Inflation or Deflation, Which “ation” is This?
Economics / Economic Theory Feb 09, 2010 - 01:50 AM GMTBy: Graham_Summers
I’ve been receiving a number of emails lately asking me whether I am a deflationist or an inflationist. Just as often I am asked if we’re in a deflationary environment or inflationary environment.
My answer to both questions is “yes.”
Truthfully, most of the us would do better if we simply dropped the “it’s either that ” paradigm of thinking for investing. Case in point, one can easily argue that stocks are in a bear market rally. But then again, with stocks up 60%+ since March 2009 (100+% for some emerging markets) one has to wonder just how stocks have to rise in order to be in a “bull” market.
The reality is that most of these titles stem from the investment community simply as a means of creating the illusion that somehow you can quantify market behavior into simple “it’s either this or it’s that” cycles and patterns. Most if not all of this is totally bogus. Indeed, more often than not, you get a bit of both options at the same time.
Like inflation and deflation today.
Few if any topics divide the investment community as greatly as the “ation” debate today. Most if not everyone is committed fully to some kind of “ation” outcome whether it’s deflation, inflation, or hyperinflation.
The reality is that both “ations” are existing right in front of our very eyes. We clearly have deflation in housing as well as most of the securities market (if the assets owned by banks were marked at anything resembling reality). On top of this there’s wages/ income dropping and the Dollar rallying again. Looks like deflation to me.
Yet, at the same time, we’ve got asset inflation in other areas like oil, food, and even stocks (all of which have risen in the last year… some by quite a lot). Heck, oil alone has nearly doubled in the last 12 months. That’s some serious inflation right?
You can even see the two forces at work in term’s of the Fed’s monetary policy. The Fed has increased its balance sheet by more than 100% from $800 billion to $2.2 trillion since the Financial Crisis began. That’s inflation for sure. But we’ve also got trillions if not tens of trillions in unrecognized losses floating around the financial markets. Again, inflation and deflation existing side by side.
Again, you can have inflation AND deflation at the same time. Betting heavily on one or the other is a sure fire way to lose money in this market. So don’t get too married to one philosophy.
Good Investing!
Graham Summers
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Graham Summers: Graham is Senior Market Strategist at OmniSans Research. He is co-editor of Gain, Pains, and Capital, OmniSans Research’s FREE daily e-letter covering the equity, commodity, currency, and real estate markets.
Graham also writes Private Wealth Advisory, a monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.
Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.
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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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