Preparing Your Portfolio For Deflation

by: Keith Springer


Investors walk a tightrope, but must have a safety net.

This year will be tougher for investors but no crash this year.

Economy will take off again when Echo-Boomers start spending.

If you want to know how many opinions there are about the economy, just multiply that by the number of investors out there. 2014 marks my 30th year in this business and I can honestly say that this is the most difficult environment I have ever witnessed. Most of this comes from the fact that the biggies, Bernanke and now Yellen, have changed all the rules. Free market capitalism has been tossed aside for Bail Outs and Printing money. Nevertheless, there are still plenty of ways to make money in this market if you know how to proceed.

At the end of the day, all the king's horses and all the king's men cannot fight the true underlying economic forces that ultimately reign. There is one fundamental rule in economics: for an economy to grow you need more spenders… period.

As I detail in Facing Goliath - How to Triumph in the Dangerous Market Ahead, the aging of America and the entire developed world are a hill so steep that even the Fed's printing press cannot ultimately climb. The bottom is that the baby boomers are well past their peak spending years, and the generation behind them, Gen-x, is far too small to make up their spending.

The good news is that the US has another generation of spenders coming up the ranks. They are the Echo-boomers, which are the children of the baby boomers. Once they get into their peak spending years which is from their late 20s to late 40s, we will experience the next economic boom period.

The bad news is that it's 5-8 years away. Until then, we will be living with deflation. This is good if you are in the work force making money. This is not so nice if you are retired or out of work.

What is giving witness to this is the bond market. If we were on the verge of a new economic surge, as stocks have been suggesting, rates would be rising. Given the stock rally we've seen, the 10 year bond should be above 3%, instead it's 2.55%. In bond market terms, that's big money.

Investor Strategy

There are strategies that investors need to take in order to get the best returns with the least risk possible. We don't need the best economy possible to be profitable, we just have to know how to play it. I do not believe that we are on the verge of a new economic collapse or a major crash… not yet. I expect the economy to limp along, never really taking off but not bad enough to throw us into another recession. This will keep the Federal Reserve stimulating with continued low interest rates and if inflation doesn't get above their 2% target, a new round of Quantitative Easing.

Stocks will be OK because they take their cue from corporate earnings, which will continue to go higher from continued cheap labor and cost cutting that has left them lean and mean. Certain sectors will do much better than others. More importantly, investors will have to be very nimble in the coming months, taking a "tactical" approach and not buy-and-hold, otherwise known as buy-and-hope. Be sure to have your exit strategy in place. That is your safety net!

Buy Apple (NASDAQ:AAPL) down here with much higher prices in sight for two main reasons. The first is its recent deal with China Mobile (NYSE:CHL) to allow iPhones to be sold in China which won't show up on the bottom line for a while and two that the iPhone 5S was not enough of an upgrade to lure in the iPhone 5 holders, but the next one will. They make sure of that by installing a battery that conveniently dies faster once a new phone is out.

Investors should also snap up the powerful growth names like Microsoft (NASDAQ:MSFT) which is the staple for every computer made and Google (NASDAQ:GOOG) which is leading the technology war and has something up its sleeves with its secret new building in San Francisco. Also look to buy selected social media companies like Twitter (NYSE:TWTR) following its decent back to earth and still has expanding user base. Facebook (NASDAQ:FB) is winning over the older crowd, the very people with money and who will not be upset by their ads. You can also simply buy the market ETFs like QQQ and SPY. Avoid the metals like GLD. With the Fed on the path to less stimulus, gold will continue to get knocked around.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.