The Consensus Continues to be Pointed Towards Inflation…

An update of the weekly inflation vs deflation indicators for 10/7/11. After another slightly positive week in the ‘risk’ markets, we find that inflation fears continue to dominate deflation worries.


The explanation of the charts from the previous updates:


The following two charts use data from google insights (google’s tool for gauging patterns in search) to figure out the prevailing opinion in the inflation vs deflation debate. The idea is to show how searches for ‘inflation’ are competing with searches for ‘deflation’. When people are searching for ‘inflation’ with greater vigor than they are searching for ‘deflation’, it is assumed that inflation fears dominate. Conversely, when people are searching for ‘deflation’ with greater vigor than they are searching for ‘inflation’, it is assumed that deflation fears dominate. The contrarian investor can use these indicators to oppose each conviction at its extreme.


Inflation Vs Deflation Google Insights Chart

Click to enlarge. Source: Google Insights

Inflation Vs Deflation Google Insights Chart (Relative Out-performance)

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'). We 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.]


A second week of net gains in the major US equity indices saw the ‘inflation vs deflation indicators’ point more aggresively towards inflation. Meaning, the consensual opinion became more focused on inflation rather than deflation (according to these indicators). The contrarian investment strategy would be to oppose either conviction at its extreme (i.e. insure against inflation during periods of manic deflation fears and insure against deflation during periods of hysteric inflation worries). In the updates of April and May, we had noted that inflation worries had reached extreme levels and so that the contrarian strategy would be to insure against deflation (and possibly underwrite the prospect of inflation). Since then, we’ve had a leg down and a rebound. As can be seen from the charts above, deflation worries are far from being overstreched. So we maintain that – although the contrarian asymmetry may have gone – there remains plenty of room on the downside for momentum speculators.

See here for our collection of rare historical economic data.

Posted Jul 10, 2011