The investing world has divided itself into two camps: those fearing inflation and those fearing deflation. A debate is raging about what we’ll face going forward and the appropriate way to invest under each scenario.
This debate is not between dummies. I’m not referring to the talking heads on TV or the perma-bulls of Wall Street who perpetually advise buying stocks NOW! Nor am a talking about the perma-bears and gold bugs that advise canned food and fall-out shelters.
I’m talking about the smart investors who saw the 2000 tech bubble and the 2008 housing bubble popping years in advance. They made money when almost everyone else lost it.
They were in complete agreement back in 2000 and 2008, but now they aren’t. Now, they hold diametrically opposed views about the economy and where to invest.
If we face deflation, you should hold cash and buy high quality fixed income instruments. If we face inflation, you should buy commodities and stocks that will thrive in a rising price environment.
They are in total disagreement about which one we face and are ripping each other to shreds in articles and interviews. I’ve never seen such strong disagreement between the smartest in the field.
The outcome really matters. If you invest in cash and bonds and inflation occurs, you’ll get killed; if you invest in commodities and stocks and deflation occurs, you’ll get killed. This is no mere academic debate. This will impact the lives of millions of investors.
Like many, I don’t know how this story ends. It’s my opinion we’ll experience deflation until bad debt is squeezed from the system and then inflation from there. The problem is getting the timing right of when we go from deflation to inflation (and correctly guessing ahead of the herd when the crowd will recognize that shift).
And, to further confuse things, the outcome depends more on the decisions of government officials than economic analysis. If they print lots of money, we’ll get inflation. If they don’t, we’ll have deflation. We’re in an uncomfortable position.
I don’t think it’s possible to get the timing right, so I’m not trying. Instead, I want to own instruments that can do well in either inflation or deflation. For me, that’s investing in businesses with pricing power and competitive advantages that can cut costs in deflation or raise prices in inflation.
I prefer businesses with cash on hand and that pay a meaningful dividend. That’s the same as owning cash and a fixed income instrument, but it has the benefit of adapting to inflationary conditions in ways that cash and bonds can’t.
I’m also favoring strong management teams that own a significant chunk of the business and are focused on building shareholder wealth. A smart management team can adapt and exploit a changing environment in ways that cash, fixed income, canned goods and commodities can’t.
In other words, I’m looking for the best of both worlds. I don’t want to guess whether we’ll experience inflation or deflation or when one or the other will kick in. Instead, I’m investing for either environment.
Such investments are likely to feel short term pain if either strong inflation or deflation occurs. But, in the long run they will survive and grow in ways the other alternatives can’t.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.