Paulson Sees Inflation on the Horizon

Written By Brian Hicks

Posted October 5, 2010


Here’s the latest take on the markets from billionaire hedge fund manager John Paulson.

In it, he makes four calls, three of which I agree with. Seeing inflation on the horizon, he likes gold, and blue chip stocks paying a good dividend yields. Additionally, he also believes bonds are in a bubble.

He also is bullish on housing which is where I think he’s off the mark in the short term. No surprise there.

Even still, it’s hard to argue with his overall view on inflation. In fact, as I pointed out in this article inflation is about to return to our shores thanks to a devalued dollar and emerging market strength.

That being said here’s how Paulson is lining up his portfolio these days….

From the Wall Street Journal by Brett Arends entitled: How to Bet Like John Paulson

Hedge fund tycoon John Paulson is the man who made his name, and a fortune, betting against subprime mortgages when no one else even knew what they were.

And he’s just made three big financial calls that you need to know about.

Speaking to the University Club in New York, he said, first, that gold could go to $2,400 an ounce based on the fundamentals—and that momentum could carry it to $4,000 an ounce. Right now it’s around $1,300. Second, he said you should get out of bonds while you can: You’re much better off investing in blue chip stocks with good dividend yields than bonds.

And third, he said you should buy a home. Now.

“If you don’t own a home, buy one,” he reportedly said. “If you own one home, buy another one, and if you own two homes buy a third and lend your relatives the money to buy a home.”

(A spokesman for Mr. Paulson did not challenge the accounts of the meeting.)

Among the New York commentariat there’s been a lot of head-scratching about Mr. Paulson’s take—especially this contrarian stance on housing.

Is he right? If so, what does he know that everyone else doesn’t?

Ignore the critics. The odds have to be on his side. The reason is simple: Inflation.

There is a debate raging on Wall Street these days between those warning about deflation and those warning about inflation. We are at, or near, deflation at the moment. It may even get worse before it gets better. But Mr. Paulson sees inflation coming by 2012 or so. Last week, several contrarian money managers I was talking to made the same prediction.

The explanation isn’t hard to find.

Forget the usual technical issues economists like to talk about, such as output gaps, labor markets, money supply and the like.

Put simply: We will get inflation because we have to. It doesn’t get any more straightforward than that.

There is only one plausible route out of this appalling situation. The government needs inflation. The country needs inflation. That will shrink these debts in relation to the economy, asset prices and incomes.

Deflation would make debts even bigger in real terms. That would be a disaster. We’re skirting it at the moment, but it can’t be allowed to take hold. That’s why Fed chairman Ben Bernanke has just offered more quantitative easing—and if that won’t work he’ll try something else. Anything else.

That’s what Mr. Paulson knows—and what anybody could know if they just take a step back from the day to day details and look at the big picture.”

That’s the game in a nutshell these days. Sad but true….

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