My morning started like any typical morning. Walking the dogs, looking at the basketball box scores, making myself a smoothie, and driving to Starbucks for my morning coffee. After flirting with my favorite baristas, I sat down with my group of friends and glanced at The Wall Street Journal. The headlines were very scary. They stated that that world’s central banks and even our own Federal Reserve were worried about the slow economic growth in 2013 and forecasted the worst possible financial outcome: deflation.
To refresh everyone, deflation happens when the prices of goods are rapidly falling with no end in sight. There is very little purchasing of nonessential items because consumers can buy goods at a cheaper price in the future. This causes an economic stagnation where inventories sit on shelves and in factories because everyone is waiting for a better price. So there is little if any manufacturing of new goods, and people are laid off in droves. I have been in the financial advisory business for over 25 years, and I have observed that most deflation scares last for a week or so then go away. Deflation is very rare, and logically, I know that the chances are slim to none that it will happen.
So I left Starbucks a little worried, got in my car, and drove to work. I turned on the radio and cursed at myself for not remembering to change the channel after the previous night’s basketball game. Because instead of basketball, I’m hearing conservative talk show host Glenn Beck praying to God on the air. I must admit, though, that I’m intrigued by Mr. Beck’s heartfelt prayer. I figured that maybe he did something shameful and was asking his fans and God for forgiveness. Boy was I wrong!
Mr. Beck was praying for all his listeners to “get out of the stock market and put all your money in gold.” By doing this, he proclaimed that they could preserve their money in the horrible, deflationary environment that we are about to experience. What’s more, one of his sponsors will gladly sell you lots and lots of gold. After this declaration, my logical brain kicked in and thought, “What good would gold or any other investment be in a deflationary environment?” But then, how could a commercial react so quickly to a financial headline?
I posed the latter question to my friend, Rick, who is in the radio business. Rick laughed and explained to me that the commercials that respond so quickly to headlines are ones which already are in the can. In other words, networks pre-produce a multitude of commercials and play the ones designed to scare people and sell them stuff they don’t need. His explanation allowed me to quell the fear of a few clients who called me that day worrying about the pending economic doom.
What really put the nail in the deflation coffin for me, though, were the next day’s headlines in The Wall Street Journal. They stated that third quarter growth was revised to 4.25% from 1.2%. Simply put, the economy did much better than expected, and the outlook for future growth was sure looking good. Right then, I decided that I should stick to reading basketball box scores. At least I could tell the difference between the real winners and losers!