In the previous post I broke down inflation/deflation pressures into seven categories, which were commodity, wage-price, financial assets, tangible assets, currency, fiat, and goods and services. Three were inflationary - commodity, financial assets and currency. Two were deflationary - tangible assets such as housing and fiat pressure resulting from federal fiscal and monetary policies. Two were relatively stable - wages and goods/ services. With the recent sell-off of commodity prices it appears as though volatile commodity prices may turn deflationary should the trend continue.
The market appears more concerned about inflation than deflation, however this may change dramatically should deflationary pressures spread to currency through a strengthening dollar, financial assets in a broad retrenchment of P/E, and goods/ services if the U.S. consumer slows spending.
In anticipation of this swing occurring in the markets, I have re-balanced my portfolio with heavy weighting to high quality U.S. bonds with a long duration (~40%) and relatively high dividend yield (>4%) stocks in the segments of consumer staples, domestic natural gas distribution, and productivity enhancing companies (~30%). I also remain about 25% in cash for a larger market correction.
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