Everybody says that there is no contagion effect between the issues in the Emerging Markets and the developed economy.
In reality there is a potential deflationary effect – but nobody will alert you as nobody knows the cure.
Japan went in deflation in the early 1990s and it is trying now to get out of it. Still the stock market index overs around 60% less of what it was in the ’90s (40,000 points!).
Deflation essentially occurs when you do not spend today, as you know that items will be cheaper tomorrow.
Europe is naturally the place at deflation risk. The main issue, in my opinion, is that while billions of euros have been pumped into the banks by the ECB and government…the banks definitely forgot to pump it into the real economy!
At an inflation rate of 0.7% it is in disinflation (prices are still growing, but at a lower rate) and could be easily tilted into deflation…by the Emerging Markets. That is the real potential contagion effect.
In deflation protection is very hard to come by. The classic (real estate, commodities, gold) do not work. Cash, long term bonds, guaranteed investment certificates, US Dollars.
Short equities (unless with growing dividends or technology), real estate. Avoid debt at all cost.
A very bad scenario indeed
Just one more things to worry about….
investorpolitico 