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Basically I think it is quite obvious that quantitative easing (QE) will be pulled back eventually and countries will start to tighten their monetary policy. When that happens, what kind of assets will be able to hold their value, and hopefully appreciate?

I know commodities are a good inflation hedge, however when QEs are gone, I think what will happen is disinflation (reduced inflation). Things like collectible items may be good, but they are beyond the reach of a normal investor.

Any other suggestions?

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migrated from quant.stackexchange.com Jun 25 '13 at 16:04

This question came from our site for finance professionals and academics.

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Since the adoption of the Evans Rule, the Federal Reserve has signaled that they probably won't pull back QE until inflation surpasses 2.5%, which is well above the current target (2%). This makes me extremely skeptical that the pullback of QE and the accompanying rise in interest rates will lead to deflation because the rate of inflation would need to drop over two points, which is huge. –  John Bensin Jun 25 '13 at 16:25
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I should clarify that the draw down of QE might lead to reduced inflation (down from the 2.5% threshold), but reduced inflation is not equivalent to deflation. Also, merely because the US central bank draws down QE doesn't mean other countries will tighten their monetary policies either. Besides, there are many countries that aren't using QE-style monetary policy now, so they don't have a QE policy to draw down. –  John Bensin Jun 25 '13 at 16:31
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@AZhu Also, keep in mind that disinflation isn't the same as low inflation either. Disinflation refers to the change in the growth of inflation. Inflation is like the speed of your car, while disinflation is like the acceleration. Just as it's possible to slow down when you're traveling quickly, it's possible to have disinflation in a high inflationary period. (Inflation is the 1st derivative of prices; disinflation is one instance of the 2nd derivative). The presence of disinflation may indicate different economic scenarios, but it doesn't necessitate a special hedge. –  John Bensin Jun 26 '13 at 2:40
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@AZhu Long story short, the draw down of QE isn't the disaster scenario that the comment on the original quant.SE question is predicting. Although some people worry about this, it's important to take a step back any time you hear a prediction of disaster like that. Someone is always predicting disaster, all the time, but the economy is still here and the business cycle continues. –  John Bensin Jun 26 '13 at 2:56
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Also, this question appears to be off-topic because it is asking for specific investment advice. –  John Bensin Oct 4 '13 at 3:30

1 Answer 1

Take defensive positions that will protect you from the scenario you anticipate,

  • short emerging markets (EM)
  • buy fixed income securities that will protect you from your expected changes in the shape of the yield curve
  • buy US Dollar currency futures, forward contracts, or options on futures

For example, go long USD/THB where THB = Thai Baht. THB is one of the few convertible currencies among emerging markets. There are a few forex brokers who will do this transaction. The cost of the trade is likely to be high though.

In your scenario, the US dollar will be king, eventually ... even if, ultimately, only temporarily :)

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