Deflationary collapse? Where to run?

If deflation means the decline in asset values, then go short equities, commodities and real estate. I don't believe gold/silver will help, b/c it too should drop if I'm thinking this through correctly. It will be more expensive on a relative basis then for debt laden firms to service their debt so if you're shorting individual stocks, I believe you could short those firms particularly since their interest coverage ratios will decline significantly as the interest remains constant and sales/assets decline.

So, short ideas: pick an ETF, any ETF. :-) ETFs for real estate, commodities and equities.

I'd love to know how people would play treasuries. stay in short term 1-3 years?

I think you're wrong to lump commodities together as everyone does. The prisoner on the rack doesn't start to yelp until all the slack is gone. That's what happened. There just isn't enough of the "stuff" to go around the world anymore, regardless of how the USA is doing. We can no longer assume commodities and ETFs will trade in a dollar-relative manner as they have when the USA was, essentially, the world economy.

Uranium, silver, copper, oil, etc, are almost guaranteed to be in shorter supply in the future. There will be wobbles but the USA and allies are no longer the only consumers! The old dollar-centric models are relevant but much less so. That's what so confounding and fascinating about this juncture. The USA is on the decline but much of the rest of world is still doing 7%+ on GDP. Sure, they'll hurt when the US can't afford their exports as much but there's no reason they shouldn't continue to integrate competitive capitalism and all things therein - manufacturing, consumerism.

This nexus, this tension, will be play out over the next 10 years in most unexpected ways. I retain SLV as I am very sure there will be some very healthy spikes in PMs along the way. Volatility begets fear begets flight to PMs. Play a riskier game along the way if you like but I think the unexpected is in the offing now more so than at any point in the last 10 years (save 9/11).

beancounter has it absolutely right. Short it all. And the smart money appears to be doing just that with treasuries. If you read any analysis of the t-bill auctions this week they were very worried about the huge supply coming for auction during a slow week. They thought it would be apocalyptic and instead the supply was sopped up readily. Money is going into durations of up to 5 years and not really touching the out years so much. I read somewhere that the next bubble could be in t-bills. I wouldn't be surprised.

As for long any equities, you want to be long equities that are also long cash and short assets. The banks that survive will likely be great buys. If there's a way to play Fed Futures, I would appreciate knowing since that would be another way.

As for commodities, they will generally go down until the Fed starts cutting rates again to try and stimulate the economy thereby killing the dollar and driving the economy into stagflation likely. By then cash will be so tight for some, liquidation/scavaging of materials will likely fill the void for quite some time. JMO

Is the filght to treasuries anything other than a better-than-cash run of the frightened? Treasuries deliver less than inflation so they are still a loss but where else to go? Gold? Definitely not with the extreme volatility it shows.

Again, I think trying to lump commodities together is too simple. I need only point you to this story:

http://www.reu​ters.com/article​/bondsNews/idUSN​2635869020080826

Mexico's main field is drying up very, very fast. The same is true (to a lesser extent) for fields all over the world, mines producing less, etc. Commodities will slump if the US takes it hard on the chin but I think smart investors will buy up all they can. The market may have its own internal mechanics but it is still a toy of man. No historical trend will allow it avoid changes in the reality it is supposed to reflect.
"demand destruction"? The International Energy Agency recently raised its forecast for global oil demand next year by 70,000 barrels to 87.8 million barrels per day.

I'll believe in demand destruction when people start living more like the Puritans did.

Hi guys,
I love arawaks logic but I think you are all being too logical and not psychological enough..
I think Arawak said it in his last comment - "Bonds are only 'better than cash' - so where else to go?".. I think equities are a very good deal, provided you know which equities to hold. Not all companies are effected by the dwindling dollar. Take AAPL for example who are exporting more and more bringing in the Euros while paying salaries with the dwindling dollar.. My point is that companies with a strong product line, no debt, US based with large exports are just what the doctor ordered. I still believe a good mix of these equities or ETF'S can deliver much better than cash returns. ADBE, PG, GILD and even LFC are either in or nearing posetive gain territory - I'm not sure straight up equities isn't the way to go..
Why is this a psychological analysis? because people hate being in cash and brokerage firms would rather go under than stay in cash - no fees when the customer is all cash. So money will stay in the market long enough for companies with strong performance to restore their true value..

Guliamo, your psychological assessment is undeniable - but what you seem to be describing is that people will take the pain on the way down, basically hold) rather than go to cash, okay, so that bolsters my short thesis. Market risk is still there though if you consider that even for companies that have strong products (but in a deflationary environment have no pricing power) and no debt and a lot of cash, their stocks will come down (high probability) with the rest of the market if it turns south too. (and will be GREAT buys as you state.) As to AAPL, I think that equity is range bound at best for a while and if it misses sales by 1% or 2% under very optimistic estimates, look out.

As to shorting bonds - I have found two short ETFs TBT (short 20 year) and PST (short 10 year) - and would very much welcome any comments on them. The comments seem to say - go long the short end of the curve and short the long end, which seems to support what I'm thinking too.

Best to all.

I think we the sheeple will just take our inflation lumps and pay the bill for the excesses through A: devaluation of the dollar, or B: Financial Collapse.

Any conversion to a value based monetary system..Well, THAT would be deflationary! Think about it... A value based currency (IE: gold, silver (better), or maybe platinum. is QUANTIFIABLE, as opposed to a trillion dollar promise to make it good. So debt and supply of money would be calculable to an actual "boook value" for the dollar. That would be disastrous, whatever you (I) think about the Fractional Reserve Banking System that allows banks to overleverage by creating electronic money and endlessly dilute the likelihood of the promise to pay by the US Government and thereby pollute the value of the dollar, a switch to the gold standard would wipe out large segments of the population (namely those who don't have cash to transfer to gold) and create instant havoc on a national scale.

In other words...No major structural changes will be made. At SOME point the bond rating services will have no choice but to downgrade US Treasury Bonds. That's when there's going to be trouble for real.

It is important to note that Deflation, in the economic sense of the word (ass-backwards) means that the dollar increases in value and purchasing power, While Inflation (again, backwards to make it confusing to us peasants) is when the dollar loses purchasing power.

I just don't see any end to inflation short of calamity. I think they'll keep the ballon puffed up as long as possible, until bands suffer a downgrade or even worse, a default.

I think we will all eventually have to switch to using the Yuan as China will own the dominant share of every business.

I will, in the meantime, continue to analyze stock trends to build my long term portfolio and possibly consider getting a Chinese wife to help me with my Mandarin.

In case it's not obvious, I've been up for several all nighters in a row, I find my statements here all very amusing and this is my way to not indulge the underlying fear driving this conversation, but rather point out in a humorous fashion that we will adapt to whatever happens.

How's that for being psychological? ;)

Cosmic

p.s. Don't buy GILD, it's broken the upward vector and I'm unsure how far it will drop.

p.s.s. The p.s. means GILD broke my model and doom will come to all those who don't have a better model than mine!

haha.. I've owned GILD for the past 6 years and it has performed well consistantly. There aren't many things in life that one can afford to go without - AIDS medication is one of them and Gilead ownes that market with what is by far the most effective HIV cocktail.. sorry cosmic, this one is a keeper as far as I'm concearned.

Your comment on what one "can afford to go without" got me thinking..

I wonder.. I probably sound like a maniac, but civilizations of complexity require ever more resources the more complex they get. Just look at NYC or any other major city.. they are drainage pits for resources. The legions of lawyers (the US has more per capita than any other country) bankers, psychologists, executives, artists, waitresses, etc. A vast majority of them, I would wager, don't contribute anything meaningful to the provisioning of essential resources for well being. Ditto for me. I help run a website that is somewhat frivolous in nature. And in addition to all the resources I consume, my servers burn tens of KwH a day. gobble gobble.

On the medical end, an old man walks into a hospital, has a procedure done to give him another few years of life. Insurance or the government then has to step in and pay thousands. In Canada, for instance, if you are over the age of 70 or something like that, the national health plan won't pay for heart ops or the like. They just won't. It doesn't make sense.

I think HIV drugs and the like will always be accessible as drug manufacturing is relatively resource light but if things really hit the fan as far as currency imploding, peak oil, etc, I doubt it will be possible to continue providing open-ended insurance plans amongst many other things. In much of the rest of the world, if you have a brain tumor, you are made comfortable until you die. For better or worse, those crazy graphs I posted above are going to come downwards and as they do they will necessitate sacrifice.

With all due respect....drug manufacturing can be pretty "resource light". It is the r and d. It is coping with government agencies and rules/regulations that is resouce heavy. Not to mention all the blind alleys that drug research will lead to that will never go to market.

Just my opinion..but the way I've been beaten up the last week i am not sure I would take my own advice on anything.