Reader Q&A: Inflation Or Deflation?

Many readers are concerned about the long-term consequences of the stimulus package and the various bailout programs. Reader Chris had this to say:

Great posting of the comment on the car maker bail-out.

What is an investor to do expecting deflation?
What steps to take in case of massive inflation?

Correct; Congress, the Fed and the Treasury have not given any evidence that they have any idea how to deal with the current economic situation. The usual solution of throwing good money after bad is simply doomed to fail.

My view is that, given enough time, we will experience both scenarios: First deflation and then Inflation.

Right now we are in a bear market along with tremendous deflationary forces. Trillions of financial assets have been destroyed around the world, housing is in a prolonged downward price spiral, unemployment is soaring and commodity prices have dropped sharply.

Stimulus packages and bailout programs will do nothing to stop this trend and will only cause more money to be poured down the drain in a vain attempt to quickly reverse the course.

I am not an economist, but if I assume that, say, $3 trillion in assets have been destroyed then it would seem that the Fed could conceivably increase money supply, by whatever means, by about the same amount before any threat of inflation would become reality. It would take some time to affect that change, which is why I believe that the inflation scenario is a number of years away.

This is not a forecast that is chiseled in stone; it’s merely my view right now. If some of the current facts change, I will change my mind as well.

As investors, how do we deal with it?

First, as noted in my weekly updates, my domestic and international Trend Tracking Indexes (TTIs) are in bear market territory, so we won’t take any action there until the major trends change.

Second, it is not necessary to try to determine exactly as to whether we are still in a deflationary mode or have crossed over into inflationary territory.

When following trends, all you need to do is look at the sector fund/ETF listings in the weekly StatSheet. Those will give you the best clue as to where the upward momentum is and in which areas you might want to deploy some of your assets.

Nobody can look into the future, but following trends that cover all major sectors of an economy is as good of a guide as you can find to see which direction we are headed. As time goes on, you will notice that leadership in certain sectors changes, so it’s imperative that you use trailing sell stops to either limit your losses or lock in any profits.

Trends in the market place are the only thing that is real because it can be measured. Stay away from hype and especially canned asset allocations promoted by commissioned salesmen. My old standby line is still valid: Never ever do business with someone who does not offer an exit strategy!