Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Dow Stock Market Short-term and Long-term Trend Analysis - 28th Nov 20
How To Spot The End Of An Excess Market Trend Phase – Part II - 28th Nov 20
BLOCKCHAIN INVESTMENT PRIMER - 28th Nov 20
The Gold Stocks Correction is Maturing - 28th Nov 20
Biden and Yellen Pushed Gold Price Down to $1,800 - 28th Nov 20
Sheffield Christmas Lights 2020 - Peace Gardens vs 2019 and 2018 - 28th Nov 20
MUST WATCH Before You Waste Money on Buying A New PC Computer System - 27th Nov 20
Gold: Insurance for Prudent Investors, Precious Metals Reduce Risk & Preserve Wealth - 27th Nov 20
How To Spot The End Of An Excess Market Trend Phase - 27th Nov 20
Snow Falling Effect Christmas Lights Outdoor Projector Amazon Review - 27th Nov 20
4 Reasons Why You Shouldn't Put off Your Roof Repairs - 27th Nov 20
Further Clues Reveal Gold’s Weakness - 26th Nov 20
Fun Things to Do this Christmas - 26th Nov 20
Industries that Require Secure Messaging Apps - 26th Nov 20
Dow Stock Market Trend Analysis - 25th Nov 20
Amazon Black Friday Dell 32 Inch S3220DGF VA Curved Screen Gaming Monitor Bargain Deal! - 25th Nov 20
Biden the Silver Bull - 25th Nov 20
Inflation Warning to the Fed: Be Careful What You Wish For - 25th Nov 20
Financial Stocks Sector ETF Shows Unique Island Setup – What Next? - 25th Nov 20
Herd Immunity or Herd Insolvency: Which Will Affect Gold More? - 25th Nov 20
Stock Market SEASONAL TREND and ELECTION CYCLE - 24th Nov 20
Amazon Black Friday - Karcher K7 FC Pressure Washer Assembly and 1st Use - Is it Any Good? - 24th Nov 20
I Dislike Shallow People And Shallow Market Pullbacks - 24th Nov 20
Small Traders vs. Large Traders vs. Commercials: Who Is Right Most Often? - 24th Nov 20
10 Reasons You Should Trade With a Regulated Broker In UK - 24th Nov 20
Stock Market Elliott Wave Analysis - 23rd Nov 20
Evolution of the Fed - 23rd Nov 20
Gold and Silver Now and Then - A Comparison - 23rd Nov 20
Nasdaq NQ Has Stalled Above a 1.382 Fibonacci Expansion Range Three Times - 23rd Nov 20
Learn How To Trade Forex Successfully - 23rd Nov 20
Market 2020 vs 2016 and 2012 - 22nd Nov 20
Gold & Silver - Adapting Dynamic Learning Shows Possible Upside Price Rally - 22nd Nov 20
Stock Market Short-term Correction - 22nd Nov 20
Stock Market SPY/SPX Island Setups Warn Of A Potential Reversal In This Uptrend - 21st Nov 20
Why Budgies Make Great Pets for Kids - 21st Nov 20
How To Find The Best Dry Dog Food For Your Furry Best Friend?  - 21st Nov 20
The Key to a Successful LGBT Relationship is Matching by Preferences - 21st Nov 20
Stock Market Dow Long-term Trend Analysis - 20th Nov 20
Margin: How Stock Market Investors Are "Reaching for the Stars" - 20th Nov 20
World’s Largest Free-Trade Pact Inspiration for Global Economic Recovery - 20th Nov 20
Dating Sites Break all the Stereotypes About Distance - 20th Nov 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Current Commodities Price Deflation to be Followed by Massive Inflation Later

Commodities / Inflation Nov 17, 2008 - 10:19 AM GMT

By: Richard_Shaw

Commodities

Best Financial Markets Analysis ArticleThe global economy is declining. As a result, prices of important kinds of “stuff” is falling. Governments are pouring money onto the markets to solve a problem that may have been caused by easy money originally.

If you party too much and awake the next day with a hangover, taking a shot of alcohol may take the immediate pain away.  However, it only delays and probably increases the pain when you finally decide to stop drinking, or become so sick you can't drink any more. Taking that morning after drink is referred to as taking a “hair of the dog that bit you”.


Some people are concerned that the US and perhaps some other countries, particularly the UK, may be in the economic functional equivalent of taking a hair of the dog that bit them.

So What?

If that perspective makes sense, then what would be the consequence?

The original easy money caused an asset bubble. The absence of easy money caused a deflation in asset prices (commodities, real estate, stocks and most bonds) — pretty much everything but short-term sovereign debt.

Once the money being poured on begins to move, asset prices will begin to rise again. Then the question is whether all the extra money will make a new asset bubble, leaving governments without remaining tools to deal with a subsequent crisis? Either way inflation, not deflation will be the situation.

Investment coping strategies during inflation are different than during deflation. Investors need a plan to deal with the eventual change in circumstance. If hyperinflation were to occur, which some fear, all bets are off.  If the more likely “normal” or high inflation (not hyperinflation) occurs, shifts in asset class weights are appropriate.

Asset Class Rotation Based on Conditions

Note: We have stated before that we deviated from our core asset allocation, non-market timing approach this summer for assets we control by going substantially to cash before the current unpleasantness. We think standing aside as a train wreck is coming straight at you is not the same as market timing, which we do not practice — it's self-preservation.  We think rebalancing a diversified set of asset classes works better than market timing under normal circumstances. This discussion is about re-weighting a fully invested and diversified portfolio, not about going entirely to one class or the other.

Monitoring Prices for Deflation or Inflation

If you are concerned about turning points between deflation and inflation, the CPI is not a good place to look.  It's well known to be limited in scope and may also be managed to some degree by the government, which not only is a player (with indexed entitlement programs and inflation indexed bonds), but is also the scorekeeper and the final court of appeals.

The place to look for price level changes is directly at the prices of key items themselves.  They'll let you know whether we are in deflation or inflation.

The rate of change of prices (shape of the curve) as well as absolute price levels will inform you.

We would suggest following this basket:

  • oil (USO)
  • copper (JJC)
  • gold (GLD)
  • soybeans (JJG for grains)
  • EUR/USD fx (FXE)
  • USD/JPY fx (FXY)
  • 2-Year Treasuries (SHY for 1-3 yr T's))
  • 10-Year Treasuries (IEF for 7-10 year T's)
  • 30-Year Treasuries (TLT for 20+ year T's)

The charts below are for five-year, monthly, perpetual near-month futures contracts, but stock investors can get a similar view by observing the ETF or ETN listed after each category (not all perfect matches, but reasonably useful if you don't have spot or futures prices available).

Current Situation

There is no inflation, except in the price of Treasuries, particularly short dated Treasuries, as investors flee risk and prize liquidity.  The price premium on Treasuries will melt when investors once again move to riskier assets for yield and gain.

We are in a deflationary period.  No signs of inflation in these charts.

Gold

Oil

Copper

Soybeans

Euro
(Dollars per Euro - spot fx since 1994)
Dollar becoming stronger vs Euro

Yen
(Yen per Dollar - spot fx since 1994)
Dollar becoming weaker vs Yen

2-Year Treasuries
(up means lower interest rate)

10-Year Treasuries

30-Year Treasuries

By Richard Shaw 
http://www.qvmgroup.com

Richard Shaw leads the QVM team as President of QVM Group. Richard has extensive investment industry experience including serving on the board of directors of two large investment management companies, including Aberdeen Asset Management (listed London Stock Exchange) and as a charter investor and director of Lending Tree ( download short professional profile ). He provides portfolio design and management services to individual and corporate clients. He also edits the QVM investment blog. His writings are generally republished by SeekingAlpha and Reuters and are linked to sites such as Kiplinger and Yahoo Finance and other sites. He is a 1970 graduate of Dartmouth College.

Copyright 2006-2008 by QVM Group LLC All rights reserved.

Disclaimer: The above is a matter of opinion and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Do your own due diligence.

Richard Shaw 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