I rarely make market forecasts since if I'm right people will expect me to make more forecasts which is a pressure I'd rather not deal with and if I'm wrong I look like a fool (which, interestingly enough isn't a stretch). I'm going to go out on a limb and say that I'm not buying into the Deflation scenario. I'm not saying we can't or won't have some deflation, simply saying that it won't be long term. Yes, I am aware that we just had two straight months of deflation, however if you strip out energy and commodity prices we actually had steady or slightly increasing prices. Why do I think we will have inflation?
First, the Fed chairman has basically said he would do anything possible to avoid deflation, so that is one.
Second, the Fed is printing so much money to address the crisis that it has to be inflationary, I don't believe that the fed can "mop" up this money as quickly as it thinks. Neutralizing is not nearly as easy as people are playing it up to be.
Third, interest rates are zero which doesn't bode well for the dollar. There was major flight from the dollar yesterday when the announcement came. While the dollar is the reserve currency of the world - at some point people might want to earn something on their money. I know, I know, right now people are more concerned about return OF their money rather return ON their money - this will change. A falling dollar is great for exports, but it can be inflationary and very well may inflate commodities again. I'm not saying oil will hit its highs of earlier this year, but that a doubling of oil at some point isn't out of the question. Don't get too used to paying $1.50 a gallon for gas.
Fourth, the banks still are not lending and that is because they still have impaired balance sheets. The Fed is going to print money to buy their bad assets - more printed money will cause inflation.
Again, I could be wrong, but my textbooks tell me I'm not. For what it is worth I'm recommending Treasury Inflation Protected Securities. New issue's are best as they protect against the possibility of deflation, but secondary are fine as well if you have a decent time period.
Gold is probably an option as well, but I'm not going there just yet and to be frank, I just don't know what's going to happen.
The Fed is walking a tight rope and I'm not saying it isn't doing the right thing, I really don't know, but I don't believe we can print this much money and have this low of interest rates without long term inflation.
O.K., there you have it, my prediction. I've got a 33% chance of being right - there will either be no inflation, deflation or inflation, my chances aren't too bad!
Keep in mind that this is not a blog that gives investment advice (you must pay for that as a client of mine), these are just my current views, if you invest on your own based on my views and lose money - tough.
Scott Dauenhauer CFP, MSFP, AIF