Investors are terrified of inflation right now…
But is it really a worry? Is it poised to eat away at your savings and wreck your income investments?
Many newsletter writers and talking heads say yes… According to them, inflation is already a big problem.
So let’s take a look at the facts. They may surprise you…
[ad#Google Adsense 336×280-IA]For people who own fixed-income investments (like bonds or preferred shares), inflation is always a major worry.
It eats away at your returns. For example, if you earn 4% in annual interest on a bond, but inflation runs at 5%, you’ve actually lost purchasing power.
We don’t want to see inflation rear its ugly head.
And counter to what many people believe, I don’t think it will any time soon.
The mainstream media is starting to predict that inflation is heading higher… but I think the move could be smaller than most think. That’s because producer prices tend to lead consumer prices, and the Producer Price Index (PPI) – which represents prices that producers pay for their input materials and supplies – is still subdued.
As you can see, the PPI is below the levels of the Consumer Price Index (CPI) – or the final prices consumers pay. The CPI trails the PPI, so we expect the CPI to head lower from here. And in today’s situation – when the PPI is lower than the CPI and at low levels – it’s a bullish sign for stocks, as companies enjoy higher profit margins. It’s also good for bond investors.
Therefore, I’m still telling my readers to buy fixed-income investments, such as tax-free municipal bonds.
One of my favorite ways to invest in “muni” bonds, which I’ve discussed here before, is the Invesco Value Muni Fund (IIM) .
Right now, IIM is offering you a little more than 6% in annual interest.
For those in higher tax brackets, the income you receive is equivalent to getting 9%-10% on your taxable investments. Even people in lower brackets benefit from getting tax-free income (6.5%-8% equivalent).
Those yields are similar to what you can get from high-yield corporate “junk” bonds, which yield a little less than 6%, according to the Merrill Lynch High Yield Index. But junk bonds are much riskier, with default rates that have ranged historically from 1% to 12%.
Plus, IIM is trading at an 8% discount to its underlying assets, which makes it an even better buy… It’s like buying a dollar for 92 cents.
With oil prices over $100 and the economy starting to chug along, many of TV’s talking heads and the financial media would have you believe inflation is a problem. But the facts tell us otherwise.
Don’t let these worries keep you from making money. Hold on to your income investments and consider buying shares of a tax-free muni fund like IIM. As soon as the facts about inflation change, we’ll let you know.
Here’s to our health, wealth, and a great retirement,
Dr. David Eifrig Jr.
[ad#stansberry-ps]
Source: Daily Wealth