"Embrace Inflation": How to Profit and Protect Your Wealth

"Deflation is a very serious risk [but] inflation is a greater likelihood," Arun Motianey, senior strategist at RGE Monitor, says of the great economic debate of our age.

Despite ongoing (and legitimate) concerns that a combination of China's economic risk, debt deleveraging and technology will spur Japan-style deflation in the coming decade, Motianey is more concerned about inflation for a simple reason: "I'm expecting the central banks of the world to embrace inflation," he says.

If you think the Fed is easy now, just wait. Motianey predicts the Fed will monetize the public debt in the not-too-distant future, meaning it will print money and buy Treasuries -- well beyond what it's done in the past year. The Fed will also probably require banks to hold a higher level of government debt in order to maintain demand, he says.

Unlike the inflation of the 1970s, Motianey predicts we'll soon enter a period of "voluntary inflation," not unlike the 1948-1951 episode when the Fed somewhat surreptitiously helped Uncle Sam inflate its way out of the huge debts incurred during World War II and its aftermath.

A big difference between then and now is the sensitivity and sophistication of the financial markets to such Fed maneuvers. In his new book, SuperCycles: The New Economic Force Transforming Global Markets and Investment Strategy, Motianey details how investors should prepare for what he calls a "targeted period of higher inflation," including:

• --Avoid government bonds: "The so-called risk free bonds ironically will now become the riskiest," he says.
• --Hold corporate bonds as a "quasi-equity": A little inflation will provide corporations with pricing power, leading to higher earnings and the cash flow needed to meet their debt obligations, he says.
• --Stay long stocks, with a narrow focus on dividend payers, as well as companies that produce natural resources and basic materials.
• --Own gold and other commodities, which Motianey predicts will do "extremely well" in this scenario.

All this may sound self-evident but deflationary pressures - or the perception thereof - have been driving some market action lately, meaning opportunities are being created for those who believe inflation is the greater long-term threat.