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Inflation Concerns Resurface Among Hedge Fund Managers

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Clarence L. Polk

• November 10, 2023

Some influential hedge fund managers are raising alarm bells about the prospects of sustained inflation, signaling a shift in sentiment within the industry. Kenneth Griffin, founder of Citadel, recently joined the chorus of voices expressing concerns about rising costs tied to deglobalization. He anticipates that as countries rely less on foreign competition and retool their economies, the deflationary pressure that has characterized the US economy for decades will dissipate. In his view, this could pave the way for a lasting increase in baseline inflation, potentially lasting for decades to come.

Griffin is not alone in his apprehension about persistent inflation. Ray Dalio, founder of Bridgewater, and other industry figures have also been sounding the alarm in recent months. Multiple factors contribute to their concerns, including heightened inflationary pressures and the potential strain on the US debt load due to higher interest rates.

These worries have implications for investors, who may face the prospect of higher interest rates even after adjusting for inflation. Charts depicting this trend over the past week show a simultaneous rally in bonds and stocks as investors speculate that the Federal Reserve's aggressive anti-inflation policies could be coming to an end. Notably, exchange-traded funds like the iShares 20+ Year Treasury Bond ETF (TLT) have experienced significant inflows, despite lackluster performance this year—a sign that investors are positioning themselves for a potentially favorable turn towards falling rates that would boost prices.

However, if Griffin's predictions materialize, the Federal Reserve may find itself grappling with additional challenges as it aims to maintain its long-standing commitment to a 2% inflation target. Previously, the central bank benefited from companies capitalizing on global supply chains and workforces to reduce costs. With deglobalization trends gathering momentum, the Fed may need to reassess its tactics and consider further interventions to ensure price stability.

Overall, these concerns among hedge fund managers underscore the potential for shifts in the economic landscape. As inflationary pressures mount and deglobalization continues, investors must be prepared for a future that may involve higher interest rates and reshaped market dynamics.

Protecting Against Inflation: Unique Strategies for Investors

With global uncertainties and escalating tensions, the White House has recently prioritized bringing supply chains back to the U.S., aiming to reduce the country's reliance on foreign governments. While this decision strengthens national security, it also comes with increased costs.

In a worst-case scenario, experts warn that the U.S. debt could spiral out of control if higher interest rates compel federal officials to print more money to meet the mounting debt. As a result, investors are seeking ways to protect themselves from inflation while avoiding the risk of further interest rate hikes.

Cash: The Simplest Solution

Cash remains the simplest way to safeguard against inflation. After enduring an extended period of negative real rates, various options—from Treasury bills to money-market accounts—are now providing investors compensation well above the current annual inflation rate of approximately 3.4%.

Renowned investor Dalio of Bridgewater Associates conveyed his preference for cash during a September conference. He highlighted the high yields offered by cash-like investments such as Treasury bills, currently surpassing 5%. Dalio also anticipates that rates will need to rise further to attract global investors to Treasuries.

I Series Savings Bonds: A Government-Guaranteed Option

The U.S. Treasury Department recently raised the real rate offered on I Series Savings Bonds to 1.3%. This means that investors are guaranteed to exceed inflation by that margin over the bond's thirty-year lifespan.

While these savings bonds cannot be redeemed for one year, redeeming them within five years results in a loss of the last three months' worth of interest. The Treasury enforces an annual purchase limit of $10,000 per investor for these bonds, with a few limited workarounds available.

Importantly, individual retail investors have an edge over larger hedge funds in accessing I bonds. This advantage should not be overlooked.

In conclusion, protecting against inflation requires strategic thinking. Despite the potential risks associated with rising interest rates, options such as cash and government-backed savings bonds offer opportunities for investors to mitigate inflationary risks and maintain their financial stability.