Random Roger: Deflation, Is It Coming?

If (almost) everything drops in price then holding cash, even if it yields 5 basis points is a good hold. This is fairly obvious in that if we do have deflation then interest rates won't be going up anytime soon and as low as they are could continue to to head lower making longer term bonds relatively attractive for the little bit of yield and potential price appreciation. A point I have made before is that while bond prices may not go down in the near term, anyone buying at these levels is buying high. If rates are at or near all time lows then by definition prices are high. We know prices can stay high for a long time but no one should lose sight of the fact that prices are very high. My own preference in the fixed income market is short term investment grade domestic corporates and short term foreign sovereign debt from countries like Norway, Australia, Denmark and Canada (these would be very difficult for individuals to access due to minimum order size requirements). If a US deflation turns out to be as bad as Japan's deflation we know that many other countries will get a long just fine. The US got along just fine during the first eleven years of Japan's deflation. WisdomTree has a bunch of foreign dividend ETFs, iShares and PowerShares also have products in the space and you can find other funds with high yields that are not necessarily "dividend" funds. Funds or stocks, anyone worried about deflation needs to look at Japan and get a grip on the potential of how much lower US stocks could go and avoid/invest accordingly, again if you think the US is headed toward deflation. You can read both articles to get particulars on what other things they suggest investing in should there be deflation but let's ponder whether there will even be a meaningful deflation or just a couple of years of what might be a modestly deflationary environment. Deflation is not lower prices that come about through innovation and technology enhancements. The Fed has taken inflationary steps but thus far these steps have not resulted in price inflation in the government stats but maybe there are subtle signs of inflation elsewhere. One thing is certain we are several years in to an asset price deflation in the US. I have no idea whether the word bubble would have any relevance should such a thing happen but as mentioned above, bond prices are very high and we also know the extent to which bond funds have had massive inflows going their way. A portfolio favoring two-three year paper won't suffer large price drops should rates skyrocket, it would simply have a below market yield for a while.