Wednesday, May 19, 2010

May 19th in Brief

Recap in brief...

  • Squeezed Euro (though I personally think a further rebound is possible)
  • Oversold financial rebound (see GS)
  • Continued flight to high quality yield (a 3.36% 10 year Treasury yield when 4% was "rich" a bit more than a month ago... amazing for sure, but is it now overbought?)
  • Most notably... an inflation protection (i.e. hard asset) sell-off (was it once people digested the CPI print?)

There are too many people (including me) piled into the reflation trade with the view that the Fed will do anything it takes to get the job done (i.e. the strong preference for inflation vs. deflation). Thus, when it moves the other way... it MOVES the other way.

The issue is that over the shorter term it is likely to move the other way often as we are in an extremely disinflationary environment (high unemployment, low capacity utilization, low growth, deleveraging private and public balance sheets via increased savings).

That said, I am allocating for "reflation" as once it moves (in months / years), it could move quickly.

Source: Yahoo


  1. Today was such a mess I don't know if I can make much out of it. Plenty of longer term items though including the FED holding off on asset sales until after they tighten rates the first 2013?

  2. I think blogger was having an issue but I did write earlier:
    Disinflation or Stagflation, is there a difference?

  3. disinflation is a decline is the inflation rate (i.e. from 3% to 2% to 1%) whereas deflation is actual price decrease. disinflation or deflation could happen as the economy grows (i.e. japan), whereas stagflation is inflation while the economy is "stagnant".

    stagflation generally is a bad thing, but with as much nominal debt as the u.s. has, deflation or disinflation may be worse. the example of japan once again...

    nominal debt levels are so high that even if the economy grows, but deflation is larger (i.e. real gdp is positive, but nominal gdp is negative) caused the debt to gdp level to increase even if debt levels don't increase. this is the circular reference problem and the reason why the fed will err on the side of inflation.

    the problem is any "flation" is tough to control. too much deflation causes stag and hyper inflation as governments try to print their way out of it.

    my opinion is that most of these countries too indebted should write the stuff off (i.e. re-structure), deal with the pain that will cause (i.e. nationalize / bailout banks that hold the stuff), and move on.

    pretending cheap financing and/or that citizens will accept severe austerity measures to pay back foreigners isn't realistic in my opinion.

    interesting times...