PLP Advisors, LLC

Financial Advisor Talks About Deflationary Evidence


Grand Rapids, MI -- (SBWIRE) -- 03/28/2013 -- Do you have trouble keeping up with what is going on in the U.S. economy? Dennis Tubbergen, a financial advisor, author, radio show host and CEO of PLP Advisors, LLC can help out. Whether people enjoy his weekly newsletter at or his blog at, Tubbergen is dedicated to sharing his viewpoints and opinions. On March 18, 2013 his blog was titled Deflationary Evidence?

"The Wall Street Journal ran a commentary piece written by Alen Mattich that discussed the growing evidence that deflation is about ready to grip Europe," began Tubbergen.

Below he quotes from the article that ran March 15, 2013 in the WSJ.

Although it's possible to make at least partially convincing arguments why investors should be bullish about U.S., U.K. and Japanese equities, it's a much tougher call on European equities.

Not least because of the risk that the euro zone will succumb to deflationary pressures. The latest data show that consumer-price inflation has slowed to 1.8% in February from 2% the previous month. Core inflation remained at 1.3%. With the euro-zone economy expected to contract again this year, downward pressure remains on consumer prices, further reinforced by the euro's strength over recent months.

The downward trend in inflation among the region's hardest-hit economies has been particularly notable, especially as the effects of pevious tax hikes fall out of the equation. Irish inflation has tumbled from an annual rate of 2.6% last summer to 1.2% in February, Italy's from 3.6% over the summer to 2% now, Spain's from 3.5% during the third quarter to 2.9% now, while Portugal's has been particularly dramatic, collapsing from 4.2% over the summer to a mere 0.2% in February. On a month-to-month basis, all of these countries have been flirting with deflation since at least late last year.

Deflation represents a double problem for equities. Not only does it tend to signal domestic economic weakness -- unless falling prices have been triggered by a positive supply shock, which hasn't been the case -- but it's a self-perpetuating weakness. Deflation raises the real burden of existing debts so that borrowers find themselves even deeper in the hole. They then reduce expenditures further, compounding the slump in domestic demand.

And as the Japanese experience of the past couple of decades showed, deflation tends to put upward pressure on the currency, which, in turn, makes it harder for these economies to export their way to growth. The Nikkei index has been in a long-run downtrend since it peaked at the end of 1989.

So why have equities been rallying?

A substantial part of the bull run across the continent is likely to stem from a drop in the convertibility discount -- the risk that member states fall out of the euro and suffer dramatic economic crisis as a result. This is thanks to European Central Bank President Mario Draghi's promise to do whatever it takes to defend the euro.

A part of the rally will also have come from slipstream effects of the U.S.'s huge bull run. Correlations have historically been strong between European and U.S. equities, with the causality generally running from the west side of the Atlantic to the east.

The article goes on to say there is also hope that Germany will inspire a euro-zone revival through a pickup in domestic demand there.

As excessively tight as ECB monetary policy is for the single currency's troubled economies, it is excessively weak for Germany's. This is starting to appear in rising German wage demands. Higher German wages imply stronger consumption demand from Germany, which has not only boosted German equities strongly but prospective euro-zone exporters to Germany as well. Even if the overall euro zone's competitive position is worsening because of a strong currency, a much needed adjustment within the single currency's economies seems to be taking place.

But whether this last bullish factor is sufficient to outweigh the deflationary effects is questionable. As Japan showed, deflation is very hard to escape. While Germany might be in a position to lift the rest of the euro zone, the rest of the euro zone could well be in a stronger position to drag down Germany.

"Given the high debt levels that exist in Europe, it's not surprising that the reported inflation rates in many European countries are going lower," noted Tubbergen. "A study of history confirms this. "

Tubbergen explains that when reviewing even a small amount of history, one quickly reaches the conclusion that high debt levels are deflationary. Prior U.S. depressions in the 1830s, 1870s, and the 1930s were deflationary and each followed a period of expanding debt levels made possible by easy credit. During each of these deflationary periods, debt was purged from the system and deflation was prevalent.

"The deflation conclusion is probably very evident to you if you have owned real estate over the past decade," states Tubbergen. "Easy credit via no money down loans, interest adjustable mortgages and negative amortization loans fueled the real estate price bubble that burst 5 years ago."

According to Tubbergen, similar real estate bubbles burst in the 1830s, the 1870s and the 1920s with real estate values declining in every instance.

"Predictably, after real estate values declined in each of these time frames, stock values soon followed, " concludes Tubbergen. "Stocks didn't like deflation in any of these historic time frames and stocks won't like deflation this time around either. It's my view that taking steps to protect yourself now makes sense even though you may end up being early."

To read the blog in its entirety go to and select his March 18, 2013 entry.

Tubbergen’s syndicated radio show can be heard on metro Michigan stations WTKG 1230 AM and WOOD Newsradio1300 AM and 106.9 FM.
About Dennis Tubbergen
Dennis Tubbergen has been in the financial industry for over 25 years and has his corporate offices in Grand Rapids, Michigan. Tubbergen is CEO of PLP Advisors, LLC and has an online blog that can be read at To view Tubbergen’s latest Moving Markets? newsletter, go to

The opinions expressed herein are those of the writer and not necessarily those of USA Wealth Management, LLC. This update may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Therefore, no forecast should be construed as a guarantee. Prior to making any investment decision, individuals should consult a professional to determine the risks, costs, benefits and fees associated with a particular investment. Information obtained from third party resources is believed to be reliable but the accuracy cannot be guaranteed.