I mentioned a bit more than a month ago that I was wrestling with the question of how to deal with an inflationary economy. I'm still wrestling. The economic disaster hasn't injured me quite as much in the non-retirement portfolio as I had feared, or rather, the damage to my stock mutual funds and some of my bonds has been almost compensated by the improvement in some of my other bonds. The Fannie Mae bonds, for example, are actually above par! And I have some hope, that over the next ten years, either the voters will get smart enough to kick the Democrats out of power, or more direct action will make the value of anything but freeze dried food and ammunition rather irrelevant.
Liz Ann Sonders of Schwab is indicating that there is beginning to be a cautious, realistic optimism about the market, and investors are moving from cash to a variety of investments. I don't find this hard to believe; the economy was supposed to rebound by second half anyway, and even the crooks who control Congress couldn't completely screw this up. As Sonders pointed out on June 24, the Fed believes that the recession is beginning to ease, and their actions reflect this. But also:
Schwab's Investment Strategy Council continues to believe inflation is not a near-term risk.Which fits with some stuff that I linked to several months ago. For those that are still many years from retirement, slowly easing back into conservative growth stock mutual funds might be a good idea. For those of us who aren't that many years away, perhaps either short-term bonds (maturities of 2-5 years) make sense, or adjustable rate bonds.
Although money supply has grown, the money multiplier (or velocity of money) has collapsed. Quantitative/credit easing ("printing money") doesn't cause inflation unless that money is getting into the economy … at this point, it isn't.
In the longer-term, credit growth will revive and the economic recovery will be more clear—and only then will the Fed need to begin the tightening process. The Fed made it clear that stage is still well ahead of us.
Of course, don't make the mistake that I made, buying some Sallie Mae adjustable bonds--ones that could theoretically drop to 0% interest if interest rates fell to 0. Not like that could happen, I told myself! Unlike a fixed rate bond, where falling interest rates at least make the value of the bond go up--with these, not only does the interest rate fall--but so does the value of the bond, since it now pays a much lower interest rate. I guess that I will just hold onto these, until they mature (some years out), or the inflation ogre shows up and spoils the party--at which point, those bonds will probably be worth having.