and falling asset values, which may slow growth but support bond prices. Global trade and capital flows are also slowing. The outlook calls for a challenging year with opportunities in quality companies and bonds offering higher yields. Flexibility will be needed to respond to changing opportunities and risks.
- October proved to be a positive month for global markets, with the Canadian S&P/TSX and U.S. S&P500 seeing impressive year-to-date returns. Investor sentiment continued to improve from the lows seen in the spring.
- Factors contributing to the improved outlook in October included the anticipated second round of U.S. quantitative easing, strong second quarter corporate earnings, and the results of the U.S. midterm elections maintaining political gridlock.
- The materials and information technology sectors performed strongest for the Canadian market in October, driven by gains in commodity prices and Research in Motion's new product announcement respectively.
The document discusses the need for a planned rollback of economic stimulus packages as economies show signs of recovery. It notes that while stimulus was needed to boost economies, prolonged reliance on stimulus can undermine sustainable growth and fiscal stability. A gradual, coordinated reduction in stimulus by governments and central banks is necessary to transition economies off artificial support. However, full recovery is not yet assured given remaining risks, so stimulus withdrawal needs careful management.
The global economy is improving overall, with the U.S. and U.K. leading the way. We expect higher GDP growth from the U.S. to support risk assets in the third quarter. We continue to expect a rise in U.S. interest rates in 2014, though eurozone policy may help slow a near-term increase. We favor credit, prepayment, and liquidity risks, which we express in allocations to mezzanine CMBS, peripheral European sovereigns, select EM sovereigns, and interest-only (IO) CMOs.
The document discusses how the financial crisis was deliberately created by breaking natural economic laws regarding debt and interest rates. It argues that decreasing the money supply through bond sales while raising interest rates upset the banking sector and led to consolidation. Companies, individuals, and banks were all negatively impacted as prices fell but interest rates and costs rose. The crisis allowed major banks to consolidate power through bailouts and buyouts of smaller failing banks.
- Emerging markets have experienced weaker economic growth compared to developed markets in 2013.
- Emerging market equities have significantly underperformed developed market equities since 2010, with the underperformance accumulating prior to recent tapering talk.
- Within emerging markets, BRIC countries like Brazil, Russia, India, and China have particularly underperformed the broader emerging market universe.
Rumpelstiltskin at the Fed by Harley Bassman, PIMCO, executive vice presiden...Nigel Mark Dias
Rumpelstiltskin at the Fed by Harley Bassman, PIMCO, executive vice president & portfolio manager
SUMMARY
Has the Federal Reserve reached the bottom of its policy toolkit? Many things are still possible, at least in theory, including negative interest rates (which we believe would be ineffective and potentially harmful) or a “helicopter drop” of money. Another option is to resurrect a successful plan from 83 years ago: Purchase a tremendous amount of gold at a price substantially higher than market levels.
A massive Fed gold purchase program might finally lift the anchor on inflationary expectations and consumers’ spending habits. It would increase the price of a globally recognized store of value. It almost sounds like a fairy tale – but it’s happened before.
Though it seems incredibly farfetched, a massive Fed gold purchase program could echo a Depression-era effort that effectively boosted the U.S. economy.
Warren Buffett famously railed against the shiny yellow metal in 2012 when he noted all the gold in the world could be swapped for the totality of U.S. cropland and seven ExxonMobils with $1 trillion left over for “walking-around money.” His point was that these assets can generate significant returns while owning gold produces no discernable cash flow.
While this observation is certainly true, the rub is that this is not a fair comparison since gold is not an asset; rather, it should be considered an alternate currency. Pundits often describe the five factors that define “money”:
Its supply is controlled or limited,
It is fungible/uniform – this is why diamonds cannot qualify,
It is portable – this is why land cannot qualify,
It is divisible – thus art cannot be money, and
It is liquid – this means people will readily accept it in exchange.
By this definition, gold is certainly a form of money, and to Mr. Buffett’s point, one also earns no cash flow on paper dollars, euros, yen or yuan.
This document summarizes economic trends from September 2009. It discusses six factors driving economic growth: 1) massive stimulus spending, 2) businesses reversing purges, 3) rising confidence, 4) housing and auto industries stabilizing, 5) improving exports, and 6) stalled increases in mortgage rates and oil prices. It argues the recovery will continue surpassing expectations with 4% GDP growth. It also says the consumer's role is unclear and inflation will likely remain stable.
No bubble trouble; stocks are still reasonably priced. This credit cycle has unique characteristics that continue to make high-yield bonds attractive. Interest-rate volatility poses greater risk than higher rates themselves.
As Fed tapering unfolds, we expect to see stronger growth from developed markets, while emerging markets in aggregate may experience further currency and capital market weakness. In the United States, declining labor participation continues to drive falling unemployment figures, and may harbor the beginning of a wage inflation surprise.
• We expect credit, liquidity, and prepayment risks will continue to
be rewarded by the market in the months ahead, while interestrate
risk remains unattractive due to its asymmetric risk profile.
The document discusses the recent turmoil in global financial markets and argues that governments have failed to address the root causes of the economic crisis. It makes three key points:
1) Stock market declines show that the recovery is fragile and a double-dip recession may be on the horizon.
2) Governments have kicked the can down the road rather than fixing underlying problems, and the global economic landscape now has additional constraints making responses more difficult.
3) The US economy in particular remains weak with high unemployment, stagnant GDP, and a large budget deficit, showing similarities to Japan's "lost decade" raising the risk of prolonged low growth in the US.
The document discusses concerns about future inflation given recent monetary and fiscal policy actions. It provides three key reasons to be wary of inflation:
1) Monetary policy - The Fed has increased the monetary base significantly and its exit strategy from quantitative easing may be difficult. This compromises its independence.
2) Fiscal policy - The US government faces large deficits and debt levels that could put pressure on the Fed to pursue inflationary policies.
3) Interaction of policies - The Fed's actions during the financial crisis reduced its independence, making it harder to maintain low, stable inflation as fiscal pressures rise. Close monitoring of inflation is prudent given these challenges to monetary policy.
Over the past 60 years, there has been significant inflation in the United States as the price of basic goods like bread, cars, and houses have increased substantially. Inflation causes anxiety among the general public even when it is at relatively low levels. The document goes on to provide an introduction to the concept of inflation and signals that the following sections will explain what inflation is, how it is measured, and how it relates to interest rates and investments.
Using cartoons to teach about inflationMike Fladlien
This document provides a summary of several cartoons that use humor and metaphor to explain concepts related to inflation. It discusses topics like the components that make up the Consumer Price Index, the effects of drought on food prices, how higher gas prices can slow economic recovery, and how monetary and fiscal policy tools like interest rates and tax cuts can be used to combat inflation. The document also examines more complex issues like cost-push inflation, the distributional impacts of inflation on debtors and creditors, and the risks of hyperinflation.
Inflation Views by the author Bud LabitanBud Labitan
I release this free book project file here as "Inflation Views" and dedicate it to the friends, members, and acquaintances of ISVI, International Society of Value Investors. "Inflation Views" covers Warren Buffett's writings on inflation from 1977 to 1983. I added data and commentary to help the reader understand that period. In my view, much of the knowledge gained during that time is relevant to us today.
Question 1Response 1Development inside and out effects t.docxaudeleypearl
Question 1:
Response 1:
Development inside and out effects the entire country's economy. It impacts the managing body, regardless the clearly irrelevant subtleties in the average person's dependably life. Both a conditions and clear deferred results of how the economy is getting along, swelling has the two its fans and spoilers. Distinctive envisions that particular degrees of swelling are helpful for a prospering economy, yet that progressively critical rates raise concerns. It can degrade the money basically and, at logically lamentable, has been a key part to subsidences.
Swelling, as referenced, is the rate a worth ascensions, and fundamentally how much the dollar is worth at a given moment concerning checking. The idea behind swelling being an impact for good in the economy is that a reasonable enough rate can nudge financial movement without debasing the money so much that it ends up being basically vain (Kohn, 2006).
Swelling can in like manner falter from asset for asset. Subordinate upon the season, the expense of gas could go up independently from with everything considered headway as it routinely does as summer moves close. In reality, there is even a term - focus improvement - for swelling that parts in everything except for sustenance and imperativeness (gas and oil), as these regions have separate factors that add to them. There are a wide degree of sorts of swelling, subordinate upon what remarkable is being viewed comparatively as what the development rate truly is by all accounts. For example, what happens if the swelling rate is well over the Fed's normal goal? At a higher rate, yet still in the single digits, that is known as walking swelling. It is seen as concerning yet sensible (Ball, 2006).
Swelling is generally depicted reliant on its rate and causes. By and large, Inflation happens in an economy when vitality for thing and experiences outmaneuvers the supply of yield. in this manner, clarifications behind Inflation have different sides, the intrigue side and supply side. The widely inclusive activity of hazard premiums in driving enlargement pay over the scope of advancing years is dependable with secured budgetary improvement and inside and out oblige cash related procedure events in the moved economies. The degree for further fitting budgetary enabling seen with money related stars seems to have declined amidst the enough low advance charges and gigantic monetary records of national banks (Bodie, 2016).
In relentless time, the correspondence of perils has wound up being constantly phenomenal, the general point of view has lit up, and money related conditions have engaged on net. With the work superstar proceeding to reinforce, and GDP improvement expected to keep up a vital good ways from back in the consequent quarter, it likely will be fitting soon to change the affiliation supports rate. Likewise, if the economy propels as shown by the SEP concentrate way, the affiliation supports rate will probably app ...
- The document discusses the recent volatility in global stock markets and the fear that has gripped investors. While there are valid economic concerns, fear has become contagious and may be overstating the risks.
- The US economy has held up better than expected so far in 2016, with steady job growth and consumer spending. However, tightening financial conditions have led to declines in stock valuations.
- Central banks are again trying to ease financial conditions through further monetary stimulus in order to support the economy and stabilize markets, though investor faith in their actions may be waning.
This document provides an overview of inflation and how it is measured. It discusses what inflation is, how it is defined and measured through indexes like the CPI. It outlines some of the key causes of inflation like demand-pull and cost-push factors. It also discusses how inflation affects different groups like creditors, debtors and those on fixed incomes. The document explains how central banks like the Federal Reserve use interest rates to try and control inflation.
The document summarizes the economic recessions in Japan and the United States. It discusses how Japan experienced a "lost decade" after its bubble economy collapsed in the early 1990s, bringing an end to its post-war growth. Despite monetary and fiscal stimulus, Japan struggled with deflation and a liquidity trap. The US also experienced recessions in the 2000s and late 2000s due to the dot-com bubble bursting and the subprime mortgage crisis.
The document discusses the growing threat of cyberattacks and why they could cause a global crisis. It notes that over 30 countries have implemented cybersecurity strategies in response. However, the threat is outpacing these initiatives as organizations become more dependent on digital technologies and data. The risks are particularly concerning for critical infrastructure industries like energy, banking, and manufacturing. Companies have significantly increased their cyber insurance coverage in response, with healthcare firms buying 178% more coverage and utilities 98% more on average since 2012. The document concludes that greater data dependence and potential impacts of breaches mean cyberattacks remain one of the top risks for causing a global crisis.
What we would like to consider is the price of taming inflation and how that will affect peoples, work, investments, and lives in the coming years.
https://youtu.be/0RuIunNvvKI
- Upcoming inflation may benefit gold prices, especially if inflation persists longer than expected by central banks. Inflation expectations have risen significantly in recent months.
- The large US twin deficits could negatively impact the economy and support gold prices. The US current account and fiscal deficits have ballooned to record levels.
- While gold does not always rise when deficits increase, it has benefited in past periods when easy fiscal policy was accompanied by accommodative monetary policy, as is the case currently. The Fed intends to keep interest rates low to support economic recovery.
What recent and past actions have Canada and the US taken to counter.pdfmeejuhaszjasmynspe52
What recent and past actions have Canada and the US taken to counteract their exchange rates
with the economy in such distress over the past 10 years?
Solution
Since 2007, the world has experienced a period of severe financial stress, not seen since the time
of the Great Depression. This crisis started with the collapse of the subprime residential
mortgage market in the United States and spread to the rest of the world through exposure to
U.S. real estate assets, often in the form of complex financial derivatives, and a collapse in global
trade. Many countries were significantly affected by these adverse shocks, causing systemic
banking crises in a number of countries, despite extraordinary policy interventions. Systemic
banking crises are disruptive events not only to financial systems but to the economy as a whole.
Such crises are not specific to the recent past or specific countries – almost no country has
avoided the experience and some have had multiple banking crises. While the banking crises of
the past have differed in terms of underlying causes, triggers, and economic impact, they share
many commonalities. Banking crises are often preceded by prolonged periods of high credit
growth and are often associated with large imbalances in the balance sheets of the private sector,
such as maturity mismatches or exchange rate risk, that ultimately translate into credit risk for
the banking sector.
Crisis management starts with the containment of liquidity pressures through liquidity support,
guarantees on bank liabilities, deposit freezes, or bank holidays. This containment phase is
followed by a resolution phase during which typically a broad range of measures (such as capital
injections, asset purchases, and guarantees) are taken to restructure banks and reignite economic
growth. It is intrinsically difficult to compare the success of crisis resolution policies given
differences across countries and time in the size of the initial shock to the financial system, the
size of the financial system, the quality of institutions, and the intensity and scope of policy
interventions. With this caveat we now compare policy responses during the recent crisis episode
with those of the past. The policy responses during the 2007-2009 crises episodes were broadly
similar to those used in the past. First, liquidity pressures were contained through liquidity
support and guarantees on bank liabilities. Like the crises of the past, during which bank
holidays and deposit freezes have rarely been used as containment policies, we have no records
of the use of bank holidays during the recent wave of crises, while a deposit freeze was used only
in the case of Latvia for deposits in Parex Bank. On the resolution side, a wide array of
instruments was used this time, including asset purchases, asset guarantees, and equity injections.
All these measures have been used in the past, but this time around they seem to have been put in
place quicker (for detailed informatio.
How Will Inflation Affect Your Investments?InvestingTips
This document discusses how inflation affects investments. It explains that inflation erodes the purchasing power of money over time. Investors need to earn returns higher than the inflation rate to maintain purchasing power. The large government spending to address the pandemic may cause inflation if excess money enters the economy faster than new goods and services. To fight inflation, the government raises interest rates to reduce money supply and slow economic growth. Investors should examine how different assets may perform during inflationary periods and adjust their portfolios accordingly.
Gold may rise as market euphoria about economic recovery ends. While strong GDP growth is expected in the short term due to base effects and stimulus, optimism may be exaggerated, unemployment remains elevated, and risks remain from virus variants. Inflation is already above the Fed's 2% target according to official data, and likely even higher using alternative measures, but the Fed says price increases will be temporary. However, inflation could be more persistent given money supply increases, government spending, and pent-up demand as the economy reopens. Higher inflation would be bullish for gold as an inflation hedge.
Base on the article answer 1 Explain F A Hayeks theory of.pdfadvanibagco
Base on the article answer:
1. Explain F A Hayek's theory of the "Business Cycle".
PLEASE WRITE A MINIMUM OF SIX LINES FOR EACH ANSWER.
The article:
In March 2007 then-Treasury secretary Henry Paulson told Americans that the global economy
was as strong as Ive seen it in my business career. Our financial institutions are strong, he added
in March 2008. Our investment banks are strong. Our banks are strong. Theyre going to be strong
for many, many years. Federal Reserve chairman Ben Bernanke said in May 2007, We do not
expect significant spillovers from the subprime market to the rest of the economy or to the financial
system. In August 2008, Paulson and Bernanke assured the country that other than perhaps $25
billion in bailout money for Fannie and Freddie, the fundamentals of the economy were sound.
Then, all of a sudden, things were so bad that without a $700 billion congressional appropriation,
the whole thing would collapse. In the wake of this change of heart on the part of our leaders,
Americans found themselves bombarded with a predictable and relentless refrain: the free market
economy has failed. The alleged remedies were equally predictable: more regulation, more
government intervention, more spending, more money creation, and more debt. To add insult to
injury, the very people who had been responsible for the policies that created the mess were
posing as the wise public servants who would show us the way out. And following a now-familiar
pattern, government failure would not only be blamed on anyone and everyone but the
government itself, but it would also be used to justify additional grants of government power. The
truth of the matter is that intervention in the market, rather than the market economy itself, was the
driving factor behind the bust. F.A. Hayek won the Nobel Prize for his work showing how the
central banks intervention into the economy gives rise to the boom-bust cycle, making us feel
prosperous until we suffer the inevitable crash. Most Americans know nothing about Hayeks
theory (known as the Austrian theory of the business cycle), and are therefore easy prey for the
quacks who blame the market for problems caused by the manipulation of money and credit. The
artificial booms the Fed provokes, wrote economist Henry Hazlitt decades ago, must end in a
crisis and a slump, andworse than the slump itself may be the public delusion that the slump has
been caused, not by the previous inflation, but by the inherent defects of capitalism. Although my
recently released book, Meltdown explains the process in more detail, an abbreviated version of
Austrian business cycle theory might run as follows: Government-established central banks can
artificially lower interest rates by increasing the supply of money (and thus the funds banks have
available to lend) through the banking system. This is supposed to stimulate the economy. What it
actually does is mislead investors into embarking on an investment boom that the artificially lo.
This document summarizes the challenges of saving money in today's economic environment of low interest rates and steady inflation. It discusses how inflation encourages spending now rather than saving, and how low interest rates on savings vehicles provide little protection against inflation. It provides a hypothetical example using the purchase of a toaster to illustrate how inflation can motivate unnecessary spending. The document examines factors like the Federal Reserve interest rate that impact bank savings rates. It also notes that some consumers turn to riskier long-term investments or debt to cope with these economic conditions, making it difficult to build financial stability. In the end, it argues that maintaining liquid savings is still important despite low returns, and that opportunities may arise when economic activity slows.
What happens if the us credit rating is downgraded 7.22.2021 - Kurt S. Altric...Kurt S. Altrichter
1) The US government debt level of nearly $30 trillion poses risks even though low interest rates have kept debt servicing costs low currently. The upcoming expiration of the debt ceiling raises the possibility of a downgrade in the US credit rating or a technical default.
2) A credit downgrade or hitting the debt ceiling without a resolution could negatively impact risk assets, as occurred in 2011. Investors should take a longer term view and pay attention to weakening economic fundamentals rather than just focusing on record high stock markets.
3) The options available to address the growing debt problem like raising taxes or interest rates all carry risks for either the economy, financial markets or the US dollar. The government appears backed into a corner with
The document discusses various topics related to inflation including:
1. Inflation is defined as a rise in general price levels reported as a rate of change which reduces the purchasing power of money.
2. Inflation can be caused by increases in the money supply, reductions in goods available, decreases in demand for money, and increases in demand for goods.
3. Effects of inflation include a reduction in purchasing power of currency, changes to spending habits, speculation, and impacts to income distribution between lenders and borrowers.
It is our opinion that wishful thinking and your investments do not go well together and wishful thinking is what the brief shift in market sentiment regarding a Fed pivot amounted to.
https://youtu.be/INhxM58dFwA
1. The phantom menace
Is the inflation threat hype—or real?
Concerns have been raised that the US government’s attempts to stimulate the economy
could unleash a wave of runaway inflation. Is inflation in the future—and if it is, is your
portfolio prepared for one of the greatest risks to personal wealth?
Many economists will tell you not to worry about Many investors agree. Consider the bond market:
inflation. While the consumer price index (CPI), The 10-year Treasury note was yielding just 3.43% as
a widely used gauge of consumer spending, rose of 1/24/11, according to the Federal Reserve. At the
0.5% in December 2010, its largest monthly gain since same time, traditional hedges against inflation—Treasury
June 2009, so-called core inflation (which eliminates inflation protected securities (TIPS) and gold—have
volatile food and energy costs) was a relatively weak recently fallen in price, according to the Barclays Capital
0.1%. For 2010, the CPI rose just 1.5% and core inflation US TIPS Index and Dow Jones US Gold Mining Index.
rose only 0.8%. That places core inflation well below
the US Federal Reserve Board’s (Fed’s) target of 2%— But there are three reasons we call inflation “the
and the 2% to 2.5% annualized rates prevailing before phantom menace”—meaning you need to be aware of it.
the Great Recession of 2008 and 2009.
WHAT IS INFLATION?
Many inflation watchers argue that the downtrend does
Inflation is a general rise in prices. It is often attributed to
not seem to have ended. They point out that with the
the Fed’s monetary policy. Pumping more money into
unemployment rate at 9.4% as of December 2010,
the economy dilutes the buying power of the money in
wages are going to stay low for a long time, which will
the economy. So, in an inflationary environment, a dollar
help rein in inflation. If anything, these economists say,
buys less tomorrow than it does today.
slack in the labor markets suggests that core inflation
might continue to fall for awhile.
Investment products: No bank guarantee I Not FDIC insured I May lose value
2. Rethinking inflation
Three reasons we call inflation the phantom menace
OFFICIAL INFLATION DATA On the following pages, we look more
MAY BE UNDERSTATED deeply into the history, evolution and current
Over the past 30 years, the government has composition of the CPI.
made many changes to the way it calculates
inflation. Because of these changes, inflation OFFICIAL INFLATION DATA
today may not be the same thing as inflation LOOKS BACKWARD
the last time we saw it. Inflation numbers calculate what has happened,
not what is going to happen. But if you look beyond
According to economist John Williams at Shadow labor costs and consider raw materials, you’ll see
Government Statistics, if we still calculated inflation that prices are rising. Consider a 10/21/10 article in
the way we did under the Carter presidency, The Wall Street Journal, “Dilemma Over Pricing,”
today’s CPI would be closer to 10% than 1.5%. which points out what is obvious to anyone who
Jim Grant, the host and editor of the newsletter follows commodities: The cost of nearly everything
Grant’s Interest Rate Observer, has said that the is going up. As the article notes: “Corn is up 44%,
Fed arguing that the inflation rate is too low is “like milk is up 6.5%, hot rolled coil steel is up 4%, copper
the New York Police Department complaining is up 29% and oil is up 14% from a year ago.”
about the lack of crimes.”
Sooner or later, these raw material price
How can this be the case? The way inflation increases are going to show up in consumer
is calculated today, if steak prices boom, it’s goods. “Across Corporate America, more
assumed that you will buy cheaper hamburger companies are wrestling with when and how
instead—making inflation nonexistent. much to raise prices as raw materials costs
climb,” says The Wall Street Journal article.
Or, consider the case of hedonics, which is
a method of estimating a product’s value. In fact, prices may already be rising. “There
Hedonics asks the question, "How much of might not have been a second round of
a product's price increase is a function of quantitative easing if Federal Reserve Chairman
inflation, and how much is a function of quality Ben Bernanke shopped at Walmart,” says a
improvement?” Let’s say, for example, that you 1/11/10 CNBC.com article. “A new pricing survey
purchase a television. The quality of televisions of products sold at the world’s largest retailer
has increased over time, with many improved showed a 0.6% price increase in just the last
features, such as plasma screens and HDMI two months, according to MKM Partners. At that
connections. If you buy a more expensive TV rate, prices would be close to 4% higher a year
today, then, is that the result of inflation? The from now, double the Fed’s mandate.”
government says no—and uses a complex
calculation to adjust inflation for product quality And it’s just not Walmart that is raising prices.
enhancements. Its argument: In a way, the MKM surveyed 86 everyday grocery items such
price of the improved TV is going down, not up, as food and detergent made by national brands,
because you’re getting more for your money. and found a “meaningful increase.”
2 » The phantom menace
3. ECONOMICS 101 article in The Wall Street Journal, “Choosing the
The Fed, in an attempt to stimulate the US economy, 1970s Over the 1930s.”
has engaged in another round of quantitative
easing. This easing, dubbed QE2, would involve WHY DOES IT MATTER?
massive purchases of US Treasuries—which is Inflation is near a historical low. As a result, we
designed to push down yields on Treasuries and believe it will eventually rise and pose a threat.
bonds and drive up investment and consumption. That may not happen immediately—but in our
opinion, it will happen.
There are many fancy names for what the Fed
is doing, but essentially, the policymakers are When inflation does show up, by the time the
creating more money—and in doing so, diluting the bond market notices it is here, we believe it may
purchasing power of the dollar. be too late for many investors—specifically, those
who are invested in asset classes that typically
What the economy needs, the Fed’s thinking perform poorly in inflationary environments,
goes, is some inflation. Indeed, according to which is most of them, as we explain on page 9.
some insiders, the Fed is seeking an inflation
rate in the 4% to 6% range for just “a couple of What can investors do in such a challenging
years”—but if this spills over into 1970s-style economic environment? In our opinion, what we
double-digit inflation, then so be it. have always encouraged them to do. First, don’t
remain on the sidelines, as leaving assets in cash
“That’s because the central thinking at the Fed could eat away at their value in an inflationary
is that while it knows how to deal with inflation environment. Second, invest intelligently, in asset
and recognizes the problems associated with classes and mutual funds that could prepare
fairly high rates of price appreciation, embedded a portfolio for the threat of rising inflation—
deflation is…harder to defeat,” says a 10/14/10 whenever it occurs.
INFLAT ION FEARS ARE GLOBAL
Inflation fears aren’t just domestic. In an interview with The Wall Street Journal, European Central
Bank President Jean-Claude Trichet warned that inflation pressures in the Eurozone must be watched
closely, and urged central bankers everywhere to ensure that higher energy and food prices don't gain
a foothold in the global economy. Why should Americans care? Because inflation abroad could be
exported back to the United States in the form of higher prices for consumer goods.
The sources, opinions and forecasts expressed are those of DWS Investments, are as of 12/31/10 and any forward-looking
statements may not actually come to pass. This information is subject to change at any time based on market and other
conditions and should not be construed as investment advice. All opinions and estimates reflect our judgement as of the date of
this report and are subject to change without notice. Such opinions and estimates, including forecast returns, involve a number
of assumptions that may not prove valid.
The phantom menace » 3
4. CPI basics
Understanding the index that defines inflation
The CPI, which is produced by the US Bureau of Labor Statistics, measures changes in the prices of
consumer goods and services. It samples more than 80,000 items per month—everything from laundry
detergent to apparel to vehicles.
ONE-YEAR CPI PERCENTAGE (12/31/26–12/31/10)
25%
20%
15%
10% Average CPI
3.11%
5%
0%
–5%
2010 CPI
–10% 1.50%
–15%
12/26 12/38 12/50 12/62 12/74 12/86 12/98 12/10
CPI category Weight The CPI "market basket" is developed from
detailed expenditure information provided by
Housing 42%
individuals from around the country. For the
Transportation 17%
current CPI, this information was collected
Food and beverage 15% from the Consumer Expenditure Surveys for
Medical care 7% 2007 and 2008.
Recreation 6%
Education and communication 6% Over the two-year period, expenditure
information from approximately 28,000 weekly
Apparel 4%
diaries and 60,000 quarterly interviews was used
Other goods and services 3%
to determine the importance, or weight, of the
more than 200 items in the CPI.
Sources for chart and table: US Bureau of Labor Statistics as of 12/31/10.
4 » The phantom menace
5. The impact of changes to the CPI
New calculation methodologies understate inflation
CPI calculations have not remained constant since 1917, when the index started.
In 1983, the index stopped using housing prices, switching instead to owners’ equivalent rent, which
is the amount of rent that could be paid to substitute a currently owned house for an equivalent rental
property. It is now the largest part of the CPI.
In 1998, the index broadened the use of product quality enhancements, or hedonics. As we have
already noted, hedonics is a method of estimating a product’s value. Let’s say, for example, that you
purchase a television. The quality of televisions has increased over time, with many improved features,
such as plasma screens and HDMI connections. If you buy a more expensive television today, then, is
that the result of inflation? The government says no—and uses a complex calculation to adjust inflation
for product quality enhancements. Its argument: In a way, the price of the improved television is going
down, not up, because you’re getting more for your money.
In 1999, the CPI began using product substitutions (assuming, for example, that if the price of steak
rises, consumers will buy hamburger instead).
These changes may have led the CPI to significantly understate inflation. Below we show what the
CPI would be today using older methods of calculating CPI.
HAVE CPI CHANGES LED TO UNDERSTATED INFLATION?
10%
8%
6%
4%
2%
0% 1.50% 4.80% 8.90%
Current CPI Pre-1990 Pre-1983
CPI method estimate CPI method estimate
Sources for chart: Morningstar (except pre-1983 and pre-1990 CPI method estimates, which are from Shadowstats.com, BLS and
S&P) as of 12/31/10.
The phantom menace » 5
6. Behind changing CPI numbers
The impact of owners’ equivalent rent and hedonics
OWNERS’ EQUIVALENT RENT MITIGATES HOUSING PRICE SWINGS
(12/31/01–12/31/10)
20%
Is the housing market
10% decline understating
deflation?
0%
The CPI understated
–10% inflation during the
housing market bubble.
–20%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Housing prices CPI owners’ equivalent rent
PRICES ARE ADJUSTED HIGHER TO REFLECT PRODUCT QUALITY
ENHANCEMENTS
How is price adjusted?
$3,000 TV A is no longer available and has been replaced by TV B. Rather than use the
400% price difference between the two TVs to measure inflation, the US Bureau
$2,500 of Labor Statistic uses a complex formula to determine TV A’s “quality-adjusted”
price. When this formula is applied, TV A costs not $250, but $1,345.
$2,000
Implied inflation
$1,500
–7.25%
$1,000
Implied
inflation
$500
400%
$0 $250 $1,250 $1,345 $1,250
TV A 27-inch, TV B 42-inch, TV A 27-inch, TV B 42-inch,
CRT, HDTV plasma, HDTV CRT, HDTV plasma, HDTV
Original price Adjusted price
Sources for top chart: US Bureau of Labor Statistics and S&P, as of 12/31/10 (for housing prices) and 11/30/10 (for owners’
equivalent rent). Source for bottom chart: US Bureau of Labor Statistics as of 12/31/10. Past performance is no guarantee of
future results.
6 » The phantom menace
7. Inflation or deflation?
In today’s economy, it’s both
While core consumer inflation rose just 0.1% in December 2010, suggesting that inflation is tame,
that number belies what many consumers feel in their wallets: Raw material prices are climbing, and
as a result, across America, companies are raising the prices of their goods and services. The reason
inflation isn’t obvious, perhaps, is that not all prices are rising. We’re currently seeing inflation in the
prices of goods we need, and deflation in the prices of goods we want. The tables below illustrate.
NEEDS (BASIC GOODS) WANTS (LUXURY ITEMS)
HAVE INCREASED IN PRICE HAVE DECREASED IN PRICE
10 largest category increases in Inflation 10 largest category decreases in Inflation
price the last 12 months rate price the last 12 months rate
Butter +21.88% Televisions –19.06%
Fuel oil +16.51% Photographic equipment –13.55%
Lamb and organ meats +16.23% Other video equipment –13.48%
Lamb and mutton +15.93% Other furniture –11.40%
Gasoline (all types) +13.85% Computer software and accessories –10.50%
Bacon and related products +13.73% Tomatoes –10.50%
Other pork +12.82% Window coverings –8.22%
Delivery services +12.67% Dishes and flatware –7.64%
Ham, excluding canned +11.41% Video casettes and discs –7.59%
Uncooked beef and veal +10.81% Lettuce –7.45%
FAST FACTS
■■ General Mills, a global food company, said it increased the prices of a quarter of its breakfast cereals
in November 2010 as a result of rising grain and other commodity prices.
■■ United Technologies, which builds helicopters, jet engines, elevators and air conditioners, says that
higher prices for commodities will represent a $40 million to $50 million expense headwind in 2011.
■■ Supervalu, a grocery retailer, lowered its fiscal 2011 earnings outlook in October 2010 because the
prices it pays for its products are rising.
Sources for charts: US Bureau of Labor Statistics and myinflationrate.com, as of December 2010. Source for fast facts: The Wall Street
Journal, “Dilemma Over Pricing,” 10/21/10. Highlighted rows are the items of most interest to the average consumer based on the
opinions of DWS Investments. The sources, opinions and forecasts expressed are those of DWS Investments, are as of 12/31/10 and
any forward-looking statements may not actually come to pass. This information is subject to change at any time based on market
and other conditions and should not be construed as investment advice. All opinions and estimates reflect our judgement on the date
of this report and are subject to change without notice. Such opinions and estimates, including forecast returns, involve a number of
assumptions that may not prove valid.
The phantom menace » 7
8. Floating-rate loans and commodities
Your best options for fighting inflation?
We’ve explained why many people believe inflation could rise—and with inflation expectations high
and interest rates near historic lows, do you really want to keep your money on the sidelines?
What can investors do in such a challenging economic environment? As we noted previously,
we recommend what we have always recommended: Invest intelligently.
Consider floating-rate loans and commodities. Historically, floating-rate loans and commodities have
been positively correlated to inflation—meaning that as inflation has risen so too have the returns of
floating-rate loans and commodities.
15-YEAR CORRELATION OF ASSET CLASSES TO INFLATION (as of 12/31/10)
Inflation 1.00
Floating-rate loans 0.37
Commodities 0.25
US TIPS 0.11
Short-term bonds 0.07
Large-cap equities 0.03
Intermediate-term bonds –0.06
–0.1 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
FAST FACTS
■■ Floating-rate loans, also referred to as senior-secured loans, are debt instruments with floating-rate
coupons. Coupons for floating-rate loans are tied to a variable rate, most commonly the London
Interbank Offered Rate (LIBOR), and generally reset every 30 to 90 days.
■■ Commodities are basic goods such as oil, metals and livestock. They can be broken down into
five broad sub-sectors: energy, base metals (also referred to as industrial metals), precious metals,
agriculture and livestock.
Source for chart: Morningstar, as of 12/31/10. Correlation is historical and does not guarantee future results. Asset classes are
represented as follows: floating-rate loans, Morningstar Bank Loan category; commodities, Dow Jones UBS Commodity Index;
US TIPS, Morningstar Inflation Protected Bond category; short-term bonds, Morningstar Short-Term Bond category; large-cap
equities, Morningstar Large Blend category; intermediate-term bonds, Morningstar Intermediate-Term Bond category; large-cap
equities, inflation, US Bureau of Labor Statistics, CPI All Urban NSA. Data is for illustrative purposes and does not represent any
DWS fund. It is not possible to invest directly in a category. Correlation refers to how securities or asset classes perform in relation
to each another and/or the market. A 1.0 correlation indicates that two security types move in exactly the same direction. A –1.0
correlation indicates movement in exactly opposite directions. A zero correlation implies no relation in the movements.
8 » The phantom menace
9. How prepared are you?
Investors are underweight inflation-fighting asset classes
Different asset classes perform differently in inflationary environments. We divided Morningstar
categories into those that we believe will perform well in inflationary or deflationary environments—or
neither. What did we find? That only 17% of investor assets are allocated to inflation-fighting categories.
INVESTORS ARE UNDERWEIGHT POTENTIAL INFLATION FIGHTERS
30%
Deflation Neither Deflation Inflation
53%
Neither $6.7 trillion $3.8 trillion $2.1 trillion
17% 53.00% 30.38% 16.62%
Inflation
WHAT ASSET CLASSES POTENTIALLY WORK DURING
INFLATION OR DEFLATION?
For inflation, consider international stocks and For deflation, consider cash, US Treasury and
bonds, high-yield bonds, hard assets and agency securities, high-grade corporate bonds
alternative asset classes. and some alternatives (such as market neutral).
Source for table and chart: DWS Investments (for inflation indicators and category representation) and Strategic Insight (for
assets) as of 12/31/10. “Underweight” means an investor or investment holds a lower weighting in a given sector or security
than in another sector, security or benchmark. “Overweight” means the fund has a higher weighting. Deflation includes
the Morningstar Intermediate Government, Intermediate-Term Bond, Long Government, Long-Term Bond, Market Neutral,
Money Market Tax-Free, Money Market Taxable, Muni National Long and Short Government categories. Inflation includes the
Morningstar Bank Loan, Commodities Agriculture, Commodities Broad Basket, Commodities Energy, Commodities Industrial
Metal, Commodities Miscellaneous, Commodities Precious Metals, Diversified Emerging Markets, Diversified Pac/Asia, Emerging
Markets Bond, Equity Energy, Equity Precious Metals, Europe Stock, Foreign Large Blend, Foreign Large Growth, Foreign Large
Value, Foreign Small/Mid Growth, Foreign Small/Mid Value, Global Real Estate, High Yield Bond, Inflation-Protected Bond,
Japan Stock, Latin America Stock, Natural Resources, Pac/Asia ex-Japan Stock and Real Estate categories. Neither includes the
Morningstar Bear Market, Communications, Conservative Allocation, Consumer Discretionary, Consumer Staples, Convertibles,
Currency, Financial, Health, High Yield Muni, Industrials, Large Blend, Large Growth, Large Value, Long-Short, Mid Blend, Mid
Growth, Mid Value, Miscellaneous Sector, Moderate Allocation, Multisector Bond, Muni CA Intermediate/Short, Muni CA Long,
Muni MA, Muni MN, Muni National Intermediate, Muni National Short, Muni NJ, Muni NY Intermediate/Short, Muni NY Long,
Muni OH, Muni PA, Muni Single State Intermediate, Muni Single State Long, Muni Single State Short, Retirement Income, Short-
Term Bond, Small Blend, Small Growth, Small Value, Target Date 2000-2010, Target Date 2011-2015, Target Date 2016-2020,
Target Date 2021-2025, Target Date 2026-2030, Target Date 2031-2035, Target Date 2036-2040, Target Date 2041-2045, Target
Date 2050+, Technology, Ultrashort Bond, Utilities, World Allocation, World Bond and World Stock categories.
The phantom menace » 9
10. DWS Enhanced Commodity Strategy Fund
A history of inflation-fighting power
Commodities may help provide a measure of potential protection against rising inflation because they
are real assets,so their prices typically rise with inflation. In fact, going back to 1976, commodities have
outperformed stocks and bonds in years when inflation has increased.
COMMODITIES HAVE PERFORMED WELL WHEN INFLATION HAS RISEN
(average annual total return, 12/31/76–12/31/10)
45% Average inflation is represented by the average US Consumer Price Index
(CPI) inflation growth rate from 12/31/76 through 12/31/10, which was 4.4%.
Inflation was considered rising when it was higher than it was one year prior.
30%
15%
0% 27.8% 6.2% 6.1% 28.3% 8.4% 5.9%
Commodities Stocks Bonds Commodities Stocks Bonds
Below average and rising Above average and rising
DWS ENHANCED COMMODITY STRATEGY FUND: A UNIQUE STRATEGY
■■ DWS Enhanced Commodity Strategy Fund invests in derivatives representing 19 different commodities.1
■■ The commodities allocation is adjusted using three active management strategies: A tactical
strategy reduces net commodity exposure when trends suggest that commodities are overvalued; a
relative value strategy actively overweights, underweights or shorts each commodity depending on
how “cheap” or “expensive” portfolio managers think it is; and a roll enhancement strategy seeks
to roll into the futures contract that may have the potential to optimize returns.2, 3, 4
■■ Remaining assets are invested in a diversified fixed-income portfolio.
Source for chart: Morningstar, Bloomberg, FactSet as of 12/31/10. Past performance is no guarantee of future results.
The chart above is for illustrative purposes only and do not represent any DWS fund. Commodities, bonds and stocks are
represented by the S&P Goldman Sachs Commodities Index (which measures an unleveraged, long-only investment in futures
that are broadly diversified across the spectrum of commodities), the Barclays Capital US Aggregate Index (which is widely
considered representative of the US bond market) and the S&P 500 Index (which is widely considered representative of the
US stock market), respectively. Equity index returns include reinvestment of all distributions. Index returns do not reflect fees
or expenses, and it is not possible to invest directly in an index. The values of equity investments are more volatile than those
of other securities. Fixed-income investments are subject to interest-rate risk, and their value will decline as interest rates rise.
Commodities are long-term investments and should be considered part of a diversified portfolio; market-price movements,
regulatory changes, economic changes and adverse political or financial factors could have a significant impact on performance.
10 » The phantom menace
11. DWS Floating Rate Plus Fund
Poised to perform regardless of when inflation rises?
Floating-rate loans may provide a potential measure of protection against rising inflation because their
coupons “float.” In other words, the coupon rate is set at a premium over a going market interest rate
(such as LIBOR), and thus will tend to rise if market interest rates rise. History shows that floating-rate loans
have performed well as long as inflation has risen—regardless of how much level of inflation has risen.
FLOATING-RATE LOANS’ AVERAGE ANNUAL TOTAL RETURN (2/31/89–12/31/10)
10%
8%
6%
4%
2%
9.7% 3.9%
0%
Rising inflation Falling inflation
DWS FLOATING RATE PLUS FUND: A COMPELLING OPTION
FOR CURRENT TIMES
■■ DWS Floating Rate Plus Fund seeks to deliver attractive returns over time by maximizing yield while
maintaining relative stability of principal. The fund does this by utilizing a “par-loan” approach, which
focuses on loans portfolio managers believe will repay at face value. Portfolio managers look at the
entire credit spectrum with an emphasis on relatively higher-quality issues (B and BB), cash flow and
hard asset value. They also seek to mitigate downside risk.
■■ The fund (Class S shares) ranked in the top 30% and 7% of the Morningstar Bank Loan category
over the one- and three-year periods (as of 12/31/10; based on total returns; of 43/140 and 8/116
funds, respectively).
■■ The fund (Class S shares) was the only fund in the Morningstar Bank Loan category to rank in the
top 35% during the 2008 bear market, the top 24% during the 2009 bull market and top 30% in
2010 (as of 12/31/10; based on total returns; of 46/127, 32/134 and 43/140 funds, respectively.
Source for chart and text: Morningstar as of 12/31/10. Past performance is no guarantee of future results. This chart is for illustrative
purposes only and does not represent any DWS fund. Floating-rate loans are represented by the Morningstar Bank Loan category.
Rankings and ratings are historical and do not guarantee future results. Class S shares of DWS Floating Rate Plus Fund were ranked
as follows in the Morningstar Bank Loan category: one-year, 43/140 funds; three-year, 8/116 funds; five year, not available; 10-year,
not available. Rankings are based on a fund’s total return with distributions reinvested. Rankings of other share classes may vary.
The phantom menace » 11