Inflation Fears Continue to Subside from their Feb 2011 Extremes…
An update of the weekly inflation vs deflation google insights chart for 31/7/11. The indicator show that inflation fears (relative to deflation worries) continue to subside from the exuberant peak of February of this year.
The following chart shows uses data from google insights (google’s tool for gauging search patterns) to figure out the prevailing opinion in the seemingly permanent inflation vs deflation debate. The intention is to demonstrate the frequency and vigor with which investors are searching for ‘inflation’ compared to ‘deflation’. When people are searching more vigorously for ’inflation’ than for ‘deflation’, it is presumed that inflation fears dominate. Conversely, when people are searching more vigorously for ‘deflation’ than for ‘inflation’, it is presumed that deflation fears dominate. The contrarian investment strategy would be to oppose either conviction at its extreme.
The chart above uses data that shows the relative outperformance/underperformance of the ‘inflation’ and ‘deflation’ search queries relative to searches in the entire ‘finance & insurance’ category of the web. So, regardless of the quantitive change in overall searches in the finance & insurance category, these indicators show if there are proportionally more or less searches for ‘inflation’ and ‘deflation’. In this way, we can estimate the degree to which the finance proportion of the internet community is worried about inflation compared to deflation.
As can be seen from the chart above, inflation worries reached an extreme in February 2011. Ever since, deflation fears have been creeping up on worries about inflation. We use the above indicator as a means by which to gauge sentiment over the medium term. As Felix Zulauf mentioned the other week, it is prudent to maintain a by and large defensive portfolio while playing the bullish and bearish extremes over the medium term. These indicators are suitable for the latter task. During the extremes in sentiment about inflation during the beginning of this year, we maintained that it would be prudent to insure against deflation (while underwriting the risk of inflation). Since those wild extremes have tempered somewhat, we now maintain that the contrarian asymmetry in the ‘deflation trade’ has waned, but the momentum to the downside is by no means stretched.
Over the coming months, we’ll continue to watch this indicator. Should searches for ‘deflation’ happen to explode relative to searches for ‘inflation’, we’ll consider reversing our position (by seeking to insure against inflation while underwriting the risk of deflation).
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