Inflation, Deflation, Stagflation

The Clover Asset Management Free Press

FORWARD THINKING

A I N D EPEND ENT POINT OF VIEW BY: E RIC ST-CYR CEO, CLOVER ASSET MANAGEMENT L I MI T ED

July 14 2008

forwardthinking@clover.ky

TE LEPH ON E ( 345 ) 947 000 5

FACSIM ILE ( 345) 9 49 00 0 5

Where do we go

from here?

INFLATION, DEFLATION OR STAGFLATION ?

The price of houses in the US is now down by more than 17% (deflation), the price of oil has more than doubled in 1

year (inflation) and the economy is bringing the stock market to its knees (stagflation). Where are the world

economies heading ?

Never in history has the economies of the world been

so interrelated. We canʼt make investment decisions in

isolation anymore. Rates of interest in China have an

impact on the US economy, terrorist attacks in Nigeria

influence the price of oil across the world and ethanol

consumption in Brazil creates riots in the streets of

Mexico.

Are the world economies facing inflation, deflation

or stagflation? Will it be a recession or a

depression? What should you do with your

money? Before we start our forecast, letʼs review

some terms to establish the

foundation of our

discussion:

Inflation: is a

broad increase in prices. Inflation can

be caused by either too few goods offered for sale,

or too much money in circulation. The most common

measure of inflation is the consumer price index (CPI).

Historically, inflation has been negative for bonds.

When there is high inflation, a government will take

the necessary steps to increase its rate of interest to

reduce consumption and slow down the economy.

This increase will reduce the value of your bond

on

flati

portfolio. The increase in interest rates will also

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make equities less attractive short term. In

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theory, stocks should be able to absorb the

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effects of inflation as revenue and earnings

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