Investors Fear Deflation
The Wall Street Journal writes about a growing fear among investors, the fear of deflation:
Some of the world's leading investors are becoming more worried about deflation and are re-shaping their portfolios to prepare for a possible period of falling prices.
Bond-fund heavyweight Bill Gross, investment manager Jeremy Grantham and hedge-fund managers David Tepper and Alan Fournier are among the best-known investors who are bracing for a possible bout of deflation, a development that could cripple global economies and world stock markets.
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The investors cite weak economic figures and a mounting consensus that global policy makers are reluctant, or unable, to take further steps to boost economic growth as reasons for their market positions.
"Deflation isn't just a topic of intellectual curiosity, it's happening," says Mr. Gross, who runs the $239 billion mutual fund Pimco Total Return Fund, citing an annualized 0.1% decline over the past two years in the U.S. consumer-price index. "It's an uncertain world that's tipping toward deflation."
These investors are walking a fine line. Deflation scares immediately following the 2008 financial crisis didn't materialize, in large part because central banks intervened.
Indeed, many of these star investors don't see extended deflation as a sure bet and predict that, as deflation becomes more likely, the Federal Reserve and other government officials will take radical steps to arrest the decline, such as buying bonds or introducing spending programs.
Still, preliminary signs of deflation are spurring Mr. Gross and the others to take on larger positions of interest-bearing investments such as bonds or dividend-paying stocks. They also have begun buying protection against possible stock-market losses. In a period of falling prices, companies can find it challenging to generate profits, putting pressure on stocks.
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