I've been a deflationist since 2009. I know that Fed chief Ben Bernanke has promised to do whatever it takes to ensure that deflation -- falling demand that leads to falling prices -- doesn't spread through the U.S. economy, but I'm not sure he really has the power to stop it.
The Japanese government has tried to fight deflation for years without much luck. Japanese history shows that consumers can take years to clean up their balance sheet following a credit bubble collapse, and their lack of spending for the duration puts downward pressure on prices.
Cash is king
During a deflationary period, cash is king. As prices fall, cash's buying power rises. On the flip side, deflation punishes debt holders, as high-powered dollars that could have been used to make purchases or investments instead go to principal and interest payments. Talk about bad timing!
What kinds of companies should Fools consider during a deflationary period? Cash-rich companies with very little debt burden seem like a great place to start looking for ideas. In fact, right now, Applied Signal Technology
|
Company |
Net Cash |
Yield |
Debt/Equity |
|---|---|---|---|
|
Applied Signal Technology |
$16.5 |
2.5% |
2.2% |
|
Harris |
($752.1) |
1.9% |
55.1% |
|
Northrop Grumman |
($2,113) |
3.1% |
32.6% |
Source: Capital IQ, a division of Standard & Poor's. Dollars in millions.
Compared to competitors Harris Corp and Northrop Grumman, Applied Signal Technology is better prepared to handle a deflationary environment. It has little debt, a net cash position on its balance sheet, and pays out a nice dividend to shareholders.
The Foolish bottom line
I think the United States will continue to experience disinflation, and even deflationary pressures, for years to come. That's just a natural consequence of too much debt in the system. We can look to Japan's "Lost Decade" for a glimpse of what deleveraging and deflation look like. I don't know whether the U.S. will be just like Japan, but as an investor, I want to be prepared. So I think it's a good idea to stick with companies that have lots of cash, create lots more cash, and share all that cash with shareholders. In that light, Applied Signal Technology could be a good candidate to keep you ahead of the game.
