Long periods of deflation are quite rare. In fact, before Japan’s on-again, off-again experience with deflation starting in the 1990s, you have to go all the way back to the Great Depression to find another sustained bout of this trend in the developed world.
As a result, if deflation were actually to strike in the United States — and that is a big “if” — investors might not be able to draw from their own experience to determine how best to position their portfolios.
This is what the New York Times does best and it’s why, even behind a paywall, I’ll still pony up to read it.
The nation is now being introduced to an idea that’s new to many – the coming of a deflationary environment. Glenn Beck‘s rantings aside, the reality is that the Obama administration can only wish that all the money printing and quantitative easing had led to any kind of inflation. It didn’t and the value of almost everything is still flat to down.
So how does the investing class prepare a strategy for a full-blown deflationary environment?
The NYT’s Paul Lim talks to some asset managers and strategists with some thoughts. The consensus seems to be the that the following ideas should be considered:
High Quality Blue Chips (which have been outperformed by small cap trash over the last 18 months/ten years)
Low Debt, High Cash (allows companies to take advantage of weaker competitors)
Technology (especially large cap techs, which dominate their space and thus maintain pricing power)
Health Care and Telecom (Sam Stovall of S&P notes that these sectors outperformed in Japan during their Lost Decade)
High Dividend Payers (cash thrown off by stock dividends becomes valuable during deflation)
Prepare for Inflation (because as one money manager advises, the obvious policy response to real-deal deflation will be mega-doses of inflationary medicine, so he like TIPS)
Anyway, the piece is worth a read. Investors of my generation haven’t really seen deflation yet, so now’s the time to prepare.