While we have become more accustomed to the seemingly inexplicable, incongruous action in capital markets, last weeks action stunned even us. Lets lay out the divergent events of last week, particularly as they relate to the sudden fascination with deflation.
1. Central Bank officials en masse celebrate the recent Japanese move towards inflation targeting
2. Gold Plummets
3. Fed official urges ” a more accommodative monetary policy that puts upward pressure on prices”
4. Market chatter regarding additional stimulus picks up, using the drop in gold as cover for more QE
5. The benefits of Governmental austerity in Europe are questioned
The action in Gold and other commodities was ostensibly the impetus for the sudden fixation on Deflation. However, did no one think that this talk was somewhat out of place alongside the various Central Bank discussions regarding the need(combined with the unlimited firepower) to push prices higher. While we understand that the transmission mechanism between Central Bank liquidity and real liquidity has broken down, it would be a mistake to think that this break is permanent. The risk of igniting pricing power is now even greater, given the fact that Governments no longer feel the pressure of fiscal restraint. This last weeks action proves that Markets are always fighting the last battle. We suggest that proactive market combatants, instead begin to think about the next one.
The Informed Contrarian 