By Aaron Katsman

We are always complaining that prices that we pay for goods and services are always going up. Listen to the news and you will hear that the price of bread is going up, as is the price of gasoline. In addition, in order to escape the economic slowdown that has gripped the world, the US and almost every other country, is printing money 24 hours a day, 7 days a week to meet the trillions in new government spending.

We hear the term “Inflation” thrown around but what is it and how does it impact our investments?

Definition

Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service.

The value of a dollar does not stay constant when there is inflation. The value of a dollar is observed in terms of purchasing power, which is the real, tangible goods that money can buy. When inflation goes up, there is a decline in the purchasing power of money. For example, if the inflation rate is 2% annually, then theoretically a $1 pack of gum will cost $1.02 in a year. After inflation, your dollar can’t buy the same goods it could beforehand.

Inflation and Investment

With little in the way of economic growth in sight, the threat of inflation seems mild. Many analysts say that it could take months before we need to worry about inflation. With all due respect to those analysts, we have actual data that shows the economy is inflating. Data just released in the US showed higher consumer prices, and in Israel, we have had 4 consecutive increases in the CPI (Madad).

If it appears that we are going to enter a period of high inflation, and what we said above is true that inflation erodes the purchasing power of your money, the question for investors is how to protect your portfolio against a spike in inflation?

There are 3 traditional inflation hedges that investors use to protect their portfolios. The general principal is to buy something now and sell it later, after inflation has increased the price of the product.

The most popular hedge against inflation is to buy gold. According to Blanchard Economic Research, “Gold is renowned as a hedge against inflation. The most consistent factor determining the price of gold has been inflation - as inflation goes up, the price of gold goes up along with it. Since the end of World War II, the 5 years in which U.S. inflation was at its highest were 1946, 1974, 1975, 1979, and 1980. During those 5 years, the average real return on stocks, as measured by the Dow, was -12.33%; the average real return on gold was 130.4%.”

In recent times the use of commodities aside from gold has gained in popularity. Corn and wheat are just some of other base commodities that increase in price during inflationary periods.

The problem with gold and other commodities is that they are not very liquid. For those investors who require a high level of liquidity, government bonds linked to the inflation rate may be the way to go. In the US these bonds are called TIPS (Treasury Inflation Protected Securities). TIPS come with the same guarantee as other US government bonds, and investors will see an increase in interest paid if inflation increases. While in the US, CPI-linked bonds are rather new, in Israel (where we have seen hyperinflation) inflation linked bonds are very popular.

Don’t wait for inflation to arrive to start thinking about protecting your portfolio, because by then it may be too late. Get a head start now and protect the value and purchasing power of your money.

Aaron Katsman is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. a registered broker dealer, Member FINRA, SIPC, MSRB, NFA, SIFMA. For more information, call (02) 624-0995 or email aaron@lighthousecapital.co.il.

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It was only a few weeks ago that market pundits were predicting the US Dollar to reach 4.5 against the Israeli Shekel. Well what sayeth you pundits now?

Can you say 3.89???? Giddy up. The Shekel, like most other currencies continue to soar as President Obama continues to print money. We have seen a 7% fall in the USD/NIS rate in less than a month. Didn’t Obama say that he wanted a strong greenback?

It’s not exactly like the Israeli economy is on fire. This is clearly a USD story and doesn’t have much to do with the Shekel. As long as we continue to see businesses become nationalized, and the US Mint working 24/7, this has the potential to become a bigger and longer trend.

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Things apparnetly are boring for El Al airlines so they decided to spice things up a bit. It appears that El Al is openly marketing to European Gays and Lesbians, and hoping to sell them on coming to Israel in June for Gay pride week.

According to Ynet: “According to tourism branch sources, this is the first time El Al takes such a direct and upfront approach to gay tourism, that is courted around the world by travel agencies and airlines due to the great profit potential found among this population.

On average, gay tourists spend more time vacationing than non-gay tourists and are known to be bigger spenders.

The special packages will be marketed in a no less unique way: Thousands of gay Israelis surfing the Atraf dating website were urged to invite their homosexual friends from Europe to vacation in Israel and enjoy an array of events taking place during Gay and Lesbian Pride Month this June.

The events will peak in Tel Aviv’s pride parade, that will be bigger and better than ever this year as part of the city’s centennial celebrations.

If the campaign is successful, hundreds, if not thousands of gay tourists from Europe are expected to flood the city for the first time since the pride parades started.

Tel Aviv’s gay community welcomed the joint initiative with El Al. Travel agent Russell Lord, who specializes in bringing gay tourists to Israel, said on Tuesday, “Since the campaign was launched yesterday, I’ve received many positive responses from gay tourists from Germany, Switzerland, Holland and Greece, and I didn’t believe there would be such quick responses.”

How long do you think it will take for the Israeli Hareidim, or ultra-orthodox, to announce a boycott of El Al? This should be an interesting fight. Stay tuned.

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I guess the celebration of Israel’s 61st birthday last week was superfluous. After all according to BOI head Stanley Fischer,  Israel came into existence when he took his position a few years ago. How else do you explain his bizarre statement in the Knesset today, when speaking about the Bank Hapoalim situation.

According to Globes: “Fischer told the committee, “It’s a mistake to discuss this matter. We’re still in the middle of the measures. I can assure you that we would not have embarked on this path without considering everything, every repercussion, in the middle of the greatest financial crisis this country has every known.”

The ‘greatest financial crisis the country has every known’. Huh?

What drivel. What is he talking about? Israel was about to go bankrupt 7 years ago…remember? Remember the days of hyperinflation????

Give me a break. The fact that Fischer was talking up the economy, as it was entering a slowdown is bad enough. To now say this is a great crisis, is both admitting that you have failed, and that you know nothing of Israeli history. Either way it doesn’t look good.

Much like Prez. Obama, who is trying to recreate the country in his own image without any respect to history, Fischer as well has used the same strategy. unforuneately, those that don’t learn from history are the ones that are doomed to repeat it.

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