Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
The Central Bank Time Machine - 23rd Aug 19
Stock Market August Breakdown Prediction and Analysis - 23rd Aug 19
U.S. To “Drown The World” In Oil - 23rd Aug 19
Modern Monetary Theory Could Destroy America - 23rd Aug 19
Seven Key Words That Explain "Stupidly High" Bond Market Prices - 23rd Aug 19
Is the Fed Too Late Prevent A US Housing Bear Market? - 23rd Aug 19
Manchester Airport FREE Drop Off Area Service at JetParks 1 - Video - 23rd Aug 19
Gold Price Trend Validation - 22nd Aug 19
Economist Lays Out the Next Step to Wonderland for the Fed - 22nd Aug 19
GCSE Exam Results Day Shock! How to Get 9 A*'s Grade 9's in England and Maths - 22nd Aug 19
KEY WEEK FOR US MARKETS, GOLD, AND OIL - Audio Analysis - 22nd Aug 19
USD/JPY, USD/CHF, GBP/USD Currency Pairs to Watch Prior to FOMC Minutes and Jackson Hole - 22nd Aug 19
Fed Too Late To Prevent US Real Estate Market Crash? - 22nd Aug 19
Retail Sector Isn’t Dead. It’s Growing and Pays 6%+ Dividends - 22nd Aug 19
FREE Access EWI's Financial Market Forecasting Service - 22nd Aug 19
Benefits of Acrobits Softphone - 22nd Aug 19
How to Protect Your Site from Bots & Spam? - 21st Aug 19
Fed Too Late To Prevent A US Housing Market Crash? - 21st Aug 19
Gold and the Cracks in the U.S., Japan and Germany’s Economic Data - 21st Aug 19
The Gold Rush of 2019 - 21st Aug 19
How to Play Interest Rates in US Real Estate - 21st Aug 19
Stocks Likely to Breakout Instead of Gold - 21st Aug 19
Top 6 Tips to Attract Followers On SoundCloud - 21st Aug 19
WAYS TO SECURE YOUR FINANCIAL FUTURE - 21st Aug 19
Holiday Nightmares - Your Caravan is Missing! - 21st Aug 19
UK House Building and House Prices Trend Forecast - 20th Aug 19
The Next Stock Market Breakdown And The Setup - 20th Aug 19
5 Ways to Save by Using a Mortgage Broker - 20th Aug 19
Is This Time Different? Predictive Power of the Yield Curve and Gold - 19th Aug 19
New Dawn for the iGaming Industry in the United States - 19th Aug 19
Gold Set to Correct but Internals Remain Bullish - 19th Aug 19
Stock Market Correction Continues - 19th Aug 19
The Number One Gold Stock Of 2019 - 19th Aug 19
The State of the Financial Union - 18th Aug 19
The Nuts and Bolts: Yield Inversion Says Recession is Coming But it May take 24 months - 18th Aug 19
Markets August 19 Turn Date is Tomorrow – Are You Ready? - 18th Aug 19
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
GOLD BULL RUN TREND ANALYSIS - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19

Market Oracle FREE Newsletter

The No 1 Gold Stock for 2019

Inflation or Deflation: Who is the Winner?

Interest-Rates / US Bonds May 06, 2009 - 11:15 AM GMT

By: Q1_Publishing

Interest-Rates

Best Financial Markets Analysis ArticleIn this environment, we anticipate that inflation will remain low. Indeed, given the sizable margin of slack in resource utilization and diminished cost pressures from oil and other commodities, inflation is likely to move down some...


Early this morning, that’s what Fed Chairman Ben Bernanke told a Congressional committee charged with overseeing (?) the economy.

Is he right and inflation is not a concern now? Or is he wrong and Inflation is a much bigger risk than he’s letting on?

These are the questions weighing on many folks’ minds right. And rightfully so too. After all, the difference between getting it right and wrong will be big.

If you bet correctly, the window of opportunity is wide open.

If inflation wins out, now is one of the best opportunities in years to invest in farmland, toll roads, and other “real assets” which perform exceptionally well during inflationary times.

If deflation wins out, now is the time get out of everything. Cash and long-term government bonds will be top performers.

That’s why now, with opinion still sharply divided, is time to get positioned. First though, we’ve got to determine which way to go.

Let History be Your Guide

Over the past few months we’ve looked at all sides of the inflation/deflation argument. We’ve discovered that all bubble-booms throughout history eventually end in deflationary busts. We’ve also watched the Federal Reserve go to unprecedented lengths to increase the money supply in an effort to battle deflationary forces.

Our current situation, however, is not like every other bubble-boom-bust. So many comparisons have been made to the Great Depression. But most of them fail to account for one key difference, massive government spending around the world.

The current levels of U.S. government deficit spending are well documented. After a year of nearly $1 trillion “stimulus” packages and aggressive loosening of monetary policy, Congress is now set to debate spending another $4.1 trillion. While they haggle over whose friends will be taken care of the most, the administration tries to close every tax loophole in exchange for a short-term cash infusion, and everyone pats themselves on the back for finding $100 million in savings, there are much bigger consequences to be dealt with.

The deficit resulting from the record budget spending is expected to be between $1.7 trillion (best estimate) and $2.8 trillion (highest estimate I’ve seen – probably much more reasonable as well) after the new spending plan budget is passed.

Of course, every administration for the past 50 years has proven “deficits don’t matter” so that’s not much of an issue for too many people (enough to matter right now anyway).

That’s small compared to the real issue at hand anyway. The big problem is the outlays the government is about to make – whether they’re funded by increased taxes, printing money, or debt (or all of the above).

Desperate Times and Desperate Measures

Under the guise of saving the economy, the U.S. government has committed itself to spending so much money that GDP growth is inevitable.

This is not a new strategy. It has been a few times before in U.S. history. Just take a look over the past 150 years. The last few times U.S. government spending reached these levels (as a percentage of GDP), the consequences, which were always the same, followed close behind.

In 1861, the Union printed more money, borrowed everything it could, and spent it all to fight back the “rebels.” Inflation between 1861 and 1865 ended up at 117% for the period. That’s 16.7% on an annualized basis. 

In 1917, President Woodrow Wilson aggressively emptied the government coffers in World War I. Prices increased 126% between 1917 and 1918. That’s 50.3% annual rate.

In the 1940’s we went through it again. The U.S. involvement in World War II forced another surge in government spending. This time the prices rose 108% between 1941 and 1945. That works out to a 15.7% annual rate of inflation.

Then in the 1960’s, during the quest for the “Great Society” amidst the Vietnam War, the U.S. government stepped up spending in a big way. The end result was the “lost decade” of the 70’s and stagflation which followed.

See a pattern here?

You’re not the only one. That’s why I’m so perplexed the markets, once again, expect it really is different this time.

It’s no secret the government is spending big. History shows the results are always the same. Still though the market doesn’t seem to be too concerned about the inflationary effects of what will surely follow.

The market’s refusal to accept reality, however, could be starting to come to an end.

A Changing Tide: Bonds Don’t Lie

Although the stock market gets all the headlines, the bond market is actually far better at predicting an economic recovery, expected inflation, etc. It’s just so much bigger and more efficient.

That’s why I always pay close attention to it. And a funny thing happened this week. Something which showed the tide could be turning when it comes to the deflation/inflation debate (well, at least where people are placing their bets – I’m always weary of people who don’t “eat their own cooking”).

This week the yield on the 10-year Treasury bond climbed to 3.18%. That’s just shy of a five-month high of 3.21% and could be forecasting inflation on the horizon. Remember, bond yields move inversely to bond prices. So the yield increase means the selling pressure is increasing and/or the buying demand is declining.

In the chart below, you can really see the decline in the value of the long bond as tracked by the Barclays 20-Year Treasury Bond ETF (NYSE:TLT):

Long-term government bonds have experienced a pretty strong sell-off since the credit crisis sent bond prices soaring.

Why would bonds be selling off, you ask?

Well, there are two reasons.

The first is the economy is showing signs of improvement. As the economy shows some “green shoots,” investors are likely willing to take on a bit more risk. As a result, they sell out of government bonds and move into riskier assets like stocks and corporate bonds. Both of which have been doing exceptionally well lately.

The other reason is inflation. A bond’s yield must be equal to or higher than inflation expectations. If it wasn’t the bondholder would be getting a negative return. Although this has happened in rare instances in the past, most bondholders are not willing to accept a guaranteed loss. So when inflation starts to become a concern, bond prices fall and yields rise.

Whether this is the big one when inflation really starts have impact or it’s is a few months or years down the road doesn’t really matter here. Inflation is coming and it’s never too late to get prepared.

Winning Either Way

In the past few of years we’ve seen a lot of changes. Politics has moved into a greater role in our personal and business lives. As it has, the divide between the capitalists and socialists has grown even wider.

We could even be witnessing Alexander Tyler’s prediction play out right before our eyes. The Scottish philosopher warned of democratic governments:

A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy.

Slowly but surely, it looks like the “majority” has figured it out. And the inevitable result will be sharp increases in government spending to appease the majority. There are only a few ways to fund that spending. As we looked at a few months ago, there will be three ways:

1. Increase taxes
2. Borrow more money
3. Print more money and inflate the debt away

At this point, it’s likely we’ll get some increase in taxes (remember, it’s the “patriotic” thing to do), a lot more government borrowing, and a lot of money printing and inflation. They’re the politically easiest choices to make.

Its times like these which I can get exceptionally frustrated. When I first started investing, I enjoyed looking for great ideas, great business models, and great products.

There was nothing like uncovering a successful business which was meeting its customers’ needs and the customers were happy purchases and on its way to creating vast amounts of shareholder value.

But when all the forces are pointing towards a huge wave of inflation coming - an annual rate of 10% to 20% given the historical ranges – you’ve got to take what the market gives you. And right now, while the inflation/deflation debate rages on, it’s giving us a chance to protect ourselves from the coming inflationary wave inexpensively and maybe actually profit as well.

Good investing,

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

Q1 Publishing is committed to providing investors with well-researched, level-headed, no-nonsense, analysis and investment advice that will allow you to secure enduring wealth and independence.

© 2009 Copyright Q1 Publishing - All Rights Reserved
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.

Q1 Publishing Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules