Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Deflation investing?
Old 11-23-2008, 11:29 PM   #1
Recycles dryer sheets
 
Join Date: Nov 2008
Posts: 131
Deflation investing?

All the investing books warn of the dangers of inflation and how to protect against it, but it's too bad none of them warn of the dangers of deflation and how to protect against that too. It would have helped a lot of people this year. For some reason the investing community relegated that to the tin foil hat corner, even though the evidence for it was everywhere.

Maybe it's instructive to review how its played out so far ...

  1. Housing price deflation. Obvious one here - sell your house and rent, which was a great move in 2005. Housing is as much a financial decision as is investing.
  2. Equity deflation. Own quality bonds - enough said.
  3. Commodities deflation. It was wild to see everybody flipping over commodities last year - like they were the new undiscovered asset class. Commodities have always been far too volatile for you, me, hedgies, and institutional investors - what was different in 2007?
  4. CPI deflation. This is the deflation everybody thinks of, which we're beginning to see now and could become more widespread.
  5. Currency deflation. The strongest currency goes to the country with the highest productivity growth, traditionally the US which I expect to continue well into the future. One danger with overseas investing is you're not just playing with stocks, but currencies, and the buck bears have been slaughtered this last year.
  6. Foreign equity deflation. It was also amusing to see everybody dogpile onto stocks everywhere else in the world, because when the downturn came it would trash those markets even worse than ours. The U.S. will probably be the best of a bad lot.
So how do you protect against deflation as an investor?
  1. Stay out of debt. No news here for LBYM's investors ...
  2. Own some Treasuries. The longer the better. Individual investors don't generally own the long bond, but sometimes it makes sense. Intermediate Treasuries won't kill you, and this year they've had a healthy return.
  3. Be willing to give up potential gain to preserve capital. Tortoise vs hare kind of investing - would you rather be rich or retired? I'd rather have the retirement thank you, and give up the boat.
  4. Never, ever believe that anything grows to the sky always and forever. Such as trees, skyscrapers, housing prices, college costs, medical costs, stock prices, inflation ...
Just a few thoughts, call me crazy, but maybe some people will find it helpful or amusing.
__________________

__________________
Architect is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 11-24-2008, 03:55 AM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Feb 2007
Posts: 5,072
I have not studied it as closely as inflation.

But you will want assets that can hold their value.

I think TIPS principal are adjusted downward until they mature so if you are hold them you might consider adjusting your portfolio accordingly. Of course, it may depend on how much of them you own and how long you anticipate the deflationary cycle to run.

IMO - These things are difficult to predict and time (like the stock market). That is why even in bonds it makes send to diversify. We hold some TIPS in our portfolio of bonds. And we know inflation is happening in certain areas (look at the SS increase, health care prices, cost of education, etc.)

Right now... It seems that the deflation is only occurring in certain areas (e.g. real estate). If it goes broader and last long... we might be in trouble.

Individual - TIPS: FAQs


I am interested in hearing what others think about this topic and how they might hedge against it.
__________________

__________________
chinaco is offline   Reply With Quote
Old 11-24-2008, 07:50 AM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2006
Posts: 11,015
How about land? They're not making any more of it, and you can grow food on it.
__________________
Meadbh is offline   Reply With Quote
Old 11-24-2008, 08:57 AM   #4
Thinks s/he gets paid by the post
Rustic23's Avatar
 
Join Date: Dec 2005
Location: Lake Livingston, Tx
Posts: 3,624
In the appraisal business it was often said that the most expensive thing to own is raw land. It produces little and due to taxes cost a bundle to own. Raw land is normally valued at the capitalized value of the cash crop. So a crop brining in $600 an acre would sell for $6,000. The closer the land is to development i.e. town or city the use changes and the value goes up. Other rural land has a value change based on trees, streams, lakes and other assorted amenities as the land gains value as second home sites. During deflation, land prices should fall right along with everything else.
__________________
Rustic23 is offline   Reply With Quote
Old 11-24-2008, 09:00 AM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2004
Posts: 11,614
I'd add one cautionary note: Don't go from one mania to another. Deflation is unlikely to be the new long-term trend, though that scenario is possible. Overweighting the "possible but unlikely" scenario (e.g. by loading up on LT Treasuries) could significantly increase the "far-more-likely" scenario (resumed inflation as the government prints money round-the-clock to "stimulizate" the economy).

As usual--balance and diversity will likely prove the most profitable (and sustainable) course of action. Abandonng equities now and locking in losses to pile into an 80% LT Treasury portfolio could be a big mistake if inflation goes to 10%.
__________________
"Freedom begins when you tell Mrs. Grundy to go fly a kite." - R. Heinlein
samclem is offline   Reply With Quote
Old 11-24-2008, 09:45 AM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
dex's Avatar
 
Join Date: Oct 2003
Posts: 5,105
This is a good question. I don't have the answer to how to invest in a deflationary environment.
My only guess is cash, savings accounts and short term bond funds.

Maybe it is too late to adjust your portfolio for deflation and think about where to put you money to take advantage of the turnaround.

Tough question as to what to do.
__________________
Sometimes death is not as tragic as not knowing how to live. This man knew how to live--and how to make others glad they were living. - Jack Benny at Nat King Cole's funeral
dex is offline   Reply With Quote
Old 11-24-2008, 09:46 AM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,380
Quote:
Originally Posted by samclem View Post
I'd add one cautionary note: Don't go from one mania to another. Deflation is unlikely to be the new long-term trend, though that scenario is possible.
I agree with this. Further, I believe that long term straight treasuries will likely be by far the worst investment class going forward. We have had fairly high inflation. Suddenly in the middle of a very severe credit crunch and a rapidly slowing economy, we get a few moths of rapid disinflation. Why do people expect that enough deflation will show up, and stay, to make long term bonds at < 4% anything other than a loser?

Don't be conned by government. The S&P cash yield tops l.t. treasuries, or at least it did last week before S&P rallied.

Ha
__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is online now   Reply With Quote
Old 11-24-2008, 09:53 AM   #8
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,616
Quote:
Originally Posted by samclem View Post
Deflation is unlikely to be the new long-term trend, though that scenario is possible.
Yeah, no kidding. Never underestimate the power of the printing presses of the U.S. government.

I think there's a wealth of economic research on how to avoid Japan's mistakes, and deflation-fighting tactics are probably well in hand.
__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Old 11-24-2008, 10:42 AM   #9
Thinks s/he gets paid by the post
Rustic23's Avatar
 
Join Date: Dec 2005
Location: Lake Livingston, Tx
Posts: 3,624
Not an economist here, however, from what I remember it would seem like a trillion dollars plus in spending would be inflationary. However, stagflation was a term coined during the Carter era. Volker is given credit for raising interest rates to 20% to break inflation. If this happens again then it would seem like long term gov. bonds would be the place to be if we see that type of rise again. I remember reading a book, I think by Donnahue (sp), that said when bond rates exceed 10% your portfolio should be 100% fixed income.
__________________
Rustic23 is offline   Reply With Quote
Old 11-24-2008, 11:01 AM   #10
Thinks s/he gets paid by the post
 
Join Date: Jun 2005
Posts: 1,543
deflation - bonds, government debt, other income paying investments, cash

inflation - gold, natural resources, real estate (not 100% sure about this)
__________________
al_bundy is offline   Reply With Quote
Old 11-24-2008, 11:05 AM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
dex's Avatar
 
Join Date: Oct 2003
Posts: 5,105
Quote:
Originally Posted by al_bundy View Post
deflation - bonds, government debt, other income paying investments, cash

inflation - gold, natural resources, real estate (not 100% sure about this)
Al,
You left out the timing of when to buy these things.
__________________
Sometimes death is not as tragic as not knowing how to live. This man knew how to live--and how to make others glad they were living. - Jack Benny at Nat King Cole's funeral
dex is offline   Reply With Quote
Old 11-24-2008, 11:12 AM   #12
Thinks s/he gets paid by the post
 
Join Date: Jun 2005
Posts: 1,543
July 2008, but i don't suggest buying bank stocks for the dividend

depends on which bear you believe, the we can't escape deflation bear or we will repeat the 1970's hyperinflation bear. i'm reading one of my newsletters now and it's saying Gold will hit around 1500 before it tops out with a possible downside target of 413 before it turns up again.
__________________
al_bundy is offline   Reply With Quote
Old 11-24-2008, 12:50 PM   #13
Thinks s/he gets paid by the post
lazygood4nothinbum's Avatar
 
Join Date: Feb 2006
Posts: 3,895
yard (garage) sales
__________________
"off with their heads"~~dr. joseph-ignace guillotin

"life should begin with age and its privileges and accumulations, and end with youth and its capacity to splendidly enjoy such advantages."~~mark twain - letter to edward kimmitt 1901
lazygood4nothinbum is offline   Reply With Quote
Old 11-24-2008, 12:54 PM   #14
Thinks s/he gets paid by the post
 
Join Date: Aug 2006
Posts: 1,356
Does it really count as deflation if it is just bubble prices returning to normal?

Quote:
Originally Posted by haha View Post
I agree with this. Further, I believe that long term straight treasuries will likely be by far the worst investment class going forward. We have had fairly high inflation. Suddenly in the middle of a very severe credit crunch and a rapidly slowing economy, we get a few moths of rapid disinflation. Why do people expect that enough deflaion will show up, and stay, to make long term bonds at < 4% anything other than a loser?

Don't be conned by government. The S&P cash yield tops l.t. treasuries, or at least it did last week before S&P rallied.

Ha
__________________
Hamlet is offline   Reply With Quote
Old 11-24-2008, 02:42 PM   #15
Recycles dryer sheets
Gardnr's Avatar
 
Join Date: Jul 2008
Location: ENE MO - near STL
Posts: 424
Quote:
Originally Posted by Rustic23 View Post
Not an economist here, however, from what I remember it would seem like a trillion dollars plus in spending would be inflationary. However, stagflation was a term coined during the Carter era. Volker is given credit for raising interest rates to 20% to break inflation. If this happens again then it would seem like long term gov. bonds would be the place to be if we see that type of rise again. I remember reading a book, I think by Donnahue (sp), that said when bond rates exceed 10% your portfolio should be 100% fixed income.
If you're in LT bonds when interest rates go up as you describe you're going to get SLAUGHTERED. You want to be ST and then buy the LT when interest rates have topped out (if you can know that at the time; always the hard part). You'll then make a killing when rates start back down to "normal" range.

Be careful out there!
__________________
Gardnr is offline   Reply With Quote
Old 11-24-2008, 04:34 PM   #16
Thinks s/he gets paid by the post
FIRE'd@51's Avatar
 
Join Date: Aug 2006
Posts: 2,315
Currently, we are in a period of asset deflation, but I wouldn't count on it being a long-term phenomenon when I look at this:

__________________
FIRE'd@51 is offline   Reply With Quote
Old 11-24-2008, 04:54 PM   #17
Full time employment: Posting here.
 
Join Date: Oct 2007
Location: New York
Posts: 898
I view the current deflation threat as a welcome buying opportunity for TIPS. I'll be in line for the January auction of the 20 yr.

Deflation is an overrated short term threat, IMHO, I'm more worried about inflation medicum and long term.
__________________
Money's just something you need in case you don't die tomorrow.
Maurice is offline   Reply With Quote
Old 11-24-2008, 05:50 PM   #18
Full time employment: Posting here.
Darryl's Avatar
 
Join Date: Mar 2007
Posts: 577
Been buying TIPS for the last month in my Roth will also be inline in January buying 20yrs also. The Feds willingness to print money and inability to control spending will translate into inflation. I'm not sure when it will spike but I'll bet my money it's before 2029.
__________________
I highjacked a rainbow and crashed into a pot of gold - Bon Jovi
Darryl is offline   Reply With Quote
Old 11-24-2008, 06:42 PM   #19
Recycles dryer sheets
 
Join Date: Nov 2008
Posts: 131
There are many deflationary forces in the economy presently. First, monetary creation hasn't gained any traction - the Fed is impotent. They can't even control the Funds rate, it's effectively zero when it should be 1%. I have personal doubts the Fed can take on the whole economy and arbitrarily create inflation, especially when we've fallen into a liquidity trap. The baby boomers have an average of $46k for retirement assets*, and little outside a rapidly deflating house. They've begun saving and should continue for a long while yet.

But my post is to offer some insight that there's more to deflation than just falling prices in the supermarket. Hedging or investing for deflation this last year would have been very profitable.

Something to cogitate ...

* Oops - this number is from last year before the crash ...
__________________
Architect is offline   Reply With Quote
Old 11-24-2008, 08:22 PM   #20
Recycles dryer sheets
barbarus's Avatar
 
Join Date: Aug 2007
Posts: 433
The Fed congenitally fears deflation like they fear no other thing, probably including nuclear war. Therefore they will respond to the current economic debacle with hyperinflation. They will 'crank up the printing presses" and flood the world with cheap bucks.This is a grand thing for debtors who will be paying off their bills with dollars of declining value. It's an easy way to resolve the national debt for the government and it encourages rampant consumption.

Conversely, this is Hell on earth to savers, who will find their hard-earned funds worth less and less, with no way to grow their moneys value.
__________________

__________________
Consult with only myself as your adviser or representative. My thoughts should be construed as investment advice of the highest caliber. Past performance is but a pale shadow and guarantee of even greater results in the future.
barbarus is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Deflation is Here, What Next? Helena FIRE and Money 38 10-13-2008 02:24 PM
Deflation Helena FIRE and Money 28 02-13-2008 06:56 PM
Deflation ? Helena FIRE and Money 45 09-08-2006 09:43 PM
Good deflation Arif Young Dreamers 5 02-10-2006 01:11 PM
Possible Deflation Scenario Cut-Throat FIRE and Money 13 08-30-2003 02:59 AM

 

 
All times are GMT -6. The time now is 01:31 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.