It is no surprise that the primary question clients currently field is, "How high is inflation rising?"

Many remember the late 1970s and early 1980s when inflation was about 14%. With the Obama administration and Congress spending at the highest rate in our country's history, this topic is front and center in clients' concerns. After the meltdown of the baby boomer's portfolios this past year, a second blast from inflation would severely erode their purchasing power. Not all of our clients bailed to fixed income, but many investors did. If inflation returns, their new, bond-heavy portfolios would suffer, and investor confidence in the capital markets would plunge. I encourage advisors to understand inflation and its root causes.   More 

A brief addendum to my previous pieces on inflation and quantitative easing.

The latest Financial Highlight from the Federal Reserve Bank of Atlanta decomposes the Fed's purchases of Treasury securities by maturity. Half of these Treasury purchases have maturity between four and 10 years. Treasury purchases are a hefty part of the Fed balance sheet.

Therefore, if the Fed does nothing and just lets these bonds expire, it will drain liquidity from the system and consequently limit the monetary base in four to 10 years, which is when I thought that higher-than-average inflation would be a realistic scenario.   More 

I was quoted by The Wall Street Journal on Saturday discussing how to design portfolios in case one expects deflation or inflation. I said that cash has generally kept up with inflation. What I meant is that over the long run, the total return to cash has been a little above inflation. For example, the Ibbotson SBBI Yearbook 2009 shows that between the beginning of 1926 and the end of 2008, the average return to cash was 3.7% annualized, while inflation was 3% annualized.

However, and particularly after the end of the gold standard and the Bretton Woods system, inflationary bursts have eroded the purchasing power of savings. Therefore, I used Morningstar EnCorr to find annualized returns to different fixed income indexes for the years and compared them with inflation for the period from 1973 through 2008.   More 

What is the least loved asset class? I would argue that it is U.S. Treasury notes and bonds, but there are at least a few reasons that it makes sense to have some Treasury bonds in your clients' portfolios:   More 

Jack Hough has a fun piece in SmartMoney titled, "True or False: U.S. Economic Stats Lie"  If you care about understanding the economy, it's always good to dig into how our economic data are compiled and computed. There are variety of difficult and interesting issues attached to measuring basic concepts such as inflation and unemployment. These issues can cause the data to lead us astray.   More