The Flavor of the Month – Deflation

Published Every Thursday 

Economic Outlook In Crisis Monitor Showing Bankruptcy And DepresThe Case For Deflation
There is a strong body of thought that we are headed for a period of deflation. According to Harry Dent, author of “The Great Crash Ahead”, “we are in the initial stages of a Primary Bear Market“. He points out this is evidenced by the long-term chart on the Dow. The fundamental reason for this, he explains, is the de-leveraging of the baby-boomer generation.

Dr. A. Gary Shilling wrote two books on deflation which he thinks is a coming reality. He says “inflation in the U.S. has historically been a wartime phenomenon, including not only shooting wars but also the Cold War and the War on Poverty. That’s when the federal government vastly overspends its income on top of a robust private economy—obviously not the case today when government stimulus isn’t even offsetting private sector weakness. Deflation reigns in peacetime, and I think it is again, with the end of the Iraq engagement and as the unwinding of Afghanistan expenditures further reduce military spending.“

The World of 2013 – a Deflationary Cycle?
In every economic cycle, factors change. It used to be that listening to the wisdom of your parents as to economic advice was always the smartest thing to do. Parents that grew up during the great depression taught their children that saving money was the only thing to do. In the inflationary 1970’s, it was buy a piece of real estate, any real estate. In the dot.com 1990’s it was buy an internet stock. In each generation, there is a new wisdom learned and the older wisdoms diminish in importance. The one inescapable conclusion is that as communications improve and get ever more speedy, so the world changes ever more speedy.

There will always be unforetold events that change the world around us, and one can never be fully prepared for the unknown. The best that one can do, is to open your eyes in a macro or an all-encompassing view. There are great events unfolding around us, that are obvious.

  • the baby boomer generation is reaching retirement age.
  • the  # of great economic blocs in the world have increased to include China
  • the numbers of middle class citizens with disposable income and needs is growing worldwide
  • the average number of children per household is decreasing
  • debt around the world must diminish
  • technology will continue to advance at an ever-increasing rate

To understand where to invest, one must take into account these undeniable trends. Deflation may very well affect us as governments reduce their spending and consumers change their buying habits. However, if you examine the stock market over any of the decade long trends of the past, an obvious fact emerges. Certain classes of stocks do not do as well as other classes of stocks in every age. The old adage of ‘buy and hold’ is accordingly severely flawed.

Without getting into specific stocks today, consumer staples that are in demand for the young and immature will be in less demand than stocks catering to the aging population.

Extensive housing in distant suburbs will be less desirable than core housing. Efficient transportation will be more in demand than muscle cars. Imports and exports to other world economic centers will boom, and trade will expand to meet worldwide demand.

Deflation
If deflation hits with a vengeance, as it may, or may not, one must be invested in those sectors that are less exposed to deflation, and more in those sectors that are mandated by these obvious trends.

Pick specific stocks rather than indexes. Pick companies with market position that can meet the new demand and withstand deflation by having more demand for their goods and services. Pick companies in businesses that you understand.

Deflation doesn’t have to destroy your savings. Be wise.

 

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We may or may not have positions in the securities we name. In making an investment decision numerous factors must be considered including portfolio balancing, timing, cash and capital reserves, asset allocation and other factors. Readers are strongly advised to do their own research. Matters discussed contain forward-looking statements that are subject to risks and uncertainties and actual results may differ materially from any future results, performance or achievements expressed or implied.

Views expressed are opinions and not investment advice. Persons investing should retain a licensed professional to guide them and  not rely on the opinions expressed herein. This report is neither a solicitation nor a recommendation to buy or sell securities. We are not a registered investment advisor nor a broker-dealer. The information contained herein is based on sources which we believe reliable but is not guaranteed as being accurate or a complete statement or summary of the available data.

By Larry Cyna

Mr. Cyna is an accomplished investor in the Canadian public markets for over 20 years, and has managed significant portfolios. He is a financing specialist for private and public companies, and has expertise in real estate and debt obligations. He has assisted private companies accessing the public markets, has been a founding director of public companies and continues as a strategic consultant to selected clientele. He is and has been a director, a senior officer and on the Advisory Board of a number of TSX and TSXV public companies in the mining, resource, technology and telecommunications sectors, and the Founding Director of two CPC’s with qualifying transactions in mining and minerals. He was an honorary director of the Rotman School of Management MBA IMC program, has completed the Canadian Securities Institute Canadian Securities Course & Institute Conduct and Practices Handbook Course, was a former Manager under contract to an Investment Manager at BMO Nesbitt Burns, a roster mediator under the Ontario Mandatory Mediation Program, Toronto, a member of the Institute of Corporate Directors of Ontario, a member of the Upper Canada Dispute Resolution Group, and the Ontario Bar Association, Alternate Dispute Resolution section. He obtained his designation as a Chartered Accountant in Ontario in 1971 and was the recipient of the Founder’s Prize for academic achievement together with a cash reward. He became a CPA in the State of Illinois, USA in 1999 under IQEX with a grade of 92%. He is a Member of the Institute of Chartered Accountants of Ontario and the Canadian Institute of Chartered Accountants. He holds certificates in Advanced ADR & in Civil Justice in Ontario, Faculty of Law, University of Windsor, certificate in Dispute Resolution from the Ontario Institute of Chartered Accountants. Previous accomplishments are Manager of Cymor Risk Consultants LP specializing in Risk Management Assessment; CEO of Cyna & Associates specializing in mediation and ADR; Founder & Senior Partner of Cyna & Co, Chartered Accountants, a fully licensed and accredited public accountancy firm with international affiliations; and was a partner in a large public accountancy firm. Mr. Cyna is well known in the Canadian Investing community. He is invited to, and attends presentations given by public companies usually 3 or 4 times each week. These presentations are intended by the various hosting companies to present their inside story to sophisticated parties and Investment Managers for the purpose of attracting funding, or of making parties more interested in acquiring shares of those companies. Being a part of this keeps Mr. Cyna deeply involved in the current market and leads to numerous investment opportunities.