One of the key issues investors have to make a decision on in the next couple of years is what the likely profile for inflation is going to be and how it will affect their investment decisions.
Some have framed this decision as being one between deflation and hyper inflation. Even if we ignore the somewhat ridiculous “hyper” element of the choice, the implications for financial assets are hugely different.
If we see deflation then the obvious choice is government bonds, with equities likely to struggle and commodities still more so, while index linked bonds are likely to be a waste of money.
If we get inflation you can largely turn the order around, although too high an inflation rate is normally not to be good for equities either as interest rates tend to be high and volatile in such an outcome. Yet is this the real choice we are facing? The Financial Times has been full of articles arguing that inflation is a necessary outcome of the quantitative easing, normally citing a likely surge in “inflationary” lending.Full Story
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