Deflation Is Here

Toddo (AKA Todd Harrison from Minyanville.com) declared deflation about half a year ago. Some writers said about it well before that. I wrote about it couple of times. The picture was distorted by commodities bubble, which itself was based on idiotic premise of big inflation coming up. I'd like to know how can inflation happen in period of debt destruction and slowdown of economy, which reduces velocity of money. Now commodities bubble exploded. If Russia's aggression in Georgia can't raise the price of oil, what can?

What can we do in deflation. Not much. It all depends on Fed, mostly on Bernanke. If uncle Ben can find three or four more rabbits in his hat, he just might reinflate economy, and we'll be OK. At this point, it will be time to buy banks. This is the time to buy not the best, but the worst, beaten down financials, which are struggling for their survival. Some of them might fail even when printing press done it's job, but if you buy a basket of them, you can still be up great. I see at least two candidates here: Washington Mutual (WM) and E-Trade (ETFC). That's the first thought.

If Bernanke fails, all bets are off. Cash is the king. The only way to make money on market during real, multi-year deflation is to find fast growing companies. There aren't going to be many. And it's not easy to find them. Another way might be to go short. Commodities are good targets, financials aren't going to do good either. But short is always a trade, you have to be crazy to go short long-term. And you need to really know what are you doing, because when going short, losses are not limited. Stops should be hard, I mean stop cover orders should be on broker's books.

Full disclosure: at the time of publication author had no positions in any stocks mentioned. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.