5 WAYS TO PROTECT YOUR PORTFOLIO IN A DEFLATIONARY ENVIRONMENT
5 March 2010 by Cullen Roche
3 Comments
Understanding that we are in a deflationary environment (see here) doesn’t necessarily mean you have to buy up canned goods, guns, gold bars and search out for a good bunker. There are ways to protect yourself and even benefit in such an environment. In his strategy note this afternoon, David Rosenberg brings us his 5 ways to protect ones portfolio in a deflationary environment:
Source: Gluskin Sheff
“ultra high selectivity with regard to financials”
while i agree that there are landmines among the financials, i think you are only increasing your risk by trying to be selective. do you really think you can sort out which banks are fudging the most on their reserves? do you think rosenberg or bove can?
this is really bad advice if you want exposure to financials (which i am seriously overweight). far better to diversify among the financials.
just trying to help
The best plays for deflation are Fed backed corporate bonds. Nice yield, Govt backing, and great pricing because pensions and the like are terrified to hold the names. Its basically the PIMCO play…
The bigger issue is, of course, when the current deflation will end and inflation will begin, presumably in earnest, due to the inflation of the money supply. Many are predicting the turn around is now, although I continue to believe that deflation has longer to run.
But given an assumption of deflation, which is the point of this article, then NONE of the suggestions are a good idea. Cash is king in a period of deflation. Ignore return on investment; look only for return OF your investment (your principal). Cash in a mattress will outperform all Wall Street sponsored investments (except for those bets that short markets AND are actually collected). Given deflation, you will be able to purchase “things” at lower prices later than you can now. Remember, stock market averages fell 89% in the great depression. And that’s not even counting all of the companies that went bankrupt and thus were eliminated from the averages; thus, the value of a typical portfolio of stocks fell even more than that.
Again, if we are really talking about a continuation of the current deflation of housing, commercial real estate, and credit, then all five of the above ideas are terrible.
Likewise “canned goods, guns, gold bars” are not items that are likely to gain big time relative to cash in a deflation. Gold, being both money and a commodity, could either go up (as money) or down (as a commodity), and will probably do some of each, before finally zooming up (when deflation ends and inflation kicks in.