Intel: Deflation Fighter

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 Intel (Nasdaq: INTC  ) looks like a deflation fighter to me.

Company

Net Cash

Yield

Debt/Equity

Intel Corporation

$15,897

3.3%

5.2%

Micron Technology Inc. (NYSE: MU  )

$ (56)

0%

30.8%

Advanced Micro Devices, Inc. (NYSE: AMD  )

$ (680)

0%

343.1%

 Source: Capital IQ, a division of Standard & Poor's. Dollars in millions.

Compared to competitors Micron Technology and Advanced Micro Devices, Intel appears better prepared to handle a deflationary environment. It has little debt, a net cash position on its balance sheet, and pays out a 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, Intel could be a good candidate to keep you ahead of the game.

Million Dollar Portfolio associate advisor David Meier does not own shares of any of the companies mentioned. Intel is a Motley Fool Inside Value recommendation. The Fool owns shares of and has written puts on Intel. Motley Fool Options has recommended buying calls on Intel. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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  • Report this Comment On August 24, 2010, at 5:07 PM, gfbjohn wrote:

    Collapsing consumer spending is as much a symptom of collapsing jobs as of collapsing spending sentiment, but even retrenching sentiment can be assuaged if people who do have jobs feel secure they will still have them tomorrow.

    To reverse collapsing spending then, we need a stable, nay, enhanced, hiring job environment. There's one small problem though: businesses are busy reducing production because of anemic demand, paring costs and offshoring jobs, the exact opposite of what we need. But if I were a business owner I'd be doing the same: I would do market research and find that consumers, as noted, are not spending because of a lack of money, because of a lack of jobs, because I'm not hiring to produce more.

    It's time to get inventive and break this catch-22. The only place I can see to do that is to address 2 problems: as people become un- or under-employed, their needs, wants and desires don't vanish, they only become "unvested" so there is no longer a physical presence (i.e., money) of this demand. And yet we have the technology at hand to such an extent that we should be living like royalty! Talk about an ironic paradox. So first we need to register what the complete aggregate demand is. And let's not be timid here. Let's shoot for everyone living at least really well.

    Once we've determined the aggregate real demand including unvested demand, we'll find there is a monstrous amount of demand just waiting like a bucking bronco in a rodeo chute to bust out. Put this horse IN FRONT of supply and things could get going in a hurry. But this leads to the other thing that has to happen: people need to be ready to step up and fill the high tech jobs that it will take to build and maintain the necessary new infrastructure to produce to satisfy the discovered real aggregate demand.

    So let's get plenty of free online training out there, get everyone spun up past the time and life wasting "would you like fries with that" type of low paying service jobs, and get busy about producing what we really want. Align effort properly and we can want what we make and make what we want.

    Or we can fret and hope things will get better and wait for businesses to make the leap with no idea what they really should produce so they just won't, and our income remains a shrunken shadow of what it needs to be to get us out of trillion dollar deficits and tens of trillions in national debt which are putting our great country directly in the cross-hairs of apocalyptic economic disaster.

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