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Hennessee Warns Hedge Fund Clients To Expect Prolonged Inflation

by Phillip Morton, Investors

19 November 2008

Hennessee Group LLC, an adviser to hedge fund investors, is advising its clients on actions to take in the next five years for asset classes including hedge funds, bonds and precious metals given the likelihood of a recession and prolonged price inflation.

The Hennessee Group believes that while the Federal Reserve and the United States Treasury are taking the necessary actions to remedy the current credit crisis and mitigate the risk of a severe recession, these actions have longer term collateral consequences.

According to Hennessee, the stage is being set for a high inflationary period beginning in the next three years. Charles Gradante, co-founder of the Hennessee Group, observed that “a hyperinflationary period could be the next crisis on the horizon beginning in 2010 or 2011.”

He added: “If the money supply continues to grow at its current pace, we could see inflationary levels similar to those experienced in the 1970’s once the current credit crisis begins to subside.”

Specifically, Gradante believes money supply growth (M2) will exceed 12% in 2009, rivaling money supply growth of the 1970’s.

The Hennessee Group is concerned that the US could experience a similar economic scenario to that experienced 30 years ago, with the Fed and Treasury making it clear they will do whatever it takes to avoid further fallout from the credit crisis.

While there has been a recent pullback in the price of oil and other commodities, as well as inflation in general, the Hennessee Group believes this is a short term correction in a longer term upward trend in inflation. It warns that this trend could be exacerbated by the recent aggressive fiscal and monetary actions, including the USD700bn bail-out programme and the recent Commercial Paper Funding Facility. In total, the US has lent out nearly USD1 trillion in bailout money and some estimate this number could reach USD2 trillion before the credit crisis comes to an end. This, warns Hennessee, could lead to sharp growth in the money supply and higher interest rates.

“Such a scenario could ultimately force the Fed to reverse course in monetary policy as they did in the late 1970s by aggressively raising rates and removing liquidity from the market place,” stated Gradante.

“As a possible consequence of these actions the US could experience the worst of all economic conditions – stagflation,” he added.

Given this backdrop, the Hennessee Group believes commodities, namely gold and other precious metals, could serve as good hedges against inflation going forward, as they did in the hyperinflationary and subsequent stagflation days of the 1970s.

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