The era in which countries could have strong growth and modest inflation is over, according to PIMCO portfolio manager Mihir Worah.
Worah, in the firm’s latest secular outlook series, says that what we referred to as the “Goldilocks” economy in the 90’s is at an end. That’s because underlying inflation is rising due to commodity demand from emerging markets, the easy money policies of developed world central banks meant to inflate asset prices, and currency competition.
From Mihir Worah:
Finally, in our view, the biggest implication for the global economy of these dynamics is that the Goldilocks days of the ’90s where nations could have strong growth and low inflation simultaneously are gone. Perhaps the only way to address the trade off is through new forms of repression like raising margin requirements on commodity investments. While such measures may be temporarily successful, in the long run fundamentals will exert themselves.
Worah suggests a few asset classes that may be able to survive this onslaught. One, are commodities linked to global growth, like oil and copper. Another is some equities. A third is inflation-linked bonds.
From Mihir Worah:
But let me touch upon one other asset class that we feel is very important: inflation-linked bonds. In the U.S., for example, they have the same credit risk as regular U.S. Treasuries, but the interest payments and principal are linked to the rate of inflation. To be sure, there is currently a valuation issue with inflation-linked bonds as real rates on such bonds are low. But we believe those rates are likely to stay low – one way for developed markets to escape from their debt overhang is by artificially keeping real rates low, either through regulation or through higher inflation via inflationary/low-rate policies. So in our view, inflation-linked bonds have the potential to hold their value while serving as a cornerstone of an inflation-hedging strategy.
PIMCO’s 10-year TIPS (treasury inflation protected securities) ETF has surged since the middle of February, but had a terrible Q4 in 2010.
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