The Virtuous V Economic Scenario

There's been a seemingly endless diatribe of angst about a few economic calamities: namely, a potential deflationary spiral and, just as important, the huge current consumer and corporate debt load.

Whenever a disaster story is bandied about in the media, prudent investors are generally best served to discount the likelihood of its occurrence -- especially when, as with these two aforementioned dangers, the best and brightest investors are the most worried. Simply put, that means it probably won't happen.

For example, I have a book with all sorts of fancy charts signaling imminent doom because of excessive debt. One chart shows household debt tripling over a 30-year period and consumer installment debt up about threefold as well. Another 30-year chart, titled "Corporate Liquidity Ratio," suggests that disaster is around the corner because corporations are "strapped for cash," as this ratio is in significant decline.

However, this book isn't about today's debt crisis at all. Contrary Investing by Richard Band is an interesting read, to be sure, with plenty of workable investing strategies to contemplate. But the book, with its many ornate charts, was published in 1985, not 2003.

The Virtuous V

I can think of a different scenario that could unfold over the next few years. It would go a long way toward avoiding the deflationary situation about which so many are worried and curing the debt overhang as well, all in one fell swoop. I call it the "Virtuous V" scenario. It's simple, and nobody is talking about it, which means it's plausible and worth considering.

Here's how it works: The Federal Reserve has pushed extraordinarily hard to avoid the deflation bogeyman, cutting rates to 45-year lows. That's the first part of the "V" formation; it's already occurred with the massive decline in interest rates.

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Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor and portfolio manager of The Turnaround Fund, a no-load mutual fund. At time of publication, neither Alsin nor ACM held a position in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback and invites you to send it to [e-mail]. Click here to receive Arne's latest favorite stock picks from his newsletter, The Turnaround Report.

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