What do we do in a deflationary period?

Discussion in 'Psychology' started by aphexcoil, May 16, 2003.

  1. With the latest CPI numbers, it appears that deflation is still a going concern for the United States. First, do you see deflation actually occurring within the United States anytime soon? Secondly, what investment strategies are good in a deflationary market? How does this affect loans, lenders, etc?

  2. regough


    I've been around long enough to know that anything is at least possible and in deflation I would think that cash and more cash is KING :)
  3. In a deflationary environment you want to buy bonds because you are promised the original $1,000 back at maturity all the while prices are falling. Of course this is if you buy a bond as it is issued not on the secondary market. The outperformance of bonds over the past several years tells me that we were in somewhat of a deflationary environment long before Sir Alan said we were.

  4. the problem is the deflation is being fought so hard that it will lead to inflation in the near future, maybe even this year. All the people buying bonds had better be ready to sell, and of course they missed out on the nice stock market rally.
  5. bigbear


    not much about deflation. only 5 posts here. just read conquer the crash - precter. good book - doomsday predictions - but interesting none the less.

    greenspan didn't say too much aboyut deflation except that their is a chance and the price of insurance against it is cheap.
  6. true deflation is almost impossible in a country that can print as much money as it needs to.
    a small amount of deflation is good for the debt free consumer. he can buy more goods and services for the same dollar.
    the best way to handle deflation if it were to happen is with cold cash or government bonds only. you will be able to pick up assets at discounted prices when highly indebted people must sell or face bankruptcy.
  7. The thing to pay especial attention to is the amount of money coming into or leaving the market.

    When you see the balance changing, then anticipate prices fllowing suit vis a vis either equities or their indexes.

    As a rider,you can count on the volatility to follow suit as well. The slowing of money coming in and also it leaving kills volatility so you will see what appears to be support levels forming.

    The other situation leads to people thinking there is a rally on but the rallies generally fail. Use the rally attempt test from WJO to see this.

    A lot of the time you will see money fairly static and that will cause a low volatility slow driftdownward.

    You can see here that people who aren't fine tuned to deflation are screwing up wih their traditional views..."it's a tough market..chop chop blah blah etc.
  8. the lenders are the ones in real trouble if we have deflation. in this type of bubble market where most consumers borrow the full amount of a loan its sets up a disaster senario. example: a consumer buys a house for 500k and borrows the full amount. every one is happy if we have inflation because in a few years there should be equity in the house. but if you have deflation the whole thing collapses.if you have 10% deflation the house is worth 450k but the loan balance is still 500k. if you have 2 years of 10% deflation the house is worth 405k and the loan is still close to 500k. if you multiply this for all the homes and cars in this country and soon you have the banking system insolvent.
  9. this assumes the bond issuer CAN pay it back, best bets are munis and governments that are more likely good for it... but cash is king!

    watch the CRB, still a long way to go but a drop under 190 would be ominous...