QE1, QE2, QE3, the Bernanke “Twist” and probably QE4 are pumping out money at a rate never before seen in history. The Fed will not only generate US inflation but it will be exporting that inflation to the rest of the World, especially emerging markets.

It is interesting to note that many investors holding large cash positions view their money as an asset, when, it is really more of a liability at this point in time. The fact is that cash, correctly deployed, can allow an investor to sidestep the worst stretches of a financial crisis, like the one that may be on the way in 2013-2015.

Even though the trillions of dollars the Fed has injected into the system seem to be having some effect on the economy, the USA will pay a terrible price in the future. The hyperinflation scenario is certainly possible, but not probable. However, what is likely is a dramatic realignment of the dollar and a general increase in worldwide living expenses, inflation.

Economist and Hedge Fund Manager Shayne Heffernan of www.livetradingnews.com takes a look at protecting your real net worth from inflation.

Yale Economics Professor Robert J. Shiller has found that when you look at 10 year periods of price/earnings (P/E) data dating all the way back to 1871, the markets tend to rise when the average P/E is low, as it is now. Conversely, when the average price/earnings values are high as they were in late 1999, and again in 2007, a decline in stock prices is much more likely.

Here is where we are now:






Year ago



Year ago

Dow Industrial






Dow Transportation






Dow Utility






Other Indexes

Friday, November 23, 2012






Year ago



Year ago

Russell 2000






Nasdaq 100






S&P 500






There are, of course, no guarantees that history will repeat itself, but should it, the same data implies we could see real returns of 10% a year or more “for years to come,” as Shiller noted in a recent interview with Kiplinger’s Personal Finance.

What is just as important in here is that there does not seem to be significant upside in the USA unless earnings see massive growth, what we may be heading towards is inflation without economic growth, a slow to stagnant economy being over supplied with cash.

Here is a basic plan that could help lock in respectable returns, while protecting your cash from inflation.

Let’s take a look at each of the Five elements of his strategy:

1. Break with tradition and avoid Treasury Inflation Protected Securities (TIPS). If you’re based in the US and have mostly US assets, once upon a time you would have reached for iShares Barclays TIPS Bond Fund (NYSE:TIP) to offset this risk. The TIPS portfolio is a combination of inflation-indexed securities, but it also offers a good deal of risk now as the USA may face further downgrades.

Another place people would go for an inflation hedge is SPDR DB International Government Inflation Protected Bond ETF (NYSE: WIP). A collection of internationally diversified government inflation-indexed bonds that provides even worse risk, major Economies like the EU have already allowed member states to default, now that this dangerous precedent has been set, you can not invest in government bonds and feel secure.

Make sure you talk with your tax advisor about both, though. Depending on your tax situation, you may find that because of the tax liability on inflation-related accretion, these are generally best held in tax-exempt accounts.

2. Own some metals. Despite widespread belief to the contrary, gold has never been statistically proven as an inflation hedge. But the yellow metal has proven to be a great crisis hedge because of the 10:1 relationship between gold prices and bond coupon rates, which obviously are directly related to inflation. Also consider Silver and my personal favorite Copper.

Over time, the two move in such a way that having US$1 for every US$9 in bond principal can help immunize the value of your bond portfolio. So to the extent that you own gold, do so not because you expect it to rise sharply, but because it will offset the inflationary damage.

A good place to start is the SPDR Gold Trust (NYSE: GLD), iShares Silver Trust (ETF) (NYSE:SLV) because they are tied directly to the underlying asset without the hassles or risks of direct personal storage associated with bullion.

3. Buy Value. There are still value stocks and value exchanges around the World. Singapore and China stand out as value right now, both exchanges are trading at very low PE ratio’s , do your research and be prepared to hold for a 5 year period, the returns here could be spectacular, and it is my preferred course of action. Avoid companies with large debt or a history of new stock issues,

4. Short the US dollar to hedge your bets further. Not only is the government going to borrow monstrous amounts of money, but when you add the complete federal fiscal obligations into the picture. This makes the US dollar, as legendary investor Jim Rogers put it, “a terribly flawed currency” that could fail at any time.

Currencies I like are SGD, THB, MYR, IDR, PHP

5. Asian Real Estate as an Inflation Hedge

According to the 2012 Q3 Asia-Pacific Capital Market Observation, the total value of the Q3 Asia-Pacific real estate investment reached $19 billion, with an average increase of 21% over the past three years, considering that fast 3 years captures the tail end of the Global Financial Crisis, those numbers are impressive and will remain impressive over the next 5 years. That makes prime Asian Real Estate a viable inflation hedge.

There is also a positive foreign exchange component in ASEAN, China, Taiwan and Korea. As the USA, Japan and Europe embark on a year of printing money in 2013, Asia in the most part, as avoided that issue by having relatively low debt to GDP combined with the strongest growth rate in the World.

“Asian property is a bargain, the various reports of bubble’s etc are incorrect, the changing demographic of Asian Society is creating a new dynamic, a new market is emerging and demand is high as long as you remain value driven and in the sectors/countries/cities.” Shayne Heffernan said today in a note to traders.

Reports shows that global investors is holding a cautious attitude to the capital market due to the decelerated growth of world economy and the Euro-zone debt crisis. However, the concern is that HongKong, Singapore, Japan and Australia have become the investment center of the capital market.

Chinese mainland investors are still the driving force of real estate investment, accounting for 80% of the total deal.

Foreign direct investment trends are still showing China and Asia markets will grow until at least 2020, despite an ongoing global financial crisis. In fact much of the money being printed in the USA, Europe and Japan will be invested in Asia, increasing the regional rate of growth and real estate values.

List of ASEAN countries GDP (nominal), International Monetary Fund 2011 estimates.

RankCountryGDP (millions of USD) 
European Union17,577,000 
United States15,094,000 
People’s Republic of China7,298,000 
South Korea1,163,000 
1 Indonesia845,680 
2 Thailand345,649 
3 Malaysia278,680 
4 Singapore259,849 
5 Philippines213,129 
6 Vietnam122,722 
7 Burma51,925 
8 Brunei15,533 
9 Cambodia12,861 
10 Laos7,891 

List of ASEAN countries GDP (PPP), International Monetary Fund 2016 estimates.

RankCountryGDP (millions of USD)Percent
United States19,704.590
People’s Republic of China20,336.086
South Korea2,148,000
1 Indonesia1,777,000 
2 Thailand842,789 
3 Philippines531,186 
4 Malaysia362,398 
5 Singapore318,915 
6 Vietnam230,341 
7 Burma63,689 
8 Cambodia21,081 
9 Brunei18,120 
10 Laos10,491

Jakarta and Bangkok were the outstanding prime residential market performers in 2012, with year on year price growth pushing 30%, the new Asia Pacific Residential Review report from Knight Frank shows.

While in Jakarta, this positive price appreciation is in parallel to the rest of the housing market, in Bangkok, this is in contrast to mass market price drops, as luxury condominiums in tight supply situated off Sukhumvit have seen their prices pushed upwards, the report says.

Indonesia’s strong performance continues and the introduction of a Loan to Value (LTV) cap of 70% in July has not held back demand as positive buyer sentiment continued to fuel price growth in the Jakarta market, it points out.

In Bangkok, with surprisingly little difference in selling prices of condominiums in the city and city fringe areas, buyers tend to favour condominiums in the city area, while demand for luxury condominiums in the heart of Bangkok remains high, with supply tight and few projects launching this year.

In Thailand, the firm expects price performance of the Bangkok condominium market to polarise between city centre and periphery locations. ‘On the periphery, with large amounts of new supply in the market we expect more price competition leading to softening prices, whereas with more limited supply available in the city area, we expect more upward price
Pressure,’ says the report.

In Vietnam, the huge credit growth of preceding years is coming back to haunt banks, who have record amounts of bad debt related to the real estate sector. ‘We expect the market to continue to be troubled, with the relative slowdown in the economy continuing to put downward pressure on residential prices. This does however provide opportunities for buyers
who can secure funding,’ the report explains.

Lastly here is one key point to consider. You rarely get a second chance to do anything, especially when it comes to investing. So it may be wise to act now before the markets make it cost-prohibitive to protect yourself. When the economic recovery gets here, you will likely be happy you did.

Shayne Heffernan Ph.D.
Economist/Hedge Fund Manager

Shayne Heffernan oversees the management of funds for institutions and high net worth individuals. He is also an active consultant working with Corporations around the World.

He is recognized as one of the leading Economists in South East Asia, as well as the preeminent authority on ASEAN. His opinions and forecasts are widely read by decision makers in the region and Internationally.

Shayne Heffernan holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reached a peak of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.

Chinese Society of Economists
American Economic Society