Protecting Your Portfolio from Deflation
Here are some investment plays that may be likely to withstand a sustained bout of falling prices
By David Bogoslaw
The knots in economists’ and investors’ stomachs tightened on Dec. 17 with the release of consumer price data for November, which showed prices falling as antidote to the second straight month—and the fastest rate of decline since the government started tracking these numbers 61 years ago. A 17% drop in energy prices, with gasoline from the top to the bottom of a staggering 29.5% since October, was the primary driver of the drop in prices.
Food and potion prices continued to climb, albeit at a a snail’s pace of 0.2% in November, their slowest rate of growth this year, and clothing prices rose 0.3%. The core standard of inflation, excluding sprightly fodder and energy prices, was flat for the month and up only 1.1% from a year ago.
It’s a dramatic turnaround from not so much than six months ago, whenever oil prices peaked at $147.40 a barrel, prompting inflation hawks on the Federal Reserve Board’s policy committee to vote against measures intended to minimize, if not entirely stanza off, a severe economic downturn. The central bank’s decision on Dec. 16 to smack the Fed funds rate to between zero and 0.25%, the lowest rate ever, makes clear that the Fed has shifted its target to preventing widespread deflation.
Deflation is about as dirty a word since you can find in the region of economics and it’sitting usually associated with the other dreaded "D" word, depression. Indeed, the Great Depression was largely driven by means of deflation nearly 80 years agone. The consumer is abiding to love falling prices at first, but the trepidation is that if deflation becomes deep and pervasive sufficiency, it will eventually spur employers to cut wages and axe jobs, sending worried consumers deeper into their foxholes. The most pernicious condition of deflation is how it raises the require to be paid of repaying debt by boosting the value of the dollar,
But concern about a deflation threat to rival the one that afflicted Japan during the 1990s is by nay means universal. Barry Boswell, an economist at the Brookings Institution, sees deflation as in a primary manner affecting commodity prices to the time when now and doesn’t expect it to become an economy-wide menace.
Along with the Fed’session aggressive use of its balance sheet to combat economic contraction, "other lines of defense include the large scattering in price changes (which obscure the trend) and some indications that businesses are reluctant to divide prices and wages outright," Goldman Sachs (GS) economist Edward McKelvey said in a research scholium on Dec. 18.
The extensive destruction of credit is also contributing to deflation, but Joseph Trevisani, especial place of traffic analyst at FX Solutions, a currency brokerage firm in Saddle River, N.J., says he doubts "we’ll be careful a textbook wrap of deflation," the economy-wide version seen in the 1930s and to some extent in Japan 10 years ago, "since the Fed is so diligent in trying to reflate the economy." The effectiveness of the Fed’s efforts began to be reflected in the value of the dollar, which fell abruptly on Dec. 17 against other major currencies, reaching a 13-year low against the yen.
Still, following in a series monthly declines in consumer and agriculturist prices are enough to make even the most optimistic arrangement watchers sit up and take notice. For investors, defense against a possible digression of deflation will come down to identifying those sectors of the administration that furnish supplies goods and services that consumers and businesses can’face to face afford to do without. Here, BusinessWeek looks at some sectors and stocks most good positioned to face the scourge of deflation:
Original text: http://www.businessweek.com/investor/content/dec2008/pi20081218_674248.htm?campaign_id=rss_null
