Peter,
well, it's not that clear cut. bonds, specifically the safe kind (i.e. government bonds, not corporates!) normally do well in deflation. just look at the past 12 years in the JGB market for instance...Japan has had a bond bubble as a result of its deflationary depression.
paying down debt is clearly warranted, as debt burdens tend to become more onerous in real terms in a deflationary era.
cash is fine, and i suspect gold/silver will be as well. i also think that stocks in industries that are not economically sensitive (tobacco and food for example) and at the same time sport high yields will be sought after. generally, safe income generating assets are a good bet in a deflation.
with the bond market there's just that little problem that it obviously DIDN'T do well in '30 - '32. but then, there were some special factors behind that, inter alia the fact that gold was flowing out of the US, which the Fed attempted to counter by actually RAISING rates in late '31.
could the bond market run into similar problems this time? yes, it could. in case the dollar should depreciate markedly, the vast foreign holdings of US bonds and notes could begin to weigh on the market. so essentially the bond market could become an ancillary victim of the current account deficit coming home to roost.
that said, i'm short term bullish on the bond market, as i believe the recent sell-off was overdone and warrants a correction. but all big positions in the bond market should sport stops, just in case the negative scenario comes to pass after all. |
