Economies with massive amounts of debt are highly subject to deflationary pressures. The United States is approaching $20 trillion in debt and with the new White House spending bill, add an additional $4.4 trillion.
Then it’s no surprise that markets dropped more than 10% in late January as shocked investors digested reports of creeping inflation in the United States. But is there really inflation or not?
I believe both are outcomes possible. This isn't, however, helpful when preparing an investment portfolio. In an inflationary situation, you want to hold commodities such as gold, oil, and some real estate. Deflation is when the cost of commodities and goods decline, so you'll want to keep your money in safe-haven assets, such as treasury bonds.
The consumer price index, an inflation metric, has trailed higher this year which could be a true sign of inflation. However, when overlayed against the US dollar index, higher consumer prices could be nothing more than a consequence of a declining dollar (see below graph).
The best scenario is that the U.S. has a moderate increase in price and wage inflation. However, even in this case, the economy would need to grow at unrealistic rates in order to pay off the federal debt. What could happen, and what we need to prepare for, is a dramatic move in the inflation metric, either positive or negative.
A decade of low-interest rates has distorted the relationship between stocks and bonds. At Eureka Wealth Management, I help my clients find other means of creating a diversified portfolio that takes advantage of the various economic outcomes that we may face. Call me for a free portfolio review at (760) 537-0791 or book an initial consultation online at eurekawealthmanagement.com.
St. Louis Fed: CPI vs U.S. dollar index, 1 year