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Friday, December 26, 2008

DE or IN?  …Flation that is.

There is general understanding that we are in a period of deflation.  I understand what that is…it’s when gas goes from $4/gallon to $2/gallon, or mortgages go from 6% to 4.5%.  It’s the “Japan economy” everyone has been predicting.  Where we essentially “flat-line” for awhile (although Japan’s been doing it for a long time now!); the experts say we will see contraction in spending, declines in earnings, weak job reports, cheaper goods and services, etc.  Okay, okay…I get it.  I have a degree in Finance from the Harvard of the Pacific (UH)! 

So what is the government’s reaction to this?  Bailout.  What’s the Bailout mean?  Print money, buy bad debt, print money, invest in banks, print money, invest in car manufacturers and print more money.  So you say we won’t see this affect inflation because corporate America is in liquidation mode so it’s a sum zero game just like Japan?  Maybe.  But increasing the monetary supply is supposed to lead to inflation right?  Maybe.
This is a tough one for my crystal ball.  Here’s what one Forbes article says:

“One last investment that should work out well over time: Buy property, if you live in a place with a forest of for-sale signs. The housing crisis is terrible, but it won’t last forever. If you can get a mortgage, and if I’m right about inflation, you will eventually be paying it back with 50- or 60-cent dollars. Pay 20% down on a house that rises 40% in five years and you’ll triple your investment, assuming you can cover the interest and maintenance with rental income. If prices rise above the rate of inflation, a reasonable possibility given how depressed they are now, your return will be still higher, possibly significantly so.

Take that money out of your mattress. If you don’t, you’ll miss one of the great buying opportunities of your life.”

David Dreman is chairman of Dreman Value Management of Jersey City, N.J. His latest book is Contrarian Investment Strategies: The Next Generation. Visit his homepage at

All I can say is…I hope he’s right!

Posted by Trevor Benn on December 26, 2008 at 09:59 AM
Investment • (3) CommentsPermalink
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