10 Things You Should and
Shouldn't Do During Deflation
February 10,
2009
This article is part of a
syndicated series about
deflation from market analyst
Robert Prechter, the world’s
foremost expert on and proponent
of the deflationary scenario.
For more on deflation and how
you can survive it,
download Prechter’s FREE
60-page Deflation Survival eBook,
part of Prechter’s NEW Deflation
Survival Guide.
The following article was
adapted from Robert Prechter’s
NEW
Deflation Survival eBook, a
free 60-page compilation of
Prechter’s most important
teachings and warnings about
deflation.
By Robert Prechter, CMT
1) Should you invest
in real estate?
Short Answer: NO
Long Answer: The worst thing
about real estate is its lack of
liquidity during a bear market.
At least in the stock market,
when your stock is down 60
percent and you realize you’ve
made a horrendous mistake, you
can call your broker and get out
(unless you’re a mutual fund,
insurance company or other
institution with millions of
shares, in which case, you’re
stuck). With real estate, you
can’t pick up the phone and
sell. You need to find a buyer
for your house in order to sell
it. In a depression, buyers just
go away. Mom and Pop move in
with the kids, or the kids move
in with Mom and Pop. People
start living in their offices or
moving their offices into their
living quarters. Businesses
close down. In time, there is a
massive glut of real estate.
– Conquer the Crash, Chapter
16
2) Should you prepare
for a change in politics?
Short Answer: YES
Long Answer: At some point
during a financial crisis, money
flows typically become a
political issue. You should keep
a sharp eye on political trends
in your home country. In severe
economic times, governments have
been known to ban foreign
investment, demand capital
repatriation, outlaw money
transfers abroad, close banks,
freeze bank accounts, restrict
or seize private pensions, raise
taxes, fix prices and impose
currency exchange values. They
have been known to use force to
change the course of who gets
hurt and who is spared, which
means that the prudent are
punished and the thriftless are
rewarded, reversing the result
from what it would be according
to who deserves to be spared or
get hurt. In extreme cases, such
as when authoritarians assume
power, they simply appropriate
or take de facto control of your
property.
You cannot anticipate every
possible law, regulation or
political event that will be
implemented to thwart your
attempt at safety, liquidity and
solvency. This is why you must
plan ahead and pay attention. As
you do, think about these issues
so that when political forces
troll for victims, you are
legally outside the scope of the
dragnet.
– Conquer the Crash, Chapter
27
3) Should you invest
in commercial bonds?
Short Answer: NO
Long Answer: If there is one
bit of conventional wisdom that
we hear repeatedly with respect
to investing for a deflationary
depression, it is that long-term
bonds are the best possible
investment. This assertion is
wrong. Any bond issued by a
borrower who cannot pay goes to
zero in a depression. In the
Great Depression, bonds of many
companies, municipalities and
foreign governments were
crushed. They became wallpaper
as their issuers went bankrupt
and defaulted. Bonds of suspect
issuers also went way down, at
least for a time. Understand
that in a crash, no one knows
its depth, and almost everyone
becomes afraid. That makes
investors sell bonds of any
issuers that they fear could
default. Even when people trust
the bonds they own, they are
sometimes forced to sell them to
raise cash to live on. For this
reason, even the safest bonds
can go down, at least
temporarily, as AAA bonds did in
1931 and 1932.
– Conquer the Crash, Chapter
15
4) Should you take
precautions if you run a
business?
Short Answer: YES
Long Answer: Avoid long-term
employment contracts with
employees. Try to locate in a
state with “at-will” employment
laws. Red tape and legal
impediments to firing could
bankrupt your company in a
financial crunch, thus putting
everyone in your company out of
work.
If you run a business that
normally carries a large
business inventory (such as an
auto or boat dealership), try to
reduce it. If your business
requires certain manufactured
specialty items that may be hard
to obtain in a depression, stock
up.
If you are an employer, start
making plans for what you will
do if the company’s cash flow
declines and you have to cut
expenditures. Would it be best
to fire certain people? Would it
be better to adjust all salaries
downward an equal percentage so
that you can keep everyone
employed?
Finally, plan how you will
take advantage of the next major
bottom in the economy.
Positioning your company
properly at that time could
ensure success for decades to
come.
– Conquer the Crash, Chapter
30
5) Should you invest
in collectibles?
Short Answer: NO
Long Answer: Collecting for
investment purposes is almost
always foolish. Never buy
anything marketed as a
collectible. The chances of
losing money when collectibility
is priced into an item are huge.
Usually, collecting trends are
fads. They might be short-run or
long-run fads, but they
eventually dissolve.
– Conquer the Crash, Chapter
17
6) Should you do
anything with respect to your
employment?
Short Answer: YES
Long Answer: If you have no
special reason to believe that
the company you work for will
prosper so much in a contracting
economy that its stock will rise
in a bear market, then cash out
any stock or stock options that
your company has issued to you
(or that you bought on your
own).
If your remuneration is tied
to the same company’s fortunes
in the form of stock or stock
options, try to convert it to a
liquid income stream. Make sure
you get paid actual money for
your labor.
If you have a choice of
employment, try to think about
which job will best weather the
coming financial and economic
storm. Then go get it.
– Conquer the Crash, Chapter
31
7) Should you
speculate in stocks?
Short Answer: NO
Long Answer: Perhaps the
number one precaution to take at
the start of a deflationary
crash is to make sure that your
investment capital is not
invested “long” in stocks, stock
mutual funds, stock index
futures, stock options or any
other equity-based investment or
speculation. That advice alone
should be worth the time you
[spend to read Conquer the
Crash].
In 2000 and 2001, countless
Internet stocks fell from $50 or
$100 a share to near zero in a
matter of months. In 2001, Enron
went from $85 to pennies a share
in less than a year. These are
the early casualties of debt,
leverage and incautious
speculation.
– Conquer the Crash, Chapter
20
8) Should you call in
loans and pay off your debt?
Short Answer: YES
Long Answer: Have you lent
money to friends, relatives or
co-workers? The odds of
collecting any of these debts
are usually slim to none, but if
you can prod your personal
debtors into paying you back
before they get further strapped
for cash, it will not only help
you but it will also give you
some additional wherewithal to
help those very same people if
they become destitute later.
If at all possible, remain or
become debt-free. Being
debt-free means that you are
freer, period. You don’t have to
sweat credit card payments. You
don’t have to sweat home or auto
repossession or loss of your
business. You don’t have to work
6 percent more, or 10 percent
more, or 18 percent more just to
stay even.
– Conquer the Crash, Chapter
29
9) Should you invest
in commodities, such as crude
oil?
Short Answer: Mostly NO
Long Answer: Pay particular
attention to what happened in
1929-1932, the three years of
intense deflation in which the
stock market crashed. As you can
see, commodities crashed, too.
You can get rich being short
commodity futures in a
deflationary crash. This is a
player’s game, though, and I am
not about to urge a typical
investor to follow that course.
If you are a seasoned commodity
trader, avoid the long side and
use rallies to sell short. Make
sure that your broker keeps your
liquid funds in T-bills or an
equally safe medium.
There can be exceptions to
the broad trend. A commodity can
rise against the trend on a war,
a war scare, a shortage or a
disruption of transport. Oil is
an example of a commodity with
that type of risk. This
commodity should have nowhere to
go but down during a depression.
– Conquer the Crash, Chapter
21
Go to
2nd Column
For more information see:
Can the Government Stop Another Great Depression?
The Primary Precondition of Deflation --What
must happen for Deflation to take over.
What Causes Deflation?
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