A Deflationary Environment? Wait, What? ~ market folly

Sunday, June 29, 2008

A Deflationary Environment? Wait, What?

The other day, Todd Harrison from Minyanville.com was on Yahoo! Tech Ticker with Aaron Task discussing the markets and brought up an interesting scenario: a deflationary environment. Immediately upon watching that video, I started questioning one of my underlying investment theses. All along, I have partially been long commodities and energy on the basis of a very inflationary environment. But, *what if* all my notions are wrong and instead we see bubbles begin to burst and lull into a period of heavy deflation? I don't necessarily agree with it, but it's definitely something to think about, and that's the point. I love insight like what Todd provided us with, because it makes us question our notions and come up with alternative investment scenarios. Should deflation indeed come to roost, then I would need to have an actionable plan to fall back on. So, it's time to start coming up with Plan B "just in case." Even if this scenario does not play out, it is still a great macro thinking exercise to inherently reverse your entire thought process at present. In the markets, you've always got to be looking forwards. Should signs of deflation pop up, we will need to be prepared to benefit from that, rather than scrambling around trying to figure out what is going on.

What's funny is that literally hours after watching the video and having those thoughts, Soren Macbeth posted on his blog that the exact same thoughts were running through his mind. So, needless to say, look for an ongoing conversation over the next week about a possible deflationary scenario gameplan. Because, even if we don't necessarily think that scenario will play out, it never hurts to be prepared and to constantly question your theses so you can patch up any holes you might find.

Check out Todd Harrison's thoughts on a deflationary environment here.

Thoughts? Post 'em up!


TraderMark said...

Todd has been talking about deflation for 2+ years as the ultimate ending. If he is correct there will be no place to hide. Deflation is what the rich fear. Inflation they are cool with since it only kills the lower and middle class

So tell me where would you place your money in a deflationary environment? Think 1930s.

As the guys in Minyanville say - we have deflation in the things we want, we have inflation in the things we need. We have inflation now - the question becomes as credit contracts worldwide in our shadow banking system do all roads lead to deflation? If so, we are all in trouble

Mike Masland said...
This comment has been removed by the author.
Mike Masland said...

I really think that Mish has nailed some excellent points on the deflation/inflation debate in his blog.

I agree with him on quite a few points. Two of which are...

1. Were headed for serious deflation
2. Gold WILL rise in a deflationary environment

Important articles:

J. (marketfolly) said...

mike, glad you brought that up. from what i've been finding, it seems that gold is the place to go in both an inflationary and deflationary environment. it's puzzling at first, but when you sit down and really think it through, it makes sense.

however, its tough finding anything else really worthwhile putting money into in that kind of scenario

Anonymous said...

how about the dollar - and as a step further, euro companies deriving revenues from U.S operations.

Anonymous said...

Isn't it true that Deflation of assets is what's behind the investment losses? If so, then doesn't it make sense that the Fed will try to Reinflate to save itself? Since it is owned by the Private Banks who's assets are Deflating.
I would agree with the previous poster that they would rather save the Rich through Inflation than take the hit of Deflation with the rest of us.