Wednesday, August 19, 2009

The inflation vs. deflation debate

I have written before that the inflation vs. deflation bet is likely the Call of the Decade.

That topic is becoming hot. I have had several exchanges in the last few days about the inflation vs. deflation outlook for the economy. Some have pointed to Barry Ritholtz’s post at Big Picture indicating that deflation currently has the upper hand. Dave Rosenberg also pointed to the same theme today.

On the other hand, Warren Buffett wrote an op-ed in the New York Times warning of the risks of USD devaluation and debasement should the US government continue on its current trajectory of deficit spending, which would lead to inflation for US residents.

I will repeat what I said to everyone that I discussed this topic with.

When I read the analysis, both camps are persuasive. Both camps are populated with some very smart investors (who wants to bet against Warren Buffett?)


Let the model decide
It is becoming evident that the future will be dominated by either inflation/hyper-inflation/USD devaluation, or deflation, but little in between. In this case, I would prefer to allow a trend following model do its work and tell me which way the wind is blowing (see an explanation of the model here).

3 comments:

rajesh said...

Could the price of Gold be any indicator of where the inflation is headed. Need you expert view on this Sir?

Humble Student of the Markets said...

Gold, oil and other commodity prices are certainly important indicators of inflationary expectations.

keithpiccirillo said...

Dr. Hui,
What are you working on?
Any info on Donald Coxe, I read his book, bought some shares of his commodity fund and only get quarterly letters at his site.
I put monies with good jockeys like B. Berkowitz, Heebner and him, and am looking into Dr. Lo's fund.
Is it not logical to have assets with managers who give you a chance of being better hedged, or even out when a crisis strikes? I have been looking at managers quarterlies to try to get some insights on if they think deflation or inflation, and it seems strength, no debt, best of breed is the place to be at these levels.
I also would like to know what are the popular computers fund managers use to trade, the environment on a typical trading day. It must be writing code and exchanging ideas/information with the fund manager. This seems like the basis for a good blog to me. I read at least a book a week, and the top blogs.
The canadian bank TD looks good, BMO not so much.
HNU.TO is the devil's tool, I saw it on stockcharts.com and looked it up.
Thanks.