It’s been another rough week in the markets, as reflected by the following Hot Off the Web articles. You may also be interested in reading my last weekend’s blog “What now?”  discussing what actions you may consider taking now.

In WSJ’s “Among pressing problems, threat of deflation” Sudeep Reddy raises the possibility of a Japan style deflationary period, due to falling food and energy prices, coupled with the economic downturn. However, its likelihood is perceived to be low. (One way to protect against potential deflation is locking in long-term government bonds- though their interest rates are already quite low, but in Japan they went even lower during the 90s.)

In fact, Robin Goldwyn Blumenthal in Barron’s “Shinning through the rubble”makes the case for gold going to $2,000 in the next few years. One of the technical indicators used to support this forecast is the ratio of the DJIA-to-gold price which fell to low single digits at points where the DJIA bottomed and gold peaked at other major turning points around 1920, 1930 and 1980. As usual, not everybody agrees, some think it’s priced at fair value at currently. (While, I wouldn’t necessarily rush out to buy gold now, I have it included as part of my strategic asset allocation as an insurance policy against massive inflation. Interestingly, gold also fell this year from its $1,000 peak to the $785, though it did much better than stocks.)

Anne Tergesen in WSJ’s “Why now is the time to help your heirs” points out that for Americans who expect to be affected by estate taxes the current market drop may be an ideal opportunity “to transfer wealth to younger generations, without triggering much or any inheritance tax.” Mechanisms suggested are: trust funds which effectively transfer gains to heirs, transferring $12,000 equivalent to a relative or friend, paying tuition or medical bills for grandchildren, family loans at low “applicable federal rates”, and other more complex trust schemes. (I suspect that for wealthy Canadian readers, there may be similar, both inheritance tax-related opportunity on U.S. based property and not inheritance-tax related, tax opportunities to explore with their tax advisors given current market conditions.)

Financial Post’s Jonathan Chevreau in “Time is running out” starts out with some self-flagellation as why he/we didn’t sell when there were signs flashing “sell” earlier this year (at least in retrospect). Though he does redeem himself when he refers to Fred Kirby’s analysis which “assumes a hypothetical Roaring Twenties investor puts $100,000 into the market at the worst possible time: Sept. 30, 1929. The mix is 60% S&P 500-type companies and 40% U. S. Treasury bonds. From October, 1929, to June, 1932, the Dow Jones Industrial Average lost 88% of its value and it took 22 years — to the summer of 1954 — to recover those losses. If this same investor focused on large-cap blue chips, reinvested all dividends and interest, and rebalanced annually (my emphasis), the portfolio would have recovered to $100,000 again by February, 1936 — a much shorter time frame than 1954.” He also points out that the crash, while it may delay the retirement of boomers, it is actually good news for young people who can start their portfolio building at relatively low prices. (My cash position was as high as 18% (well above my target cash allocation in my strategic asset allocation), and I did start reinvesting some of the cash (1%), though prices have gone down since then. Of course you can’t time the bottom, so while we are unlikely to be there as yet, if you are sitting on cash waiting for the ”bottom”, you may consider investing some of it very gradually on the way to the bottom, wherever that may be. Don’t forget your cash cushion, about one year’s worth of expenses if you are working, and 4-5 years of cash and short-term bonds’ worth expenses for retirees.)

In “Next victim of turmoil may be your salary” , NYT’s David Leonhard reminds his readers that during economic downturns workers’ pay decreases. In fact he presents data that suggests that median (American) household income in 2010 will be lower than ten years earlier (today it is about the same as ten years earlier). A 3-7% pay-cut was associated with every recession. He also makes reference to a number of sources of very interesting data “Census Bureau” and “Economic data since 1930s” .

For those ready to rush out to buy some of the tempting high dividend stocks, Rob Carrick has “A cautionary tale about dividend stocks” . He suggests caution since dividends can be cut as company fortunes turn down, resulting not just in lower income stream but also capital loss. (e.g. Bank of America) One thing to watch out for is vulnerability with companies which pay out a large percentage of their income in dividends.

In “How retirees can ease pain of market rout” Kelly Greene and Anne Tergesen present some options after 20-30% drop in retirement portfolio values.. Suggestions range from a mild stop giving yourself inflation increases until portfolio recovers to forgo withdrawals completely (i.e. go back to work even part-time for a while). (Also see my “What now?” blog )

In “How to defer taxes and reap a stock profit” the Globe and Mail’s Tim Cestnick suggests ‘put options’ (though they are more expensive today, so make sure it is still worth doing) as a mechanisms to defer taxes on a stock position that’s still has gains and you would like to sell before it loses more of its value. The other, less desirable, mechanism that he suggests is selling the stock (that you are holding) short.

And finally, David Parkinson summarizes some of Jack Bogle’s observations on recent events in “It’s the economy Charlie Brown”Among the interesting quotes is that “Innovation in the financial field has, by and large, been done to serve the innovators, and not to serve the investors”; there are many more.