Popular Sentiment Over Deflation Recedes

Aside from failed effects of the fiscal stimulus, one of the factors that could have been swaying political sentiment against Keynesian economics is the inordinate focus on “deflation”.

Yet for all the supposed threats that deflation would bring, there has been little signs of the emergence of the bogeyman since the culmination of the crisis.

This popular sentiment may have reached a "tipping point".

This from the Wall Street Journal Blog,

Deflation anxieties may be about to spur the Federal Reserve to do more to help the economy, but for bond traders, fears of a downward spiral in prices appear to be pretty low.

A paper published Monday by the Federal Reserve Bank of San Francisco said that based on pricing levels in the inflation indexed government bond market — the securities are commonly called TIPS — investors are sanguine the economy can escape a crippling bought of falling prices…

Fed officials fear that while growth remains positive, it is not powerful enough to overcome the ground lost over the course of the recession, leaving inflation at dangerously low levels, and unemployment unacceptably high. They want to act to help get growth levels higher, even though many economists and some in the Fed wonder if the institution can be effective in boosting activity, given that borrowing rates are already near historic lows and the financial system is flush with liquidity.

The TIPS market has long been one of the ways policymakers, economists and market participants could get a handle on the outlook for inflation. That said, the use of TIPS to tell a broader story is a complicated task.

The rap against the TIPS market goes like this: It is a relatively new market sector, and it has less liquidity than other parts of the Treasury trading world. That means price movements can be signaling something other than a shift in investors’ inflation outlook. In the market’s favor, however, is the fact that it at least represents a real money bet on something — an investor can lose cash if they predicted the pricing outlook incorrectly. In any case, Christensen argued his model compensates for these factors.

The gold market has been saying this ever since.

And as we long been saying here, false premises will eventually be unmasked.

Commodity Inflation

The mainstream says there is LITTLE inflation to worry about.

However, evidence seems to go against this view.

Aside from the vibrant actions in the emerging market’s financial asset markets, where we seem to be witnessing ‘asset inflation’, we also seem to be seeing a broadening of rising price level activities in the commodity spectrum.

Below are nice charts from Bespoke Invest.

The Bespoke team comments

Most but not all have been on strong runs higher lately. In the charts, the green shading represents between two standard deviations above and below the 50-day moving average. Moves above or below the green zone are considered overbought or oversold. As shown, the two most widely followed commodities -- oil and gold -- are both trading outside of their trading ranges into extreme overbought territory. Silver, platinum, and copper are all at overbought levels as well. Wheat has pulled back to the bottom of its trading range recently, while coffee and orange juice have been heading lower as well. Corn pulled back from overbought territory a couple weeks ago, but it has bounced back some. Finally, natural gas remains in an epic downtrend.

These are symptoms of the relative effects of inflation.

Like in the domestic stock market, the rising tide tends to lift all boats but not simultaneously and not in the same degree. But overall, the general price level increments higher overtime as real purchasing power of currencies fall.

Well, even the US Treasury Inflated Protected Securities (TIPS) seem to be manifesting the same progressing expectations of inflation.

Bottom line: We seem to be experiencing the spreading effects of inflation.