Tuesday, 24 August 2010

Deflation, Inflation - Which is coming and What to do?

The economic turmoil following the credit crunch and financial crisis continues and one of the ongoing debates of significance to investors is whether we face a period of deflation or a renewal of inflation.

Why it matters to investors
It matters because different types of investments (stocks, bonds) and different companies (sectors and individual characteristics) do better if the economy experiences the falling prices of deflation or the opposite, the rising prices of inflation.

The Deflation is likely camp
Well-known economist David Rosenberg of Gluskin Sheff in the Globe and Mail article 'Another day older and deeper into debt'
Inflation, Deflation? in the Financial Post

Inflation is still a threat adherents
The Bank for International Settlements 'Warns of rising inflation threat' in the International Business Times
Canada Economic Outlook by BMO Capital Markets
Investor & author Marc Faber warns that inflation will come to the US in this article in the Financial Post

Those who aren't sure
'The Economy: What's the story: inflation, deflation or ...?' with a handy historical international perspective in the International Business Times
'Inflation, deflation or just 'lowflation'?' by Shane Oliver of AMP Capital

Inflation / Deflation Price Indices - The Official Reality up to today
Canada: 1.8% as of July per Bank of Canada CPI
USA: 0.3% as of July per US Bureau of Labor Statistics CPI-U
OECD Countries: average 1.5% ranging from a high of 8.4% in Turkey to a low of -0.9% in Ireland as of June per OECD Stat Extracts; among key non-OECD countries are India at 13.7%, Russia at 5.8% and China at 2.8%

What to do to protect against, or benefit from ...
Deflation - Click through to our previous post Investing During Deflation
and the Wall Street Journal's How to Beat Deflation

Inflation - See our previous post Investments to Protect Against Inflation

Either / Or - If it isn't clear to you which way things will go and you want something that will do ok in either environment, then the classic solution is to pick a bit of everything, i.e. to diversify - cash, normal and real return bonds, stocks in all sectors, perhaps gold and commodities in a low-fee portfolio that is periodically rebalanced. For ideas on a starting point and specific holdings, see Simple Portfolios Compared.

Whatever comes to pass and when, the Scout Motto embodies the right attitude to the inflation vs deflation question - "Be prepared"!

Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above notes are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

1 comment:

CanadianInvestor said...

Just noticed author and blogger Larry Swedroe weighing in the same topic with more advice on what to do. see http://moneywatch.bnet.com/investing/blog/wise-investing/inflation-or-deflation-which-economic-risk-is-greater/1620/