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Oh well, back to the grind..! Continued from here, and I guess here: I actually started writing this post the other day, but quickly got side-tracked into a different post – after all, one can’t really talk about real assets without first taking on inflation! For reference, here’s a reprint of my investment allocation pie-chart:

Natural Resources (3%), Agri (5%) & Property (10%): 

For this post, I think it makes more sense to group my real asset (or should I say, inflation plays..!) allocations together. As I’ll get to, this overall allocation is actually a less aggressive bet on inflation than it appears. This is not where I originally intended to be – I’d planned to amass at least a 20-25% allocation dedicated to inflation pure plays. But, as I detailed in my last post, I screwed up with my rather Pavlovian assumption of rapid inflation in response to the US & European fiscal & monetary stimulus we’ve seen to date.

[And as I write, it's amusing to see the respective central banks almost tripping each other up in their race to hint at & declare more stimulus. The difference in emphasis is also interesting. I'd perhaps describe the Fed's mission as providing liquidity, while the ECB's intent on absorbing illiquidity - not quite the same thing, actually! The ECB also continues to strive to act more prudently, touting sterilized intervention - quite honestly, considering bank behaviour these days, it makes v little difference right now. But I certainly think it supports my thesis that the EUR's the better long-term currency bet (at least vs. the USD!)].

It’s not that I actually believe the deflation nutters..! They appear to have got it right for now, but they’re forgetting something: De-leveraging is a finite process, while monetary stimulus can be a pretty much infinite process. [And a lot less expensive these days - used to cost a lot of paper & ink, now it's just a click away! Good news, I guess the cost of inflation's getting cheaper... ;-) Maybe Obama should have used that in his convention speech?!] So, c’mon, which process do you think inevitably wins out in the end..?!

But that’s all currently obscured by the fact all this easing’s being offset, for possibly some years to come, by far larger de-leveraging – by consumers, to some extent, but mostly by the banks (due to the multiplier effect). This led me to reconsider my perspective, and conclude we may see a possibly prolonged period of low inflation. Which would then:

‘…be followed by a scenario where, almost at the snap of a finger, economic growth, risk appetite and especially inflation will start firing monstrously on all cylinders… Therefore, there seems to be plenty of time to kill before you really need to jump into those real asset/inflation pure plays.’

So, why on earth do I even have an 18% allocation to real assets right now? OK, I’ll get to that. But first, I should highlight another screw-up/disconnect on my part: For a variety of reasons, I’ve a distinct preference personally for i) Agri vs. ii) Property vs. iii) Natural Resources. But this order/ranking is completely wrong! As I’ve highlighted, banks are inextricably linked to & are the primary conduit for inflation. Another reason to hate the bastards, eh..?! ;-) I think it’s pretty impossible to envisage a serious onslaught of inflation without the banks being back in full scale risk-on/balance sheet expansion mode.

And how do banks like to lend? Well, inflation’s a monetary phenomenon (amazing to see people still debate that!), but property is totally a credit phenomenon. When banks are nervous they demand property as collateral, and when they’re suffering full-blown ‘confidence’ property also seems like incredibly attractive collateral to them..! When we do turn the corner & the impact of all this easing finally arrives, with a vengeance, it’s going to be via bank credit – which is just about the same as saying via property. [So, obviously, what you really need to watch for (whether it's by state, country or region) is simply the tipping point where bank balance sheets flip back into expansion mode].

Property’s therefore the most obvious, the largest & the first inflation play to ride. Eventually, as bank & investor risk appetite grows, investment & lending will spill over into natural resources. Finally, as inflation starts to get out of control (and the hucksters really come out of the woodwork) it will be agri’s time to really shine. Big picture, think of all this within the context of, say, a long-term relationship between an increasingly frazzled financial adviser & his horribly churned client:

- First, he hunkers down with bonds & waits for the pain of former losses to go away…

- Then he bravely pokes his head over the trenches and buys a couple of nice dividend stocks – it goes well, and he begins to slowly & steadily load up on stocks, culminating in a charming selection of AIM/OTC/IPO/POS stocks

- Now flush with confidence & becoming fearful about inflation, he ploughs into a series of red-carpet property deals/syndicates – ‘bricks & mortar’, my man, you can’t go wrong…

- Next, sharp as ever, he scents exuberance (& danger) in the air – time to buy resource stocks, diamonds, gold bars etc. – real assets in the ground & the vault, that’s what you need now, sir!

- Finally, there’s nothing left to invest in (and perhaps a lot less money to invest with too) – time to load up on agri futures/stocks, bushels of corn and wires to smooth overseas land salesmen, as the price of everything is rising 25% a year…

So, forget my personal preferences – in terms of sizing, priority & timing of inflation pure plays, it’s: i) Property, ii) Natural Resources, and then iii) Agri.

To be Continued…

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