Updated: Jun 3
Deflation occurs when headline inflation falls below 0%, this causes the price of goods and services to rise.
The US Dollar will strengthen and everything else against it will lose value, this includes Commodities, OIL, Precious Metals and Currencies.
The problem with a sudden deflationary shock is that interest rates will suddenly rise dramatically. If you have seen my post on interest rates you will see what I am expecting to happen.
As the value of debt rises and defaults start to increase asset bubbles begin to pop, credit dries up and sends the economy into a deflationary spiral.
As you know bonds are the inverse of interest rates\bond yields and the bond market is the biggest market in the world with value in the quadrillions so when this market goes then basically everything goes down with it including global stock markets.
This is not about doom and gloom but rather just knowing what is happening so you can get a picture in your mind of what is about to happen and get you excited about markets again because at the end of the day it’s just a natural phenomenon, we all are. There is always opportunity in markets; it’s all about identifying where you want to be positioning yourself so that you can benefit in these times.
Remaining positive is the key to remaining calm and focused during these times because this too shall pass and when it does you will come out the other side with valuable experience and knowledge.
The waves are setting up in ways that agree with what happens in the above scenario and not the other way around like if it were to be a bias. It’s just interesting to note this and we just happen to be in a time where markets are extremely volatile and a perfect storm is brewing and has been for quite some time now.
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