Deflation or Inflation 5 yr horizon?

[dtrader98]

I don't post polls much, but am interested to hear cogent arguments and opinions on both sides of the coin, as I've seen many strong arguments for both sides.
I know there are some sharp thinkers with economic backgrounds floating around, and I want to pick your brain.

Feel free to qualify degrees of either (mild, hyper), but please keep it cogent.

 

[Mike805]

Well, my thinking is likely the popular one, inflation.

The 30yr Bond/SP500 relationship leads me to believe so. Either the S&P has to give or the bond market has to give. There's only so much our government can do to keep the bond market from obeying basic supply/demand. If this bonds/cash correlation continues to behave as it has been behaving, inflation will start to get ugly. Gold is already overpriced as it is.

Its a no win situation right now. The imbalances are not reverting to normal levels and they either have to, or our money will be worth a helluva a lot less in the near term.

Look at it this way: April 1st 2009 30 year bonds were trading between 127-128 (~3.96-4.02% yield) and the SP was at 780. Today the SP is at 1020 and the 30 year is at 122 (4.34% yield). Those numbers mean that in the same time frame, your cash (assets) appreciated by ~30% and the cost to borrow went up by 0.4%. Its almost as if the market has concluded that money has literally "appeared" out of thin air... not sure who you can thank for that one... Oh, that's right - maybe its the treasury for buying up 1.2billion t-bonds with their infinite money supply for the past few months?

Our government is basically devaluing all our assets so they can keep the bond market afloat. That type of interference has usually never ended well...

 

[Martinghoul]

I lean towards mild deflation, aka disinflation, for a whole variety of reasons. Foremost among them is the unprecedented contraction in lending, which I expect to continue for a while yet.

 

[Mike805]

Quote from Martinghoul:

I lean towards mild deflation, aka disinflation, for a whole variety of reasons.

Care to explain some of those reasons?

 

[Debaser82]

The entire inflation deflation debate in my view is totally useless in deciding your portfolio management.

DOW from 2000 to when it crashed:

Everyone agrees that this era was inflationary rather then deflationary and still stocks moved up only 40% in 8 years which isnt that spectacular especially when keeping in mind the devaluation of the $ VS other currencies and gold.

Dow 2009:

Biggest rally in your lifetime while all the economists in the world agree we are facing the bigest deflationary storm since the great depression 1930's.



Ofcourse in the long run cash is trash as it has been for decades now.

My grandfather paid 5 cents to get on the bus

My father paid 50 cents to get on the bus

I pay 2 euro to get on the bus


Not untill pigs with teeth will fly will the next generation pay 50 cents to get on the bus again so you can forget outsmarting the masses by betting on the deflation trend.

If you think deflation means cheaper life conditions for the people why not make it easy on yourself and move to Tokyo....


So anyway, cash trash, what else is good?

No idea, play the swings.

Oh and gold ofcourse but I won't talk about that cause I am biased.

 

[Scataphagos]

There are currently both deflationary and inflationary forces in the economy.

Which will manifest next is anybody's guess.

IF deflation gets the upper hand, probably won't last for long.. government and Bernanke will stimulate and print more and more to stop the downward path (eventually).

Ultimately, inflation wins out...probably BIG inflation at some point.

 

[dtrader98]

I know it's early, but talk about a divided view.:eek:

Great thoughts. Keep em coming.

 

[Martinghoul]

Quote from Mike805:

Care to explain some of those reasons?

1) As mentioned already, tightening lending conditions.
2) Continued chronic underemployment
3) Wages and salaries collapse that occurred during the crunch will not be unwound quickly
4) Very steady and even slightly declining inflation expectations (surveys)
5) Decreasing demand for tobacco
6) No evidence of wage/price spiral (low unionization of labor force, low share of capital in productivity)
7) No fundamental evidence of commodity-driven inflation

This is just my view of the situation (based on a whole variety of economic data), so take with a grain of salt, obviously.

 

[trefoil]

If I have to choose between the 2, deflation because labor markets are slack and will continue to be so for a long time. Between that and all the credit contraction going on, you've got a pretty good recipe for deflation.
However, the best bit of wisdom I've read, and I'd love to give credit but I don't remember who said it, is that there will be commodity inflation and labor deflation. With China & India joining the global economy, labor is devalued. But of course their growth means more demand for raw materials and energy. This time around, on energy, there's at least a big "green" push that will, I think, keep that from getting out of hand. So I don't think the commodity side will get too feverish.
But, overall, go long commodities, short labor. Kind of like the seventies, but without the Saturday Night Fever.

 

[maxpi]

There is inflationary pressure bottled up currently. When the banks start lending, forget it, that will be a huge creation of money and devaluation of the currency...

I also don't think that Obama's economic advisers are the same as Clinton's, if you want to compare Democrats to Democrats, Clinton's were basically Reagonomics people and I don't know for sure but somehow I doubt that Obama's are at all...