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David Rosenberg hasn’t changed his deflationary outlook, but he has become a bit more open minded as the rally has confounded even the best of analysts.   In a recent research note he gave investors 6 ways to prepare for potential inflation:

There is no sense in being dogmatic. But just in case inflation were to stage a comeback, this is how one would prepare for it:

  • Precious metals (while gold grabs the spotlight, silver has surged 52% this year and has far outpaced the 27% runup in gold; and the gold/silver ratio, while down from a peak of 84 to 66, is still above the average of 54 over the past three decades).
  • An even steeper U.S. yield curve!
  • TIPS (or real return bonds) — the 5-year TIPS breakevens right now point to an inflation expectation of just over 1.7%, whereas consumer expectations are closer to 2.6%.
  • Short-term duration corporate bonds (and go out the credit curve).
  • Commodity currencies — Canadian Loonie, New Zealand Kiwi, Aussie dollar, Brazilian Real, and Norwegian Kroner.
  • Basic material stocks (including energy) as well as consumer staples (tobacco, food/beverage).

We don’t have a big inflation view, but you never score brownie points by being dogmatic. If (when?) the massive amounts of fiscal and monetary stimulus ever do show through in final inflation (this will hinge on a renewed expansion in household balance sheets and a fresh credit-creation cycle), these are the areas that would likely garner the most investor interest.

For readers who are curious, I continue to maintain my view that deflation remains the stronger of the two forces at work.  Consumer balance sheet de-leveraging will keep CPI from expanding rapidly.  Without a vast expansion in credit I find it difficult to envision a scenario in which prices rise rapidly out of control.  This however, will not keep bubbles from forming in various assets as Central Banks force investors out of low risk assets and into higher yielding assets.  This reckless banking tactic is likely to result in more booms and busts as investors pile into a select few assets to meet their investment needs.  All the while continuing to de-leverage their personal balance sheets and struggle to meet their personal financial needs.  Meanwhile, the investment ideas above will not only become tools to combat inflation, but necessary tools of diversification as investors fight to keep their heads above water….