Inflation vs. Deflation

[Mike805]

In light of the recent market events I'm getting concerned my current asset allocation. Currently, my portfolio is as follows:
15% = Cash.
50% = Variety of hedge funds/funds of funds/mutual funds.
25% = Personal short term trading accounts.
10% = low risk IRA.

I'm relatively young, hence my risk appetite toward higher risk investments. All in all I've been doing the above ratio's for about 10 years with very good results. The 50% in hedge funds is well balanced and doing well this year despite the recent turmoil. The IRA is down about 40% this year (what a joke - mutual fund managers are worthless). My personal trading is good. But, being 15% in USD cash worries me...

I'm concerned about where our dollar is going. Today the dollar index is 81.4 and off its lows, crude is 84.93 and way off its highs... is this the mark of deflation? Should I be looking forward to a deflationary environment? Given that's the case, how does one position themselves for a deflationary economy?

What about inflation? Seems unlikely as the US as well as most of the world has just lost a tremendous amount of paper wealth in the last few weeks.

I'd like to know your ideas on what we're heading for - inflation or deflation and what would one should do about it in each case. The irrational side of me can envision wheelbarrows of cash in line at the supermarket, yet, it seems that all that cash just evaporated via this global-economic storm. What does one do? Stuff the "mattress" with t-bills, buy gold or, just hold the cash for a few years?

Mike

 

[Pa(b)st Prime]

IMO, you've got a good mix. Also imho one of the biggest threats going forward is global currency collapse. For all I know it's weeks away. Gold is saying something.

I presume you own your residence as well?

Quote from Mike805:

In light of the recent market events I'm getting concerned my current asset allocation. Currently, my portfolio is as follows:
15% = Cash.
50% = Variety of hedge funds/funds of funds/mutual funds.
25% = Personal short term trading accounts.
10% = low risk IRA.

I'm relatively young, hence my risk appetite toward higher risk investments. All in all I've been doing the above ratio's for about 10 years with very good results. The 50% in hedge funds is well balanced and doing well this year despite the recent turmoil. The IRA is down about 40% this year (what a joke - mutual fund managers are worthless). My personal trading is good. But, being 15% in USD cash worries me...

I'm concerned about where our dollar is going. Today the dollar index is 81.4 and off its lows, crude is 84.93 and way off its highs... is this the mark of deflation? Should I be looking forward to a deflationary environment? Given that's the case, how does one position themselves for a deflationary economy?

What about inflation? Seems unlikely as the US as well as most of the world has just lost a tremendous amount of paper wealth in the last few weeks.

I'd like to know your ideas on what we're heading for - inflation or deflation and what would one do about it in each case. The irrational side of me can envision wheelbarrows of cash in line at the supermarket, yet, it seem all that cash just evaporating in some global-economic storm. What does one do? Stuff the "mattress" with t-bills, buy gold?

Mike

 

[Mike805]

Quote from Pa(b)st Prime:

IMO, you've got a good mix. Also imho one of the biggest threats going forward is global currency collapse. For all I know it's weeks away. Gold is saying something.

I presume you own your residence as well?

No, wifey and I sold all our properties in 06-07 per a long distance move for her work. Got lucky with that timing to say the least.... Been wanting to buy all this year in our new locale but I think RE's going down another 20-30% at least...

Is gold the only way to hedge a global currency collapse?

 

[dhpar]

just posted it somewhere else:

it is ironic isn't it, that lack of money (credit crunch) gets always followed by (hyper)inflation - and that we need to live through these lesson again and again - at least as long as we have a fiat currency.

"Inflation is Always and Everywhere a Monetary Phenomenon" M.F.

and no, it is not different this time: http://blogs.wsj.com/economics/2008/10/09/sign-of-the-times-2/ note that they plan to add 2 more digits next year. LOL

by the way if all goes down the toilet it is better to own your own property. that's the only thing that has some value left - shelter, warm clothing and food. i guess that's what pabst tried to suggest...

 

[Pa(b)st Prime]

Quote from Mike805:

No, wifey and I sold all our properties in 06-07 per a long distance move for her work. Got lucky with that timing to say the least.... Been wanting to buy all this year in our new locale but I think RE's going down another 20-30% at least...

Is gold the only way to hedge a global currency collapse?

Stocks and RE will hold value in inflation as well. I doubt the divergence of higher gold/sinking asset prices is sustainable to this recent degree. If we're truly headed for global "depression" then gold will sell off. If as I suspect the global asset calamity is staved off by use of printing presses then prices of everything will fly.

Housing is a perfect example. P/E's (resale price vs. rent) were ridiculously stretched (still are in some regions). But while the resale price component in the equation has tumbled rents seem to be hanging tight. Granted that ALSO may change but until one sees bona fide drops in earnings or rents then assets have some value but just at reduced multiples.

 

[TraderZones]

Quote from Mike805:

In light of the recent market events I'm getting concerned my current asset allocation. Currently, my portfolio is as follows:
15% = Cash.
50% = Variety of hedge funds/funds of funds/mutual funds.
25% = Personal short term trading accounts.
10% = low risk IRA.

I'm relatively young, hence my risk appetite toward higher risk investments. All in all I've been doing the above ratio's for about 10 years with very good results. The 50% in hedge funds is well balanced and doing well this year despite the recent turmoil. The IRA is down about 40% this year (what a joke - mutual fund managers are worthless). My personal trading is good. But, being 15% in USD cash worries me...

I'm concerned about where our dollar is going. Today the dollar index is 81.4 and off its lows, crude is 84.93 and way off its highs... is this the mark of deflation? Should I be looking forward to a deflationary environment? Given that's the case, how does one position themselves for a deflationary economy?

What about inflation? Seems unlikely as the US as well as most of the world has just lost a tremendous amount of paper wealth in the last few weeks.

I'd like to know your ideas on what we're heading for - inflation or deflation and what would one should do about it in each case. The irrational side of me can envision wheelbarrows of cash in line at the supermarket, yet, it seems that all that cash just evaporated via this global-economic storm. What does one do? Stuff the "mattress" with t-bills, buy gold or, just hold the cash for a few years?

Mike

During inflation, gold tends to hold/increase its value.

During the deflation of the Great Depression when commodities sufffered great deflation, only govt bonds, gold and land/homes held their value. Gold increased, actually. But homeowners had to wait many years to get their money back

Nutshell? Cannot hurt to greatly increase your gold. With its volatility, you can get some by buying on dips. Also, buy a property when things get worse, especially if you can live in it.

 

[drsteph]

There are ways to hedge your USD exposure in IRA type investments. Pimco has unhedged foreign government bond mutual funds, there is an ETF for foreign govt bonds (BWX), and some of the closed end funds specialize in that area. You can do quasi dollar short long currency trades with the currencyshares trust etf's (like FXY for JPY) or you can try a currency basket like what axel merk uses.

You should be aware that while these trades did well for the last few years they have been losers this year. In a real currency collapse, I don't know how they would fare as credit issues, redemptions, legislation comes into play. But if you have a natural long USD position, it may serve a purpose.

Of course, I am not a financial advisor and I do not hold myself out to be one. You are directed to speak with your financial, legal, and tax advisors for advice specific to your situation. This is provided for entertainment purposes only. DYODD.

Full disclosure: Long PFBDX, MERKX

 

[Daal]

the deflation collapse scenario seems to have lost its strenght after the bailout plan, government is on the case. all the treasury issuance with trillion in deficits will crowd out or tax private capital which should reduce the supply of goods down the road and thats inflationary.

fed will also have to hold rates lower than they want, an obama selected chairman could also be tempted to inflate all the debt. this means inflation down the road but not for next year or two

 

[Fractals 'R Us]

The credit freeze sort of forced the banksters to increase the money supply, did it not? And real inflation has been higher than the figures we get from the public sector for awhile, I'm thinking we are tipping towards inflation.

 

[Cache Landing]

Quote from Daal:

the deflation collapse scenario seems to have lost its strenght after the bailout plan, government is on the case. all the treasury issuance with trillion in deficits will crowd out or tax private capital which should reduce the supply of goods down the road and thats inflationary.

fed will also have to hold rates lower than they want, an obama selected chairman could also be tempted to inflate all the debt. this means inflation down the road but not for next year or two

DITTO