Inflation vs. Deflation Debate: Both Sides Are Persuasive

by: Cam Hui, CFA

I have written before that the inflation vs. deflation bet is likely the Call of the Decade.

That topic is becoming hot. I have had several exchanges in the last few days about the inflation vs. deflation outlook for the economy. Some have pointed to Barry Ritholtz’s post at Big Picture indicating that deflation currently has the upper hand. Dave Rosenberg also pointed to the same theme today.

On the other hand, Warren Buffett wrote an op-ed in the New York Times warning of the risks of USD devaluation and debasement should the US government continue on its current trajectory of deficit spending, which would lead to inflation for US residents.

I will repeat what I said to everyone that I discussed this topic with.

When I read the analysis, both camps are persuasive. Both camps are populated with some very smart investors (who wants to bet against Warren Buffett?)

Let the model decide
It is becoming evident that the future will be dominated by either inflation/hyper-inflation/USD devaluation, or deflation, but little in between. In this case, I would prefer to allow a trend following model do its work and tell me which way the wind is blowing (see an explanation of the model here).