Inflation vs deflation - Dec 12, 2008

There is a recession in thinking. Apparently the Think Tanks are not able to think due to lack of funding from various industries and of course lobbyists that support them. What were they thinking!! I gues there are just tanks now.
Neal Kashkari of the U.S Treasury said earlier during the week that the Treasury would make money from the bail-out. I suppose the next plan is to have an IPO or contract it out to the highest bidder from the junk bond industry.

Inflation / Deflation
There is a big debate about what we should be worried about, inflation or deflation? Out of the two scenarios the Fed will choose inflation over deflation for sure. To stop deflation they need to create inflation. Given the momentum in the economic slide and the urgency of the matter the Fed and other Central Banks except for China (only 568 Bil) have poured Trillions of Dollars into the system by way of Money, Gtees and Commitments. In current state of panic, pressure and criticism they are likely to go overboard. Deflation control will lead to Inflation control. The best Investment to hold in Deflation is U.S $ and in Inflation its Gold. Equities are best held when it’s neither or when they are oversold. But are they?

U.S treasury’s total outstanding funding and commitments are said to be close to $7.8 Trl. The U.S treasury has said that they will not borrow to fund it, which means that they will print money and expand their balance sheet. We have analysts that believe this would not impact inflation as inflation is a function of demand and supply and there is enough idle capacity to meet the boost in demand that will come about with added money in the system. A service based economy like the U.S can easily expand capacity with people, laptop and Blackberry to go. Plus manufacturing base in China can be expanded in a short period with govt “influence” there. However they fail to see the bottle necks in the value chain in commodities / material and energy sectors that will eventually start to put pressure on prices. Any indication of such pressure will have hedge funds going for such investments in force and simply expedite the process. What matters is when will such a pressure build in these bottle necks? It does take a while as the commodity component is considered to be getting smaller and smaller in products. e,g a Cereal component in a cereal box is very small compared to cost of packaging. Printing, distribution, marketing etc. This is the reason why the fed is more worried about deflation and will tackle inflation later.

Much anticipated Bear Rally.
We have multiple channels with 24hrs of market news, screens with 10 boxes with analysts and portfolio managers giving there last 5 minute take on the market and the Internet where people are constantly told to expect a Bear Rally. With so much of media coverage about it, who would participate in it and for how long? That is why nobody is falling for it as everyone knows, just like all other previous bear rallies this one should not have many legs and should fizzle soon. Unless it’s a slow uptrend.