flation - In or De?

"I don't know" is where I will begin (and end). But in between, let me present some differing views. Everyone (and I mean everyone) is convinced that Fed's actions will produce massive inflation going forward. I am sure you have seen the charts showing money supply a year ago and today and the chart is off the charts. The popular view is that we'll face some deflation and then massive inflation. OK, but my problem here is that when everyone is convinced something will happen, it usually doesn't!

Barron's recently interviewed Ray Dalio of Bridgewater Associates (excellent interview) and asked him the inflation question. He said, "A wave of currency devaluations and strong gold will serve to negate deflationary pressures, bringing inflation to a low, positive number rather than producing unacceptably high inflation -- and that will last for as far as I can see out, roughly about two years." So no inflationary worries there! Furthermore, a Matin Wolf article in the Financial Times (another excellent article) compared the current recession to Japan's and drew some lessons. He is more worried about deflation, than about inflation. The argument here is that this is balance sheet recession (similar to Ray's point) and these ones (a) take time (b) inflict pain (c) are not easy to tackle. But again, no inflationaly worries..

On the other hand a handful of very respected value investors including Seth Klarman, David Einhorn and Mohnish Pabrai are really worried about inflation and are putting their money where their mouth is! Seth Klarman as I mentioned in a previous post said, "We think inflation could become out of control in 3 to 5 years. Yet, we might not wait for that position. Hence, perhaps early, we have a large inflation hedge. We don't own gold as a commodity. We won't disclose our inflation hedge, yet with enough work, you can find true inflation hedges." David Einhorn of Greenlight Capital in his latest shareholder letter said, "Our current chairman of the Federal Reserve, Ben Bernanke, is an "inflationist". When times were good, he supported an easy money policy. Even when the Fed raised rates...bubble formation...money printing...Our guess is that if the chairman of the Fed is determined to debase the currency, he will succeed. Our instinct is that Gold will do well either way: deflation will lead to further steps to debase the currency, while inflation speaks for itself." Mohnish Pabrai in this annual letter to his investors went a step further and gave his macro view on the economy going forward. I mean this is an ardent Buffett follower and hes talking about the macro view and the massive inflation and high interest rates in the future. He has geared his portfolio towards hard assets like low cost barrels in the ground, low cost iron ore reserve etc. Said another way - hes buying commodities!

Only time will tell what will happen. This is a time when many wonderful business are selling for way below their intrinsic values. The challenge in this market is to identify and buy the safest and the cheapest stock (or debt). The macro world can change very fast; are you agile enough? As a value investor if you are overly worried about the macro view, a smart hedge I can understand, a core holding - not so much!