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By Herbert Lash
NEW YORK, Jan 27 (Reuters) - Influential value investor
David Dreman said in an interview on Wednesday that inflation
lies ahead and the Federal Reserve is caught in an "impossible
situation" because it cannot raise interest rates amid high
unemployment.
Dreman, known for a contrarian investing style, said
inflation could rise to double-digit levels in three years and
equal a bout of rapidly rising consumer prices that the United
States suffered during the late 1970s.
Gold, energy assets and industrial metals along with stocks
will do well in a high inflationary environment. Also,
homeowners should see home values rise, Dreman told Reuters.
"We're going to have some major inflation," said Dreman,
who oversees about $5 billion in equity assets at Dreman Value
Management LLC in Jersey City, New Jersey.
"The Fed really is in a box. It's forced to print money,
but at the same time they know they shouldn't," he said. "It's
an impossible situation ... There just doesn't seem any way
out. I don't see how we're going to avoid that."
Dreman, who likes out-of-favor stocks, is enjoying a strong
rebound after suffering a dismal 2008.
The Dreman Market Over-Reaction Fund, with $7.7 million
under management at Dec. 31, was up 60.0 percent in 2009,
according to data from Lipper Inc, which ranked it the best
large-cap value fund last year.
In 2008, the fund posted negative returns of 46.8 percent.
DWS Investments fired Dreman last April for poor
performance at one of the DWS funds he managed.
Dreman said stocks, and especially those of companies whose
sales keep up even in a tough economy, can keep abreast of the
rate of rising consumer prices, or even top that pace.
Since World War Two, the value of the U.S. dollar has
plunged because of inflation, yet stock prices have soared, he
said.
Investors should avoid fixed-income instruments with a term
longer than three years, he said. A double-digit rate of
inflation can cut the price of a bond in half, he said.
Dreman is so sure that inflation will surge he has shorted
30-year U.S. Treasury bonds for his own account. An investor
shorts a security on expectations its price will fall.
Apache Corp and Devon Energy Corp are two oil exploration
and development stocks he likes. He cited the long-term demand
for energy that the companies can exploit.
In banking, Dreman likes JPMorgan Chase & Co, Wells Fargo &
Co and PNC Financial Services Group Inc because "all are
strong."
Large banks have gotten funding at about 0.88 percent, when
others are paying up to 3 percent, he said.
Dreman has written four books on investor psychology in
which he developed the rationale behind investing in
out-of-favor stocks and why he is known as a contrarian
investor.
