The ongoing debate still rages…inflation or deflation?  We’ve blogged a lot on these topics and it’s our stance that in the near term, deflation is the bigger risk.  Longer term then, inflation will be a concern.  Here’s a list of ingredients of deflation that we see as being currently present, and hence, why we believe that deflation is the greater near term risk.

  • Rising Unemployment – There has never been a sustained inflationary period without wage inflation.  Currently, wages are basically flat and falling.  A few years ago 1 in 16 Americans were unemployed, today it is 1 in 5.
  • Wealth Destruction – Two bear markets and a housing market collapse have put the American consumer on the ropes.
  • Decreased Demand / Increased Savings – Savings rates have increased to 6% and is expected to rise over the next 3-5 years back up to the 9% level where it was 20 years ago.
  • Low Capacity Utilization – This occurs when factories aren’t utilizing their full capacity.  While this metric is rebounding, it is still lower than at any time since the data has been collected.

Not an exhaustive list, but certainly enough to help formulate our opinion.  So, the question becomes, how do you invest in periods of near term deflation?  Stay tuned til next time…