Deflation
Excerpt from John Mauldin's Newsletter
My highlights are in bold. To obtain the complete newsletter (which includes John's predictions for 2009), see disclaimer. I have also linked his site from this blog (right side of site).
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This you can take to the bank: If the Fed buys $500 billion in assets of various kinds and if the US government spends an extra trillion dollars and deflation is still a concern, they are going to double down and do it again. And yet again if they think it is necessary. They are not going to stop until the nominal economy is growing and inflation is above at least 1%.
How much will that number finally be? No one really knows. This has never been attempted. Maybe the initial stimulus package and Fed debt purchases will be enough. My bet is that it won’t be, but that is just a guess. We are in uncharted waters. But the captains of the boats are all Keynesians. They are going to fight a recession and deflation with old-fashioned stimulus. And that means we had better adjust our portfolios and businesses for that.
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Analysis: Implication for Canada
If deflation is going to be the story for 2009 like I think it will be, then commodity prices will collapse at levels not thought of by even the most bearish of traders. Canada and more notably the provinces of Alberta (oil) and B.C. (forestry) will be affected most significantly.
The only commodity I may find appealing is gold and silver. This is more for reasons around the U.S. dollar, and U.S. bonds.
Actions
Profiting as an investor in the stock market is going to take a toll on all of us. The fatigue is already setting in for those who keep hoping for an positive, bullish, return. But I can promise you that this will be like an extended tennis game. The opponent is a bear that will not go away, wants to wear you out, and as a result, you are on the defensive. The only thing you can do to stay in the investment game is to keep the ball in play.
How?
You cannot hit winning points (at the cost of missing and falling further behind). You need to hit what are called "neutral" balls: shots that won't win points, but won't be erroneous ones either that you will lose the point. This sort of strategy, as it applies to the market, will be that:
- You're still in the game
- When the opportunity finally arrives to win the point (and to make a profitable trade), you will be ready
