Inflation or Deflation? Which is the Consensual Opinion? Weekly Chart Update – 7/5/11
An update of the weekly google insights charts for 7/5/11. With these charts, the contrarian investor can attempt to gauge the prevailing opinion in the famous inflation vs deflation debate.
The following charts show how searches for ‘inflation’ are competing with searches for ‘deflation’. The idea is that when ‘inflation’ searches are growing in excess of ‘deflation’ searches, inflation fears dominate. Conversely, when ‘deflation’ searches are growing in excess of ‘inflation’ searches, deflation fears dominate. The contrarian investment strategy would be to oppose either conviction at its extreme; that is, the contrarian could insure against deflation in an environment of hysteric inflation fears, and conversely insure against inflation in an environment of manic deflation worries.
The first chart uses plain search volume indices from google insights, whereas the second chart uses the relative out-performance of those indices (compared to searches about ‘finance & investing’). I invert the ‘deflation’ parts (red) to show how the two search items are competing with each other. When the blue parts are high, people are searching for ‘inflation’. When the red parts are very negative, people are searching for ‘deflation’. The black line is the aggregate of these two. When it is rising, inflation fears dominate, and when it is falling, deflation fears dominate.
After the past week (with ‘risk assets’ taking a hit), it isn’t surprising that the first chart should show increasing worries about deflation. As mentioned over the past few weeks, inflation fears have been at elevated levels of late, and so perhaps the contrarian investor should seek to insure against deflation (and underwrite the risk of inflation). Of course, it is possible that inflation worries could reach even greater extremes – but regardless, our premise is that such extremes would provide even better opportunities to insure against deflation.
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