Inflation or Deflation? Which is the Consensual Opinion? Weekly Chart Update – 22/5/11
An update of the weekly google insights charts for 22/5/11. The inflation vs deflation indicators suggest that inflation fears remain at heightened levels.
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.
The charts are showing that inflation fears remain at elevated levels. The natural interpretation would be that the contrarian investor could find opportunities in insuring against deflation (and possibly underwriting the prospect of inflation). The so-called ‘risk assets’ haven’t been ‘acting’ all that well lately. The dollar has rallied sharply against it’s major counterparts (most notably the Euro, Pound Sterling & Swiss Franc) and commodities & equities have slowed in momentum. Given the extreme levels of inflation fears that have dominated for some time (and the plethora of clean-up operations in process), we could easily be on the verge of another rise in deflation fears (and a concomitant rise in the dollar, US government securities and the yen).
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