Wednesday, February 11, 2009
The land of the blind
My question is related to your article on deflation. I’ve heard this tug-of-war regarding inflation versus deflation, and I see both sides of the debate. It seems like you would suggest there will be some (potentially long) period of deflation, with inflation coming later. My question is simple:
How do you invest to profit (or at least minimize losses) during a period of deflation? Any buy-and-hold sorts of things you can add to a portfolio to hedge against deflation?
Answer: 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. (Roger that.- AM)