Friday, August 27, 2010

The Benefits of Deflation

I've been kind of quiet all summer on both of my blogs. But I haven't gone away and I haven't changed my fundamental stance. I'm predicting a drop this fall that at least tests the March '09 lows. I'm guessing the markets will bounce off those lows and then cut through them in the January/February time frame after the seasonal euphoria known as the Santa Claus Rally is over. We'll see if I'm right.

The economy is not recovering. The sugar high of Federal stimulus money has worn off and left no lasting effect.

One of the benefits of deflation, for those who have cash, is that the price of desirable things falls. Houses are declining in value. The government temporarily destroyed the cheap used car market with cash for clunkers, but the price of used cars is beginning to fall because of lack of demand. One thing that always takes a hit in bad economic times is the motorcycle industry. A bike is really a pleasure vehicle. It's not necessary. You can't ride it for more than half the year and you don't tend to ride it much when it rains. Thus it is an expense that can be cut. Good used motorcycles flood the market.

And since this is motorcycle country, there are lots of them up here. Once, when I was in Cleveland, I checked the classifieds section of the Plain Dealer. We had more motorcycles for sale in the Rapid City paper (population 68,000) than in the Cleveland paper (regional population well over 3 million.) Since there are lots of them, they're starting to get cheap.

I sold my 96 Virago 750 and wanted another bike. I've always been a fan of the old Goldwings. The engines are bulletproof and there are several examples running around the country with 250,000+ miles on them. But I've always hated the plastics they put on them. I had bought a wrecked Goldwing with the intention of making what's called a "Naked Wing" out of it. If you google Naked Wing you will find that there are a lot of guys who like them without their plastic and who do interesting things with them. Anyhow, the wrecked one has just been sitting in my shed waiting for me to pay attention to it. Once I got children it seems I gave up on hobbies.

In the first few years of production they were sold without any fairings or other plastics. Those bikes are tolerably rare, relatively desirable, and not particularly cheap. Until now. I just bought one in mint condition for $1,100. It has 33,000 miles on it. It's not the Hinckley Triumph Bonneville that I ultimately want, but it is a nice intermediate distraction until I get there.

In a deflationary environment the man or woman with cash, even a little bit of cash, can buy assets at multigenerational lows. They won't go anywhere for a long time, but when they do, they will be enormously valuable.

Stay out of debt. Save money. Buy a little gold and a little silver. Be patient. Trust God.