Over the next decade, the critical element in any investment portfolio will be the correct call regarding inflation or its antipode, deflation. Despite near term deflation risks, the overwhelming consensus view is that "sooner or later" inflation will inevitably return, probably with great momentum. This inflationist view of the world seems to rely on two general propositions. First, the unprecedented increases in the Fed's balance sheet are, by definition, inflationary. The Fed has to print money to restore health to the economy, but ultimately this process will result in a substantially higher general price level. Second, an unparalleled surge in federal government spending and massive deficits will stimulate economic activity. This will serve to reinforce the reflationary efforts of the Fed and lead to inflation.

These propositions are intuitively attractive. However, they are beguiling and do not stand the test of history or economic theory. As a consequence, betting on inflation as a portfolio strategy will be as bad a bet in the next decade as it has been over the disinflationary period of the past twenty years when Treasury bonds produced a higher total return than common stocks. This is a reminder that both stock and Treasury bond returns are sensitive to inflation, albeit with inverse results.

Dr. Lacy H. Hunt, an internationally-known economist, is Executive Vice President of Hoisington Investment Management Company, and in this position he is also Vice Chairman of the Strategic Investment Committee. He also serves as the firm's Chief Compliance Officer.

Previously he was Chief U.S. economist for the HSBC group, one of the world's largest banks. He was also Executive Vice President and Chief Economist at Fidelity Bank. Earlier he served as Vice President for Monetary Economics at Chase Econometric Associates. A native of Texas, Dr. Hunt held the position of Senior Economist for the Federal Reserve Bank of Dallas.

Lacy earned his BA from the University of the South (1964), his MBA from the Wharton School of the University of Pennsylvania (1966), and his Ph.D. in Economics from the Fox School of Business & Management at Temple University (1969).