Inflation?, What Inflation?

I do not intend this post to be a statement that inflation is here. But I think that challenging our traditional notions of how we measure inflation may be in order. Whether it is Core Inflation or Consumer Price Index (CPI had an increase of 1.2% over the last 12 months through November 17), it is clear that these measures are not reflective what has been going on on the commodities markets over the last several months.

Commodity Price appreciation for the recent 5 months:

Commodities                                        Return*
Aluminum                                               19.20%
Barley                                                     75.10%
Coffee                                                    22.73%
Copper                                                   29.83%
Corn                                                       55.27%
Cotton                                                    58.86%
Gold                                                       11.85%
Lead                                                       28.29%
Lumber                                                   15.42%
Lean hogs                                                1.69%
Live cattle                                                4.30%
Nickel                                                     16.87%
Orange juice                                             1.38%
Palladium                                                 66.25%
Platinum                                                  10.03%
Rice                                                        52.44%
Silver                                                      52.86%
Soybeans                                                18.70%
Sugar                                                      47.49%
Tin                                                          40.95%
Wheat                                                     50.08%
Zinc                                                        19.62%
Rare earths                                             60.53%

With interest rates at historic lows, it remains to be seen how investors could keep up with a significant loss of purchasing power.

Investment Discipline

I am sure many of us have heard that trying to “time the market” is not a good idea. Statistics have shown that missing the five best trading days of the year can significantly affect investment returns.

Well, a different statistic this year shows again why timing is not a good idea. According to a study last week by the analysts at Bespoke1 , year-to-date returns for the S&P 500 Index would have dropped from 8.3 percent to -3.8 percent if you were out of the market the first trading day of each month!

The concept of buying near the low end and selling near the high end of a trading range in an attempt to extract incre¬mental return out of a relatively flat market may be appealing. However, when large returns are spread among a few widely dispersed days, asset allocation suddenly looks more attractive than attempting to aggressively trade a range-bound market.

The message? Traditional investment markets continue to be a great place for a longer-term strategy, but jumping in and out of the market for incremental returns is playing with fire.


Source (1): “If Only There Were 20 Months a Year”, December 1, 2010, Bespoke Investment Group, www.bespokeinvest.com