Deflation Article

An Investment Lesson from Deflation Scares

December 2002

On November 6, 2002, The Wall Street Journal, in a front-page article entitled “Inside the FED, Deflation draws a closer look”, stated that the FED was discussing the possibility of deflation at a country inn in Woodstock, VT. It said “central bank officials” attended this ominous-sounding meeting.

But wait, when was this meeting? A careful reading of the article reveals that the meeting happened in 1999! This is news? A meeting three years ago is now making headlines? What gives?

Why would the WSJ publish it now? Why not 3 years ago? The answer is simple and once you understand the "“why” of it you will become a much wiser investor.

The why is simple... front page headlines sell papers.

But people are so bombarded with information that subconsciously they filter out 99% of it.

For instance, if you are sitting in a room and a ceiling fan is spinning over your head, you will hardly notice it. But if a bat were to zoom over your head you would instantly register the fact that it wasn't a fan but a bat.

The same holds true for newspapers, if your subconscious considers the information beyond possibility your subconscious will discard it and not even let it register with your conscious mind.

But if your subconscious considers the information pertinent to your survival it immediately sounds the warning signal and brings the information to the forefront.

Newspaper editors instinctively know this and will only publish things that they think will grab their readers attention. Three years ago the editors felt that the public wasn't interested in a story about deflation, since everyone was talking about inflation.

But in today's economic environment interest rates are low and inflation is falling, so people are more willing to consider the possibility of deflation. The funny thing is that according to our charts we have probably already turned the corner and are already several months into an increase in inflation. We have crossed above the moving average, indicating a definite up-trend is in place, so unless we cross back below the moving average we can easily relegate this "information" into the 99% ignore category.

So what does this deflation lesson teach us about investing?

1) Just because information makes it to the front page, doesn't mean it has any relation to reality.

2) After market turning points you are more likely to see "misinformation" i.e. information that is pointing in the wrong direction. For example just after a peak the papers all talk about "the next leg up" and just after a trough they talk about how all stocks will soon be worthless. Front page articles make good contrary indicators.

3) While a trend is in motion however, newspaper articles will point in the direction the herd is traveling becoming a good weathervane for market sentiment. So the key is to determine whether you are in the middle of an established trend or near a turning point. Or you can follow the lead of some very successful investors I know and simply ignore everything the news media tells you and go strictly by numerical analysis.

4) Avoid the pitfalls of deflation and reduce your debt
See article: Low Mortgage Rates- Reduce your Payment or the length of the Loan?

To Find out more about Deflation-
Read the Following Articles:

 What is Deflation? and Deflation and Politics

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