Posted on 06/21/2021 1:39:36 PM PDT by MtnClimber
We are entering a period where financial pundits agree will be inflationary, but some think it could turn deflationary. Here is an article from a similar economic period in 2008 evaluating strategies for both situations. As alwats, let the buyer beware:
Monday, August 11, 2008 Investment Scenarios: Inflation vs Deflation I've said all along that you need to be thinking ahead and preparing your portfolio for various potential economic and market scenarios. And, I've roughly broken down these scenarios into two environments: inflationary & deflationary. So, after much reading, pondering, and hypothesizing, I've come up with my broad gameplan for each scenario.
Inflationary Environment In an inflationary scenario, the following positions should be poised to benefit:
- Long Gold: As a speculator's instrument, many argue that gold is an inflation hedge. Long also other precious metals and commodities in general.
- Long Oil: In a truly inflationary environment, oil is supply inelastic; any increase or decrease in price would not result in a corresponding increase or decrease in supply.
- Short Leverage: A common theme regardless of environment, really. Leveraged companies, companies who provide leverage, companies with leveraged consumers.... short them all. A deleveraging environment is ahead of us.
- Long Technology: Regardless of environment, technology will evolve and there will be demand for such advancements.
- Short Fixed Income: Weak domestic currency/monetary system means it will underperform and thus should be shorted.
- Long Emerging Markets: A weak domestic currency/monetary system implies higher returns can be found abroad in countries experiencing vast growth.
- Avoid staying in cash: Inflation means your currency is worth less every day. Fight it by not staying in it if at all possible.
Deflationary Environment Many people are becoming increasingly concerned that deflation is in our future. And, this concern is duly warranted considering that deflation typically rears its ugly head after periods of prolonged globalization and global growth. Such growth leads to increased investment, a massive increase in production, and thus excess capacity all around the world. Such excess capacity then brings forth lower prices. In deflation, companies suffer while the consumer is the real winner. In a deflationary scenario, the following positions should be poised to benefit:
- Short Equities: In deflation, traditional investments should suffer simply because the underlying companies will see lower margins and losses. And, more often than not, certain companies will become insolvent.
- Short Housing: Rent rather than own. As prices collapse, stand back and let the landlords watch the values of their properties plummet.
- Long Fixed Income: Mainly sought after as a safe haven (much like gold in an inflationary environment). While by no means a 'top pick' for investing during deflation, it is an option for those who do not have access to short selling (the preferred position). Although fixed income yields should decline due to fed easing (to combat deflation), the underlying should theoretically depreciate much less than equities (which you do not want to be long). Seek better quality bonds.
- Short Leverage: Regardless of environment, deleveraging should be a big theme playing out in the future. Short any companies that have anything to do with leverage. In deflation, leverage begins to unwind and as such currency plays can be found. A massive leveraged carry trade in the Yen has taken place over the years and as such would be unwound in deflation, thus benefiting the Yen.
- Short Emerging Markets: The global boom that once fueled these nations quickly turns sour for them. Global excess means prices come down and companies suffer.
- Long Technology: Regardless of environment, technology will advance and will be in demand.
- Avoid debt and raise cash
- Long Gold: In extreme conditions (in any direction), gold can make sense. In deflation, it can make sense when acting as currency.
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Whether in an inflationary or deflationary environment, portfolios can be poised to outperform. While the theme of deleveraging seems all but inevitable, the exact scenario(s) that will unfold are hard to predict. But, the possible outcomes stand roughly divided by the two scenarios outlined above. And, both environments offer unique investment opportunities poised to outperform. (See here for an additional set of stipulations regarding each type of environment).
Something to watch if you are an investor.
Thank you.
The one key take away from this article…
- Avoid staying in cash: Inflation means your currency is worth less every day. Fight it by not staying in it if at all possible.
Powell about 30 minutes ago:
Fed Chair Jerome Powell: Fed Will Do Everything We Can To Support Economy For As Long As It Takes To Complete Recovery
- Inflation Has Increased Notably In Recent Months
- As Transitory Supply Effects Abate, Inflation Expected To Drop Back Toward 2%
Interesting thing is, the Bond Market’s action yesterday says it agrees with Powell. The yield curve flattened somewhat, which fits the expected economic direction and the eventual payment for bringing it about.
So buy all this stuff today, and sell it tomorrow and buy all this other stuff to cover all the bases. Keep doing that over and over.
I like it but I won’t do it. d:^)
Random thoughts: You don’t have a housing crash when you have a housing shortage and we have a big one.
Since bonds don’t produce enough at this time, I use preferred stocks. No tax advantage but slightly better after-tax yields.
I think avoiding staying in cash is for inflation. Cash is one strategy for deflation. You have t see what is hapening to know what to do.
I think we’re in for additional inflation if Biden gets his economic package.
I think the increases in price driven by reduced production last year while still getting increased demand are going to stick around if not continue to grow.
Despite my thoughts on inflation, I’m keeping some cash on the side as I expect that we have another significant drop in the market on the horizon. My plan is to do what I did last year to double my money. Wait for the drop to steady and then buy long dated SPY call options with the cash.
In the meantime the stock account stays invested in high dividend stocks of 6% or more+ selling call options on those stocks for additional income. Either I keep the stock and the option money or I get both the option money and the profit on the stock. Then I can buy back into the dividend stock on the next down day.
Outside of that I have some gold and silver mining stocks, a very few technology positions, and a very minor TIPS bond fund position.
2021 is nothing like 2008.
And that advice is generally but not completely accurate.
But forget deflation. The Fed wants inflation and they are getting it.
Except that both were recessionary events caused by the government.
“ Except that both were recessionary events…”
We aren’t in nor are we near a recession.
True.
But remember, if the shtf you will need about $10k in cash and $10k in gold and silver to help the family to survive.
And lots of lead (Pb).
5.56mm
“And lots of lead (Pb).”
Lead is no good without brass, powder, and primers unless, of course, you’re using a wrist-rocket or sling though I prefer ball bearings.
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