Deflation Fears Gain Ground…

This week’s update of the inflation vs deflation indicators show that deflation fears are gaining ground against inflation worries…

 

The following charts use google insights data to gauge the prevailing opinion in the perennial inflation vs deflation debate. The intention is to depict how google searches for ‘inflation’ are competing with google searches for ‘deflation’. The premise is that inflation fears dominate when people are searching for it in excess of ‘deflation’ (and vice versa). The contrarian investment strategy would be to oppose either conviction at its extreme; that is, the contrarian would insure against deflation in an environment of hysteric inflation fears, and conversely insure against inflation in an environment of manic deflation worries.

 

Inflation Vs Deflation Indicator Chart

Click to enlarge. Source: Google Insights

Inflation Vs Deflation Indicator Chart (Relative)

Click to enlarge. Source: Google Insights

 

[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.]

 

These charts have been indicating that inflation fears have been at extreme levels for several weeks. Hence, the contrarian strategy (according to these indicators) has been to insure against deflation (and perhaps underwrite the risk of inflation). These days, ownership of the so-called ‘risk assets’ are deemed to be insurance against inflation whereas ownership of the dollar, the yen & US government securities are regarded as deflation insurance. With the latest downtick in the above indicators, we can see that this strategy has paid off well. US Government 10-year notes and 30-year bonds have enjoyed 7 weeks of nominal gains, and the dollar and yen have been strong. The downward moves in these indicators are usually swift and brief – so, if this is the beginning of a downward move (which we suspect), it will probably pay to be in US government securities, the dollar and the yen for a few months. The time to reverse one’s trades will arrive when these indicators point to prevailing worries about deflation.

See here for our collection of rare historical economic data.

Posted May 29, 2011