Should North American investors be investing based on an economic environment that is recessionary or inflationary?
As mentioned previously, the US economy seems to be in a bull market as bad news (such as housing or employment stats) results in rising stock markets. If the market responds to bad news by pushing up the stock market, what’s going to happen if the news releases are neutral or positive? Answer: most likely they will really jump. Seeing as the US economy is in stagflation, what’s an investor in Canada and the US supposed to do? If the economy is just in the initial stages of a recession, this is probably a bad time to be investing in stocks. However if the economy is entering a period of runaway inflation, now is a bad time not to be investing in stocks. And to confuse matters even more, some sectors of the US economy are deflating e.g. housing and financials.
In the article (Housing continues to deflate, what’s Bernanke the deflation fighter going to do?), I mentioned what the most likely response from Ben Bernanke and other central bankers would be when faced with stagflation. Due to their vested interested in seeing the economy doing well (relates directly to them getting rehired), central bankers can be counted on to provide excessive stimulus to fight recession rather than try to combat inflation with higher rates. So expect more liquidity and as a result, expect more inflation.
Areas not to invest in (sector to short):
High inflation is bad for savers as it transfers their wealth to the borrowers. As a result savers need to put their money into assets that appreciate as inflation increases rather than keeping the money as cash or some kind of cash equivalent e.g. bank accounts, money market funds, t-bills etc. I also wouldn’t recommend any kind of bonds (other than inflation indexed bonds) as the high inflation will just eat away at the fixed coupon and principal payments…the same way it eats away at a pensioners fixed income. Cash is not king during inflationary times.
More areas not to invest in (sectors to short):
High inflation means that the price of everything should increase in value other than the currency (i.e. cash and cash equivalents) which loses value, but there are sectors that will do relatively worse than others. Other areas to avoid are the sectors that were over built from the previous round of excessive liquidity e.g. housing, financials and most of the service sector (restaurants, entertainment, hotels, airlines, retail, gambling, personal services etc.). As the recession takes hold, people are going to realize they and their economy is not nearly as wealthy as they thought. More people will lose jobs as the economy tries to shake off the excess and more of their wealth will be transferred off shore as their government encourages them to spend, spend, spend on things they don’t want. As a result of the wealth reduction, people will cut back on their discretionary spending which will cause the service sector to follow the same down ward spiral as the manufacturing spiral. I never understood why we needed so many Starbucks or McDonald’s restaurants in such close proximity to each other. North America’s economy which consists predominantly of services (which for the most part don’t produce wealth unlike manufacturing) will decline as the quickly shrinking manufacturing sector is only able to support a much smaller service sector.
Sectors to buy:
Therefore the key to equity investing in a stagflation environment is to invest in sectors that won’t be affected by the recession in North America. Areas that will have high demand from the world economy are commodities such as the energy sector (oil, gas, coal and uranium), the agricultural sector (fertilizer), base metals and precious metals.
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Source: http://www.buysellandtell.com
As mentioned previously, the US economy seems to be in a bull market as bad news (such as housing or employment stats) results in rising stock markets. If the market responds to bad news by pushing up the stock market, what’s going to happen if the news releases are neutral or positive? Answer: most likely they will really jump. Seeing as the US economy is in stagflation, what’s an investor in Canada and the US supposed to do? If the economy is just in the initial stages of a recession, this is probably a bad time to be investing in stocks. However if the economy is entering a period of runaway inflation, now is a bad time not to be investing in stocks. And to confuse matters even more, some sectors of the US economy are deflating e.g. housing and financials.
In the article (Housing continues to deflate, what’s Bernanke the deflation fighter going to do?), I mentioned what the most likely response from Ben Bernanke and other central bankers would be when faced with stagflation. Due to their vested interested in seeing the economy doing well (relates directly to them getting rehired), central bankers can be counted on to provide excessive stimulus to fight recession rather than try to combat inflation with higher rates. So expect more liquidity and as a result, expect more inflation.
Areas not to invest in (sector to short):
High inflation is bad for savers as it transfers their wealth to the borrowers. As a result savers need to put their money into assets that appreciate as inflation increases rather than keeping the money as cash or some kind of cash equivalent e.g. bank accounts, money market funds, t-bills etc. I also wouldn’t recommend any kind of bonds (other than inflation indexed bonds) as the high inflation will just eat away at the fixed coupon and principal payments…the same way it eats away at a pensioners fixed income. Cash is not king during inflationary times.
More areas not to invest in (sectors to short):
High inflation means that the price of everything should increase in value other than the currency (i.e. cash and cash equivalents) which loses value, but there are sectors that will do relatively worse than others. Other areas to avoid are the sectors that were over built from the previous round of excessive liquidity e.g. housing, financials and most of the service sector (restaurants, entertainment, hotels, airlines, retail, gambling, personal services etc.). As the recession takes hold, people are going to realize they and their economy is not nearly as wealthy as they thought. More people will lose jobs as the economy tries to shake off the excess and more of their wealth will be transferred off shore as their government encourages them to spend, spend, spend on things they don’t want. As a result of the wealth reduction, people will cut back on their discretionary spending which will cause the service sector to follow the same down ward spiral as the manufacturing spiral. I never understood why we needed so many Starbucks or McDonald’s restaurants in such close proximity to each other. North America’s economy which consists predominantly of services (which for the most part don’t produce wealth unlike manufacturing) will decline as the quickly shrinking manufacturing sector is only able to support a much smaller service sector.
Sectors to buy:
Therefore the key to equity investing in a stagflation environment is to invest in sectors that won’t be affected by the recession in North America. Areas that will have high demand from the world economy are commodities such as the energy sector (oil, gas, coal and uranium), the agricultural sector (fertilizer), base metals and precious metals.
________
Source: http://www.buysellandtell.com
