2009 Inflation-Deflation Timer: Model Update

by: Cam Hui, CFA
As I went through the year-end discussions over the holiday season, it struck me that the inflation-deflation question remains stuck in a lot of people's minds. As examples, Zero Hedge pointed out this paper by Brait Capital Management, and recent instances of the inflation vs. deflation debates continue here and here.

In the meantime, my Inflation-Deflation Timer model has remained at an inflation reading since July 2009. The table below shows the returns of the Inflation-Deflation Timer model compared to other asset classes. All returns are denominated in Canadian Dollars.

(click images for a bigger picture)

The returns for the Inflation-Deflation Timer model was a very respectable 18.1% in 2009, which is roughly in line with a 60/40 balanced fund benchmark during normal periods, but it performed best during recent deflationary crisis periods.

Model signals

The chart below shows the returns and “signals” of the Inflation-Deflation Timer model of the last couple of years. The gray zones show periods when an "inflation" signal was flashing, the pink zones indicate a "deflation" signal and the white zones indicate a neutral signal.

As the chart indicates, the Inflation-Deflation Timer model was able to successfully navigate through difficult asset deflation periods. The model protected earlier gains by switching to the default-free U.S. Treasury long bonds during the asset deflation periods. In 2009, when the model indicated inflation, the model moved to riskier assets, namely equities and commodities, further advancing the model’s performance.