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Forget Your Inflation Fears, Think About Investing for a Deflationary Environment

Posted Nov 16, 2009 12:00pm EST by Heesun Wee in Investing, Products and Trends, Recession
Related: ^dji, ^gspc, EEM, dia, spy, XHB, DBC

With prices rising for many goods including food, fuel, gold and stocks, many market watchers are chanting: beware of inflation!

But not our guest Gary Shilling, president of A. Gary Shiling & Co. "I see a world of excess supply," says Shilling, author of the popular INSIGHT newsletter. "I see that over the next decade."

Many signs point toward deflationary pressures, according to Shilling: Advances in technology boosting productivity, globalization and weak demand for goods as Americans save more. All these factors are likely to build inventory and trim about 1.5% off real U.S. GDP growth annually, he says.

So what should an investor buy in a deflationary environment? Shilling's strategy includes preferring:

  • High quality bonds and Treasuries
  • Dividend payers like utilities
  • Small luxury goods
  • The dollar. "I think the dollar is in for a substantial rally," he says.
  • Consumer staples and food
  • Health Care

And what to avoid? His list includes:

  • Commodities
  • Big-ticket consumer purchases
  • Emerging market stocks, bonds
  • Antiques, art and other "alternative investments"
  • Commercial real estate
  • Home-builders
  • Junk bonds
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