Preparing for a Deflationary Spiral: Lessons from the Great Depression
Understanding Deflation and Its Impact on the Economy
In this article, we aim not to spread doom and gloom or suggest that we're on the brink of an economic catastrophe. Instead, the goal is to provide valuable information and practical strategies to help you navigate potential deflationary environments. By understanding your options and staying informed, you'll survive no matter the future. Not financial advice.
I talked last time about inflation, but what if we head to a severe recession 1929 style?
The stock market can't make up for where we are heading.
The bond market screams recession.
Everything looks terrible, even Opec cutting. Rates stay inverted. Demand weak. Here in Finland, bankruptcies are on the rise.
The unemployment rate stays low. It feels like everything is based on pure hope and hopium. Even the banks now predict it will not be so "bad" just slightly bad? We got some big waves (Banking crisis and problems in commercial real estate funds). Will we get a tsunami? From massive liquidity injection to record tightening at record speed - Ok, just slightly bad. Following talking heads and listening to what central bankers say has been an enormous failure - Did they get anything right? Will they get anything right?
Make long-term goals, stay on the plan, cut the noise out, and trust your instinct. There's no need to panic or desperately hunt for the next big investment opportunity. Instead, consistently participating in the market, regardless of market conditions, will ultimately lead to success in the long run.
History and Lessons from the Great Depression
Some causes and similarities to the present day:
Stock Market Crash of 1929: Full panic. Everybody was investing in the roaring twenties; everything just went up - Similar to today? Will we get crash and panic?
Bank Failures: A wave of bank collapses, partly due to a lack of federal deposit insurance, led to a credit contraction and further reduced consumer spending and investments - What is happening now?
Horrible policies: Policies, such as the Smoot-Hawley Tariff Act, led to a decline in global trade, exacerbating the economic downturn. Policies today even worse? 🤡 See the "Inflation reduction act" and the EU's response.
Overproduction and Underconsumption: Excess production during the 1920s and a decline in consumer demand created a surplus of goods that contributed to deflationary pressures. After covid, are inventories full in some industries?
The Federal Reserve's contractionary monetary policy during the late 1920s and early 1930s tightened credit, contributing to the severity of the Great Depression - FED doing what they do best 🤡 you still expect some magical soft landing?
Asset Allocation in a Deflationary Environment
In a deflationary environment, the following asset allocation and strategies have historically performed well:
Government Bonds: Long-term government bonds tend to perform well in deflation. TLT 0.00%↑
Treasury Inflation-Protected Securities (TIPS): TIPS can hedge against deflation. Deflation will eventually lead to inflation. STIP 0.00%↑
Dividend-Paying Stocks: Investing in high-quality, dividend-paying stocks. Good dividend history combined with good recession-proof business (I like UPM)
Although equities typically struggle during deflation, specific sectors prove more resilient than others. Focus on defensive sectors like utilities, healthcare, and consumer staples. Consider technology stocks, which may also perform well in extended deflationary periods (reduce costs and increase productivity).
Cash and Cash Equivalents: Cash is king in deflation.
Gold: Good store of value. Gold should now perform poorly when high-interest rates, but stop for a second and ask yourself why it is at an all-time high. If you are looking to retire soon, bet gold.
Bitcoin: Bitcoin is the apex predator and Gold on steroids.
No debt and no leverage. When every dollar matters, the debt suddenly does not feel so good. Best way to get rid of your pristine assets is to take too much risk, no matter if your thesis was correct in the long run if you got wiped out.
Diversify your portfolio: I am shilling ideas to invest in bonds, high-quality stocks, and some Bitcoin, so don't put all your eggs in one basket. The last post was about commodities and Bitcoin. We all have different goals and risk tolerance. How do you sleep well?
Conclusion
Remember, this isn't about spreading doom and gloom – it's about arming ourselves with knowledge and staying adaptable. So keep an open mind, trust your instincts, and maintain a diversified, carefully crafted portfolio that aligns with your unique goals and risk tolerance. In the end, staying informed and disciplined will help you weather any financial storm and come out stronger on the other side.
And no, i still do not own any bonds, I have no desire or interest in buying them. Real assets FTW!