Building on our post from a few weeks ago regarding global inflation's rise from the dead ("I'd buy that for a $1"... well, maybe $1.055 - May 30th) we're turning our attention on how to invest in an inflationary environment. As we wrote then, the problem with inflation in 2008 (as opposed to the experience of the past 20 years) is that it's being driven in no small part by Emerging Economy growth, which is still robust, and being felt by Developed Economies who are experiencing slowing growth and stubbornly high commodity-driven prices. The results for Developed Economies are consumers with reduced purchasing power and corporations with shrinking operating margins. Once again, Central Bankers are in a bind... whereas over the last several months they have chosen to "look-through" rising inflation (read: ignore) and cut rates to stimulate growth, now they have to start hiking rates to counter inflation (and more importantly, inflation expectations) and hope that growth stays at least modestly positive. Against this less than compelling backdrop, investors do have a few options...

• Focus on industries/stocks that are in strong secular growth areas, such as alternative energy and clean technologies, which may be less impacted by a global growth slowdown/equity market malaise. Oil man Boone Pickens' move into water is an example of this sort of thinking
• Make greater use of shorting stocks/industries in order to mitigate a decline in the overall stock market. A comparable strategy is simply to hold cash in the form of Treasury bills. For decades the go-to strategy has been to hold T-bills which have provided a good inflation hedge and have been a proverbial bridge over troubled water. But this Garfunkel-ian strategy doesn't really hold up in a world where 1 year US T-bills are yielding 2.5% and inflation is running at 4.2%... in effect you're paying the government 1.7% to enjoy your money.
• Own commodities. Although counter to conventional wisdom, owning commodities in this slow growth/high inflation world has proven to be the best method to generate positive returns/protect capital. As the chart of the CRB commodity index demonstrates below, COMMODITIES HAVE BEEN THE PLACE TO BE since the onset of the housing debacle (here's a good article from The Atlantic by Robert Shiller on the evolution of the housing bubble and some ideas on how to prevent future bubbles) rising an impressive (drum-roll please) 50% in the last ten months. To us this reflects the reality of the BRIC infrastructure build-out that has been going on for the past several years and will continue for the foreseeable future, keeping a floor under a whole host of commodity prices, and by association, commodity stocks... we will be investing accordingly.

In other news...

Here's an interesting piece on why US consumers (and likely Canadians, Germans, French, Japanese, etc.) seem to be feeling worse about the economy than economic conditions might indicate. In short, consumer psychology is subject to frame-of-reference and selective information problems, while the media has done its usual bang-up job of mountain manufacturing from simple mole hills.