Jim Rogers, legendary commodities investor and co-founder of the Quantum Fund along with George Soros (a legend in his own right), has been looking at the pace of money printing in the developed world. And he doesn't like what he sees. In fact, the legendary investor was recently quoted as predicting, "inflation run amok."
Rogers isn't just another Wall Street prognosticator. He predicted the housing bubble and financial crash, and started selling stocks in the sectors in 2006. He also saw the slowdown we've seen during the past couple years in Chinese stocks coming. During the 10 years he helped manage the Quantum Fund with Soros, the fund returned 4,200%.
So it's easy to see why people tend to sit up and pay attention when Rogers warns of trouble on the horizon.
An unprecedented increase in monetary stimulus
Rogers has good reason to fear the high inflation. Since 2008, the Federal Reserve has pumped more than $2.3 trillion into the economy and just recently announced another $40 billion program to reduce interest rates further in the third round of quantitative easing. The result has been only a gradual reduction in unemployment and a sluggish 2% rate of economic growth. To make matters worse, if the president cannot come to an agreement with Congress to avoid the fiscal cliff, then there will be little left to support the economy but to enact more monetary easing.
And the U.S. Federal Reserve is not alone. Central banks in Europe, Japan and China have all turned on the printing presses to stimulate growth. While these policies have led to only a slight increase in inflation during the past couple of years, this could all change soon.
If the economy starts showing any sign of improvement, then markets could start pushing prices across all sectors dramatically higher, which would be the best-case scenario. Even if the economy doesn't pick up, the immense amount of new money central banks are creating could start pushing up prices. The result: Stagnant growth and high inflation, or stagflation.
Follow the leader
Investors looking to protect their portfolios, or even profit from the coming rise in prices, should consider what Rogers and other successful investors are doing. Rogers has been a buyer of commodities -- especially gold and agriculture -- recently saying that agriculture is one of the few sectors that will boom during the next few years. Extreme weather patterns across the globe pushed some agricultural prices up more than 60% this year and the increased consumption of meat in emerging markets will likely drive the price of feed grains up.
Several exchange-traded funds (ETFs) provide a good bet on inflation and other global forces. The PowerShares DB Commodity Index Tracking (NYSE: DBC) gives investors exposure to a range of assets from energy to metals and agriculture. Investors looking for a more focused investment in agriculture may prefer the PowerShares DB Agriculture (NYSE: DBA). The fund holds a diversified mix of agriculture futures contracts including: Corn (12.4%), wheat (12.4%), cattle (16.7%) and soybeans (12.4%).
Of course, the classic inflation bet has been gold. An investment in the SPDR Gold Shares ETF (NYSE: GLD) since its inception in 2004 has returned 17.7% on an annual basis and many investors are positioning for a new breakout in prices.
One of my favorite inflation hedges is in real estate investment trusts (REITs). Runaway inflation makes the high level of debt on company books worth much less, but real estate assets keep their value even as the dollar falls. HCP Inc. (NYSE: HCP), a REIT that buys and manages health care properties, should do well as the Affordable Care Act brings more insured visits to hospitals and services. The shares pay a 4.5% dividend yield and have returned more than 24% in the past year.
The policy levers have certainly been pulled for either economic growth, inflation or both. This is why I recommended Freeport McMoRan (NYSE: FCX) back in August. The metal-mining stock has exposure to copper and gold prices and a 30.4% annualized revenue growth during the past 10 years.
The stock has some great support behind it with the rebound in housing and global monetary easing, and has returned about 10% since I profiled it in August, beating the S&P 500 by more than 12%. Best yet, shares still trade at a relatively cheap 12.4 times trailing earnings and pay about a 3% dividend yield.
Risks to Consider: Despite a multi-trillion dollar response to slow economic growth, monetary easing has yet to lead to much higher inflation. It is a good bet that prices are going higher, but it may take a year or more before a strong jump in inflation materializes.
Action to Take --> Whether economic growth picks up or not, it is a fairly safe bet that prices across all segments of the industry are going higher. The only question is how high and how fast. Investors need to have assets in their portfolios that will protect them from the coming rise in inflation and the ideas mentioned should do just that.