Inflation versus deflation - who cares?

Well, anyone who cares about investing should, but other than that, everyone who exists on the planet and isn't wealthy beyond belief should! Basic example: cash is king during a deflation but cash is trash during a significant inflation. In other words, cash is essentially the best investment during a deflation if one is not interested in or able to bet on price declines in the stock market, commodities or real estate. On the other hand, cash is the worst possible investment during a heavy inflationary period, because the value of money declines in such an environment.

The current period is characterized by an intellectual battle between smart investment advisors who favor inflation and those who favor deflation. Those commentators who are not smart, are seen on mainstream television and radio, and who don't know their ass from a hole in the ground have a unanimous opinion: who cares - just buy stocks and then buy some more! These same people told you to buy stocks in 1999, 2000, 2001, 2002, 2007 and 2008. Even a broken clock is right twice a day, but some of us are seeking to do better than the sheeple.

On the one hand, banks are in trouble, a recession is well underway, unemployment is rising, real estate prices are declining, and people are up to their eyeballs in debt. These are deflationary forces. The unwinding of a debt bubble is essentially always deflationary.

On the other hand, our government is handing out money to banks and other asshats as fast as they can run the printing presses and is now talking about a second stimulus package.

Here is the key to understanding where we are heading: GOVERNMENT IS A PARASITE ON THE ECONOMY. IT CAN "TWEAK" THE PRIMARY TREND SO IT MOVES FASTER OR SLOWER AND SOMETIMES STEER HOT MONEY FLOWS INTO A PARTICULAR INDUSTRY, BUT GOVERNMENT CAN NEVER, NEVER, NEVER CREATE THE PRIMARY TREND OF THE BUSINESS CYCLE. If you understand this, then you understand that deflation is king for the near-term future.

Now, having said this, those trying to time the markets as to deflation versus inflation may have a tough job. What I mean by this is that it can be dangerous to underestimate the incompetence of bureaucrats. We could have a deflation that is aggressively fought by our fearless leaders with massive money creation. The issue then is that we could lurch from a deflation to a severe, intense inflation, possibly even a hyperinflation, and the transition could happen within a few months' time if our creditors really start getting nervous and decrease or cancel our lines of credit.

The solution? Buy gold. Gold will hold up OK during a deflation; will increase in value relative to food, oil, stocks, real estate and almost every other asset (except possibly cash); and will not require a rapid investment theme switch if we move from deflation to inflation because gold will kick cash's ass if we lurch into a currency crisis/heavy inflation. Gold is "asset protection" insurance and should comprise at least 10-20% of your portfolio in the current environment.

By the way, the "Goldilocks" scenario of "no inflation or deflation, just a muddle through and stocks should do OK" is a fantasy created by those who wish to avoid reality and bury their heads in the sand. It won't happen.

Though stocks will do poorly in either a deflationary or heavy inflationary environment, they tend to do better in an inflationary environment. Gold stocks outperform gold during a deflation and the reverse is true during a heavy inflation.

Deflation is king for now and I would advise heavy purchasing of gold stocks over the next 2-3 weeks, with a reasonable goal of at least a 40-50% gain over the next 6 months. Buy the gold stock ETF (ticker: GDX) if you are not familiar with the sector. Plan on selling and locking in profits between mid-April and mid-May if you are a trader and plan on holding for at least 2-3 years for a 200-400% gain if you are an investor.