UUP: the best way to buy some insurance, if a deflationary scare comes?

[giofranchi]

In attachment what Mr. Gary Shilling has to say about USD strength.

 

Imo, not only “cash is king” in a deflationary scare, but also the USD remains “the only game in town”. And I don’t see how it could fail to appreciate against other major currencies.

 

Would like to hear what people on the board think about it!

Thank you,

 

giofranchi

insight-0513b-USD.pdf

[Packer16]

My concern about deflation and tolerance of it depends upon a stable store of value (via the money supply).  In the past times when there was a good amount of deflation there was stable money.  As soon as stable money was turned into increasing the money supply to monetize the debt, there was modest inflation and subsequent financial repression.  The US was the first to go off stable money, Japan followed and now Europe is following.  Going off stable money may not be a bad thing as long as you have a debt deflation that is keeping market prices down.  In essence, we are experiencing real deflation from the debt but nominal inflation.  This is the scenario where I think equities do well but bonds and cash lose real purchasing power versus these assets.

 

Packer 

[giofranchi]

My concern about deflation and tolerance of it depends upon a stable store of value (via the money supply).  In the past times when there was a good amount of deflation there was stable money.  As soon as stable money was turned into increasing the money supply to monetize the debt, there was modest inflation and subsequent financial repression.  The US was the first to go off stable money, Japan followed and now Europe is following.  Going off stable money may not be a bad thing as long as you have a debt deflation that is keeping market prices down.  In essence, we are experiencing real deflation from the debt but nominal inflation.  This is the scenario where I think equities do well but bonds and cash lose real purchasing power versus these assets.

 

Packer

 

Yes, I agree! But, to do well, stocks also need to be undervalued. Today, vice versa, the general market is overvalued. I am not saying a correction is coming. I am only saying that the risk of it today shouldn’t be overlooked. And you don’t buy insurance, when you know something for certain, you buy insurance, when you don’t want to overlook a risk.

UUP might be a good way to hedge, because I don’t see the USD depreciating much against other major currencies, even if a correction doesn’t materialize. So, I think it will protect and even increase purchasing power in a correction, on the other hand it will not cost much, if the market keeps marching upward.

 

giofranchi

[Packer16]

I guess my take is I don't buy the market.  I try to buy undervalued equities.  Even though delfation is a risk, I think at its first wiff you will see QE ramped up like crazy which should keep equities at least fairly valued so I think the deflation scenario is very unliklely unless our monetary policy changes.  I think you could see it in Europe but it looks like Europe is following the US & Japan so delfation may be muted there also.

 

Packer

[giofranchi]

First of all, let’s be clear: there are a lot of different types of deflation, and I am only referring to a deflation in market prices, a drop in the value of the indices.

The idea that monetary policy will dictate and control market prices forever is something I have an incredible hard time to accept, without believing that unintended consequences might follow. In other words, I do not have much faith in price control engineering, without risks.

 

giofranchi