Over the past 12 months, many economists and investment professionals have been warning Americans that a severe dollar collapse was likely, given the U.S. government's view that the economy was in severe dire straights, just as it was in the Great Depression.
"Fed Officials and most politicians also warn that the only way to fix these problems (in their myopic and incorrect view) is to simply print more money and heap more and more layers onto our already spiraling national debt," writes Nicholas Southwick Levis at SeekingAlpha.
In the 1930s, money printing (quantitative easing) helped to relieve the economic stress caused by the stock market crash and the credit collapse that sent many depositors into mass panic and to mile-long lines to withdraw their savings in a bank run, explains Levis.
Today, we have just the opposite problem -- massive inflation and too much debt -- and are trying to cure that problem by adding fuel to the fire -- intentionally creating more inflation.
What is fairly clear is that the Fed will not tolerate the needed deflation, he continues. "Therefore, as investors we must view the game for how it is obviously played -- inflationary forces will persist against the backdrop of a relatively overvalued and overbought stock market until a massive correction is allowed to happen and a real de-leveraging begins."
So how can you protect your portfolio against inflationary forces, if you believe consumer prices are about to spike higher in the aftermath of the Fed's actions? To help you find ideas, we crunched some numbers, and identified a universe of stocks that have outperformed the S&P 500 during the two most recent periods of rising inflation.
These periods of rising inflation occurred between April 2004-July 2005, and January 2007-June 2008, as shown by this chart of the consumer price index:
All of the stocks mentioned below have outperformed the S&P 500 during the time periods discussed above, i.e., they tend to outperform the rest of the market when inflation increases.
In addition, all of these stocks have seen significant institutional buying during the current quarter.
We can go back in time, and analyze the entire list's performance during previous dollar rebounds. Here's a graphic representation of this list's performance against the S&P 500 between April 2004-July 2005:
... and the list's performance against the S&P 500 between January 2007-June 2008:
1. Walter Energy
2. Gulfport Energy
4. Key Energy Services
5. Williams Companies
6. Abraxas Petroleum
7. Steel Dynamics
8. Weatherford International
9. Massey Energy
10. AK Steel Holding
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research. Note: The numbers on top of items represent the forward P/E ratio, if available.
Kapitall's Eben Esterhuizen does not own shares of any companies mentioned.
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