The American economy is unusually hard to forecast in mid-2009 beyond the near term.  One can predict with confidence that an enormous increase in the monetary base over the past year should translate into a wave of inflation once the economy recovers from the current recession.  However, whether the wave will be short and moderate or enduring and huge depends on (1) whether the government carries through with its unprecedented deficit spending programs and (2) how it funds them. 

The problem is that the economy is confronting a Catch-22: if the government funds its new programs through borrowing and taxation, then the resulting high interest rates and reduced discretionary private income will strangle the recovery.  On the other hand, if the government funds the programs by printing money then the resulting enduring inflation will savage the economic health of people on fixed incomes and discourage consumption, which will sap the vitality of the recovery even if it avoids strangulation.

Private investment to expand business in this economic environment is hazardous.  However, there is a low-risk investment strategy that can improve the prospects of many companies for growth and profitability regardless of whether the government follows through with its deficit spending programs and regardless of how it funds them.  The strategy is based on two characteristics of the current state of the economy: (1) inflation and short-term interest rates are expected to remain low until the economy recovers from the current recession, and (2) prices of many assets, including natural inflation hedges, have declined substantially during the recession.

Among the assets with declining prices is commercial real estate.  For businesses that spend significantly on commercial real estate use (and use of related capital assets) as an ongoing business cost, the present time is opportune to acquire ownership of at least some of that property as a hedge against profitability erosion from an inflationary wave of uncertain magnitude that is assuredly coming.

Asset acquisition takes amounts of liquid capital that few businesses have on their balance sheets.  Hence, most businesses have to figure out how to finance capital asset acquisitions without exposing most of the expected gains to risk that the wrong inflation-and-recession scenario will materialize to threaten the gains.

Under current circumstances, long term borrowing to finance inflation hedges is a poor tactic on two accounts.  First, long term interest rates already factor in the twin risks of prolonged post-recession inflation and a multiple-dip recession, which for most businesses erodes away at the outset most gains that could be expected from the investment strategy.  Second, most long-term debt service is not tax-deductible, which makes debt service a costly cash flow constraint on an after tax basis.

The efficient solution is to use shorter term asset-based finance with modest to moderate leverage.  With patented Electrum Partners technology, borrowers can structure such finance to protect both lenders and borrowers.  By restricting financing maturities to relatively short terms and avoiding balloon payments, borrowers immunize lenders against most or all inflationary risk.  By maintaining unusually high coverage ratios and designing the financing structure to facilitate rapid default resolution, borrowers protect lenders against collateral wastage in default if the acquired assets must be redeployed.  These features reduce lender loss risk to minimal levels.

Minimal lender loss risk translates into lower borrower interest rates.  This boosts expected net returns even before inflationary expectations are taken into account.  The constraint on financing maturities allows us to employ operating-lease-based finance.  This enables borrowers to write off all debt service payments for tax accounting purposes and present accurately attractive depictions for financial accounting purposes.  These combine to give short term finance a distinct advantage over long term finance.

It is unusual to find a profitable low-risk investment strategy in hazardous times with expected returns that increase directly with the extent to which an economic hazard materializes.  The present opportunity stems from the nature of the hazard together with our proprietary financial technology.  The proprietary technology plays a key role by enabling the lender risk reduction necessary to reduce short term borrower interest rates.

This investment strategy embodies the principle advanced by Dale Carnegie that we should make lemonade when life hands us lemons.  Businesses that can hedge against inflation risk by vertically integrating would do well to consider implementing some version of the strategy before the forthcoming inflationary wave arrives.