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How to Profit From Deflation - Part Two |
by John Jagerson
This article was originally published November 21st, 2008. You can see the first part of this series on investing in a deflationary economy here. Since the time this was originally published the major central banks around the world have gone to extreme measures to fight deflation and its negative economic effects. It has now been 6 months since that initial scare and today's CPI numbers continued a trend of negative inflation measures. Today's CPI number showed the first annual decline in consumer prices since 1955.
Deflation continues to be a risk in the US that few analysts are talking about. The signs of a deflationary period including a preference for cash and cash equivalents, falling consumer spending and a bearish equity market are all here. This doesn't mean that deflation is currently in effect it just means we may be heading there. We suspect the Fed and other major central banks will continue to fight this possibility but it doesn't mean we can't turn those risks into a few opportunities.
For example, the yield on the 10-year note is still at multi-decade lows. Demand for safer assets, cash equivalents and the expansion of the Fed's balance sheet is driving the value of government bonds up and yields down. The bull market in bonds is available for retail traders through ETFs, savings bonds and government notes and bond futures. In today's video, I will go into more detail about how these work and why they may be an attractive way to diversify your portfolio. If you need more information about how ETFs work, click here.
This article was just one illustration for how you can turn the effects of a shift in assets towards cash and away from growth oriented assets like stocks or commercial bonds to your advantage. In the next article in this series we will discuss some other alternatives.
Part one of this article about defining a deflationary environment can be found here.
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