The Coming Inflation Trade

Making the case for Real Estate, Master Limited Partnerships and Alternative Hard Asset Investments

Visit the front pages of Wall Street Greek to see our current coverage of economic reports and financial markets.

(Tickers: ARLP, AHGP, APL, ATN, BWP, BBEP, BPL, BGH, CLMT, CPLP, CQP, CEP, CPNO, XTEX, DPM, DMLP, DEP, EROC, EPB, EEP, ENP, ETP, ETE, EPD, EPE, EVEP, EXLP, FGP, GEL, GLP, HLND, HEP, NRGY, NRGP, KMP, KSP, LGCY, LINE, MMP, MWE, MMLP, NRP, NMM, NS, NSH, OKS, OSP, PVR, PVG, PAA, QELP, KGS, RGNC, RVEP, SEP, STON, SXL, NGLS, TCLP, TGP, TLP, VNR, WES, WPZ, WMZ, BAC, FRE, FNM, GS, MS, WFC, TD, SRS, URE, IGR, XIN, RYHRX, TRREX, TOL, HOV, DHI, BZH, LEN, KBH, PHM, NVR, GFA, MDC, CTX, KBH, RYL, MTH, XIN, BHS, SPF, MHO, OHB, WCI, NYX, DIA, SPY, QQQQ, NYX, DOG, SDS, QLD, XLF, IWM, TWM, IWD, SDK)

Inflation Trade

Inflation is coming! Not tame, controlled increases in prices and wages that make everyone feel richer; this inflation will be nasty, double digit, 70's style inflation that will erode purchasing power and destroy the fixed income markets. Annuities, bonds, and pensions will provide the same income, but it will cost much more to buy everything... not just petroleum-based products, but water, utilities, food, clothing, and all the necessities of life.

The massive debt accumulated by the US Government will be repaid with dollars 90%, 80%, or 50% of their current value; the debt will be monetized! This inflationary period should start to become apparent at the end of the 4th quarter of 2010 or the 1st quarter of 2011. There is time to prepare and protect income and wealth, as well as reap enormous profits.

"The stage has been set to reap "generational" profits from the financial turmoil of the past few years..."

The premise of my article is the accumulation of assets that generate income and will grow and benefit from rising prices. The focus is on the inflation-hedged asset class of single-family residential homes purchased for the express purpose of rental income and capital gains. Those who have identified the trend and positioned themselves early in the "Inflation Trade" should reap explosive profits. These rentals can be easily accumulated: individually, conservatively, and dependably. The stage has been set to reap "generational" profits from the financial turmoil of the past few years, and create a lifeboat to protect the investor and his family against future economic cycle troughs.

This article has been written to prepare the individual investor for the coming economic change that I view inevitable. I hope to provide an incentive to individuals to execute a plan to create lasting wealth that can be used immediately, and that can also be passed along to future generations as an income legacy.

The extraordinary times present in the US will likely allow the traditional time frame of 10 years, which is needed to accumulate and season a rental portfolio, to be reduced to 4 years. I strongly believe the combination of: historically low fixed rate mortgages; the developing housing shortage, due to the lack of new construction necessary to keep pace with our expanding population; and the explosion of government debt, will drive those wishing to protect purchasing power into tangibles and income producing Real Estate.

I hope to provide a recipe to accumulate, manage, and harvest the profits during the coming "Boom Years," and to prepare the reader for the inevitable downturn needed to contain the inflation unleashed by government action. My wish is to provide economic signposts to gauge the cycles' progress, as well as an exit strategy to be employed prior to the next recession, which will potentially be worse than the 2007 - 2009 downturn.

A dire and yet highly possible scenario for the future is a 70's style true inflation across all sectors of the economy. While visiting Australia this past summer, I met with school teachers who were striking for higher pay. The Nurses Union had just been awarded a 21% pay increase, and the government had offered the teachers a 12% raise, which was turned down. The teachers' demand was for a 16% increase in pay. This behavior is typical in an economy entering into a Price-Wage Spiral. As prices go up, more income is needed to afford the prices, in turn causing a need to raise prices to afford the wages. The cycle invariably ends badly.

However, huge gains can be made by those positioned in inflation hedged assets such as master limited partnerships typical with commodity based products such as gas, oil, coal, pipelines, iron ores, etc, as well as tangibles such as art, stamps, and coins. Real estate rental properties have an income stream that can grow significantly during an inflationary "boom." Furthermore, property value/price generally exceeds the rate of inflation adding a "value-on" component.

Editor's Note:

A few publicly traded master limited partnerships include: Alliance Resource Partners L.P. (Nasdaq: ARLP), Alliance Resource Holdings (Nasdaq: AHGP), Atlas Pipeline Partners L.P. (NYSE: APL), Atlas Pipeline Holdings (NYSE: AHD), Atlas Energy Resources (NYSE: ATN), Boardwalk Pipeline Partners (NYSE: BWP), Breitburn Energy Partners (Nasdaq: BBEP), Buckeye Partners (NYSE: BPL), Buckeye Holdings (NYSE: BGH), Calumet Specialty Products (Nasdaq: CLMT), Capital Product Partners (Nasdaq: CPLP), Cheniere Energy Partners (AMEX: CQP), Constellation Energy Partners (PCX: CEP), Copano Energy (Nasdaq: CPNO), Crosstex Energy (Nasdaq: XTEX), DCP Midstream Partners (NYSE: DPM), Dorchester Minerals (Nasdaq: DMLP), Duncan Energy Partners (NYSE: DEP), Eagle Rock Energy Partners (Nasdaq: EROC), El Paso Pipeline Partners (NYSE: EPB), Enbridge Energy Partners (NYSE: EEP), Encore Energy Partners (NYSE: ENP), Energy Transfer Partners (NYSE: ETP), Energy Transfer Equity (NYSE: ETE), Enterprise Products Partners (NYSE: EPD), Enterprise GP Holdings (NYSE: EPE), EV Energy Partners (Nasdaq: EVEP), Exterran Partners (Nasdaq: EXLP), Ferrellgas Partners (NYSE: FGP), Genesis Energy (AMEX: GEL), Global Partners LP (NYSE: GLP), Hiland Partners (Nasdaq: HLND), Holly Energy Partners (NYSE: HEP), Inergy (Nasdaq: NRGY), Inergy Holdings (Nasdaq: NRGP), Kinder Morgan Energy Partners (NYSE: KMP), K-Sea Transportation (NYSE: KSP), Legacy Reserves (Nasdaq: LGCY), Linn Energy (Nasdaq: LINE), Magellan Midstream Partners (NYSE: MMP), MarkWest Energy (NYSE: MWE), Martin Midstream Partners (Nasdaq: MMLP), Natural Resource Partners (NYSE: NRP), Navios Maritime Partners (NYSE: NMM), NuStar Energy (NYSE: NS), NuStar GP Holdings (NYSE: NSH), ONEOK Partners (NYSE: OKS), OSG America (NYSE: OSP), Penn Virginia Resource (NYSE: PVR), Penn Virginia GP Holdings (NYSE: PVG), Plains All American (NYSE: PAA), Quest Energy (Nasdaq: QELP), Quicksilver Gas Services (NYSE: KGS), Regency Energy Partners (Nasdaq: RGNC), Rio Vista Energy (Nasdaq: RVEP), Spectra Energy Partners (NYSE: SEP), Stonemor Partners (Nasdaq: STON), Sunoco Logistics Partners (NYSE: SXL), Targa Resources (Nasdaq: NGLS), TC Pipelines (Nasdaq: TCLP), Teekay LNG Partners (NYSE: TGP), Transmontaigne Partners (NYSE: TLP), Vanguard Natural Resources (NYSE: VNR), Western Gas Partners (NYSE: WES), Williams Partners (NYSE: WPZ) and Williams Pipeline (NYSE: WMZ).


Please see our disclosures at the Wall Street Greek website and author bio pages found there.