russ koesterich ishares chief investment strategist understanding inflation: investing with...
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Russ KoesterichiShares Chief Investment Strategist
Understanding Inflation:Investing with Confidence in Any Inflationary Environment
2 FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Yea
r-o
ver-
Yea
r C
han
ge
5 Y
ear
Ro
llin
g V
ola
tili
ty
1/52 1/63 1/72 1/81 1/90 1/99 1/08
Volatility of US InflationUS Consumer Price Index
Source: Bloomberg, as of 6/30/10.
The volatility of inflation is now at its highest level since 1954
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
0.00%
0.10%
0.20%
0.30%
0.40%
0.50%
0.60%
0.70%
Is Inflation at Risk?
4 FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
No double dip
No deleveraging
Fed acted early and aggressively
US is not Japan
5 FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
What to watch: Excess capacity
Cap
aci
ty U
tili
zati
on
(%
)
CP
I Y
oY
(%
)
Sources: Bureau of Labor Statistics, Bloomberg, Federal Reserve, as of 2/28/10.
Capacity Utilization and Inflation
3/68 3/74 3/80 3/86 3/92 3/98 3/04 3/10
Capacity Utilization (One-Year Lag) CPI YoY
65
70
75
80
85
90
-4
-2
0
2
4
6
8
10
12
14
16
6 FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
What to watch: Jobs
No
n-f
arm
Pay
roll
Yo
Y (
%)
CP
I Y
oY
(%
)
3/68 3/74 3/80 3/86 3/92 3/98 3/04
Sources: Bureau of Labor Statistics, Bloomberg, Federal Reserve, as of 2/28/10.
Job Creation and Inflation
3/10
Non-farm Payrolls YoY (One-Year Lag) CPI YoY
-6
-4
-2
0
2
4
6
-4
-2
0
2
4
6
8
10
12
14
16
7 FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
What to watch: Money and inflation
1/06 8/06 3/07 10/07 5/08 12/08 7/09
Sources: Federal Reserve, Bloomberg, as of 2/28/10.
US M2 vs. Monetary Base
M2 Monetary Base
100
125
150
175
200
225
250
275
8 FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
What to watch: Money and inflationQ
uar
terl
y L
ag
Correlation Quarter over Quarter (QoQ) Changes
Money Supply vs. Inflation
Sources: Bloomberg, as of 2/28/10.
-0.05 0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40
0 Lag
2 Quarters
4 Quarters
6 Quarters
8 Quarters
10 Quarters
9 Quarters
7 Quarters
5 Quarters
3 Quarters
1 Quarter
9 FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
In the “sweet spot”
Average P/E
CPI YoY Less than 1% 15.62
CPI YoY 1% to 3% 19.24
CPI YoY 3% to 5% 16.95
CPI YoY 5% to 7% 13.18
CPI YoY 7% to 9% 10.34
CPI YoY Above 9% 8.77
Sources: Bloomberg, as of 2/28/10.
S&P 500® Multiples and Inflation Level
10 FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Lower Inflation Higher Inflation
• U.S. large cap
• Healthcare
• Consumer staples
• TIPS
• Energy Producer
• Commodities/Gold/Precious Metals
• Energy
• TIPS
• Treasuries
• Financials
• Consumer discretionary
Un
der
wei
gh
tO
verw
eig
ht
The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective.
11 FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Inflation and the Presidency
Sources: Bloomberg, as of 2/28/10.
Inflation Data1871–Present
0%
1%
2%
3%
4%
5%
Republicans Democrats
1.2%
4.5%
An
nu
al
Infl
ati
on
Ra
te
Federal SpendingAverage Annual Increase
1914–Present
3.0%
9.4%
0%
2%
4%
6%
8%
10%
12%
14%
Republicans Democrats
4.9%
13.5%
An
nu
al
Infl
ati
on
Ra
te
InflationAdjusted
InflationAdjusted
Questions?
The information included in this material has been taken from trade and other sources considered reliable. No representation is made that this information is complete, and it should not be relied upon as such. Any opinions expressed in this material reflect our judgment at this date and are subject to change. This information should not be construed as research, investment advice or a recommendation regarding any security in particular. No part of this material may be reproduced in any manner without the prior written permission of BlackRock, Inc.
Russ Koesterich is an affiliate of BlackRock Fund Distribution Company and BlackRock Execution Services, which are subsidiaries of BlackRock, Inc.
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