Inflation or Deflation? What’s The Evidence Say? You Decide.
The inflation vs deflation debate continues. I feel like I read an argument presenting both sides every single day on sites like Zero Hedge. It typically goes something like this:
Inflationist: We’re printing money like crazy. It will end in massive inflation.
Deflationist: It doesn’t matter how much money you print if it doesn’t get into the economy, there’s no inflation.
Inflationist: What do you call oil at $85 a barrel?
Deflationist: What do you call housing down another 10%?
The reality is I’m not sure where we’re headed. The reality is that I see signs of both inflation and deflation. Let’s look at the evidence:
Potential Real World Evidence For Inflation
- Rising oil prices – as of writing, we’re over $87/barrel – accompanied by higher prices at the pump
- High gold and precious metals prices
- Dow Jones near 11,000?
- Rising movie theater prices (source)
- Rising electric bills
Potential Real World Evidence For Deflation
- Housing bust
- Continuing discounts for car sales from all major auto makers
- Massive restaurant discounts – 2 for $20 deals seem rampant
- Growing $1 menus at fast food restaurants like McDonald’s
There are plenty more examples of both inflation and deflation in the real world. Add them in the comments below if you have examples. The above lists are just a starting point for discussion purposes.
As I said above, I’m not sure where we’re heading but I haven’t given up on the idea that we might have both inflation and deflation; inflation in the necessities such as energy and food, deflation in the luxury, non-necessities like large homes, autos, boats, restaurants, etc.
Can You Prepare For Both?
How would you go about preparing for both? If you buy gold for inflation, you’ll get killed in a deflationary environment. If you hold cash for deflation, you could get wiped out in a high inflationary environment. So, what’s the answer? The best protection against both might be sound, well-established companies that can do well in a serious recession or depression. Companies like McDonald’s Corporation (MCD) and Wal-Mart Stores, Inc (WMT) come to mind. The stocks pay a dividend, will keep up with inflation, and will do well in a tough economy.
Diversification is probably your best bet. A diversified approach with sound, dividend-paying, defensive stocks, some cash, and some precious metals might be your best answer. If you can time some of your purchases, even better. For example, in a major correction, load up on shares and ounces of gold/silver. As stocks and metals rise, accumulate cash. Like most things in the world of investing, easier said than done, right?