The topic we focused on entering last year is still the most important as we enter 2011: Inflation vs. Deflation
It would appear on the surface after the magnificent performance of both the stock market and commodities that inflation has won and the discussion is over.
This is far from the case. Prices rising is a symptom of inflation, it is not inflation itself. Inflation is an increase in the total money supply and credit. Deflation is a decrease in the total money supply and credit.
With a sharp contraction in consumer, real estate, business, and commercial loans, plus the coming potential for a contraction in government loans, deflation is still a tremendous headwind ahead of us.
To help understand this concept, imagine there is close to $50 trillion in total debt for our country. (This number is close to accurate) If that debt contracts by $2 trillion, down to $48 trillion, that means there has been a loss of $2 trillion to the total money supply which includes credit.
If Bernanke prints $1 trillion in new dollars, there is still a net loss of $1 trillion, which means we experienced deflation.
This is what is occurring today. The shadow money supply, also known as m3, is contracting faster than the Federal Reserve can create new money.
For this reason I feel that we have one more deflationary shock ahead of us at some point over the next few years, which will correct prices downward and bring strength to the dollar.
At that point, Bernanke will print a final nuclear storm of money to try and stop the deflation from occurring. This will create the final push upward, bringing massive inflation or possible hyperinflation.
My advice to an investor is to prepare for both scenarios utilizing the investment recommendations in each of the inflation or deflation scenarios below.
Please understand that in both scenarios I recommend holding 0% of your wealth in these areas:
1. American Real Estate
2. American Stocks
3. Long term Treasury Bonds
4. Municipal Bonds
5. American Corporate Bonds
Please also understand that 99% of Americans hold 100% of their wealth in these five categories. Also understand that 99% of financial advisors recommend holding 100% of your wealth in these five categories.
Let's begin...............