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Outside the Box
Nov. 5, 2010, 12:01 a.m. EDT
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First Take "º
Washington Post: In Kaplan, we trust
By Jeff Reeves
ROCKVILLE, Md. (MarketWatch) "” There are snappy headlines all over cyberspace right now about the Federal Reserve setting sail with QE2 "” or a second round of "quantitative easing" policies, for those more aware of the famous ocean liner than economic jargon.
In layman's terms, quantitative easing is a monetary policy used by central banks to stimulate the economy by increasing the supply of money in the system and boosting the excess reserves of banks. Or in more pejorative terms, the Fed is printing more money to satisfy Washington's runaway spending and hopefully prop up an ailing economy.
Financial advisers are hesitant to use social media because of compliance pressure or a lack of understanding of these tools, but consultant Mike Byrnes with Byrnes Consulting says social media is crucial for building a brand.
I'll leave the merits and menaces of QE2 "” and the nautical puns "” up to those on the rest of the Internet. The bottom line is that regardless of whether another round of quantitative easing is a success or failure, the result will be the eventual rise of inflation and devaluation of the dollar.
To help investors prepare their portfolios, here's a 10-step inflation survival guide.
This may be hard for many risk-averse investors to do, but the bottom line is that during periods of rapid inflation, your money is literally worth more today than it will be tomorrow. So "spend" it. Whether it means buying a car now instead of next year or investing in the stock market, that depends on your personal situation. But sitting on cash will cost you in the long run. Read "How to Invest $1,000 Now."
So what do you do with that cash? Well, the other side of the equation is that when inflation takes root, a nation's currency typically devalues. That means you would be wise to bet against the dollar. A number of ETFs allow you to do this. PowerShares DB US Dollar Index Bearish ETF /quotes/comstock/13*!udn/quotes/nls/udn (UDN 27.77, -0.19, -0.68%) is an inverse play on the New York Board of Trade's U.S. Dollar Index. If you're more sophisticated about currencies and macro trends, you can play exchange rates between the dollar and other currencies like the yen or euro.
U.S. Treasury bonds are bad news during an inflationary environment. That's because as yields start to rise "” and at nearly zero, they have to, eventually "” bond prices naturally fall. That means you don't want to be stuck holding the bag.
You can benefit from the flip side of the collapse in Treasury bonds by shorting them. You can do that by purchasing an inverse ETF just like the previous play on the dollar "” for instance, the ProShares UltraShort 20 Year Treasury ETF /quotes/comstock/13*!tbt/quotes/nls/tbt (TBT 34.95, +0.78, +2.28%) . A more sophisticated play is to buy puts Treasury funds such as the iShares Barclays 20 Year Treasury Bond ETF /quotes/comstock/13*!tlt/quotes/nls/tlt (TLT 98.54, -1.15, -1.15%) . Either move not only protects your portfolio from a likely collapse in T-Notes but provides a nice potential for profits.
These types of U.S. Treasury bonds (known as TIPS for short) provide the safety of a government bond with the bonus of protection against inflation. You can buy these outright, or via the iShares Barclays TIPS Fund ETF /quotes/comstock/13*!tip/quotes/nls/tip (TIP 111.67, -0.22, -0.19%) . Unlike conventional Treasurys, these bonds see their value adjust with inflation to ensure you don't get eaten up as the dollar fades. If you have any doubt whether or not TIPS work or how bullish Wall Street is on this vehicle, consider that in October the U.S. Treasury successfully executed its first-ever TIPS auction in which the bonds actually had negative yields. That's because the specter of inflation is so likely that investors were willing to enter the investment in the red with the expectation of rising yield over the life of the investment that makes a short-term loss well worth it.
How long can the Washington Post Co. keep rolling sevens with its Kaplan education division?
10:59 a.m. Today10:59 a.m. Nov. 5, 2010
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