Friday, May 8, 2009

Deflation is Dead

In recent months I have seen two sets of forecasts cross my desk from the chief corporate economist from two of the largest financial companies in the world. Both predicted deflation or near zero inflation. Both predicted falling long term interest rates. Both were noticeably Keynesian in their viewpoints of the economy. Both are quickly getting egg on their faces.

Unfortunately, their materials were copyrighted so I don't know if I can give you many specifics.

First, let's look at long-term interest rates.

Prediction by the first: Long term rates sliding down to 2.75% by year's end.
Prediction by the second: 30-yr rates falling to 3.5% during 2Q09

Let's go to the chart:

Hmmm...30-yr rates seems to have climbed to 4.3% as of 5/8 closing. These rates are almost up to the pre-crash rates of early 2008. 30-yr Treasuries tend to be an implication of the market's beliefs of long-term inflation.

Now, let's examine the whole deflation thing. How about the price of oil? Sorry for the ugly chart, but it gets the point across. Data here, along with Friday's close from Bloomberg.

Or perhaps the fact that the dollar is now at a 4-month low? If we're stuck in a liquidity trap like the Keynesians believe, then why is the world beginning to not hoard dollars?

Since, I am mocking their predictions, I will make some predictions of my own. And, since my ego is still drunk on my previous success, I'm going to make some bold ones.

1. 30-yr Treasury yields break 5.00% by year's end. 10-yr Treasuries break 4.00%.

2. WTI Oil Price will break $80/barrel before year's end.

3. Bloomberg's Dollar Index, will drop below 70 before year's end. (Currently 82.53)

So remember, buy some eggs on December 31st. My face is ready!

1 comment:

vincent said...


I've just read here:

"The huge additional monetary and fiscal stimuli implemented since September have not yet imposed their costs but may be beginning to do so. The first quarter gross domestic product (GDP) deflator came in contrary to expectations of deflation at a 2.9% rise, while 10-year Treasury bond yields have now broken decisively above 3%. Both inflation and interest rates can be expected to push sharply higher in the months ahead."