Author Topic: which asset classes will do well in a deflationary environment?  (Read 2753 times)

marcus_aurelius

  • 5 O'Clock Shadow
  • *
  • Posts: 21
which asset classes will do well in a deflationary environment?
« on: December 01, 2019, 09:30:59 PM »
(Apologies if this topic has been covered elsewhere, but I couldn't find it.)

Many people think that with QE and easy money printing, inflation is a big risk. However, due to technological progress (Moore’s law, low cost of computing and storage, etc.) and the fact that more industries are getting digitized and becoming affected by information technology, many goods and services are getting cheaper and hence deflation could be the larger mid- to long-term threat.

Here’re a couple of good videos:
https://www.youtube.com/watch?v=Y6RSaa97gcg
https://www.youtube.com/watch?v=qrlCDN-61o4&t=250s

What would you do in this scenario? Within the next 10-25 years, which assets will do well and NOT do well in a scenario of technological deflation?

My thoughts:

Not sure how stocks will fare, but if Japan is any example, they will not do well. However, deflation due to technology is a different reason than Japan’s bubble-bursting scenario. I think certain sectors will do well:

10 years from now, the vast majority of IT services (computing, networking, security, data storage) will be provided by the big 3 (Amazon Web Services, Microsoft, and Google). I think these 3 stocks will remain strong.

Healthcare stocks - if things like robotic surgery do take off, it will reduce costs and unlock hidden demand. Companies like McKesson will do acquisitions in this space and do well.

SaaS companies with non-differentiated services (Dropbox, backup, etc.) will struggle

I'm not optimistic about the vast majority of retailers and etailers. It's possible that we will have a bipolar distribution -- Amazon, Target, Walmart will be dominant in cheap goods, while very strong luxury brands will thrive at the higher end. Companies that are stuck in the middle (Gap, Forever 21) will perish.

Some premium electronics makers like Apple may suffer as cheaper devices become increasingly more capable, making their premium prices hard to justify. (Even in the US, people are holding on to their old iphones longer.) The counter argument is that if prices drop, it may open up new consumer markets who can purchase Apple devices at a lower price point. Also, Apple is increasing services revenue at a fast clip, and in general, it hasn't been a good idea to short Apple.

Bonds should do well in any deflationary environment

Holding some cash is always good since you can buy more with the same amount next year when the price is lower

Precious metals - I'm not sure how they will fare

Real estate - I think in the near term, cities will continue to do well. I'm doubtful whether real estate in the US will get a lot cheaper, although it has happened in Japan. Luckily, we have strong immigration to help offset this.

Thanks for reading. Looking forward to your thoughts.

SwordGuy

  • Walrus Stache
  • *******
  • Posts: 7275
  • Location: Fayetteville, NC
Re: which asset classes will do well in a deflationary environment?
« Reply #1 on: December 01, 2019, 10:32:35 PM »
Cash will do very well.   Ultimate in flexibility and its buying power increases during deflation.   Probably the best asset.

Some companies will do well, others will flounder, others will chug along.  That's why I buy broad-brush index funds, so I don't have to guess.    Many of the scenarios you describe are income transfer events, i.e., the consumers will transfer their spending to a new source for the same type of item.   This type of index fund covers that because the one who gets the customers goes up and the ones who lose go down, and we'll probably own both groups, so it should be a wash.

Rental property on leases should do well for the short term.   If the properties aren't leveraged, they should survive ok.    Leveraged properties would struggle if the rents go down.

I wouldn't want to live thru a major, long-term deflationary cycle.   The Great Depression was one and it was horrible.

SeattleCPA

  • Handlebar Stache
  • *****
  • Posts: 1607
  • Age: 60
  • Location: Redmond, WA
    • Evergreen Small Business
Re: which asset classes will do well in a deflationary environment?
« Reply #2 on: December 02, 2019, 07:46:58 AM »
Looking forward to your thoughts.

So this thought: Don't the "better quality" asset allocation formulas consider the deflationary scenario (and then other ugly scenarios too)?

E.g., I would say that Harry Browne's permanent portfolio, Tyler's golden butterfly, David Swensen's "unconventional success" recipe (which I use), and then Bill Bernstein's suggestions work in a variety of economies. Including deflationary ones...

But to try and address the specific question, both intermediate and then especially long-term treasury bonds protect against deflation right? And then the other issue is the investor's financial leverage... highly and even moderately leveraged investors (like farmers after the U.S. civil war?) get killed in a deflationary environment.

ChpBstrd

  • Handlebar Stache
  • *****
  • Posts: 2332
Re: which asset classes will do well in a deflationary environment?
« Reply #3 on: December 02, 2019, 12:13:03 PM »
To me, all signs point to a Japan scenario for the US:

1) The Phillips curve seems to have broken. We are at or below 2% inflation with sub-4% unemployment and sub-2% interest rates. That is supposed to be impossible, and yet it has been sustained for a decade, with relentless and mysterious disinflationary pressure.
2) US demographics look a lot like Japan in 1990. We just surpassed the percentage of the population over 65 that Japan had at their tipping point. Fertility is well below the replacement rate, again similar to Japan in the 80’s and 90’s.
3) Real estate and higher education costs have been inflated by government policy to the point that young people increasingly either forego household formation or go deeply into debt in the attempt. Millennials and Gen Z may have permanently lower spending habits than Boomers and Gen Xers, simply out of necessity. See the effect of the Japanese property bubble on consumption.
4) The savings rate is increasing, slowing the velocity of money.
5) Productivity growth is decreasing.
6) Wealth inequality is increasing, slowing the velocity of money.
7) Corporate earnings growth is slowing.
8) The US is absorbing a glut of baby boomer retirees.
9) Government regulation is being used to entrench highly indebted incumbent companies - I.e. “zombies” - with less incentive to innovate or compete. Their regulatory advantages and sheer size crowd out newcomers. Examples include pharmaceuticals, insurance, finance, telecom, defense, and technology.”

What investments will do well? I’ve done some Googling on the subject myself. Japanese investors with international/US exposure did better than those with a home market bias. Exporters like Toyota did better than companies focused on the domestic market. Real estate values were crushed but eventually came back after many years, as occurred in the US Great Depression (maybe rotate into REITs after the first lost decade?). Bonds did OK, particularly when bought in places like the US where yields had room to fall. In the end, most people crowded into savings accounts. The 4% rule does not apply during lost decades.

In my opinion, options are probably a good bet considering the risks ahead - which includes the risk of a stock “melt-up”. My equity exposure is mostly in protective put and collar positions so I can catch much of the upside and miss most of the downside.

SeattleCPA

  • Handlebar Stache
  • *****
  • Posts: 1607
  • Age: 60
  • Location: Redmond, WA
    • Evergreen Small Business
Re: which asset classes will do well in a deflationary environment?
« Reply #4 on: December 02, 2019, 01:51:41 PM »
To me, all signs point to a Japan scenario for the US:

1) The Phillips curve seems to have broken. We are at or below 2% inflation with sub-4% unemployment and sub-2% interest rates. That is supposed to be impossible, and yet it has been sustained for a decade, with relentless and mysterious disinflationary pressure.
2) US demographics look a lot like Japan in 1990. We just surpassed the percentage of the population over 65 that Japan had at their tipping point. Fertility is well below the replacement rate, again similar to Japan in the 80’s and 90’s.
3) Real estate and higher education costs have been inflated by government policy to the point that young people increasingly either forego household formation or go deeply into debt in the attempt. Millennials and Gen Z may have permanently lower spending habits than Boomers and Gen Xers, simply out of necessity. See the effect of the Japanese property bubble on consumption.
4) The savings rate is increasing, slowing the velocity of money.
5) Productivity growth is decreasing.
6) Wealth inequality is increasing, slowing the velocity of money.
7) Corporate earnings growth is slowing.
8) The US is absorbing a glut of baby boomer retirees.
9) Government regulation is being used to entrench highly indebted incumbent companies - I.e. “zombies” - with less incentive to innovate or compete. Their regulatory advantages and sheer size crowd out newcomers. Examples include pharmaceuticals, insurance, finance, telecom, defense, and technology.”

What investments will do well? I’ve done some Googling on the subject myself. Japanese investors with international/US exposure did better than those with a home market bias. Exporters like Toyota did better than companies focused on the domestic market. Real estate values were crushed but eventually came back after many years, as occurred in the US Great Depression (maybe rotate into REITs after the first lost decade?). Bonds did OK, particularly when bought in places like the US where yields had room to fall. In the end, most people crowded into savings accounts. The 4% rule does not apply during lost decades.

In my opinion, options are probably a good bet considering the risks ahead - which includes the risk of a stock “melt-up”. My equity exposure is mostly in protective put and collar positions so I can catch much of the upside and miss most of the downside.

I am much more optimistic. The only two things I'd be negative about are simplistic asset allocations (like 100% stocks)... and then planning that ignores implicitly or explicitly worst case scenarios (like that experienced by folks who retired in 1966).


Buffaloski Boris

  • Handlebar Stache
  • *****
  • Posts: 2130
Re: which asset classes will do well in a deflationary environment?
« Reply #5 on: December 02, 2019, 07:28:38 PM »
I think a Japanese style malaise is possible, but not probable. In any case, I don’t really think it changes much going forward.

-Cash is not a bad place to be.

-For other financial assets (stocks, bonds, RE, PMs, derivatives, crypto, commodities, whelk shells, etc) I agree with Ray Dallio. Diversify.

-the “best” investments right now in my opinion, financial apocalypse or not, are things that will improve your life or save money. Insulation; awesome payback. Solar panels, not bad. Paying off debt; very nice ROI. Equipment and skills to brew, garden, work out, and fix stuff; priceless.

Buffaloski Boris

  • Handlebar Stache
  • *****
  • Posts: 2130
Re: which asset classes will do well in a deflationary environment?
« Reply #6 on: December 02, 2019, 07:44:33 PM »
To me, all signs point to a Japan scenario for the US:

1) The Phillips curve seems to have broken. We are at or below 2% inflation with sub-4% unemployment and sub-2% interest rates. That is supposed to be impossible, and yet it has been sustained for a decade, with relentless and mysterious disinflationary pressure.
2) US demographics look a lot like Japan in 1990. We just surpassed the percentage of the population over 65 that Japan had at their tipping point. Fertility is well below the replacement rate, again similar to Japan in the 80’s and 90’s.
3) Real estate and higher education costs have been inflated by government policy to the point that young people increasingly either forego household formation or go deeply into debt in the attempt. Millennials and Gen Z may have permanently lower spending habits than Boomers and Gen Xers, simply out of necessity. See the effect of the Japanese property bubble on consumption.
4) The savings rate is increasing, slowing the velocity of money.
5) Productivity growth is decreasing.
6) Wealth inequality is increasing, slowing the velocity of money.
7) Corporate earnings growth is slowing.
8) The US is absorbing a glut of baby boomer retirees.
9) Government regulation is being used to entrench highly indebted incumbent companies - I.e. “zombies” - with less incentive to innovate or compete. Their regulatory advantages and sheer size crowd out newcomers. Examples include pharmaceuticals, insurance, finance, telecom, defense, and technology.”

What investments will do well? I’ve done some Googling on the subject myself. Japanese investors with international/US exposure did better than those with a home market bias. Exporters like Toyota did better than companies focused on the domestic market. Real estate values were crushed but eventually came back after many years, as occurred in the US Great Depression (maybe rotate into REITs after the first lost decade?). Bonds did OK, particularly when bought in places like the US where yields had room to fall. In the end, most people crowded into savings accounts. The 4% rule does not apply during lost decades.

In my opinion, options are probably a good bet considering the risks ahead - which includes the risk of a stock “melt-up”. My equity exposure is mostly in protective put and collar positions so I can catch much of the upside and miss most of the downside.

I hate your logic. Mostly because I’m having a heck of a time refuting it. The demographics part is the one that has always given me pause. Falling birthrates and aging populations don’t typically grow much.

In the end I don’t think it much changes my investment outlook. Cash, other financial assets diversified, and a focus on nontraditional “investments” to lower costs and improve my family and our lives.

Radagast

  • Handlebar Stache
  • *****
  • Posts: 1725
  • One Does Not Simply Work Into Mordor
Re: which asset classes will do well in a deflationary environment?
« Reply #7 on: December 02, 2019, 08:01:24 PM »
Deflation means currency is becoming more valuable, so things whose value solely depends on the value of currency are the the only things guaranteed to do better. Long term government bonds, and especially long term treasury STRIPS, will do very well, unless the yield curve is strongly inverted when you buy them. If the 30yr treasury bond yield is -1% in 20 years and inflation is -2% you will do very well with long term STRIPS if you are buying now.

J.R. Ewing

  • 5 O'Clock Shadow
  • *
  • Posts: 40
  • Location: Houston, TX
Re: which asset classes will do well in a deflationary environment?
« Reply #8 on: December 03, 2019, 01:31:14 PM »
To me, all signs point to a Japan scenario for the US:

1) The Phillips curve seems to have broken. We are at or below 2% inflation with sub-4% unemployment and sub-2% interest rates. That is supposed to be impossible, and yet it has been sustained for a decade, with relentless and mysterious disinflationary pressure.
2) US demographics look a lot like Japan in 1990. We just surpassed the percentage of the population over 65 that Japan had at their tipping point. Fertility is well below the replacement rate, again similar to Japan in the 80’s and 90’s.
3) Real estate and higher education costs have been inflated by government policy to the point that young people increasingly either forego household formation or go deeply into debt in the attempt. Millennials and Gen Z may have permanently lower spending habits than Boomers and Gen Xers, simply out of necessity. See the effect of the Japanese property bubble on consumption.
4) The savings rate is increasing, slowing the velocity of money.
5) Productivity growth is decreasing.
6) Wealth inequality is increasing, slowing the velocity of money.
7) Corporate earnings growth is slowing.
8) The US is absorbing a glut of baby boomer retirees.
9) Government regulation is being used to entrench highly indebted incumbent companies - I.e. “zombies” - with less incentive to innovate or compete. Their regulatory advantages and sheer size crowd out newcomers. Examples include pharmaceuticals, insurance, finance, telecom, defense, and technology.”

What investments will do well? I’ve done some Googling on the subject myself. Japanese investors with international/US exposure did better than those with a home market bias. Exporters like Toyota did better than companies focused on the domestic market. Real estate values were crushed but eventually came back after many years, as occurred in the US Great Depression (maybe rotate into REITs after the first lost decade?). Bonds did OK, particularly when bought in places like the US where yields had room to fall. In the end, most people crowded into savings accounts. The 4% rule does not apply during lost decades.

In my opinion, options are probably a good bet considering the risks ahead - which includes the risk of a stock “melt-up”. My equity exposure is mostly in protective put and collar positions so I can catch much of the upside and miss most of the downside.

I hate your logic. Mostly because I’m having a heck of a time refuting it. The demographics part is the one that has always given me pause. Falling birthrates and aging populations don’t typically grow much.

In the end I don’t think it much changes my investment outlook. Cash, other financial assets diversified, and a focus on nontraditional “investments” to lower costs and improve my family and our lives.

I'm feeling increasingly motivated to increase my expose to developing world stocks. 

ChpBstrd

  • Handlebar Stache
  • *****
  • Posts: 2332
Re: which asset classes will do well in a deflationary environment?
« Reply #9 on: December 03, 2019, 03:04:57 PM »
To me, all signs point to a Japan scenario for the US:

1) The Phillips curve seems to have broken. We are at or below 2% inflation with sub-4% unemployment and sub-2% interest rates. That is supposed to be impossible, and yet it has been sustained for a decade, with relentless and mysterious disinflationary pressure.
2) US demographics look a lot like Japan in 1990. We just surpassed the percentage of the population over 65 that Japan had at their tipping point. Fertility is well below the replacement rate, again similar to Japan in the 80’s and 90’s.
3) Real estate and higher education costs have been inflated by government policy to the point that young people increasingly either forego household formation or go deeply into debt in the attempt. Millennials and Gen Z may have permanently lower spending habits than Boomers and Gen Xers, simply out of necessity. See the effect of the Japanese property bubble on consumption.
4) The savings rate is increasing, slowing the velocity of money.
5) Productivity growth is decreasing.
6) Wealth inequality is increasing, slowing the velocity of money.
7) Corporate earnings growth is slowing.
8) The US is absorbing a glut of baby boomer retirees.
9) Government regulation is being used to entrench highly indebted incumbent companies - I.e. “zombies” - with less incentive to innovate or compete. Their regulatory advantages and sheer size crowd out newcomers. Examples include pharmaceuticals, insurance, finance, telecom, defense, and technology.”

What investments will do well? I’ve done some Googling on the subject myself. Japanese investors with international/US exposure did better than those with a home market bias. Exporters like Toyota did better than companies focused on the domestic market. Real estate values were crushed but eventually came back after many years, as occurred in the US Great Depression (maybe rotate into REITs after the first lost decade?). Bonds did OK, particularly when bought in places like the US where yields had room to fall. In the end, most people crowded into savings accounts. The 4% rule does not apply during lost decades.

In my opinion, options are probably a good bet considering the risks ahead - which includes the risk of a stock “melt-up”. My equity exposure is mostly in protective put and collar positions so I can catch much of the upside and miss most of the downside.

I hate your logic. Mostly because I’m having a heck of a time refuting it. The demographics part is the one that has always given me pause. Falling birthrates and aging populations don’t typically grow much.

In the end I don’t think it much changes my investment outlook. Cash, other financial assets diversified, and a focus on nontraditional “investments” to lower costs and improve my family and our lives.

I'm feeling increasingly motivated to increase my expose to developing world stocks.

The right move for Japanese investors in 1989 was to diversify into the US stock market, but I don’t know if US investors have an obviously similar choice where they could earn equity level returns in a more youthful market and be insulated from domestic economic problems. Europe (VGK) and Australia (EWA) have similar demographic weaknesses. China (FXI), Russia (ERUS), and India (INDA) are poorly regulated. China and Russia in particular have a nasty habit of not returning economic gains to shareholders. Malaysia (EWM) and Mexico (EWW) look promising in terms of demographics and valuation, but these are also the developing markets that will get pneumonia if China or the US ever catches a cold. Then there are the dice rolls of South Africa (EZA) and Brazil (EWZ).

The shift of economic growth toward poorly governed nations in the Eastern Hemisphere has left investors with few attractive choices.


ketchup

  • Magnum Stache
  • ******
  • Posts: 4280
  • Age: 29
Re: which asset classes will do well in a deflationary environment?
« Reply #10 on: December 03, 2019, 03:14:20 PM »
To me, all signs point to a Japan scenario for the US:

1) The Phillips curve seems to have broken. We are at or below 2% inflation with sub-4% unemployment and sub-2% interest rates. That is supposed to be impossible, and yet it has been sustained for a decade, with relentless and mysterious disinflationary pressure.
2) US demographics look a lot like Japan in 1990. We just surpassed the percentage of the population over 65 that Japan had at their tipping point. Fertility is well below the replacement rate, again similar to Japan in the 80’s and 90’s.
3) Real estate and higher education costs have been inflated by government policy to the point that young people increasingly either forego household formation or go deeply into debt in the attempt. Millennials and Gen Z may have permanently lower spending habits than Boomers and Gen Xers, simply out of necessity. See the effect of the Japanese property bubble on consumption.
4) The savings rate is increasing, slowing the velocity of money.
5) Productivity growth is decreasing.
6) Wealth inequality is increasing, slowing the velocity of money.
7) Corporate earnings growth is slowing.
8) The US is absorbing a glut of baby boomer retirees.
9) Government regulation is being used to entrench highly indebted incumbent companies - I.e. “zombies” - with less incentive to innovate or compete. Their regulatory advantages and sheer size crowd out newcomers. Examples include pharmaceuticals, insurance, finance, telecom, defense, and technology.”

What investments will do well? I’ve done some Googling on the subject myself. Japanese investors with international/US exposure did better than those with a home market bias. Exporters like Toyota did better than companies focused on the domestic market. Real estate values were crushed but eventually came back after many years, as occurred in the US Great Depression (maybe rotate into REITs after the first lost decade?). Bonds did OK, particularly when bought in places like the US where yields had room to fall. In the end, most people crowded into savings accounts. The 4% rule does not apply during lost decades.

In my opinion, options are probably a good bet considering the risks ahead - which includes the risk of a stock “melt-up”. My equity exposure is mostly in protective put and collar positions so I can catch much of the upside and miss most of the downside.

I hate your logic. Mostly because I’m having a heck of a time refuting it. The demographics part is the one that has always given me pause. Falling birthrates and aging populations don’t typically grow much.

In the end I don’t think it much changes my investment outlook. Cash, other financial assets diversified, and a focus on nontraditional “investments” to lower costs and improve my family and our lives.
I think immigration makes this comparison much less accurate.  It's my understanding that Japan has essentially no immigration compared to the US.  The US population would already be shrinking if it weren't for immigration.

hodedofome

  • Handlebar Stache
  • *****
  • Posts: 1392
  • Age: 40
  • Location: Texas
Re: which asset classes will do well in a deflationary environment?
« Reply #11 on: December 03, 2019, 06:35:51 PM »
To me, all signs point to a Japan scenario for the US:

1) The Phillips curve seems to have broken. We are at or below 2% inflation with sub-4% unemployment and sub-2% interest rates. That is supposed to be impossible, and yet it has been sustained for a decade, with relentless and mysterious disinflationary pressure.
2) US demographics look a lot like Japan in 1990. We just surpassed the percentage of the population over 65 that Japan had at their tipping point. Fertility is well below the replacement rate, again similar to Japan in the 80’s and 90’s.
3) Real estate and higher education costs have been inflated by government policy to the point that young people increasingly either forego household formation or go deeply into debt in the attempt. Millennials and Gen Z may have permanently lower spending habits than Boomers and Gen Xers, simply out of necessity. See the effect of the Japanese property bubble on consumption.
4) The savings rate is increasing, slowing the velocity of money.
5) Productivity growth is decreasing.
6) Wealth inequality is increasing, slowing the velocity of money.
7) Corporate earnings growth is slowing.
8) The US is absorbing a glut of baby boomer retirees.
9) Government regulation is being used to entrench highly indebted incumbent companies - I.e. “zombies” - with less incentive to innovate or compete. Their regulatory advantages and sheer size crowd out newcomers. Examples include pharmaceuticals, insurance, finance, telecom, defense, and technology.”

What investments will do well? I’ve done some Googling on the subject myself. Japanese investors with international/US exposure did better than those with a home market bias. Exporters like Toyota did better than companies focused on the domestic market. Real estate values were crushed but eventually came back after many years, as occurred in the US Great Depression (maybe rotate into REITs after the first lost decade?). Bonds did OK, particularly when bought in places like the US where yields had room to fall. In the end, most people crowded into savings accounts. The 4% rule does not apply during lost decades.

In my opinion, options are probably a good bet considering the risks ahead - which includes the risk of a stock “melt-up”. My equity exposure is mostly in protective put and collar positions so I can catch much of the upside and miss most of the downside.

I hate your logic. Mostly because I’m having a heck of a time refuting it. The demographics part is the one that has always given me pause. Falling birthrates and aging populations don’t typically grow much.

In the end I don’t think it much changes my investment outlook. Cash, other financial assets diversified, and a focus on nontraditional “investments” to lower costs and improve my family and our lives.
I think immigration makes this comparison much less accurate.  It's my understanding that Japan has essentially no immigration compared to the US.  The US population would already be shrinking if it weren't for immigration.

100% on the money. I was just about to reply the same thing. We are not like Japan, at least not yet.

I am 100% long US stocks in my retirement accounts and 300% long US stocks and 10 year treasuries in my trading account. We are hitting all time highs every day. I am insanely bullish right now.

PDXTabs

  • Handlebar Stache
  • *****
  • Posts: 2031
  • Age: 37
  • Location: Portland, OR, USA
Re: which asset classes will do well in a deflationary environment?
« Reply #12 on: December 03, 2019, 06:39:53 PM »
What would you do in this scenario? Within the next 10-25 years, which assets will do well and NOT do well in a scenario of technological deflation?

30 year treasury bonds would do very well in a deflationary environment.

SeattleCPA

  • Handlebar Stache
  • *****
  • Posts: 1607
  • Age: 60
  • Location: Redmond, WA
    • Evergreen Small Business
Re: which asset classes will do well in a deflationary environment?
« Reply #13 on: December 03, 2019, 07:15:55 PM »

"...Wealth inequality is increasing, slowing the velocity of money."


I think this is arguable. The data behind growing wealth inequality is pretty murky. Yes, you've got Piketty, Saez and Zucman arguing this is the case. But other economists (Zwick, Splinter, etc) are delivering research that says maybe not exactly the opposite... but something rather different.

This week's edition of the economist has a GREAT set of articles on this exact topic. If you're interested in getting summary info on all of the research, highly recommended reading.

Here's link to one of the articles: https://www.economist.com/briefing/2019/11/28/economists-are-rethinking-the-numbers-on-inequality

MoneyQuirk

  • 5 O'Clock Shadow
  • *
  • Posts: 76
  • Location: South Carolina
  • Aspiring writer at www.moneyquirk.com
    • Money Quirk
Re: which asset classes will do well in a deflationary environment?
« Reply #14 on: December 03, 2019, 08:26:41 PM »
I would stay the course with stocks.

If you're very concerned, I would up your cash holdings (preferably while not decreasing your stock holdings)

marcus_aurelius

  • 5 O'Clock Shadow
  • *
  • Posts: 21
Re: which asset classes will do well in a deflationary environment?
« Reply #15 on: December 05, 2019, 10:51:50 AM »
Thanks everyone for your replies and for the portfolio recommendations. I will stay the course with stocks and continue to have a good chunk of cash on hand for a rainy day, plus to buy more stocks if the market does go down.

ChpBstrd

  • Handlebar Stache
  • *****
  • Posts: 2332
Re: which asset classes will do well in a deflationary environment?
« Reply #16 on: December 06, 2019, 08:56:08 AM »
Here are the two charts that keep me up at night:

Working age population in Japan:


Working age population in US:




SeattleCPA

  • Handlebar Stache
  • *****
  • Posts: 1607
  • Age: 60
  • Location: Redmond, WA
    • Evergreen Small Business
Re: which asset classes will do well in a deflationary environment?
« Reply #17 on: December 06, 2019, 03:50:47 PM »
Here are the two charts that keep me up at night:

Working age population in Japan:


Working age population in US:


CB, seriously, I have a superpower... which is getting barely sub-clinically anxious about the absolute worst case scenario... and I don't think these charts are concerning.

The US population is growing by roughly the same percentage the workforce grows. (I think largely due to immigration.) Japan isn't.

Bloop Bloop

  • Handlebar Stache
  • *****
  • Posts: 2140
  • Location: Melbourne, Australia
Re: which asset classes will do well in a deflationary environment?
« Reply #18 on: December 06, 2019, 04:20:24 PM »
Agree that deflation might occur - not a bad thing at all - all the constant expansion/growth gets old after a while.

Fuzz

  • Bristles
  • ***
  • Posts: 394
Re: which asset classes will do well in a deflationary environment?
« Reply #19 on: December 12, 2019, 05:51:07 PM »
Here is another way of asking the same question:

https://slatestarcodex.com/2017/02/09/considerations-on-cost-disease/

It's a long article from 2017. I hope you read it. Here is how Scott Alexander frames a discussion of the relative prices of goods (and what I think the practical effect of deflation is--it's harder to buy the things you want):

I don’t know why more people don’t just come out and say “LOOK, REALLY OUR MAIN PROBLEM IS THAT ALL THE MOST IMPORTANT THINGS COST TEN TIMES AS MUCH AS THEY USED TO FOR NO REASON, PLUS THEY SEEM TO BE GOING DOWN IN QUALITY, AND NOBODY KNOWS WHY, AND WE’RE MOSTLY JUST DESPERATELY FLAILING AROUND LOOKING FOR SOLUTIONS HERE.” State that clearly, and a lot of political debates take on a different light.

For example: some people promote free universal college education, remembering a time when it was easy for middle class people to afford college if they wanted it. Other people oppose the policy, remembering a time when people didn’t depend on government handouts. Both are true! My uncle paid for his tuition at a really good college just by working a pretty easy summer job – not so hard when college cost a tenth of what it did now. The modern conflict between opponents and proponents of free college education is over how to distribute our losses. In the old days, we could combine low taxes with widely available education. Now we can’t, and we have to argue about which value to sacrifice.

Ready2Save27

  • 5 O'Clock Shadow
  • *
  • Posts: 47
  • Location: US
Re: which asset classes will do well in a deflationary environment?
« Reply #20 on: December 12, 2019, 07:34:41 PM »
I don’t know exactly what will happen in a deflationary or stagnating economic environment, but the following may help. If we entered a long (10+ yr) deflationary environment like Japan and stocks/other assets went into the toilet, pretty much everyone would be screwed. Us mustachians, having developed skills to “need”/want less, save a ton, avoid temptation, etc. would do much better than the average person. The government would have to do something (social security, etc.) to help people who suddenly have no way to retire, so that on top of our mustachian skills should mean we’re okay.

That being said, there’s been lots of other scary graphs, scary headlines, etc. and the US market has always returned. I think keeping cash/long term treasuries is betting on an unlikely event whereas stocks seem much more promising historically.

That’s just my opinion

MustacheAndaHalf

  • Magnum Stache
  • ******
  • Posts: 3000
Re: which asset classes will do well in a deflationary environment?
« Reply #21 on: December 14, 2019, 08:45:42 PM »
To me, all signs point to a Japan scenario for the US:
...
9) Government regulation is being used to entrench highly indebted incumbent companies - I.e. “zombies” - with less incentive to innovate or compete. Their regulatory advantages and sheer size crowd out newcomers. Examples include pharmaceuticals, insurance, finance, telecom, defense, and technology.”

What's your data for tech companies being "highly indebted" and "zombies"?
Apple holds $200 billion in cash, Google $100 billion, Facebook $50 billion.  Where's the debt?

ChpBstrd

  • Handlebar Stache
  • *****
  • Posts: 2332
Re: which asset classes will do well in a deflationary environment?
« Reply #22 on: December 14, 2019, 08:58:05 PM »
To me, all signs point to a Japan scenario for the US:
...
9) Government regulation is being used to entrench highly indebted incumbent companies - I.e. “zombies” - with less incentive to innovate or compete. Their regulatory advantages and sheer size crowd out newcomers. Examples include pharmaceuticals, insurance, finance, telecom, defense, and technology.”

What's your data for tech companies being "highly indebted" and "zombies"?
Apple holds $200 billion in cash, Google $100 billion, Facebook $50 billion.  Where's the debt?

9) Government regulation is being used to entrench highly indebted incumbent companies - I.e. “zombies” - with less incentive to innovate or compete. Their regulatory advantages and sheer size crowd out newcomers. Examples include pharmaceuticals, insurance, finance, telecom, defense, and, except for the highly indebted part, technology.”

Ready2Save27

  • 5 O'Clock Shadow
  • *
  • Posts: 47
  • Location: US
Re: which asset classes will do well in a deflationary environment?
« Reply #23 on: December 19, 2019, 07:13:18 PM »
I think that there can be a strong argument either way of how the US will turn out, but discussing whether we will end up like Japan and how the government can fix it doesn’t help individual people. Going back to the original question posed, I’m wondering about the potential of high-yielding dividend stocks. In a stagnant economy, there won’t be many opportunities to get good returns, so while the stocks may not go up in price, their dividends may make them worthwhile. In a deflationary environment this may not work well since stocks would be expected to decrease in value. Just keeping cash would be okay as it’s buying power would increase. Probably the best thing you could invest in is anything that would increase your income (a side business, inventing a useful product, etc.).

Though I guess if deflation was high, our costs would decrease and we’d be able to get by since we spend so little our stashes would last longer.