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Thursday, 1 October 2009

Seek Bonds, Not Stocks as Deflation Is the Threat, Not Inflation

Arguments for a 'V'-shaped recovery for the economy and the stock market are flawed, says David Levy, President of the Levy Forecasting Center.

The economy "can't support asset values at anywhere near where they used to be, even with these zero interest rates," says the economist. As a result, he predicts a Japanese style malaise for the foreseeable future while corporations attempt to shrink their balance sheets.

Based on that theory, Levy recommends buying bonds, not stocks. Specifically, he likes U.S. Treasuries and high-grade corporate bonds. His interest rates forecasts have panned out well for him in the past. In 2004, Levy opened the Levy Forecast Fund, betting interest rates would collapse during the next recession. When they did, he claims clients netted a 500% return before the fund was closed in 2008.

But how can Treasuries climb with the government's printing press working overtime? Levy believes the supply of Treasuries is offset by the shrinking supply of private debt.

And, what about inflation?

Levy still thinks deflation is a much greater risk. As he puts it, “labor costs are usually key to any sustained inflation,” and with unemployment hovering around 10% and the economy still shedding jobs, he’s just not fearing inflation.

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