Inflation, Reflation, Or Something Else?

Is there a difference between inflation or reflation, and whatever this is? Not mere semantics, it may be everything for any material distinction. Yet, the only one ever talked about is the first, as if a foregone conclusion. Why?

We’re conditioned to believe in only one or the other, recession still contracting or otherwise total recovery, on top of never questioning whatever it is the Federal Reserve may be doing:

We’ve been left with the impression that the economic situation is always binary; the economy is in recession or recovery/growth. No other choices. Believing this, everything becomes a simple matter – including the most important part. In other words, all you have to do during contraction is wait for it to end. If there are only the two options, once an economy’s reached its ultimate trough all worries can be set aside.

The public should know this is just not true because it hasn’t been. Furthermore, we’ve already been through this process. And not just recently, as recent as a few years ago. That was actually the third bid for inflationary acceleration presumably formed by the combination of successful monetary and fiscal policies. The only difference between that one and the prior two was the unusual conviction from which it was sold to the public.

Its most prominent sellers have since completely changed their tune; quietly, of course.

Let’s begin with what should happen if the inflation scenario was beginning to play itself out. The first place you’d see it is in the bond market. And that’s where inflation expectations have been rising. In fact, the 10-year TIPS breakeven moved above 200 bps today for the first time in several years. The 5-year is nearly at that the same point.

While inflation expectations are a necessary condition, there are, by themselves, nowhere close to sufficient. To start with, TIPS pays investors based on the CPI and the CPI over the last decade has been moved around by WTI alone rather than WTI plus anything else. If there was an inflationary recovery on the horizon, and investors believed it was a realistic possibility, then inflation expectations would imagine TIPS holders getting paid by more than supply factors in Cushing, OK.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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