Inflation and Deflation

As an investor, it’s vital to keep note of how the economy is faring when it comes to the purchasing power of the dollar, and the price of goods and services. Depending on the economy’s health and the current political climate, you may have to prepare your wealth for inflationdeflation, or some measure of both.

In the case of inflation, the purchasing power of a certain currency falls. This is usually correlated with the price of goods and services rising, which makes it difficult for consumer consumption to grow. If inflation rises rapidly, we end up with hyperinflation, which occurs when the purchasing power of the dollar decreases exponentially.

In contrast, deflation is when wages and the purchasing power of currency rises, and the price of goods and services are reduced. This usually occurs when productivity is at its peak and there is a decline in demand for goods and services.

Looking at major financial disasters like the Global Financial Crisis of 2008 and the Great Depression, it’s easy to see the considerable impact inflation/deflation can have on a society. So it’s important to keep an eye on the economy’s health so you can appropriately prepare for any kind of financial event.

In this page, you’ll find some interesting perspectives on the steps you could take to help keep your portfolio afloat should inflation or deflation strike.

What Could Your Property Be Worth?

Thought about buying a house recently? Or even selling? If you’ve been looking into the real estate market, or simply watching the news over the past decade, you’ll have noticed that housing prices have soared. It also would have been quite difficult for you to miss the housing crisis currently spreading throughout the country.

Why Gold Is Building Towards a Breakout

Right now in Australia, we’re getting low nominal wage growth and increased costs in about everything. That means many Australians are experiencing a reduction in REAL wages. Inflation is coming. It may not hit next month, this year, or even the next. But it’s coming. Which brings me to gold. When the market realises that governments and central banks will put up with higher than expected levels of inflation, it will start moving ‘insurance capital’ into the precious metal.

The Tug-of-War at the Heart of the US Market

Clearly, there has been too much cash in asset markets over the past few years…especially in fixed income markets. But now, the Fed is concerned that this excess cash will show up in consumer price inflation — which is, apparently, a lot worse than asset price inflation. The bond market will feel the biggest impact of this tightening.

This Figure Could Cause the Next Crash

As US bond prices collapsed, so too did bond prices in most developed countries. The rise in yields not only devastated bond portfolios, it encouraged thousands of investors to jump out of stock and into high yielding bonds. It caused the All Ordinaries (the 500 largest Aussie stocks) to fall more than 22% from its high in 1994. Question is, could we see a similar situation play out in 2018?

The Dow Jones’ Worst Point Decline in History

The Dow Jones dropped 1,175 points on Monday — the largest single-day point drop in history —erasing all profits made so far this year. The 4.6% decline is the biggest percentage loss the Dow has suffered since 2011, when we saw a drop of 1,089 points on 24 August.

What the Experts Think for 2018

The further away from ‘normal’ a prediction is, the less our brain is inclined to believe it. That anchoring mechanism is then backed up by a second survival trait. The tendency to stay in the safety of the herd. The result?

Are You Ready for Interest Rate Rises?

There’s still a shaky feeling around the global economy, as people worry what years of money printing and low interest rates have done. But that’s precisely why interest rates have to rise. And soon…

Is the Aussie Bull about to Charge?

It’s OK to be wrong in the market. After all, we’re trying to predict the future here. But, it’s not OK to keep being wrong in the face of overwhelming evidence to the contrary.
Money Morning Australia