Build Your Inflation Hedge With Infrastructure

Just when you needed something else to worry about: Inflation isn't dead. But, hey, I've got good news, too. I've found a way that you can make more money from inflation and lower the risk from inflation in your portfolio at the same time.

Diversify into infrastructure stocks. I'd go so far as to call them "the new gold."

According to the producer price index numbers released March 15, inflation isn't dead. The headline index of inflation at the wholesale level climbed at a 2.5% rate in February. That's not good news, since future inflation at the consumer level often follows the wholesale trend with a lag of six months or so. An annual 2.5% rate is certainly high enough to make the Federal Reserve nervous about cutting interest rates, as Wall Street hopes it will in the months ahead.

In a normal financial market, I'd advise adding to positions in gold and other commodity stocks as a hedge against inflation. The prices of the underlying commodities typically go up when inflation climbs, and the stocks of commodity producers climb even faster, since their earnings rise faster than the prices of the commodities themselves. That's because the costs at these companies are largely fixed, so increases in commodity prices drop straight to the company's bottom line.

Not Business as Usual

But this isn't a normal financial market. Because the 416-point selloff of Feb. 27 was largely a result of traders unwinding speculative positions purchased with borrowed money, the prices of gold and other commodities didn't zig when the stock market zagged, as they usually do. Instead, since traders were also selling speculative positions in gold and other commodities, shares in these sectors went down along with everything else.