More Inflation and Weak Growth Spell Economic TroubleKevin Douglas
On the surface, things appear to be going well for the economy right now. After a brief dip, the dollar’s value is now going steadily up, and a major bond selloff in October has created higher yields. Both of these seem to be good things. However, there’s more to this situation than meets the eye. In fact, they’re both signs of potential trouble on the horizon.
Inflation vs. Growth
Both the dollar and bond yields were falling earlier this year, in response to a variety of global factors. Therefore, to see them rising again seems like we’re on the road to recovery. Unfortunately that’s not what’s going on.
While the dollar’s value has gone up, commodity prices have remained strong as well. This suggests the rise is the result of inflation, rather than actual economic growth. Similarly, while bond yields have seemed to go up, the yields of Treasury Inflation Protected Securities (TIPS) have not.
TIPS are low-risk bonds with yields that are adjusted for inflation. This means their real value remains about the same in any economic situation, rather than being tied to an over-inflated dollar value. Their buying power is maintained over time. Therefore if the economy was really experiencing growth, TIPS values would increase to match. The fact that they haven’t means the increase in other bonds is artificial and ultimately short-lived.
A Forecast of Slower Growth
At the beginning of the year, Consensus Economics projected our economy’s growth at 2.5%. By October however, that forecast had dropped to 1.5%. Similarly, the predictions for next year have gone from 2.4% down to 2.2%. Meanwhile, expectations for inflation are on their way up, particularly in the wake of the Fed’s recent rate hike.
There are a number of possible reasons for this. The Presidential election has had a significant impact on the markets all year, leading to volatility and a marked decrease in investor confidence. This summer also saw bond prices go way up while yields plummeted. Many believe the current reversal is an over-correction for that, which won’t last long.
Whatever the cause, the effect is clear. Both markets and the value of the dollar appear to be strong and stable, but they’re not.
If you want to protect your savings during these troubled times, as well as in the slowing economic growth to come, then it’s important to get them, at least to some degree, out of the markets and into a safe haven.
Gold, much like TIPS, is not subject to inflation. As a physical commodity, it retains its buying power. That is it increases in value over time, so that regardless of what the dollar or the markets do, your investment remains stable.
Investing in something volatile like the markets can give you a good yield in the short term. However, you can also lose a large chunk of your savings, especially if retirement hits before a recovery does.