It will always be inflation – UK Inflation – May 2010 Update

I am still reading on blogs and in news articles many discussions on whether going forward we will see inflation or deflation. I might as well wade into the debate and suggest that over the long term (remember I’m a long term investor not a short term trader) I believe that we will see inflation. We could even see hyper inflation. What makes me say this? Well, my first chart showing the UK RPI for starters. It has never failed to reach a new high meaning inflation. Sure we’ve seen some deflation over the short term however I believe that policy makers and governments will just not tolerate deflation as it makes debts larger and savings worth more. Given the debts of governments and individuals this cannot be tolerated. Inflation is the easy way out. I believe that as soon as deflation next appears we’ll see yet more quantitative easing or other drastic measures to try and secure inflation. If they can’t engineer the inflation quickly through moderate means they will continue taking more risks shamelessly until the risk of currency destruction through hyper inflation is upon us. That sound pretty extreme but it is what I feel today.

Houses are still overvalued - UK property market – July 2010 Update

The Economist dated July 10th to 16th 2010 has run a very interesting article entitled “Froth and stagnation – House prices in parts of Asia continue to soar, despite efforts to slow them”. As part of this article they present a table showing a list of countries and detail whether according to “The economist house price indicators” houses are under or overvalued. As regular readers will know I am very interested in UK and Australian house prices however let’s have a look at the list from most over valued to most undervalued first:

Gold Priced in British Pounds (GBP) – July 2010 Update

In real (inflation adjusted) terms gold has stopped, at least temporarily, its steep climb by falling in value by 6.1% month on month (£837.28 to £786.14). Year on year though gold is still up by 30.8%.

Gold when priced in British Pounds (GBP) is however still yet to reach new real highs. Since 1979 we have seen two month average higher real (inflation adjusted) peaks. The first was £867.22 in 1983 and the second was £1,076.06 back in 1980. These peaks are still 9.4% and 26.9% higher respectively than today’s price.

Gold Priced in US Dollars (USD) – July 2010 Update

Within my Retirement Investing Strategy I currently hold 5.4% (down from 5.5% at the last USD gold update) of my portfolio in gold with a targeted holding of 5%. This is a variation from target of only 7% which is relatively small meaning I will not rebalance. Remember also that Gold is the only portion of my portfolio that does not provide a yield (dividends, interest etc). Even though it doesn’t provide a yield and some would even call it a ‘barbarous relic’ I choose to hold it because of its negative correlation with stocks. While one is zigging hopefully the other is zagging meaning I am selling one high while buying the other low. Only time will tell if this strategy will work.

UK FTSE 100 CAPE or FTSE PE10 based on the Shiller cyclically adjusted price earnings ratio model

Update 13 July 2010: Chart 3 added following UKVI's comment below.

For many months now I have been showing the PE10 for the ASX200 and the S&P500 however what I have always been looking for is a cyclically adjusted PE ratio dataset for the UK FTSE100. In shorthand a FTSE100 CAPE or FTSE100 PE10 depending on your preference for acronyms. Unfortunately a complete dataset has been impossible to find. I have therefore spent many hours constructing one from pieces of data taken from Motley Fool Discussion Boards, the Financial Times marketdata and Yahoo Finance. I therefore can for the first time present a chart of the FTSE100 PE10 and for good measure I’ll throw in the Real (inflation adjusted) FTSE100.