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Investing for deflation
Wednesday, February 11, 2009
In response to a question submitted earlier in the week about how one goes about "investing for deflation", Kevin Depew at Minyanville writes:
Wow - what a prospect.Conventional wisdom is that there is always something to buy in a bear market and sell in a bull market. However, if the long-term deflationary debt unwind thesis is correct, the point of recognition will result in the simultaneous decline of virtually all financial assets.
Under those circumstances, shopping for bargains among the rubble is like groping around in a pile of knives. This is a difficult concept to grasp, especially given the length and magnitude of the secular bull market in social mood and, subsequently, financial assets, that brought us to this point. But the reality is that during a deflationary debt unwind there are no good long-term investments other than cash.
The best you could reasonably expect to do is earn one or two percent on your cash...
It really sucks that our health insurance just went up 20 percent.
9 comments:
You're not earning 1 to 2 percent though, you're earning double digits because prices are falling. Health insurance is a tough one, but if the government has to cut spending, it could cause deflation there as well.
The deflation argument is a crock in the real world for normal people.
I'm not seeing it in the prices I'm paying for electricity and food.
My car and home insurance went up a lot this year, too.
I'm not seeing it for little things like movies or DVD rentals or postage or FedEx charges or trips to the dump or all the little stuff I do all month long, either. All that stuff is up.
I'm sure not seeing it for medicines I buy for my elderly mother or co-pays for health insurance. Those have all gone up a lot.
In other words, I'm not seeing deflation in anything that matters to me and my family except that gasoline prices went down a lot recently. (Gas has been creeping up again though in So. Oregon.)
For real people in the real world, this deflation argument is arguing about angels dancing on pins.
Maybe paying off debt is the best investment.
It made sense to let a mortgage be paid off by inflation, but with the AMT eating into the mortgage interest rate deduction, there's more and more reason to be debt-free.
If wages follow prices down, that will effectively mean "fixed" interest rates going up.
There isn't much deflation in costs except in asset prices. Even the post office is raising the cost of stamps. How long until "forever stamps" become the new national currency? At least they hold their value.
1. Acquire ability to manipulate space-time; travel back in time to when we were a creditor nation on the gold standard.
2. Buy long-dated Treasuries.
1% or 2% on cash is not bad at all in deflation cause remember prices are dropping. So the real returns are higher.
Look at the latest one year, three year, five year, and ten year return for the S&P 500. I've been in cash for the last 10 years and have averaged between 5&6%. Cash has outperformed the market.
Paying off debt is REALLY a great investment also.
I agree with what the Austrians say about inflation, but it does not seem to be affecting everyday prices yet.
Energy prices and housing prices have dropped but these are special cases. Most consumers are losing money on the homes they own so they don't consider this a savings. Rents are determined annually or bi-annually so they are hardly factored into consumers's projections. Consumers don't generally attribute energy prices to supply and demand, but rather to nasty Arabs and Venezuelans, mean ol' Big Oil, sales tax, and speculators on Wall Street.
Meanwhile eggs, toothbrushes, pizza, etc. are all more expensive.
Personally, I am in the market to buy a house so deflation matters to me, but I think I am a pretty rare bird these days.
Remember that the Fed cut interest rates to 1% in 2003, but we didn't really see prices jumping until 2007 and 2008.
we have an EXCESS of debt.
and yet you are arguing that this debt will be worth MORE on termination of tenor than before!
No makes sense buddy.
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