I dont know. These three words dont
inspire a lot of confidence in the messenger and probably will
not get me invited onto CNBC, but that is exactly what I think
about the topic I am about to discuss.
I received a few e-mails from people who had a problem with
a phrase in one of my
blog posts this fall. In that article I examined various
risks that other investors and I are concerned about. The
phrase was the prospect of higher, maybe even much
higher, interest rates. These readers were convinced that
higher interest rates and inflation are not a risk because we
are not going to have them for a long, long time, that we are
heading into deflation. These readers basically told me that I
should worry about the things that will come next, not things
that may or may not happen years and years down the road.
I am pretty sure that if that phrase had addressed the risk
of deflation and lower interest rates ahead, Id have
gotten as many e-mails arguing that I was wrong that
well soon have inflation and skyrocketing interest rates,
and deflation is not going to happen.
I dont know whether we are going to have inflation or
deflation in the near future. More important, Id be very
careful about trusting my money to anyone holding very strong
convictions on this topic and positioning my portfolio on the
basis of them.
Any poker player knows that the worst thing that can happen
is to have the second-best hand. If you have a weak hand, you
are going to play defensively or fold (unless you are bluffing)
and likely wont lose much. But if youre pretty
confident in your hand, you may bet aggressively (god forbid
you go all-in) after all, you could easily have the
winning cards. Four of a kind is a great poker hand unless your
opponent has a straight flush.
Generally, the more confident you are in an investment, the
larger portion of your portfolio will be placed in that
position. Therefore superconvinced inflationists will load up
on gold, and superconvinced deflationists will be swimming in
long-term bonds. If their predictions are right, theyll
make a boatload of money. If theyre wrong, however, they
will have the second-best-hand problem and lose a lot of