How To Invest For Inflation & Deflation (2024)

Instability Requires That You Know How To Invest For Both Inflation & Deflation

The secret is out…

The stable economic past we grew up with is just that – the past. The future is going to look very different.

Some prognosticators are screaming inflation, while others are equally well-reasoned in their deflation forecasts.

My best guess is they will both be wrong – and both be right.

In other words, extreme volatility should be expected to continue as it has in the recent past, and that will wreak havoc with your investment strategy.

Economic Forecasting Is Worthless

Before I dig into the investment strategy issues associated with that forecast, let me clarify an important point.

Long-time readers know I avoid economic forecasting like the plague.

3 decades of real-time investing experience has taught me that economic forecasts are worthless. They make soothsayers and goat entrail readers look like respectable professions.

Sure, some brilliant guys get it right on occasion, but a broken clock is right twice a day and you still can't tell time with it.

Similarly, you can't invest based on forecasts because eventually your forecast will be wrong, and you'll lose big-time. (Surprisingly, the time you are most likely to be wrong is when you are most confident that you are right. :-))

Related: Why you need a wealth plan, not an investment plan.

The truth is nobody really knows whether we'll have rocketing inflation or free-falling deflation over the next year or two (notice the time-frame, 1-2 years), despite confident forecasts.

Such clairvoyance requires a direct connection to a Higher Power or a magical crystal ball, both of which forecasters lack.

Yes, I agree the economics are unequivocally clear that the Fed's shenanigans virtually assure a serious inflation in the future (10+ years), but the exact sequencing of how that will occur is unknown.

I have no idea if it will start this year, 5 years from now, or 10 years from now. I just know it's baked in the cake.

The problem is, that's not good enough.

Extraordinary gains and losses can and will occur in the interim time periods of 1-4 years. Those gains and lossescanmake or break your financial success.

Every investment strategy is essentially a bet on a specific economic outcome (inflation or deflation, growth or decline, etc.). When the outcome is different from expectations, then you lose.

Unfortunately, about the only forecast I have any confidence making is that devastating periods of volatility will continue, which makes investment strategy very difficult.

Let me explain why…

Pessimism Goes Mainstream

A dollar collapse, hyperinflation, or a crippling deflation could change everything on a dime.

Not too long ago nobody would consider that a serious possibility.

People believed in the stability of our economic system. They believed in the almighty dollar with controlled inflation.

Pessimism has gone mainstream. The genie is out of the bottle.

Normal people with regular lives who don't live and breathe econometrics fully understand that our current economic trajectory is mathematically impossible. Something has to give.

Governments around the world have played the “funny money” game with bank bailouts, various rescue packages, and other entitlements.

The growth of financial obligations has reached an unsustainable level. There's too much leverage in the system, and there's no mathematical way the debts can be paid back in real terms.

They must either be defaulted in reality or defaulted in kind through inflation. They can'tbe paid back and they can'tcontinue to grow at their current pace.

Something big is going to happen economically, and the masses realize it now. It's just a question of when – not if.

All the government shenanigans with the bailouts and other nonsense I vociferously objected to on these pages over the years had the exact opposite affect from what the government intended.

They wanted to restore confidence in the system. Instead, they undermined everyone's confidence to such an astounding degree that even I was surprised.

The masses now understand our economy is no longer operating like a comfortable walk in the park, where a misstep results in a dirty knee or a bruised ankle (i.e. – a normal economic contraction).

Now, we're walking an economic tightrope strung between two 40 story buildings where a misstep results in a devastating fall. On one side is massive inflation, and the other is horrifying deflation. Both are bad…very bad.

Related:

Each error in judgment causes dreadful consequences, and that's why continued volatility is a fairly safe forecast.

What To Do?

The bottom line is I can't tell you if we'll have inflation or deflation over the next few years.

I've read economic analyses from many extraordinarily learned people who sit on opposite sides of the fence. They are equally convincing.

My belief is inflation will ultimately prevail (10+ year time horizon), but sequencing is everything.

The inflation might be preceded by a devastating deflation first. The only thing I'm confident about is we are in for a wild ride either way.

This is important because it determines investment strategy. If inflation prevails, then commodities, metals, and mildly leveraged income producing real estate (with fully amortizing, fixed rate mortgages ONLY) will be the places to invest.

Under this scenario, cash is trash and real stuff is the best place to be when inflation wins the day.

However, if another round of debilitating deflation strikes first, then these exact same investments could be a very expensive mistake.

Cash is always king in deflation because money becomes worth more in terms of the real things it can buy. For example, just look at how easily real estate investors were wiped out during the short-term 2007-2009 decline. It's because they were invested in real stuff.

Being a couple years off in timing can make the difference between bankruptcy and wealth.

In other words, the economic tightrope produces two mirror opposite scenarios. The correct investment strategy for one can be a nightmare for the other. You can't have it both ways as an investor.

That's why the markets are schizophrenic right now, producing dramatic volatility.

Related: Why you need a wealth plan, not an investment plan.

When it appears the government has the upper-hand (inflation prevails), then it's “risk on” and asset prices soar.

When it appears the government is losing the battle against deflation, then it's “risk off” and everyone runs to cash, causing asset prices to free-fall.

Not an easy situation for investors like you and me.

What's Your Solution?

The purpose of this post is to lay the foundational arguments and set the context for discussing how you're dealing with the problem.

What's your investment strategy for this economic tightrope?

Tell us in the comments below. I will then add some coaching questions to each strategy in an effort to deepen the learning.

The goal is to produce some informative and educational insights you can apply. Participants get free coaching and readers get valuable insights.

If you want to follow the discussion, I encourage you to chime in with your own ideas so that you can subscribe to the comment updates and not miss anything. We might just uncover some viable solutions that can help you…

Okay, so who's going to get the ball rolling? How will you manage your investments to protect against inflation and deflation?