It is pretty clear, but not an absolute certainty, that a recession is imminent (if not upon us already). But deflation is something like a distant blip on the radar, or growl in the dark forest. Not many people are concerned with it. Yet. Both have implications for the DTM5 strategy.

Readers of my blog probably know what a recession is – Simply put, it starts when an economy peaks and begins to get smaller, and it ends when the economy troughs and starts to expand again. There are various technical definitions of what a recession is (or how it is measured). In Canada, a recession is defined by the Canadian Encyclopedia as:

a recession occurs when two or more successive quarters (six months) show a drop in real gross domestic product (GDP), i.e., the measure of total economic output in the economy after accounting for inflation.

And what of this thing called Deflation? Deflation is simply the decline in price or value of things. It is when businesses must charge less; It is when assets such as real estate and commodities decline in value. Investopedia defines deflation as:

Deflation is a general decline in prices for goods and services, typically associated with a contraction in the supply of money and credit in the economy.

So what does this mean for the DTM5?

Followers of my blog know that I’m a venture investor, focused on a handful of investments, both public and private, in sectors such as technology, finance and commodities. I’m a long term investor, but that doesn’t mean I’m passive. I can and do act tactically to seize opportunity or mitigate risk.

A recession impacts some economic sectors / investments more than others. A slowing economy generally means the commodities that fuel our world – Energy, Metals, etc – Will be negatively impacted. So I’ve been lowering my exposure to investments in these sectors. Not eliminating them, but paring them back.

Deflation is another animal. It is not just a slowdown of an economy, but a decline in value of things. And it could be super ugly. The last time we had deflation (In Canada) was very briefly in 2020 at the advent of Coronavirus and then previous to that in 2009 during the great recession. Here is the chart of Inflation over the past 25 years – Note when it goes below zero. That is deflation.

And why the heck would I be thinking about deflation? Inflation is the problem! It is high, and central banks around the world are in panic mode, trying to figure out ways to contain it. It is what comes after inflation that is interesting.

In today’s ‘Early Morning with Dave’ economic commentary, David Rosenberg reports:

Inflation has become yesterday’s story, with copper down 27% from the cycle-high and trading down to an 18-month low. Wheat is down 28%, and we have the likes of corn, soybeans, and crude oil all down 12%. The trade-weighted dollar has strengthened 9.7% in the first half of the year, and along with the slump in commodities, will usher in deflation for the 40% of the CPI represented by the goods sector in the second half of the year. The record-high 17% share of
respondents to the University of Michigan sentiment survey in June who see DEFLATION in coming years may be onto something.

That deflationary rustle you heard in the bushes might be the Rabbit of Caerbannog (look it up). If Inflation slows the economy by making things more expensive, deflation makes things (especially investments) cheaper. That has benefits if you have cash & liquidity; That can be costly if you own the assets that are deflating. Although the likelihood of broad deflation seems fairly low right now, it is worth thinking about – If only because over the past 25 years periods of deflation have been horrifying if you were in deflating assets, but an excellent time to deploy cash.

GLTA!