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The Green Knight that Killed the Deflationary Red Dragon  |
Greetings!
In a far away land long ago there was a country (USA) with many people that highly valued, esteemed, and worshipped money. This country went through a very evil time long ago (The Great Depression) until a knight (FDR) came and defeated the evil beast (deflation) with his sword (war and taking the US dollar off the gold standard) and shield (The New Deal). Today in this same land the same evil and hideous creature (deflation) is threatening to take away what is by far most important to the majority of people in this land....their money. But don't worry a brave, new, young, and attractive hero (Obama) has come to the rescue... |
| Consider Repositioning Some of Your Assets For Deflation
There is no guarantee that we are going to have inflation, again. |
 As we look at the landscape of the economy, I think the biggest mistake that I am seeing people make out there is what I'm going to call the Inflation Fairy Tale that has a "happy" (them making money and keeping their jobs) ending. It's almost like people think that life is a fairytale and that all their dreams will end in a positive Walt Disney type fashion. Many of my clients and the investors that I speak to on a regular basis are open to and believe that a deflationary recession/depression is possible. However, at the same time, I am also talking to some of my clients and other investors that are assuming that we are going to have inflation followed by a recovery. They are making decisions based upon an inflationary recession or depression and not only that many people are thinking we're going to have an inflationary quick recovery. Maybe we will (I doubt it).
Certainly the point of this economic update is not to say that we will not have an inflationary recession or an inflationary fast recovery. That would make my life a whole lot easier and that would be something that would be more comfortable over a deflationary recession or depression. However, we can't ignore the facts before us. The demand is going down worldwide. Consumers are retreating as is proven by the quarterly losses in retail sales and the layoffs and the crashing prices of all commodities. Whether we want to or not, we need to begin to talk about, think about, and prepare for the possibility of deflation. On October 27th, I made changes to most of my clients' portfolios to reflect a 50% possibility of deflation rather than just contining to assume inflation. We have already seen deflation, for sure, the last 3 months!
Just because the government prints money that does not mean we automatically have inflation. In order for prices to rise in any type of asset class, whether we're talking commodities, silver, real estate, or stocks there must be an increase in demand. Let me state that a different way. An increase in money supply will not drive up the prices of assets unless there is an increase in demand and there is not one economist that I know of, there is not one thing, not one article that I have read that indicates there is an increase in demand. To the right you will find just a few articles that can hopefully at least introduce to you the idea of deflation and to begin to think about it and hopefully position some of your assets for the possibility of deflation instead of just assuming that our knight in shining armor (Obama) is going to save us and help us to live in inflation happily ever after.
There is no guarantee that is going to happen. The Bible says that the prudent man or woman sees danger and takes refuge (Proverbs 22:3, 27:12). Certainly deflation is a danger and I think even the most inflationary economists out there would admit that deflation is a possibility. Even if they only believe it's a 10% chance. If acquire knowledge and you pray about it and you come to the conclusion that deflation is only a 10% chance, then position at least 10% of your assets for deflation. |
US Stocks Have Had Several Long Term Bear Markets
Stocks For the Long Run? I don't think so, professor Siegel. |
 There are great times to get into the US stock market. Like when? Like in 1982 and 1932 when the P/E was around 6 or 7 and the dividend yield was over 6%. Today the P/E ratio is around 15 and the dividend yield is about 3.5%. Still overvalued and with earnings for most companies getting ready to go down the P/E may even go up!
There are also terrible times to buy US stocks like in 1929, 1966, and 2000. From 1929 to 1954 (25 years) and from 1966 to 1982 (16 years) the US stock market was break even. A person would not have grown their money 1 penny during these 2 extended time periods in US stock market history. On March 24, 2000 the S&P 500 closed at 1,527.46 and today the S&P 500 is valued at around 850. So in 8 1/2 years the largest 500 companies in America have seen their stock price, on average, go down over 44%! How long do you think this bear market will last?
When the time is right I am going to be moving a large percentage of my clients accounts into US stocks, however it may not be until my 8 year old gets to highschool. We'll see. |
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Your financial advisor/planner or investment advisor should be able to help you with buying some deflationary positions or you can call me at 1-800-917-5016 or 770-642-9373 and I can help you to position your portfolio in a way that it will not lose most all of its value in a continued deflationary environment. My prayer is that this short letter will help you be wiser and better stewards of the money that God has entrusted to you.
Sincerely,
Thomas Cloud, Jr., CFP(R), ChFC(R) |
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| Additional News Sources About Deflation |
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