Staying Even Is Winning In A Deflationary Environment

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Includes: AAPL, AMZN, BRK.A, BRK.B, CMCSA, DE, DIS, HON, KMI, THERA, UBER, WMT
by: Dana Blankenhorn

Summary

Ultra bears see 2000 for tech, 2008 for the general economy.

The real problem is the oil war, which could end at any time, or drag on.

The best advice is to hang in.

To the commodity crash, the China crash, the Brazil crash and the oil crash, let's add the unicorn crash.

So-called "unicorn" companies like Uber (Private:UBER) and Theranos (THER) are finding investment windows shutting, more equity required for less cash. The environment for Silicon Valley VCs is beginning to look a lot like that of the year 2000, when the dot-com bubble burst.

Negative interest rates are merely an acknowledgement that deflation is real. In a deflationary environment, prices drop but things like equity values drop faster. Thus the 2016 action in the market becomes rational.

It's a lesson to me. I figured that since I was investing in the "right" companies, in "winners," that as others folded their hands I would prosper. Markets don't work that way. A falling tide drops all boats, and growth companies tend to fall furthest and fastest. Thus Amazon.Com (NASDAQ:AMZN) is down 21% on the year, despite a recent rise. Apple (NASDAQ:AAPL) is down 9%, and Disney (NYSE:DIS) 10%.

These companies haven't done anything wrong. They're just as solid as they were last year. But the market environment in which they're selling has changed. Deflation leads investors preferring sure things, so Comcast (NASDAQ:CMCSA) is up slightly, and so is Wal-Mart (NYSE:WMT). These companies, too, haven't suddenly gotten clever. It's the environment they're swimming in that makes them more attractive.

What can change the environment? Peace in Syria, now supported by Russia as well as the U.S., would do it. ISIS remains active in the field because it is not a party to the peace talks - it is the target of them.

There are indications that Saudi Arabia and Iran are willing to at least end the economic war between them if not the shooting one. Russia is also hurting from the oil war, and is pleading for peace.

Getting a floor under oil could provide stability, but what's needed most is spending. Whether that is public or private makes little difference economically, although there is a lot of shared infrastructure that could do with a fix. But private investments in the Internet of Systems could stretch the value of that infrastructure. There is hope in Honeywell (NYSE:HON) and John Deere (NYSE:DE) getting a bid - both are up on the year so far.

Until deflation is whipped, and those making investments see price stability (meaning the investments they make today won't be wasted by lower prices tomorrow) it's going to be hard to change the environment and get growth re-started. It's the assumption that market peace remains possible that is behind the decision of Warren Buffett (NYSE:BRK.A) (NYSE:BRK.B) and others to buy into Kinder Morgan (NYSE:KMI), since oil transport stocks should recover most quickly when oil prices do.

There's an assumption among ultra-bears that this is the long deep breath before the plunge, that we're about to enter a 2008-style crisis with no way out, that democracy and capitalism are doomed. If you want to invest that way, go hide in a cave somewhere. What history says is that there is no such thing as "once and for all," that wars end, bankrupts are replaced by the market, and that life goes on regardless.

Peace always remains possible. Growth is always possible on the horizon.

Disclosure: I am/we are long AMZN, AAPL, CMCSA, DIS, KMI.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.