The threat of deflation has been making its rounds as inflationary measures like the consumer price index (CPI) fell for the first time in 13 months in April, dropping 0.1%. Core CPI - which excludes food and energy prices - rose only 0.9%, its smallest gain since 1966. The producer price index (PPI) also dipped 0.1%.
"The recent trend in inflation has been swiftly to the downside," Eric Green, chief U.S. rates strategist at TD Securities, told Reuters. "All measures of inflation are decelerating."
Investment behavior has shown an anxious but mixed sentiment of hedging against both inflation and deflation: Demand for gold metal is outstripping supply by more than 1% per year and has pushed gold prices to record highs, while others have sought out both corporate bonds and U.S. Treasuries for safety.
But a sign that deflationary concerns could be overtaking inflation fear is the popularity in growth of U.S. Treasuries and Treasury STRIPS. The market for STRIPS expanded 4.4% from December to April as worries increased that the Eurozone debt crisis would slow the global economy and prompt the Federal Reserve to keep rates low, supporting the value of STRIPS.
"With the austerity measures slowing growth and taking pressure off inflation, we're seeing a drifting back into Treasuries and into Strips," said Mark Fovinci of Ferguson Wellman Capital Management. "We are coming out of a recession and into recovery, which has been led by exports. The declining euro will take the edge off growth and pressure off inflation."
Despite Fed chairman Ben Bernanke's 2002 promise to fight deflation with an outlined action plan in his speech, "Deflation: Making Sure 'It' Doesn't Happen Here," analysts predicting deflation think the Fed is out of tactics and a decline in prices is inevitable.
But Money Morning Contributing Editor Martin Hutchinson isn't worried about deflation. He says inflation is heading our way and investors acting otherwise will be left unprepared.
"The inexorable gold-price rise is indicating inflation ahead, and rising commodities prices over the past year also indicate that the current inflation quiescence may not last much longer," he said in a recent article.
Hutchinson warns against turning to Treasuries as a "safe haven," despite investors and overseas central banks flocking to the investment.
"If inflation appears prominently, interest rates will rise, and long-term U.S. Treasury bond prices will fall," says Hutchinson. "Thus, long-term U.S. Treasury bonds, far from being a safe haven, are today one of the world's most dangerous investments - imbued, as they are, with both credit- and interest-rate risks. Not only should investors avoid them, they should also overweight their portfolios in assets such as gold, which can expect to benefit from Treasuries' inevitable decline in value."
Hutchinson's unflinching opinion on inflation's arrival prompted readers to write in with their contradicting views. The following is a letter received from a reader who questioned Hutchinson's position:
Question:
I (and others, I think) would very much like to have an article (perhaps by Martin Hutchinson) on the near to medium threats of deflation. Mr. Hutchinson's recent article on U.S. Treasuries not being a safe-haven prompted me to write a 'Reply' as follows:
"Excellent and timely article, thank you. But I am sticking with my U.S. Treasuries in the belief that as credit is increasingly withdrawn from the system, deflation will arrive rather than inflation, stocks will dive, gold (perhaps after one last hurrah) will fall back and the dollar rise on the back of outstanding IOU's worldwide being repaid, and because investors of the world's richest country will repatriate what funds they retain. The unwinding of credit may take time, and eventually, yes, inflation will return. Then and only then will it be time to move back into stocks, but the unwinding will take until 2012 or later - am I wrong?"
Another reader agreed, adding that:
"'Convergence' between U.S. accounting practices and international accounting practices is to be implemented in one year: June 2011. As part of this convergence, U.S. banks must soon begin to revalue (lower) assets on their books at "fair value" (mark-to-market). In response, it is highly likely that banking institutions will be forced to build up additional reserve capital to meet Federal requirements. In the process, banks could be expected to tighten up some more on credit and issue even fewer loans. Any reduction in available credit is most probably going to be deflationary, not inflationary. More banks could fail. I believe higher inflation is coming, but it may very well be much farther out than Hutchinson currently believes. Remember, it took from 1967 to 1979 for fiscal and monetary policy to produce inflation [that] markets recognized. There can be quite a lag, in the meantime, gold may have a lid on its near-term price. Is Hutchinson a closet gold bug writing an infomercial?"
Your reaction would be of great interest - deflation (or the threat of it) isn't something discussed a great deal in Money Morning, I think. Is that because you are all in the inflationary camp?
- Martin
In response to continuing questions concerning whether investors should prepare for deflation or inflation, watch for an analysis by Hutchinson next week in Money Morning.
(**) Money Morning editors reserve the right to edit responses for grammar, length and clarity when posting on our Web site. Please include your name and hometown with your email.
News and Related Story Links:
- Money Morning:
U.S. Treasury Bonds: The Not-So-Safe "Safe Haven"
- Investment News:
Strippers in pole position for race against deflation
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Money Morning Mailbag Feature
- Money Morning News Archive:
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Gold Stories
Miller cited BP's "flagrant history of taking risks to boost profits that has resulted in deaths of workers, destruction of the environment and economic chaos in local communities."
– Hmm…does that also apply to a certain 'Occidental Petroleum' – A US company, that operated in UK waters and killed some 167 people due to inept and negligent management..?
BTW – Its not Occident / Asian – its a US company "Occidental Petroleum Corporation (NYSE: OXY) is an international oil and gas exploration and production company, and its OxyChem subsidiary is a major North American chemical manufacturer"
– Does it also apply to a certain US Dow Chemical? Responsible for 15,000 deaths in a single negligent accident in Bohal, India? Also led to contaminating 300,000 people, and a large area of land still to this day.. Murder on an almost genocidal level, and they walked away with a wrist-slap due to US political pressure..
"On 1 May this year a ruptured ExxonMobil pipeline in the state of Akwa Ibom spilled more than a million gallons into the delta over seven days before the leak was stopped. Local people demonstrated against the company but say they were attacked by security guards. Community leaders are now demanding $1bn in compensation for the illness and loss of livelihood they suffered. Few expect they will succeed. In the meantime, thick balls of tar are being washed up along the coast."
Said a local "Oil companies do not value our life; they want us to all die. In the past two years, we have experienced 10 oil spills and fishermen can no longer sustain their families. It is not tolerable."
With 606 oilfields, the Niger delta supplies 40% of all the crude the United States imports and is the world capital of oil pollution. Life expectancy in its rural communities, half of which have no access to clean water, has fallen to little more than 40 years over the past two generations. Locals blame the oil that pollutes their land and can scarcely believe the contrast with the steps taken by BP and the US government to try to stop the Gulf oil leak and to protect the Louisiana shoreline from pollution."
Figured not…
More US 'one rule for us, another rule for when the US screws up even worse' is at work again…
Personally I have no love lost for BP, I think they (along with rest of the oil and chemical companies) operate as loose and fast as they can manage it in the regulatory domains in which they operate. I know that first hand as I once worked for a chemical company (not a UK or US one, and not BP!), and I witnessed it first hand.
So is it purely BP?
Case in point was evidence just this week that other (totally US) oil companies are operating exactly the same methods as BP, (and using exactly the same paperwork apparently….
apparently there is a program that just spits out US boiler-plate Oil drilling applications…
nice job for someone..)
If thats not an example of loose legislation, I dont know what is..
Sure – nail them to the mast if you want, but if you dont include every other US polluter in the same boat, then this will be exposed as the hypocrisy and US oil imperialism it increasingly appears to be…
And in response to the tea-baggers..
No the UK would not respond the same way if the US caused a similar disaster…
If fact we -didnt-, past tense.
Look to the Piper-Alfa disaster – the UK gave indemnity to all US citizens involved for total open testimony as to the causes; legislated heavily afterwards, cleared up the mess ourselves, and never turned it into a trans-atlantic political spat like Obama has with this mess.
Oh, and it didnt cause 11 deaths, but 167…slight difference…
QED