Musing about Deflation

As I noted recently, the people who need a full-time job and can't get one is about 24%, give or take an irrelevant percentage.

Our geniuses tell us all is going well. Here is the FED's official projection of inflation rates.  They act to control these rates and have an official policy to have no deflation and control inflation. Greg points out often that deflation is not a bad thing, just a part of the economic cycle, unless government makes it horrible by stalling it.

Keep in mind, nearly everyone uses deflation to mean prices going down. You may think, hey, what is wrong with that, I have a good savings account?" 

The answer is not much, really, only the big "Wall Street" hustlers and the government will be crippled by deflation.  Hence, the FED promises to stop it.

Also, note, from an investment house newsletter:

• Private construction spending — down 62% from the peak!
  
  
• ISM Manufacturing Index — close to stalling.
  
  
• New home sales — worst June on record.
  
  
• Factory orders have dropped twice in a row, down 1.2% June and 1.8% in May.
  
  
• Unemployment is stubbornly high, and claims are starting to increase — again!
  
  
• And California ... ay-yi-yi! The bad news is that bankrupt state may start issuing IOUs this month. The worse news is California may be the canary in the coal mine for the other states, and struggling municipalities.

Last week, we had another announcement of a six figure loss in jobs, but, not to worry, the unemployment rate remains the same, again! (It is now above nine percent for two years; the last time that happened was during the often invoked "Great Depression.") Perhaps, the whole country could go on welfare and unemployment and the rate will drop to zero%.  Now, that would be a recovery!

Oh, Apple announced it will be hiring some 200,000 people in China as soon as its new factory opens. Apple is a big supporter of Mr. Obama's American socialism. You sort this out.  Hint:  Ruling Class Pandering.

This is all rehashed to remind you things are not good, even in Saratoga Springs which is now catching up with the rest of the country.  They say trends move from CA east.  I think we are at the end of the pipeline.

I come to the point of this entry:  "A Lover of Treasurys Bets on Deflation" is an August 7, 2010 Wall Street Journal article. (I am not sure, but shouldn't "Treasurys" be a "sic.")

It seems the Holsington Investment Management company that handles some $5 billion in investments has been preparing for significant disinflation or deflation. The article notes this is contrary to common opinion and also notes the company outperforms everyone in its niche with a 9.3% return per year dealing only in Treasuries. That is better than the stock market return. 

These guys do not deal with clever investment tricks or have rapid-fire programs, they read economic data and shift assets to meet coming interest rate shifts.

The company thinks inflation will drop to near zero making Treasury bonds increase in value.  They think, in the end, the Treasury Bill rates will dip to 2%, which makes the price of the bill rise. The company will shift if it sees a change brewing, but right now they do not see inflation. 

Deflation is the giant monkey wrench if you are planning on inflation. The question is "what do you do." I ponder of the idea that you can't fool mother nature, just slow her down.  The FED and Treasury Department can try to alter the normal business cycle, but they can't hold the water back as they jerry-rig a dam. They are merely increasing the pressure.

Please add any input. 

To put things in perspective. If there is deflation, then those holding cash (or Treasury Bills) will be king.  If there is inflation, they will be pawns. This is a true dilemma - when considering what to do.

Here is a thought, let me know what you think:  borrow money.  If there is inflation, it will be paid back with cheaper dollars, you make a profit if you invest the money.  If there is deflation, you have many dollars, properly invested, that will be worth much more. (but you still have pay the loan in old dollars, so you can hedge that bet with an ETF).

This is makes sense, but first we should look at the best survival moves.

We do not have a Hobson's Choice, where there is only one option, we have a "Lady or the Tiger" choice.