Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
Facebook's Libra Crypto currency vs Bitcoin: Five Key Differences - 19th June 19
Fed May Trigger Wild Swing In Stock Index and Precious Metals - 19th June 19
How Long Do Land Rover Discovery Sport Brake Pads Last? - 19th June 19
Gold Golden 'Moment of Truth' Is Upon Us: $1,400-Plus or Not? - 18th June 19
Exceptional Times for Gold Warrant Special Attention - 18th June 19
The Stock Market Has Gone Nowhere and Volume is Low. What’s Next - 18th June 19
Silver Long-Term Trend Analysis - 18th June 19
IBM - Watson Deep Learning - AI Stocks Investing - Video - 18th June 19
Investors are Confident, Bullish and Buying Stocks, but… - 18th June 19
Gold and Silver Reversals – Impossible Not to Notice - 18th June 19
S&P 500 Stuck at 2,900, Still No Clear Direction - 17th June 19
Is Boris set to be the next Conservation leader? - 17th June 19
Clock’s Ticking on Your Chance to Profit from the Yield Curve Inversion - 17th June 19
Stock Market Rally Faltering? - 17th June 19
Johnson Vs Gove Tory Leadership Contest Grudge Match Betfair Betting - 17th June 19
Nasdaq Stock Index Prediction System Is Telling Us A Very Different Story - 17th June 19
King Dollar Rides Higher Creating Pressures On Foreign Economies - 17th June 19
Land Rover Discovery Sport Tailgate Not Working Problems Fix (70) - 17th June 19
Stock Market Outlook: is the S&P today just like 2007 or 2016? - 17th June 19
US China War - Thucydides Trap and gold - 16th June 19
Gold Stocks Bull Upleg Mounting - 16th June 19
Gold Price Seasonal Trend Analysis - Video - 16th June 19
Fethiye Market Fruit, Veg, Spices and Turkish Delight Tourist Shopping - 16th June 19
US Dollar Gold Trend Analysis - 15th June 19
Gold Stocks “Launch” is in Line With Fundamentals - 15th June 19
The Rise of Silver and Major Economic Decline - 15th June 19
Fire Insurance Claims: What Are the Things a Fire Claim Adjuster Does? - 15th June 19
How To Find A Trustworthy Casino? - 15th June 19
Boris Johnson Vs Michael Gove Tory Leadership Grudge Match - Video - 14th June 19
Gold and Silver, Precious Metals: T-Minus 3 Seconds To Liftoff! - 14th June 19
Silver Investing Trend Analysis - Video - 14th June 19
The American Dream Is Alive and Well - in China - 14th June 19
Keeping the Online Gaming Industry in Line - 14th June 19
How Acquisitions Affect Global Stocks - 14th June 19
Please Don’t Buy the Dip in Nvidia or Other Chip Stocks - 14th June 19
A Big Thing in Investor Education is Explainer Videos - 14th June 19
IRAN - The Next American War - 13th June 19
Boris Johnson Vs Michael Gove Tory Leadership Grudge Match Contest - 13th June 19
Top Best VPN Services You Can Choose For Your iPhone - 13th June 19
Tory Leadership Contest Betting Markets Forecast - Betfair - 13th June 19
US Stock Market Setting Up A Pennant Formation - 13th June 19
Which Stocks Will Lead The Cannabis Rebound? - 13th June 19
The Privatization of US Indo-Pacific Vision - Project 2049, Armitage, Budget Ploys and Taiwan Nexus - 12th June 19
Gold Price Breaks to the Upside - 12th June 19
Top Publicly Traded Casino Company Stocks for 2019 - 12th June 19
Silver Investing Trend Analysis - 12th June 19
Why Blue-Chip Dividend Stocks Aren’t as Safe as You Think - 12th June 19
Technical Analysis Shows Aug/Sept Stock Market Top Pattern Should Form - 12th June 19
FTSE 100: A Top European Index - 12th June 19
Gold Surprise! - 11th June 19
How Forex Indicators are Getting Even More Attention in the Market? - 11th June 19
Stock Market Storm Clouds on the Horizon - 11th June 19
Is Your Financial Security Based On A Double Aberration? - 11th June 19
What If Stocks Are Wrong About Interest Rate Cuts? - 11th June 19
US House Prices Yield Curve, Debt, QE4EVER! - 11th June 19
Natural Gas Moves Into Basing Zone - 11th June 19
U.S. Dollar Stall is Good for Commodities - 11th June 19
Fed Running Out of Time and Conventional Weapons - 11th June 19
Trade Wars Propelling Stock Markets to New Highs - 11th June 19
Best Travel Bags for Summer Holidays 2019, Back Sling packs, water proof, money belt, tactical - 11th June 19

Market Oracle FREE Newsletter

Gold Price Trend Forecast Summer 2019

Feel That? It's the Chill of Deflation

Interest-Rates / Deflation Feb 08, 2015 - 03:38 PM GMT

By: DailyWealth

Interest-Rates

Chris Mayer writes: That chill in the air? This is what deflation feels like...

Right now, the 10-year U.S. Treasury pays just 1.8%... oil is $50 a barrel... commodity prices drift near to chilling lows... and the dollar is near multiyear highs. These are all deflationary trends.


What deflation means for you as an investor is what I want to explore today. As an investor in stocks, there is a safe path through a deflationary Ice age.

I'll get to that in a moment. But first... what exactly is deflation?

The economic word deflation, says the Oxford English Dictionary, first appeared in print in 1920. The idea, I'm sure, is much older. But it is the economist Ralph G. Hawtrey who gets credit for putting the thing into words when he wrote, "Deflation... is a reversal of the process of inflation." For the record, Hawtrey was against it.

Hawtrey may be the first to define it, but definitions are dry, dead things, especially in this case. Deflation is so much more than falling prices. It is also distinctly chilly.

Barton Biggs used to write about Fire and Ice, always capitalized, borrowing from Robert Frost. Ice was deflation. In a memo dated Aug. 18, 1997, the former Morgan Stanley strategist defined Ice in more certain terms than Hawtrey:

Ice is a loss of pricing power and a world where prices are as likely to go down as up. Ice is an erosion of profits. Ice is excess capacity. Ice is developing countries with low-cost factories and huge new labor forces. Ice is creative price destruction from technology. Bursting stock market bubbles cause Ice... Ice is also about competitive devaluations, as countries try to export their unemployment and lack of growth.

That's a more colorful definition. It also fits our spot in history rather well. We've got all of the above. The only one we haven't seen much of is erosion of profits. But that's coming.

The year 2014 will go down in the books as a record year for profit margins. The S&P 500 will likely finish with a profit margin of more than 10%. It has never been that high, as the Wall Street Journal recently reported.

My bet is that will be a peak that will stand for a long time. As Horizon Kinetics wrote in their fourth-quarter commentary:

U.S. corporate profit growth has benefitted tremendously over the past few decades from changes that have now been exhausted. Since 1980, a span of over 30 years, all of these benefits helped corporate profits grow by all of 6.9% per year.

Two of those exhausted changes are falling interest rates and taxes. Look at what has happened since 1980, again from Horizon Kinetics:

Rates are low and will probably head lower, but the lion's share of the gains have already been eaten. It also seems impossible to imagine, in the current climate, that corporate tax rates will fall.

So we're back to Ice.

Ice means slow growth in sales and earnings. "Companies that can grow earnings and dividends in an Ice age should be prized," Biggs wrote. Historically, they have been. "In the 1950s and early 1960s," Biggs goes on, "slow, steady growth sold at 40 times earnings. The problem is that making the transition from one environment to the other can be very disruptive and painful for the companies that are structured for the previous one."

(By the way, Biggs' essays on Fire and Ice are in the compilation Biggs on Finance, Economics and the Stock Market. It's an interesting book to flip through – you learn, among other things, that not much has changed in markets over the years. The same debates just recur in different dressings.)

So at least one page of the playbook is obvious. You want growth. The ability to grow is a prize in any Ice age. The higher the growth rate, the more prized that growth is.

Where to find growth?

That's the key question. Following Charlie Munger's quoting of 19th-century mathematician Carl Jacobi ("Invert, always invert"), we can try to answer the question first by saying where the growth isn't.

Well, one place you're not likely going to find it is in the commodity space. Those stocks face massive headwinds as the prices of what they sell fall. But Ice is tough on more than commodity prices.

As Biggs says, Ice is also tough for companies fitted for the prior environment. All kinds of companies used to having steady growth and small price increases will find it not so easy anymore. Many of the great brands – Coca-Cola is a good example – struggle to generate any growth at all.

There are plenty of industries with excess capacity. Go to Google News and type in "excess capacity." All kinds of stuff comes up. There's too much steel. There's too much excess factory capacity of seemingly everything in China. And on and on.

Ice is not necessarily all bad either. Japan has been in an Ice age for a couple of decades. Yet life is not bad in Japan. Biggs, too, appreciated this. In Diary of a Hedgehog in 2010, he wrote about Japan:

The inflation-adjusted real return on cash is rising and cannot be taxed. The country's standard of living in real terms remains high. I visited Japan for maybe the 20th time last June, and you get no sense that this is a gray country suffering through a 20-year depression like the U.S. in the 1930s. Tokyo is alive and vibrant.

And even in an Ice age, there are also pockets of growth...

For instance, if we are in an Ice age, you want to go small. Smaller companies can grow faster in little niches than the giants. There are exceptions, though (like Apple). In my Capital & Crisis newsletter, we've been focusing on many of these "exceptions."

I'm not sure if this deflationary chill will continue... But if it does, my readers will be prepared. I urge you to do the same.

Good investing,

Chris Mayer

Editor's note: Chris Mayer is the editor of Capital & Crisis, a monthly advisory considered required reading around our office. Chris consistently provides contrarian investment ideas you won't find anywhere else. Click here to check out seven stocks Chris has deemed some of the easiest, safest... and laziest ways to grow rich – his "Coffee Can Portfolio."

http://www.dailywealth.com

The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.

Customer Service: 1-888-261-2693 – Copyright 2013 Stansberry & Associates Investment Research. All Rights Reserved. Protected by copyright laws of the United States and international treaties. This e-letter may only be used pursuant to the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), in whole or in part, is strictly prohibited without the express written permission of Stansberry & Associates Investment Research, LLC. 1217 Saint Paul Street, Baltimore MD 21202

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Daily Wealth Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules