Bogleheads

[eurowizard]

I had a thought on my walk home. I never really studied economics much past micro and labor economics in undergrad but I was thinking about how a deflation might affect me.

Right now the value of real estate, gas, commodities, and gold has dropped and the value of the USD has strengthened against the Euro.

Using the numbers that I remember offhand that the exchange rate was 1.55 USD per Euro and is now 1.25 USD per euro thats almost a 20% boost in the USD. Also comparing $900 per ounce gold to $700 per ounce gold is a 20% increase in the USD.

This leads me to believe that the huge recent drop in the stock market is really a non-event. Sure on paper I have less USD, however my USD are 20% stronger. I can buy 20% more things with my money. Sort of like a reverse stock split of my money. I have less of it, but its worth more.

This may or may not comfort you in your situation, especially if you have any debt whatsoever. In fact you are in terrible shape if you have any debt because now the debt cost is higher. The money you are paying back is worth more in terms of gold, commodities, RE, stock equity, food, etc. So if you have a mortgage you are screwed.

If you are like me and do not own a home, you are very happy because housing prices are down 30% and my stocks are only down 20%. So if my intention was to buy a house, I am actually ahead of the game.

The reason I came up with this theory was thinking about the Harry Browne Permanent Portfolio. I was reading recent numbers about it being down 10% YTD but still beating all other portfolios in one of the contests. I was thinking that 10% YTD fall is terrible in something that is supposed to be very conservative and safe - until I realized that the portfolio is actually UP about 10% compared to the USD for the year. Money is worth more!

The permanent portfolio is 25% cash which is supposed to do good in a deflation. It seems silly because the cash just stays the same price - so it seems it couldnt be doing "good" if its not increasing. Well you use that cash to rebalance into very cheap equities and cheap gold/commodities. You're cash is only working for you if you SPEND it! So dont sit on your cash waiting for the market to "get better" Spend it now and rebalance into equities and other positions that are doing bad. In a few years you will thank me

[Prokofiev]

[bozo]

My wife and I had this discussion last night. As a former retailer (she's now in education), she hates deflation, as it depresses sales. As a frugal buyer, I like deflation, as it increases bargaining power.

That being said, runaway deflation is a major heartache for the economy, since everybody puts off buying today what will be cheaper tomorrow.

The good news: if you have a major cash stash, you are in good shape.

Bozo

[eurowizard]

[craigr]

The Permanent Portfolio holds not just cash, but LT bonds (both 25% each). The 25% in cash serves two purposes: 1) Buffer losses in a recession and 2) Provide modest protection in a deflation. During a deflation it's really the LT bonds that are doing the hard work for you by going up significantly in price and also paying you in much more valuable dollars.

However, in another thread you were just telling everyone to dump LT bonds because of various factors. Yet, LT bonds are perhaps the only asset that does well in a deflation.

Over the past 12 months my LT bonds are up around 8% plus interest income. Who would have thought that in a year of $150 a barrel oil and rapidly rising commodity prices that just six months later it was going to be LT Bonds that would be helping out so much.

[eurowizard]

[grayfox]