Deflation or Inflation: How to Prepare Your Portfolio for Both Scenarios

Nobody knows what is coming – deflation or inflation? This analysis shows you two different portfolios and how the hybrid approach can insure you against both scenarios.

The scenario dilemma

The central question for every wealth builder: is inflation or deflation coming?

• Inflation scenarios: Huge amounts of money (QE), budget deficits, supply chain disruptions
• Deflation scenarios: Aging population, debt crisis, consumer collapse

The problem: You can't hedge both scenarios perfectly. But you can prepare for BOTH.

Deflation portfolio

In deflation, prices fall. Your savings are gaining purchasing power - that's the good news. The bad: Economy stagnates, unemployment rises, asset prices fall.

What protects you in deflation?

• High-quality bonds: As interest rates fall, their prices rise
• Gold: Deflation = people seek security, gold is safe
• Cash: Nominal cash increases in value
• Utilities: Utilities have stable cash flows even in recessions

Inflation portfolio

During inflation, bond prices fall (increasing interest rates). Your money loses purchasing power. What protects you?

Inflation protection assets:

• Shares: Can pass on price increases
• Raw materials & energy: Inflation prices are their prices
• Real estate: Rents rise with inflation
• Gold: Serves as purchasing power insurance

Krall phase analysis

In his thesis, Huber identifies four “claw phases” – phases where traditional portfolios crash:

• Stagflation (1970-1982): High inflation + stagnation. Only commodities and gold benefit
• Deflation (1930-1945): Win cash and bonds
• Interest rate shock (2022): Rapid interest rate hikes destroy bonds AND stocks
• Financial crash (2008): Only gold and volatility hedges help

The hybrid approach

The solution: A portfolio that covers BOTH scenarios.

The new rule:

• 60% tangible assets (stocks + real estate + raw materials)
• 30% bonds + cash (for deflation)
• 10% gold (universal hedge)