This Protects Against Inflation Even Better Than Gold…
The kids will be back in school soon… Or maybe not.
Up where I live, we’re just days from what is normally the first day of class. But school schedules are still unsettled in many parts of the country. A year ago, the unknowns of this school year would have been unthinkable. Now, they are just another inevitable in a long succession of unprecedented events that have unfolded over the past six months.
Six months ago, it was also unthinkable that the federal government would run a budget deficit of $3.7 trillion this year. That’s about 17.9% of GDP, the measure of the economic output of the country.
For comparison, deficits over the last 50 years averaged about 3% of GDP. Even in 2009, during the Great Recession, the deficit was just 9.8% of GDP. The only time this level has been higher was during World War II, when it topped 20% for three years.
A Recipe For Inflation
Let’s take a moment to look back at history. In the 1970s, when the deficit was stuck above 2.5%, economists worried about inflation. They were so concerned that the Federal Reserve changed its policy in 1979 to specifically target inflation.
[Related: Why It’s All About The Fed]
Today, the Federal Reserve is once again concerned about inflation. This time, the concern is that inflation is too low. And there will now be another change in policy to target inflation. (I touched on those changes in this piece.)
The Fed would like inflation to average 2% a year. At a rate of 2%, prices would rise about 22% in 10 years. (Fun context: The median household income grew about 7.4% over the past 10 years.)
In order to increase inflation, the Fed decided that it will target average inflation. This will actually allow inflation to be above 2% for some time as long as it averages out to 2% in the long run.
The next chart shows inflation since 1960. It jumped above 2% in 1965 and remained there almost continuously until the financial crisis in 2008.
Source: Federal Reserve
Now, I’m an investor, not an economist. When I look at that chart, I wonder why the Fed didn’t push inflation back below 2% before it skyrocketed above 10% in the 1970s. My guess is that managing inflation is difficult to do, especially after it takes hold.
But I’m sure the economists at the Fed have a plan to avoid that…
How To Trade This
My data tells me it’s best to plan for the Fed to have some problems containing inflation. And while I mentioned in this article that gold and gold miners are worth a look, I recently told my Maximum Income subscribers about a trade I like even better…
The trade is in Southern Copper Corporation (NYSE: SCCO).
Copper has historically been a strong hedge against inflation. The chart below is from a study showing that copper serves as a better short-term inflation hedge than gold.
Action To Take
In the short run, I expect inflation expectations to rise. After all, that is the Fed’s goal. And that makes copper a great trade.
SCCO is among the few copper miners that pays a dividend and is attractive to income investors. You could simply buy SCCO, collect your 3% dividend, and call it a day.
That’s not a bad plan. But over at Maximum Income, we have a better plan. We’re going to generate what I like to call “bonus dividends” on SCCO that will take our income to another level…
Frankly, I think every investor should at least consider this strategy. And if history is any guide, you could easily be adding hundreds (or thousands) in extra income to your account with just a few minutes of work.