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Deflation Requires New Strategy for Investors (The Globe and Mail)

by Brett on July 19, 2010

On Thursday I was en route to Montreal for a wedding, and as luck would have it, I received a phone call from Martin Mittelstaedt from Canada’s Globe and Mail.  Martin was working on a story about deflation investing for Saturday’s globe – a very well-timed piece given the latest CPI numbers, and Friday’s slaughter in the markets – and he asked me a few questions about my take on deflation investing.

Martin is a very sharp guy who understands credit contraction and debt deflation very well.  I was honored to have him share my $0.02 on ways to invest during deflationary times:

In deflation, cash is king, says Brett Owens, editor of the Contrary Investing Report market newsletter.

Money automatically becomes more valuable because its purchasing power increases, and Mr. Owens favours holding cash in the form of government treasury bills. He’s also shorting the S&P 500 index, hoping to make a profit if it declines, which he thinks it will. “I don’t really think there is anywhere safe to be in equities,” he says, and he expects the market will again test the panic lows seen in the aftermath of the Lehman collapse.

Deflation may ultimately benefit the value of the U.S. dollar, in part because it will continue to offer a haven and in part because most international debts are valued in the currency. With U.S. debts being written off or repaid because of the collapse of the credit bubble, Mr. Owens said there is a scramble among remaining debtors to buy the shrinking supply of dollars.

You can read Martin’s entire piece – which features deflation guru Gary Schilling – here.

I thought he did an excellent job with the piece.  I was honored to be included and mentioned in the article – and also to be quoted alongside Gary Schilling!

We also have a free daily newsletter for contrary minded investors like yourself.  Every weekday, we report on investing and trading stories that are often not found in the mainstream press.  And of course we keep close tabs on deflation and related investing strategies.

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  • Nlevis

    I must say the deflation argument is a fallacy. Every day the US government prints more money. We create this money out of thin air. Those with leveraged balance sheets and fixed rates of interest on their debt such as a mortgage have no incentive to pay their loan off soon as they are aware that the value of the dollar compared to, say, food prices is only going to fall in the next five years. Demographics neccessitates this problem as baby boom generation retirees will be drawing on Social security and medicare benefits that the government has already spent…. We will simply have to print more money than ever as we have to pay the elderly and sick to NOT go to work in the morning. The US also has very few young people coming into the workforce which makes us a nation of speculators not real goods producers…. As the value of dollars falls relative to food, energy, metals, etc… foreign investors will need a higher interest rate to compensate. This will cause deflation yes, but only to stock and bond values relative to food and farmland prices. Once interest rates tick up, the companies looking to borrow to fund growth will become much more conservative. Also, the internet is killing jobs. Look at Amazon.com and think about how many jobs were lost from bookstores, CD stores, retail outlets, etc…. This transition to a 1984 type economy is most definitely deflationary, but that deflation is US centric. Prices and profit margins will come down, but commodity prices will go up as investors ditch our treasuries and buy things like food, rent, etc….
    Anyways, I enjoyed this article and think its important to discuss these topics… Again, I feel we should put bounties on Osama Bin Laden and scrap the wars in other countries. We will go bust fighting wars all over the globe — its just a matter of assets minus liabilities and right now our balance sheet is more like that of a Pfizer than a Berkshire — sure earnings are strong and cash flow is good, but debt nevertheless in the form of unfunded liabilities is going to hamper growth and spur commodity price increases in the future…. Remember, we are having a jobless recovery due to emerging monopolies such as Amazon.com etc… as the world “flattens.” This does mean that the Amazons and Mcdonalds will face pricing pressure, but it does not mean that Soybeans, Silver, Palladium, Corn, or Lumber prices will fall anytime soon…….. Sugar for example is far cheaper than it was in the 1970’s…… So the big names with no jobs are going to have some backlash and deflation as America increasingly becomes a country with no middle class… All my opinions…. long DBA short IWM

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