Good deflation, bad deflation? In my mind, if deflation sets in, we will experience both. Deflation typically hits in phases and at varying speeds, and the preponderance of economic thought describing the U.S. experience as good deflation reminds me of “whistling past the tombstones”. I am not convinced that deflation has set in, but if it has, we are in for trouble in several market segments.

Many concerned about deflation point to the strong dollar as a cause and to cheaper gasoline as a consumer stimulant, putting us in the good deflation camp. If history is any guide, we have seen strong dollar episodes coincide with large, dramatic oil price swings, creating cyclical havoc for our oil industry. Our currently vibrant shale oil industry does not need to experience another such episode, because fracking wells cannot be simply “capped” as can conventional wells. The damage will be lasting.

Furthermore, multinational U.S. corporations will likely be put through an earnings “ringer”as foreign sales translate to fewer dollars. All in all, this is likely to cause price weakness for shares of multinationals. Looking at the Dow Jones Industrial average, we can see that most of the components are either multinational consumer, health, or oil companies.
As in life, we must be careful about what we wish for. “Good deflation” may be one of those dangerous wishes.