Toppy Market - Stocks as an Inflation Hedge?
I’m still going through the process of catching up on my Christmas reading - one web site that I like to keep an eye on is that of John Hussman, who writes an excellent weekly update of the market. I found the entry from the 20th December very interesting, and would recommend having a read.
The Market has been hitting yearly highs, and the all time high is within sight. This has been making me feel uneasy as it appears that all the current problems are being ignored and that the financial crisis has been forgotten about. The one thing that I’ve been wrestling with is, how much will the QE effect the markets in 2011?
Under normal circumstances, and given the recent run, I’d cash in my gains and (hopefully) wait for the markets to pull back to what I consider a more reasonable level before re-entering. However, these aren’t normal circumstances and I’m worried about sitting in cash in these (potentially) inflationary times.
The Hussman article has reassured me that moving into cash might not be such a bad idea, and has an interesting comment regarding holding stocks in inflationary times (which would be one of my main reasons for staying invested):
“Investors sometimes make the mistake of believing that since nominal earnings can be expected to grow during periods of inflation, stocks should be a good inflation hedge. Straightforward reasoning, but unfortunately, it’s not true. Sustained periods of inflation are disruptive, so even during the period between 1960 and 1980, S&P 500 nominal earnings still did not accelerate from their normal 6% peak-to-peak long-term growth rate. Moreover, stocks only behave as a good inflation hedge after high inflation is already fully anticipated. During the transition from low inflation to high inflation, stock prices have historically provided awful returns. “
At the moment I don’t see much value around and am inclined to take my profits. It’s also interesting to see all the resource stocks that are all the rage with the yearly competitions on Fool/Stockopedia, the contrarian in me thinks this is a clear sell signal. I must confess however that I still have large holdings in both SOCO International (LON:SIA) and Kalahari Minerals (LON:KAH) , but consider these as world class assets and would rather stay invested than gamble that I could buy cheaper later on.
The question is, what to do with my cash. I’ve been thinking of Money Market funds, but must confess that I don’t know much about them - any suggestions appreciated!
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29 comments
In terms of "toppy markets", the UK and US do look somewhat pricey, on a simplistic basis. In the UK's case, however, I wonder to what extent the apparently high rating is due to the market being dominated by global oil and mining companies?
You are suggesting a P/E of 15.7 and Yield of 2.7% is "toppy"?
Given base rate at 0.5% and very low inflation I'd argue it's probably fair value/ even edging toward slightly cheap.
Checking the FT's weekly market ratios published today, there are some interesting figures, which I've selected:
In terms of "toppy markets", the UK and US do look somewhat pricey, on a simplistic basis. In the UK's case, however, I wonder to what extent the apparently high rating is due to the market being dominated by global oil and mining companies?
More significantly, these figures suggest that Chinese and Brazilian markets are not toppy at all, as might be expected after they've been relatively static over the past year. This illustrates, once again, that the view we have of our local markets here is not necessarily an appropriate view for other parts of the world. In this globalised era, when it is relatively easy to get exposure to global markets, IMO investors need to take a broader view than just one of their own local market.
I have recently added some Aberdeen Asian Smaller (LON:AAS) to my portfolio, to add exposure to the most dynamic parts of the Far Eastern economies.
Regards,
Mark
Mark,
There have been some discussion on TMF about warrants & subscription shares. I wonder if you have considered SDPS (which I hold) or perhaps AAIW to give some gearing to your exposure.
deucetoace
I'm not sure about the joint average income being so high Imv. Wouldn't it be safer to expect that most households would have one main earner(26k aver) and then the spouse, more often than not, perhaps only working part time, or not at all. Or is this an old fashioned view? Much has been made of the gender pay gap so I'd expect the joint average to be less on that basis alone.
Housing does seem to be prettty over priced imv down south and I have to admit that I've been one of those expecting far larger falls in property in prices than we have seen to date.
Surely a large number of people with mortgages set up some level of over payment on the way down so on the way back up the first two or three interest rate rises can be absorbed without increasing your monthly outgoings?
I would like to think I'm not in a minority group here and therefore the initial stages of interest rate increases will not be as painful as feared?
Then again, maybe I'm blinkered & too close to the 'what recession?' zone where I sometimes wish the likes of Xcite directors etc were not on the house hunt ;-)
All good points but this isn't really what the numbers are telling us if you look at them closely. UK house owners have been on the whole paying down debts at record levels. Sure there will be a lot of people who get unstuck if rates rise and they start paying 7-8% on their floating loans coupled with public sector job cuts and increased taxes. The stats are showing that actually mortgage debt is not a huge problem and in general there is a huge amount of wealth stored as equity in our housing stock still.
However what you seem to be saying is that we'll get massive increases in non-housing inflation but a fall in house prices and a fall in salaries and a rise in taxes all at once and the Bank of England will raise rates to steady inflation. This will cause massive defaults in mortgages with B&B and so it is a bad inflation hedge. I just think this is unlikely and that in fact if inflation takes off then it won't be focussed on everything non-housing. I personally don't think it will take off but if it does then I suspect house prices will rise too.
As an instance of my argument look at house prices in Aberdeenshire and Deeside since the price of oil and rose above $90. All the oil money in and around Aberdeen has been filtering down through the economy in the region and has caused inflation all the way across the board including Aberdeen house prices and the Aberdeen rental market too. You can bet Alan Booth and the directors of XCite with their new bonuses are buying houses in the region.
All boats will rise on the same inflation tide however some might not rise as much.
Log
Thanks everyone for the info on Money Market funds, B&B sub debt, and the index linked gilts suggestions. Thanks also to Marben, it's very interesting to read his thoughts (and portfolio positioning) regarding the coming year. I think that given my experiences in 2008, I'd rather play it safe and leave some potential gains for the next man.
I've seen RCP mentioned several times in the past, and understand that it's an Rothschild IT which is held in high regard. I'm keen to understand what the attraction with this? Given the small discount, I'm guessing it's the management or the Rothschild name - my worry would be that in a downturn, a discount opens up. I think I read somewhere that it has a large number of unquoted holdings, which has the effect of making it less volatile than other funds.
Happy and prosperous New Year to all.
Cheers,
Iain.
Hi tacheman,
Given your view that the market is "toppy" generally (which I disagree with - but do feel that some stocks may be, whilst others are fairly- or under-valued), then this wouldn't be the time to invest.
What do I like about RCP?
My investment in RCP provides a benchmark against which I measure my overall performance (as well as a against indices). It also offers me a "lazy way" of investing for the long term.
RCP Investment Philosophy
From their annual report:
RCP Unquoted Investments
RCP is able to access a broader range of investments than I can directly.
These include hedge funds operating both absolute return and long only equity strategies specifically for RCP. In addition, RCP has significant direct investments in private companies, Agora and Agrifirma (as well as several other private companies). I would like to invest directly in both of these, if I could. Agora is a partner to Encore Oil, with a similar 15% share to Encore in the Catcher field. Agrifirma is the follow on to the highly successful publicly quoted Galahad Gold, managed by Ian Watson and Jim Slater (yes, that Jim Slater ;0)), with a focus on Brazilian agriculture.
UK Housing
Concerning interest rates, my point is that the current period of exceptionally low interest rates cannot last forever - and, as others have mentioned, homes that may currently be affordable, only due to such low rates, will no longer be. FWIW, my view appears to be supported by the consensus of property experts for 2011: http://www.ft.com/cms/s/0/dbbed8c6-1457-11e0-a21b-00144feabdc0.html
Regards & Happy New Year,
Mark
Thanks Marben for expanding on your reasoning for selecting RCP. Putting capital preservation before growth does appeal, this seems to be backed up by comparing it's performance during the downturn to other indices.
I've downloaded the annual/half yearly reports, and had a quick initial look. With investments in Agriculture, Water, Oil and Health, the IT seems to be playing on the same global themes that I am keen to have exposure to. As you say, I probably won't invest right now, but do think it 'll be one for my watchlist.
I've also noted that there's a reasonably active board on iii here.
Have to disagree with you Mark you wrote:
Current house prices are at ludicrous levels and completely unaffordable for the average home buyer.
Then you totally contradict yourself by saying
The only reason that they have held up is because interest rates are at historic lows, allowing over-borrowed households to stay put
E.g. they are affordable after all but due to low interest rates but what's wrong with that! Is that not the point of low interest rates to stimulate an economy.
Anyway I do agree house prices might fall but the OP was postulating a high inflation environment and in this case they are likely to tread water or rise slightly. If this happens the B&B sub-debt will do very very well.
Actually if you look at the affordability right now it is not very stretched it has been way more stretched in the past and is at about an average level.
There is obviously nothing wrong with a basket of high yield equities as an inflation hedge but I do tend to find that quite often a high yield stock tends to cut or maintain its dividend rather than grow it, or do some sort of re-capitalisation which effectively dilutes you or they have a very high debt level. Two of your stocks GSK and Aviva I'd say carry a lot more risk than you might think. GSK's drug pipeline is terrible and the Avandia fiasco is typical of the problems they face. Aviva I hold but who knows what the company is really worth its accounts are impossible to understand. The market obviously doesn't rate it that highly and its balance sheet is stuffed with sovereign debt.
Affordability might not be at all stretched for those who had the nous to secure a good long term mortgage deal when there was plenty of money about but you can guarantee for every one of them there'll be at least three of four who took on a 2/3 year 'sweet' mortgage deal on a high LTV who have, or,are, coming off them and are really struggling. These people are, and will be be, paying the income on our RBS prefs. Add in some food and fuel inflation and a global reality check on wage inflation and affordability is an increasingly Important issue.
In the last bust more of these people might have been repoed but the lenders, aided and abetted by their new owner HMG, are going easy on them for now because crashing the market won't do anyone any good.
Low interest rates won't last forever, and the banks still have balance sheets to repair, which will mean good margins and fees on their mortgage lending. Even a1% rise in interest rates, which is nothing by historical standards, could tip many mortgagors over the edge.
I think your assumption that rising inflation is good the housing market, because wages will rise in line with prices, is just plain wrong in today's global economy, as I have pointed out above. That doesn't necessarily make the B&B sub debt a bad investment but, in my opinion, there is some clutching at straws going on, if you think that inflating away debts, as has happened in previous decades, will ease any worries that you may have over that investment. It'll be a long, long haul I reckon and if you stick it out there is a decent chance of success, imv.
repo
they are affordable after all but due to low interest rates but what's wrong with that!
Because a mortgage has to be paid off over many years, not just 2 or 3. Current interest rates are at emergency levels, and that cannot last without causing trouble elsewhere.
repo if you look at the numbers in the b and b debt and assume only very modest house price inflation they will do very well. Don't forget half the loan book is funded by an interest free loan so high rates will see massive net interest margin and huge positive cashflow this will offset any defaults. Also under your scenario where families have to choose food over housing it doesn't sound like interest rates will be high anyway sounds more like a recession.
Hi Log,
IMO, over the next few years UK house prices are more likely to fall than rise. Current house prices are at ludicrous levels and completely unaffordable for the average home buyer. The only reason that they have held up is because interest rates are at historic lows, allowing over-borrowed households to stay put.
Only once interest rates start rising will the true extent of overborrowing be exposed, which could result in a severe correction of current UK house prices.
I also read too many articles that focus on "the market", rather than the merits of particular investments. Of course, the events of 2008 have taught us that it is dangerous to ignore the economic backdrop. However, I also feel that focussing on the UK gives a very blinkered view and that the economic situation looks very different in other parts of trhe world. There are distinct signs of a pickup in the US, with lower than expected unemployment claims numbers being reported today. I also understand that the final years leading up to a presidential election campaign are often positive for the US economy/markets, for obvious reasons, though there may be a price to pay, down the track... ;0).
My own circumstances are causing me to switch more into income generating assets, divided into "fixed income", "high yield equities" and some (income generating) "real estate". I've been doing some rebalancing lately. In the fixed income class, I am trying to hedge the risk of either an inflationary or a deflationary scenrio by exposure to both index linked gilts (that will gain from inflation) and to prefs and bonds (that will gain from deflation). The capital value of long dated or irredeemable fixed income investments, however, is vulnerable to rising interest rates.
The average yield on a basket of high yielding equities is currently 5.9% (against an average yield of 5.6% on my fixed interest investments). The basket comprises the following in roughly equal measures:
* I have held these for some time and have recently taken some signficant profits on my Renew investment, which has gained strongly of late.
I do also have significant cash on the sidelines (14%), available to take advantage of opportunities that may arise.
Most of the rest of my porfolio (55%) is devoted to funds/equities with international or natural resource exposure. The largest of these are currently:
These add up to around 25% of my main porty.
If these equities gain strongly over the coming months (or global economic conditions appear to be worsening), I expect I'll be trimming back my exposure.
Cheers,
Mark
Current house prices are at ludicrous levels and completely unaffordable for the average home buyer.
I'm interested in this comment since it is firmly in opposition to what I'm seeing amongst colleagues/friends etc.. who are all in the first time buyer category and have modest incomes and lifestyles.
nigel
What do you regard as a modest income? £25K ? & Which areas are you talking about? London?
nigel
What do you regard as a modest income? £25K ? & Which areas are you talking about? London?
Take average salaries and house prices :
Salaries - £26k (http://www.statistics.gov.uk/cci/nugget.asp?id=285)
House prices - £163k (http://www.nationwide.co.uk/hpi/historical/Dec_2010.pdf)
The average house would have at least two bedrooms thus taking joint average income of £52k and comparing against £163k (3.1x earnings) seems reasonable.
A deposit of at least 10% (£16k) is required and should take two people a good few years to save up.
Nothing unreasonable so far.
Sure, there are overheated areas where the above calcs will be completely wrong but that's always going to be the way.
I wouldn't consider house prices overvalued on an affordability basis. Historically yes - they look slightly toppy but that is NOT a reflection on future prices as we all know.
hello nigel:
Whilst its good to see some hard numbers, I would question the basis of your calculations.
You assume that each household has 2 full-time reliable breadwinners. I think that's a pretty questionable assumption, especially at a time when public sector cuts are about to hit. That makes house prices more highly geared to the level of unemployment. It used to be considered sensible that a couple should be able to pay the mortgage even if one partner lost their job, and I expect people will think that again in the future once they have suffered the consequences of what happens if you don't take this precaution.
I also think more care needs to be taken with the averages used. Whilst the average income is £26k, I have read that the median income is more like £20k, because of the skewing effect of high earners. Presumably the median house price would also be lower than £163k, but how much lower?
I managed to find some figure on the ratio of median house prices to median incomes here:
http://www.communities.gov.uk/housing/housingresearch/housingstatistics/housingstatisticsby/housingmarket/livetables/
In 2009 it was 6.27, down from the peak of 7.23 in 2007, but much higher than the 3.5 recorded in 1997.
I would also comment that having 2 breadwinners per household doesn't seem to have supported US house prices very much. Perhaps that's because unemployment is higher....
Whilst its good to see some hard numbers, I would question the basis of your calculations.
You assume that each household has 2 full-time reliable breadwinners. I think that's a pretty questionable assumption, especially at a time when public sector cuts are about to hit. That makes house prices more highly geared to the level of unemployment. It used to be considered sensible that a couple should be able to pay the mortgage even if one partner lost their job, and I expect people will think that again in the future once they have suffered the consequences of what happens if you don't take this precaution.
I also think more care needs to be taken with the averages used. Whilst the average income is £26k, I have read that the median income is more like £20k, because of the skewing effect of high earners. Presumably the median house price would also be lower than £163k, but how much lower?
I wouldn't dispute any of that. My point still remains though house prices are not ludicrously overvalued per earlier posts with very basic maths before we start confusing things.
Sometimes it's best to Keep It Simple.
RE: median incomes as a historic indicator - this is hopeless for the very simple fact that disposable incomes are dramatically higher and people spend much more money on leisure time.
Hi Mark,
I agree completely with that. However, whilst I can see wholesale market rates gradually moving up to 4-5% I doubt that mortgage rates will do the same, mainly for fear of a crash and thus (literally) collateral damage for the mortgage banks. Housing prices I see as being under gentle downward pressure for the next 10 years...minus 2-3% a year perhaps.....nothing so great as to spook the populace or change their lifestyle plans but enough to gently deflate the wasteful over-investment bubble that has led people to regard property investment as "as safe as houses" and treat them as "their pension".
You are quite right re 2008 but I think you are much too relaxed on the USA. Yes there is certainly some evidence of a pick-up, but the economy remains heavily over-borrowed and the recovery being stoked by QE is largely a jobless one. In addition, IMO, the weak fiscal position in the US leaves them exposed to being hit extremely hard in the event of unexpected major forces.......and here I'm thinking of, for example, another 1983-style oil price shock caused by a supply side problem (be that Iran, Saudi, Venezuela, Angola or whatever) .....or the long-expected "big one" earthquake in California (a state which is also already fiscally on its knees). I think that the US is "riding its luck" to a very large degree - and the risks to the economy are much higher than generally perceived.
I note your exposure to Brazil - and I think the Brazil situation is, quite probably, the most interesting and the least-discounted of all the BRIC opportunities. But I'm still mulling it over. In particular, the political backdrop of recent years has been unprecedentedly favourable - and it isn't clear to me (given the change at the top of government at the weekend) whether that will actually continue. Indeed I wouldn't rule out some destabilising events in South America given the permanent belligerance of Chavez and the incipient Falklands/Malvinas issue provoked by oil exploration...let alone the questions of Cuban politics when Castro finally dies.....all being overlain on fresh governments in Brazil and others.
This is essentially what I did within my cashed-up pension funds when I went to cash (at FTSE 6700) in 2007. I hold a chunk in both index-linked and conventionals.....and both have performed. Despite the likelihood of rising rates I don't see any need to change those holdings - although interest rates will tend to rise, I think there will continue to be a good bid for "safe" government bonds of all varieties that may well offset the potential for rate-induced price falls.
The bottom line is that I don't think equities are yet cheap enough for the risk profile I perceive them to have. I'm happy with my remaining holdings in E&Ps, but mainly because I think they have particular attractions from an M&A perspective in an environment where "resource-grabbing" is going to continue to be an important theme. The locus of this activity is gradually moving east, I think, and I consider that 2011 could be a very active year.
Time will tell...... ;-)
rgds & NHY
ee
This is essentially what I did within my cashed-up pension funds when I went to cash (at FTSE 6700) in 2007. I hold a chunk in both index-linked and conventionals.....and both have performed. Despite the likelihood of rising rates I don't see any need to change those holdings - although interest rates will tend to rise, I think there will continue to be a good bid for "safe" government bonds of all varieties that may well offset the potential for rate-induced price falls.
Interesting ee, did you do the same with your Dana money ?
Hi ee,
There is much that I agree with in your post... but I'll start at the end, with the main point I'm trying to get across in response to tacheman's original article:
I disagree with the premise that "equities" should be lumped together as one asset class. If one were considering investing in an index tracker vs the fixed interest asset class you have chosen, I would largely be in agreement and favour the latter. However, the term "equities" spans such a broad range of assets, especially these days (including, for example, commodity ETFs) that I think the equity class needs to be subdivided and that superior returns can be achieved by diligent selections within that class and timing (based on value fundamentals for each specific equity).
Turning to the US:
Broadly, I tend to agree - but I'm sticking my neck out and saying "not yet". There are emerging signs that the nascent recovery in the US is no longer "jobless" (typical of recovery cycles, when job creation follows early recovery stages) - but it's too early to know for sure. I am sure that there is trouble ahead for the US$, but it is in no one's interest for there to be a sudden collapse - especially from the Chinese POV - so world powers will do everything they can to arrive at a soft landing. Whether they will succeed remains to be seen but I suspect we have a few years before we find out.
IMO, US politics and decisions take by the electorate will play a huge part in determining the outcome. For the meanwhile, however, we're likely to have a gridlocked congress for the next couple of years, so I don't think we're likely to see anything dramatically negative in 2011. I acknowledge, however, the risks that are there.
In that regard, my decision to invest in your bete noir, gold miners, over the last couple of years has worked out well. Looking at any overall lesson there (and from your experience in the 1980s), I think it is that gold does not work as a hedge against equity market crashes but does work as a hedge against debt and currency crises (especilaly whilst real interest rates remain negative). Given that I think we agree that neither of those crises is over yet, I remain comfortable with a certain degree of exposure to selected gold mining investments.
Now to Brazil. I must point out again that Rousseff is regarded as (and tries to give the impression of being) the continuity candidate, not a dramatic change in government direction: http://www.google.com/hostednews/afp/article/ALeqM5hyjmM7PkIuwyRDZRJtPqzyoho28w?docId=CNG.d0742101cf6091a508d93992474e7181.701
[My bold ;0)]
The difference in our investing approaches illustrates the truism that each person's investing strategy must be tailored to their own circumstances and proclivities. I have little doubt that your decision to disinvest from equities in 2007 worked well for you, as it has returned perfectly respectable and above average results. My own policies led to more of a roller-coaster ride, (for my main SIPP portfolio) with my biggest ever mark-to-market loss of -27% in 2008 - but my biggest ever gains of 50% in 2009 and 42% in 2010, rather more than making up or that.
2011 and beyond will show whether I have simply been lucky over the last couple of years or whether I have learnt as I have gained experience over my 6 year full-time investing career. Looking back, I certainly feel that I have learnt a lot more over those 6 years that the preceding 20 investing as a hobby. I must acknowledge a debt to several "online" mentors (most of whom I have also become aquainted with in the "real world"), including yourself ee, for your insight into the investment banking world and warning of the perils of gearing. Carmensfella deserves a special mention, for his boundless energy in advocating shareholder activsm and arranging numerous events, without personal reward, for investors to engage in dialogue with company managements and with other investors.
Best,
Mark
PS, just so people don't get an incorrect impression, I should point out that my relative weighting in natural resource linked investments, is 1.5 : 3.5 : 1 gold : oil & gas : uranium. I also have smaller weightings linked to coking coal and nickel. I have to admit, though, that this is more an historic accident as my portfolio has developed rather than a deliberate decision - but I certainly do wish to have significantly larger exposure to oil & gas than to gold at present.
Hi Mark,
Just a couple of points:
....mmmm. Whilst there is ALWAYS going to be some truth in that argument, I am reminded that it was one that I have deployed myself in recent years and I have since become vastly more cautious of that view. Back in 2007/8 I reasoned that E&P equities should be relatively "safe" because they never discounted oil prices above $90 or so (despite actual prices north of $140) and the structural reasons for holding them were not going to disappear with the banking crisis. That didn't stop the market trashing the whole sector along with everything else......and indeed in some cases perhaps the falls were substantially larger than were justified by the fundamentals simply because they were more liquid (and thus easier to sell) than other assets.
On the US:
....I would argue that your view relies on "situation normal" for 2011. Yes if "nothing bad happens" then certainly equities and the economy will be engineered higher in tandem for political reasons.....but IMO the downside risk if that happy scenario fails is vastly larger than the upside profits if it succeeds (and in any event may merely be a deferral of problems to be faced).
It is wrong to refer to gold miners as my bete noire. I've invested a number of times in gold miners in the 1980s and 1990s - and whilst I have proven to my own satisfaction that they don't hedge against equity crashes and indeterminate feelings of uncertainty, they are certainly an attractive hedge against worries over the fundamental monetary system (and boy have we had those in spades recently!). However, it is my opinion that the same can be said of most real asset that have long-lasting value.....and I personally have preferred long-lived reserves of oil and gas. In the short run they have certainly underperformed gold - but I'm now thinking that gold is near to topping out (unless we get a whole new leg of systemic problems).
OTOH with gold, there IS a real demand for jewellery etc - and rising wealth in, for example, India seems to be stimulating MORE consumption, rather than being deterred by high prices. In the short term this fundamental demand story has strongly helped gold's performance....but I don't think one can necessarily assume that will continue.
On Brazil, I fully agree that the new PM is positioned as the "continuity candidate".....but on the other I find it very interesting to note that various points about her past seem (according to TV news in recent days) to have emerged only after the election has been done and dusted......such as aspects of her time as a Marxist rebel and political prisoner. Some, for example, seem to worry about change in the relationship with the US, given her comments about Iran....and it will be a case of carefully watching her actions I think before one can draw solid conclusions about continuity.
rgds
ee
By far the best inflation hedge out there that I know is the B&B sub-debt. There is a 5.75% callable note in 2013 I think which is trading around 30p. For those not aware of the B&B situation this all coupons are suspended but are accruing until B&B repay state aid. The state aid is mostly in the form of an interest free loan. If inflation picks up then B&B's loan book against houses will be improved significantly and the bank will be hugely cash generative given it is funding its mortgages (which will rise) against an interest free loan. If they call the bonds in 2013 then you'll get 10p accrued plus a 70p uplift. Very unlikely though. The bonds change to 5Yr gilts + (something I can't reacall) in 2013 so again a great hedge at 30p.
Check out TMF banking board for details Avidya just posted on this topic very useful post.
Log
log,
Inflation with strongly rising food and fuel prices accompanied by interest rate rises, but without the usual wage inflation will do the housing market no good at all, imv.
Inflating away debt in today's global economy doesn't look such an attractive option as it did back in the 1970s. The B&B subordinted debt may well prove a good investment but not because the sort of inflation w're likely to get any time soon will help stabilise the housing market. Quite the reverse I feel as a lot of people out there might choose to keep warm and eat rather than pay the mortgage.
repo
The obvious alternative is index-linked gilts, if one is worried about inflation. The RPI-linking is a (tax-free) capital gain. The biggest snag is the cost of buying and selling if one's timeframe is a few months.
I appreciate this dilemma. I've mostly sat on my hands recently too. I think the market is far too relaxed about the potential for unwelcome surprises and is discounting a recovery that is almost exclusively underpinned by monetary policy and QE. This, IMO, makes for a very dangerous market.
The problem is - what alternatives are there?:
Money Market Funds tend to underperform short term deposits in times of rising yields (because they invest a little further down the yield curve). OTOH they do offer diversification of credit risk (not that this is proof against loss as the recent banking crisis demonstrated).
I'm quite tempted to stay focused on cash and the oil sector. Much of the oil sector has got too expensive. A few stocks are worth adding from time to time but I'm very inclined to run a large slug of cash for a while yet - unless anyone can come up with some good bear fund ideas.
ee