Trading in Deflationary Environment

What would be the best bets if we enter a period of deflation in the next few months? I’m curious as to what sectors or fin. instruments would be the best performing. My assumption is companies like General Electric and Exxon and sectors like energy and food would be the best things to invest in. Just because GE has a diverse product/service offering, energy stocks will usually always be needed, and food is food… Not very technical, but just throwing out ideas.

Bonds are suppost to perform well in deflationary periods. Don’t know why they aren’t doing better.

The problem is that credit spreads go up because people are afraid of default. If you’re holding bonds, the purchasing value of the cash flows (assuming 0% chance of default) goes up in deflation, but the credit spreads widen because people are afraid of companies going under. As a result, tomorrow’s bonds will be getting a higher interest rate (RFR + higher credit spread), and when that happens means that the price of stuff you are holding today will go down. Once the credit spreads stop widening, bonds should perform well, assuming that the company who issued them isn’t about to go under.

specifically, under a deflationary bust (stag-deflation – a term i noticed that has been gaining momentum; a term Roubini uses often), you should invest in government bonds and yield assets. sell anything equity, and negative cash flow assets. Inflationary bust (stagflation), you should be buying precious medals (gold, silver, etc), oil, and cash; sell anything resembling financial assets.

adalfu, you don’t want cash in an inflationary environment. It is losing value as you hold it.

Doesn’t cash gain value in a deflationary environment? Think of purchasing power (price of goods declines)

Oops I read your post wrong. Sorry :wink: