Sunday, May 03, 2020

Deflation or Inflation?

Despite all the FED monetary actions, I am starting to think deflation due to the Coronavirus shutdown is the most likely short term scenario for the following reasons:

  • Demand will fall for discretionary services.    After states reopen, I expect a large number of people will still be reluctant to go to restaurants, theatres, bars, and other venues that have large congrations.  These businesses will need to lower prices to attract more patrons.
  • Total wages have fallen.   With shutdowns, employees wages are being reduced for those that continue working.  Others have been furloughed and will be on unemployment.  Both stituations will lead to lower spending.
  • People will save more and spend less.  The uncertainty of COVID-19 will cause people to be more cautious and have more funds in case of another shutdown.   In addition to less spending on entertainment (e.g vacations, travel, etc.), people will spend less on major purchases such as automobiles.
If there is defation, cash and bonds will be a great investment.   Real estate, commodities and stocks will likely see declines.   

I plan to start taking actions to hedge against the possiblity of a deflationary economy over the next few years.

For more on  New Beginnings, check back Sundays for a new segment.

This is not financial, economic nor investment advice. Please consult a professional advisor.

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