It continues to intrigue me how the crowd remains convinced that the US economy and perhaps by default the world economy is entering a condition of deflation and is falling "back" into a recession (aka "double-dip") or that there is going to be a prolonged period of economic contraction. Of course there are more than a few freaks out there who believe that the US is about to enter a depression.
I am not going to get caught up in yet another argument of deflation or double-dip, rather I would like to highlight what things we would look for that would indicate "deflation" or a "double-dip".
Many economists refer to the action of the US treasury market for clues as to what is likely to happen with respect to deflation/inflation and economic growth. However, given the blatant Fed involvement in the bond market and also the fact that moms and pops have been loading up on treasuries (amongst other fixed income instruments) I don't think that the action of the bond market can be trusted. Yes I have to hold back on the use of the "manipulation" word.
I think that the market or asset class that is least subject to "artificial" price movements is the commodity market. In essence a sure fire way of telling that something is happening on the inflation/growth front is if there is a general rise in the prices of commodities.
Most commentators refer to the CRB Index as being a proxy for the commodity market in the same way that many still refer to the Dow Industrial as a proxy for the equity market. However, the CRB is rather misleading. It has a 40% weighting to energy commodities (gas and crude), so any analysis on the behavior of the CRB is going to be misleading especially if crude is lagging or outperforming the price behavior of other commodities.
CRB Futures Index
Also the CRB excludes a number of vitally important commodities. A more definitive index is the "old" CRB Index (now referred to as the Continuous Commodity Index) and the CRB Spot Indices (see crbtrader.com). In any event, I have talked about these indices before. What I want to do today is highlight the recent price performance of a few commodities which are not included in the commodity indices but nonetheless are vitally important for our everyday lives;
Indeed this may seem a rather bizarre combination of commodities. I haven't chosen them for any particular reason, rather merely to highlight that the more one digs into the price behavior of commodities, the more one gets the feeling that something very bullish is developing on the commodity front and by default, one should be positioning portfolios for inflation rather than deflation.
Bloomberg Injection Grade Polyethylene Index
Bloomberg Ethanol Average Rack Price Index
FOEX PIX Paper US Newsprint Index
Cheddar Cheese Index
If my "naive" eyeball analysis serves me correct, then it looks as if all four commodities are moving higher. Does this indicate inflation or economic growth? I don't know, but I am reasonably confident that it does not suggest deflation or economic contraction as pundits and the press of popular opinion would have us believe, and it is definitely not supportive of low yields on long dated fixed income securities.
I think you could do a lot worse than to have a reasonable portion of your assets invested in commodities of various shapes, sizes, and descriptions.
Author's Disclosure: Long GCC SLV