Gresham’s law is the (formerly popular) insight that states: ‘Bad money drives out good’. It occurred (and still occurs in a way) when governments compulsorily overvalued one component of the money supply with respect to the other(s). A sound understanding of this has brought fortunes to alert speculators in the past; it is my contention that it may bring fortunes to them in the future.

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This is a pretty simple indicator for gauging the worries of the mass of market participants. Of course, one shouldn’t use it in isolation for anything, but nevertheless it seems to be of some value. In the two charts below I try to measure the search volumes for ‘inflation’ compared to ‘deflation’ using google insights. Basically, when the yellow line is going up, people are worrying about inflation, when the yellow line is going down, people are worrying about deflation. (Click to enlarge)

Inflation Vs Deflation (Google Searches)inflation vs deflation (rate of change google searches)

EDIT: Although the second chart says ‘ROC’ and ‘rate of change’, it is in fact a measure of ‘deflation’ and ‘inflation’ search volumes relative to the finance category search volume. The rudimentary principle still applies (yellow line up => inflation worries, yellow line down => deflation fears).

 

From a contrarian point of view, I want to be opposing dogmatic convictions about the future. When these indicators are high, I’m looking to underwrite the risk of inflation and insure against deflation. When these indicators are low, I’m looking to underwrite the risk of deflation and insure against inflation. Needless to say, both charts above point to underwriting the risk of inflation and insuring against deflation right now.

 

EDIT: I’ll be updating this indicator on a weekly basis. I should have it online by 4:00PM ET every Saturday.

 

Inflation Vs Deflation Free EBook

 

I monitor the daily treasury statements in order to get a feel for how much money is entering and leaving the coffers of the US Government. Below is a chart of the daily balance (blue) of the US Government against the S&P 500 inverted (red line). The individual accounts that make up the total operating balance are also shown. Simply put, when the blue line is going up, the US Government are – on a net basis – drawing money into their accounts. When the blue line is going down, the US government are – on a net basis – spending the money that is in their accounts. continue reading »