It may be hard to hear it over the sound of the printing presses, but it’s coming and you must be ready to protect yourself.  From gold to oil to copper and even cheese, commodity prices are going higher as investors get a sense that QE part two will lead to a drop in the U.S. dollar.  At some point, foreign buyers of U.S. debt must be enticed or compensated with higher interest rates and inflation for the fact that their investments will be repaid with weaker dollars.

To properly protect your portfolio from inflation you must take a three-pronged approach.  First, you need to buy companies that own or sell real things.  Make sure you buy mining companies, oil producers, food, REIT’s and so on.  The second step is to buy companies that have the ability to pass on increased costs to their customers or those that maintain a significant level of inventory.  Groceries stores, telcos, unregulated utilities and pipelines will do the trick.  Finally, for your bond portfolio, you must unequivocally sell your long dated maturities and buy Real Return Bonds or TIPS and floating rate debt.  At a minimum keep your bond maturities short so that you will have cash when interest rates have risen.

In its most recent communication on September 21st, the Federal Reserve made its inflation target explicit, “The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”  Start preparing now.

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