For the next six to nine months all you will hear about is deflation.  The CPI will be negative, mostly as a function of oil.  All of those people who weren’t worried about inflation dismissed the role of oil.  Now that deflation is taking center stage, they suddenly care about oil.  The press has been very negative.  I expect there will be a deflation watch on CNBC.

Advisors should be wary. Inflation, above all else, is a monetary phenomenon.  It will occur because the Fed is expanding its balance sheet and printing new money.  This always leads to inflation.  The Fed is doing everything it can to avoid another Great Depression, where the money supply shrank by a third.

From an investment view, in our due diligence meetings, throughout 2008, we said commodities were overvalued, especially oil. Now that the commodities markets have collapsed, we believe they are undervalued.   If advisors typically hold a 5-10% exposure in commodities, and now, because of the decline in commodities prices, exposure has declined, it is time to boost that allocation back to normal.

I follow a guideline that 110 minus your age should equal your equity allocation.  In your example, this would give a 70 percent allocation in equities. 

Today, the market is undervalued by more than we have seen since the beginning of our data series (1953).  It is as cheap as in the Great Depression or during mid 1970s.  I would boost that exposure to 80%.  About 10% of that equity exposure should be in commodity-related industries (shipping, agriculture, energy). 

For the bond market, Treasuries are overvalued. We should have an increase in Treasury yields in the years ahead.  This will make it difficult for a rally in bonds.  We recommend staying in the two-to-five year range. 

Within equities, we like small caps, which tend to outperform in inflationary and volatile periods.  We also tilt toward to growth stocks and have a 15% exposure to international stocks.  Today, our screens see value in cyclical growth areas (technology, health care, consumer discretionary) and not in utilities or consumer staples. 

“This [suspending mark-to-market accounting] will have the double effect of reducing transparency and increasing self-delusion (gorge yourself for months, but refuse to step on a scale, and maybe no one will realize you gained weight). And it will fool no one. When you shout at people “be confident,” you shouldn’t expect them to be anything but terrified.”