Deflation is More of a Concern

 

Mortgage interest rates fell to their lowest rates of 4.07%  in fifty years but lending activity, according to the Washington Post, is still quiet. While those of us who are thinking of buying either a car or a cottage nestled near a babbling brook the fear of economists is that deflationary pressures and not inflationary are insidiously creeping in the economy and once ensconced will be virtually impossible to get rid of.

Jeffrey Gundlach, a former star bond trader at TCW, thinks that the next few years will be the most difficult for investors in decades. He credits debt as being the main culprit and offers the following numbers in support:

This is the domestic credit market debt as a percentage of gross domestic product:

• 1933-299%
• 1951 –130%
• 2001-276%
• 2009 –353%

He also points out that the US has $62.3 trillion in liabilities versus $14 trillion in GDP.

2016 is when Social Security and Medicare go negative.

The US has never been able to get more than 20% of tax receipts as a percentage of GDP.

He goes on in a Morningstar interview to point out another 30 talking points and suggests that investors may do well to buy long-term government bonds as a method of making money out of this difficult deflationary situation.

Gundlach obviously has a motive as a bond trader but his is not the only voice. Other bond and equity traders throughout 2010 have not given up on the US long bond as a source of investment opportunity. For the longest time I have been harping on this theme that the Fed is in no hurry to raise taxes and opportunities have narrowed to either buying dividend producing funds, ETFs and stocks or US government bond funds.

Chairman Bernanke said in just recently that the economy is not responding as well as the Fed had hoped. Interest rates will be kept low for an extended period of time and Bill Gross interprets that as staying the course for at least 2 years.

Individual investors have choices and can:

• Sit in money markets for the duration and earn nothing.
• Attempt to trade stocks and or ETFs. Gamble on the risk and volatility.
• Buy specific funds, stocks and/or ETFs for dividend income.
• Buy an allocated portfolio of bond funds/ETF’s.
• Keep current fund/stock/ETF allocation and wait this out.

Eventually we’ll work our way out of the mess other people have created. I just hope that we learn our lesson.

If you have questions call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.