Can you hear them tapping away in the distance?

It’s October again, and…. uh oh…. the deflation monster seems to be on his way! Here I present a chart that represents sentiment pertaining to the inflation vs deflation debate.


Inflation & Deflation Monsters

The Inflation & Deflation Monsters - Courtesy of the wonderful minds of the ECB. Click to enlarge.

ECB Propaganda Video


As mentioned in a previous update:


The chart below is intended to demonstrate the prevailing sentiment in the never-ending inflation vs. deflation debate. The indicator below uses search indices (courtesy of google insights) to gauge the degree to which people are searching for ‘inflation‘ compared to ‘deflation‘. When people are searching more frantically for the term ‘inflation’ than for the term ‘deflation’, it is assumed that inflation fears dominate. Conversely, when people are searching more frantically for the term ‘deflation’ than for the term ‘inflation’, it is assumed that deflation fears dominate. The contrarian market participant can use the chart below to oppose ‘inflation trades’ when inflation worries are at extremes, and conversely to oppose ‘deflation trades’ when deflation fears are at extremes.


inflation vs deflation indicator

Inflation Vs Deflation Chart. Source: Google Insights. Click to enlarge.


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 months on end of reporting elevated inflation fears (and alluding to the optionality in insuring against deflation), it seems that we can now do the opposite. The contrarian investor may well consider entering (selectively!) on the long-side in the weeks and months ahead…

See here for our collection of rare historical economic data.

Posted Oct 4, 2011

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