Posts Tagged ‘Deflation’

Profiting From Deflation?

Tuesday, August 10th, 2010

Deflation has been a popular topic lately.

Some have recently expressed that deflation can be a scenario from which one can remain unimpacted, or will profit from.   Examples include a August 7-8 Wall Street Journal article titled “How to Beat Deflation-And Even Profit From It.” A recent article by Robert Prechter Jr. in the August 9 Barron’s concluded by saying “If you shed market and institutional risk, you can sail through deflationary times unscathed.”

I have previously written of deflation, in the context of whether it would be a “benefit,” in a September 8, 2009 post.

Of course, the extent of deflation plays a major role in determining its impacts…

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SPX at 1120.20 as this post is written

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Is Deflation A Benefit?

Tuesday, September 8th, 2009

Lately I have seen a few articles that have openly stated that deflation would be a “positive” for individuals.  There are various reasons given for this conclusion.

One of the reasons that has been given is that deflation would lower the price of goods, and thereby increase purchasing power.

My thought on the matter is that the overall topic of deflation and its effects is a complex one.  Adding to the complexity is the definition of deflation.  Most people define deflation in terms of CPI, but of course there are many different ways of defining the concept.

As to whether the purported “benefits” of deflation would happen, especially the increase in purchasing power, is difficult to answer as it relies on many different factors.  However, I do think that given today’s economic environment, it would be difficult to draw the conclusion that deflation would be a net positive.  Sure, if deflation (as defined in terms of CPI) were to occur, there would be some benefits, such as the aforementioned (theoretical) increase in purchasing power.  However, there would likely be significant other negative factors that could, and probably would, overwhelm whatever benefit the increase in purchasing power would have.

SPX at 1016.4 as this post is written

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P/E Ratios and Inflation / Deflation

Wednesday, September 2nd, 2009

I recently came across an interesting chart titled “Relationship Of Inflation and Price/Earnings Ratios (1900-2008).”  It is from Crestmont Research and can be found at this link:

http://www.crestmontresearch.com/pdfs/Stock%20Inflation%20&%20PE.pdf

It shows the effect of inflation and deflation (as defined by the CPI) on the P/E Ratio. I think that it is worth looking at for a variety of reasons.

One of the reasons I point it out is that it provides some historical background to the Inflation/Stock Valuation topic I discussed in the article “Does Warren Buffett’s Market Metric Still Apply?”

The “inflation is good for stocks” theory is widely held.  The logic says that inflation promotes higher revenue and earnings.  In my opinion this logic is theoretically flawed and/or incomplete.   From a practical perspective, history shows it isn’t justified, as indicated in the chart.

Furthermore, even if inflation were to appear favorable to stock prices, one has to view the stock market returns on a “real” basis.

SPX at 995.81 as this post is written

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