Inflation fears are over-blown

Inflation fears are over-blown; that’s the position of David Rosenberg, famed Wall Street Guru. I tend to agree – inflation will be milder than the worst-case-scenario we continue to hear in the media.

His case is below (full article HERE); The inflation-versus-deflation debate was Rosenberg’s topic. His verdict was that deflation will dominate.

• Recent consumer opinion polls that found 93% of Americans expect inflation to run wild this year.
• Rosenberg cited Bob Farrell’s rule number nine: When all the experts and forecasts agree – something else is going to happen. “We are our own best contrary indicator,” he said. Rosenberg showed the cover of Time magazine from July 2008. It proclaimed that inflation was back, following a month when the CPI rose 5%. Over the next year deflation set in, and the net change in the CPI was -1.0%.

His case:

• Today inflation forecasts are over 6%, yet actual CPI inflation is 2%. Ninety percent of the time when inflation forecasts were above 5%, inflation declined over the following year.
• Inflation is picking up a bit; yet that’s happened before. Inflation peaked in 2008 at 5.5%, yet bonds performed fine.
• Core Inflation is picking up, but only temporarily.
• Inflation is less today with oil >100 / barrel than last year with oil around 80 / barrel. He believes consumers will adjust their spending patterns -> causing prices to decline.
• Speculators are driving oil prices. Speculators long positions are 3x what they were when oil peaked 3 yrs ago. Thus he believes high oil prices are temporary.
• Commodity prices play a small role in inflation for the US, a mature service-sector economy.
• Rents, a large part of CPI, will come down – as foreclosed homes turn into rental properties; bringing inflation down.
• Labor costs are historically 80% correlated with inflation, and those costs are declining for companies. As long as there is high unemployment, there is little change of inflation; like it did in 2008, 2004, 1999, and 1993.
• What about government “printing money”? If it doesn’t get re-circulated in the economy, it is not going to create any inflation; and now it is still sitting on bank balance sheets. Consumers are not borrowing, they’re focusing on paying down debt.
• He said the 10-year Treasury yields (now at 3.3%) will stay between 2% and 4%, and the next big move in bond yields – about 50 to 75 basis points – “is probably going to be down.”

That’s his case for inflation remaining in check:

• We’re a contrarian indicator (when everyone thinks inflation, the opposite occurs 80% of the time);
• Labor is more important that commodity prices for US inflation – as long as unemployment remains high, inflation is on hold;
• High oil prices will lead to a drop in consumer spending – which is “deflationary” in nature

Are your investments prepared for either case? You can’t predict the future, but you can plan for it. Put a plan in place to deal with any investment scenario.