Given our inflation forecast for the next decade of 2.6% is above current 10-year breakeven inflation rates, we generally favor TIPS over nominal bonds for conservative income generation. If our expectation for heightened inflation volatility in the decade ahead does come to pass, there will be additional value available by tactically allocating between the two.
Current debt levels are simply too high to effectively tame inflation, especially if U.S. deficit spending remains at wartime levels. Real assets with ample liquidity including gold, commodities, real estate and potentially even a small measure of digital assets, for those that fully understand the risk, are well suited for such an environment. Investors can also consider collectibles such as wine, art and watches but need to be cognizant of the high transaction costs for these sleeves of real assets.
For equity investors, now is a good time to rebalance portfolios heavily skewed to the growth leadership of the last decade. We believe value is better positioned than growth and expect the growth/value spread to shrink as stock valuations take on greater importance in determining expected returns.