New Thoughts On The Inflation/Deflation Debate

I found this very interesting analysis on the inflation/deflation debate written by Scott Grannis:

"There are a number of market-based indicators that tell us that money is not in short supply, and that money is in fact in abundant supply. If the dollar is weak relative to other currencies, it's because there is an abundant supply of dollars relative to other currencies. If gold and commodity prices are rising, it's because there is an abundant supply of dollars—lots of dollars chasing a limited outstanding stock of gold. A steep yield curve also reflects abundant money, because it is the market's way of saying that short-term interest rates are going to have to rise by a lot at some point in order to reverse the Fed's current willingness to over-supply dollars to the world."

Of course this is a very important discussion because the investors who get this right will be well positioned to profit from the upcoming moves in risk assets.

With the high correlation between equities, commodities and currencies I expect the risky assets to move all in the same direction. If inflation keeps rising, the risk trade will extent further into new high grounds, but if deflation kicks in, expect major bear markets everywhere...

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