Author Topic: deflation, post covid? cash is king?  (Read 2265 times)

kenmoremmm

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deflation, post covid? cash is king?
« on: October 30, 2020, 01:57:44 AM »
i was just doing some light googling on deflationary cycles and came across this article. not sure if the author/site has a doomsday bias or not, but found the article interesting and is making me second guess my future plan for some investments. curious on on others' takes on the topic.
https://www.treasuryandrisk.com/2020/04/28/who-will-thrive-in-the-coming-deflation/?slreturn=20200930033430

cool7hand

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Re: deflation, post covid? cash is king?
« Reply #1 on: October 30, 2020, 03:19:12 AM »
If you are concerned about deflation, Ray Dalio's All Weather Portfolio might be a good fit for you. We've used it since about 2015 with great success.

https://www.iwillteachyoutoberich.com/blog/all-weather-portfolio/


waltworks

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Re: deflation, post covid? cash is king?
« Reply #2 on: October 30, 2020, 06:59:33 AM »
A quick skim says doomers who are beating a slightly different drum than the inflation doomers. Ignore.

-W

WhiteTrashCash

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Re: deflation, post covid? cash is king?
« Reply #3 on: October 30, 2020, 07:04:22 AM »
Everything will be fine. Just follow John C. Bogle's advice and long-term everything will turn up roses.

BicycleB

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Re: deflation, post covid? cash is king?
« Reply #4 on: October 31, 2020, 02:14:16 PM »
I evaluate the article on its own merits. Arguably after 6 months, we can already see that the article's gloomy predictions failed.

Its assertion - that central banks can't prevent deflation - has been, for the conditions of April 2020 when written, been proven wildly wrong. Central banks poured out money like confetti and, with support from lawmakers' fiscal stimulus, the US economy bounced along with no deflation at all.

https://cpiinflationcalculator.com/2020-cpi-and-inflation-rate-for-the-united-states/

The secondary assertion, that individuals and companies with low to zero debt will relatively prosper during deflation and will find opportunities as a result, is unproven currently but happened before and will be reasonable if deflation does occur. Lots of MMMers including MMM himself are already in the pay off your mortgage debt free investor club and thus are well prepared.

Will deflation ever occur? Sure, sometime somewhere. Maybe in the US during the 2020s. It's not likely for long, but never say never. Probably the best defense is normal MMM techniques like LBYM, invest, have diverse skills, be confident, be flexible.

nsmall

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Re: deflation, post covid? cash is king?
« Reply #5 on: October 31, 2020, 05:31:10 PM »
@cool7hand

Which vanguard funds would make up the bond funds and commodities?  This is a real question.   Thanks

ender

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Re: deflation, post covid? cash is king?
« Reply #6 on: October 31, 2020, 05:36:35 PM »
It's interesting reading that article 6 months later realizing how many of its assumptions/basis are already invalid.

maizefolk

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Re: deflation, post covid? cash is king?
« Reply #7 on: October 31, 2020, 05:45:40 PM »
I'd say one red flag early in the article is when the author starts out by proposing a different definition of inflation from the commonly understood one (decrease in prices and salaries). Often trying to change the definition of a word is that a person is trying to make it easier to argue for their conclusion while at the same relying on the fact that people will still associate the same word with the commonly understood definition even after reading an article that used the word in a different way.

Here, for example, the author is arguing Japan is experiencing deflation because private debt as a percent of GDP is declining, even though consumer prices in Japan are stable (or as the author puts it "stagnant"). If prices are stable, private debt declining isn't, in of itself, a big program for consumers, producers, or investors.

The article also treats loans and derivatives as synonymous in order to argue for the size of the debt market. This doesn't make sense since the author's example of a derivative is structured as insurance (I owe you $X if and only if Y happens). If my house is insured for $300,000, that's not the same thing as my insurance company loaning me $300,000, because I cannot actually use any of the money until and unless my house is destroyed in some way.

cool7hand

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Re: deflation, post covid? cash is king?
« Reply #8 on: November 01, 2020, 02:43:54 AM »
@cool7hand

Which vanguard funds would make up the bond funds and commodities?  This is a real question.   Thanks

Great question! We have our holdings at Schwab. The ETFs that we believe meet our goals and have the lowest fees are COMB for commodities and SGOL for gold. I'd encourage you to check them out in comparison to whatever is available where you have your holdings. I hope that helps!

ChpBstrd

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Re: deflation, post covid? cash is king?
« Reply #9 on: November 12, 2020, 08:39:56 AM »
I also have a deflationary bias, but not because of the reasons proposed in the article. To me, the last 40 years of declining inflation can more easily explained by demographic and economic changes which slow the velocity of money.

As the US population becomes older, on average, there is increasing pressure to save rather than spend. Old folks cannot obtain as much perceived utility from newfangled gadgets and fashions as young people, and they also face the risk of running out of money when they cannot earn more. So they are spending-averse. This is reflected in the past 40y of falling inflation and interest rates.

https://www.urban.org/policy-centers/cross-center-initiatives/program-retirement-policy/projects/data-warehouse/what-future-holds/us-population-aging

Second, as wealth inequality increases, much of the increase in the monetary base has accumulated in the hands of wealthy people who are less prone to spend it. As the wealthy accumulate more and more cash, that cash is essentially sucked out of economy as if it didn't exist. That is, if it is not used in day-to-day transactions, it does not affect prices, supply, or demand for the items counted in CPI or PPI.

Third, a similar process occurs as actors outside the US choose to transact in USD. To do so, they (on net) must sell something to somebody in the US, take the dollars abroad, and either hold the dollars or transact the dollars for things like labor outside of the US. The net result is the same, the dollars disappear from US circulation and there is little or no change to supply, demand, or prices in the US. As economies expand outside the US in sectors where USD are used to transact, the need for dollars increases and so more dollars are shipped offshore.

There, a simple explanation that doesn't rely on day-to-day news, obfuscation of factors, conspiracy theories, or whatnot. Boring, isn't it.

Imanuels

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Re: deflation, post covid? cash is king?
« Reply #10 on: November 12, 2020, 10:04:14 AM »
'The net result is the same, the dollars disappear from US circulation and there is little or no change to supply, demand, or prices in the US' - isn't there an additional term to the equation, namely, what about the new dollars created that appear in circulation?

ChpBstrd

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Re: deflation, post covid? cash is king?
« Reply #11 on: November 12, 2020, 07:57:54 PM »
'The net result is the same, the dollars disappear from US circulation and there is little or no change to supply, demand, or prices in the US' - isn't there an additional term to the equation, namely, what about the new dollars created that appear in circulation?

Apparently more dollars are taken out of circulation by the factors listed above than make it into circulation (adjusted for population).