Why Not Short Deflation?

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SteveR's picture
SteveR
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Why Not Short Deflation?

I hear a lot of talk on various sites and forums about how to position your investments to handle deflation, with cash being a popular answer and gold being a "probably" answer.  One approach that seems obvious but is rarely mentioned is this: short the things that will go down during deflation.

So, for example, during deflation, one could short DBC, which is an ETF that is based on a large basket of commodities.  And if you're not comfortable selling short, then there's probably an inverse ETF available that would serve the same purpose.

So as asset prices fall, your investment grows in terms of dollars.  And during deflation, the purchasing power of dollars themselves is increasing, so it seems like a double win.

Can anyone see any flaws in my thinking?  Thanks.

JAG's picture
JAG
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Posts: 2492
Re: Why Not Short Deflation?

 I think its a valid strategy, but it might be difficult to execute effectively. The deflationist Robert Pretcher just recently recorded the greatest short in the history of the US markets, and if he continues to be correct in his deflationary forecast, his next short might eclipse the his previous record from last fall.

The key to shorting the market is to avoid situations where "everyone else" is jumping on the shorting bandwagon. A great deal of traders seem to be quick to short the markets lately, so I personally will wait for a better opportunity. A short squeeze is a nasty situation to be in.

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strabes
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Re: Why Not Short Deflation?

 the issue is counterparty risk in the next phase of the collapse.  the collapse is going to drive some institutions/people to insolvency which means they won't be able to pay the shorts.  govt might even declare shorts void at that point (unless you are goldman, aig, JPMchase (i.e. rich guy)...then of course the govt will steal from us to pay them).

prechter has advised movement to safety to avoid this risk after profiting massively from the first collapse phase.  his opinion is that only your surplus/gamble money should be used to play the next phase.

SteveR's picture
SteveR
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Posts: 71
Re: Why Not Short Deflation?

Can someone provide a link or two to a good summary of Bob Prechter's line of thinking?  His name has popped up enough times that I think I need to check him out.  Thanks.

JAG's picture
JAG
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Posts: 2492
Pretcher

 Pretcher's website is www.elliottwave.com

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