Think Twice Before You Join the Deflationist School of Thought

by: Thomas MacLeod

Could it be that "inflationists", fed up with the big commodity indices (CRB, Rogers, GSCI, & DJ) and US treasuries (10 & 30yr), having more or less gone sideways since June last year, are finally beginning to throw in the towel?

To us it seems that way. Perhaps this article from Bloomberg neatly encompases what we are trying to say, the headline says it all: Bond Traders Declare Inflation Dead After Yields Fall.

But if inflation is dead then:

  1. Why is the real world market for commodities only a "few good weeks" away from all time highs?
  2. Why is it that TIPs are also a whisker away from breaking to a multi-week high against non inflation protected treasuries?
  3. Why is it that metals are preferred over US treasuries, JGBs, and Bunds?
  4. And why is there this persistent strength in gold in multi-currency terms?

Are these four indicators not clinical definitions of rising inflationary expectations by the market? If seems to us that the general trend of the graphs below is up!

Journal of Commerce Industrial Commodity Index

US 10yr Breakeven

Gold vs. US 7 & 10yr

Gold vs. International Bonds (JGBs Bunds etc)

Gold in JPY

There is a Titanic struggle going between inflationists and deflationists, but we think the inflationists will win and the chart below will break to the upside over the coming days/weeks! And then watch the inflationary storm hit with full force!

Commodities vs. Treasuries (CRB vs. TLT)

Disclosure: Long DBC, TBT, SLV, GLD, GDX