October 13, 2010 by staff 

Ebullient, The FOMC minutes released Tuesday consisted of nine pages of a painful dry economic discussion. However, this discussion was buried in a single line that explains everything you need to know about Fed policy …

“… An increase in inflation expectations down to short-term real interest rate, stimulating the economy.”

We have been positioning our portfolio to benefit from negative real interest rates or an economy where inflation is above the interest rate. In our view, creating an inflationary environment is the goal of the Fed. The usual argument is something like that.

The increase in inflation while keeping interest rates low forces investors in riskier assets (read: the stock market) to fight inflation. The surge in stock prices further raises consumer confidence 401Ks increase in value. The consumer boiling begins to spend their hard earned money instead of saving and … That … the economy is stimulated.

Whether or not it is good policy is valid discussion for the classroom, but as investors we need commerce market, we have, not what we want. Therefore, we buy U.S. stocks that have high yield and benefit from inflation induced by the Fed. The beneficiary of inflation are natural products and stocks of commodities, however, many have already taken extraordinary measures.

A classic hedge against inflation, wood, has just started to make his move and in our opinion, represents an investment opportunity. Pension funds, endowments and insurance companies have always flocked to the wood during periods of rising resource prices. In addition, an economy-boosted inflation coupled with low mortgage rates make buying a home an attractive option.

Our favorite game in this space is Plum Creek Timber [PCL 37.38 1.18 (3.26%)]. Plum Creek is the largest owner of private timberlands in the United States and operates as a REIT traded. The company has a dividend yield of 4.7% and is a pure play on rising lumber prices.

During the last term lumber weeks on the CME rose significantly with several days to reach the maximum price movement of exchange. However, the price of the shares of Plum Creek Timber is still occurring in tandem. We consider this an attractive investment anomaly.

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