Friday, October 16, 2009

Inflation Pressures Hitting Extremes

My inflation indicator, which is derived from the trends in gold, crude oil and yields on the 10 year Treasury, is moving into the extreme inflation zone, and this should be a headwind for equities. See figure 1 a weekly chart of the S&P500 with the indicator in the bottom panel.

Figure 1. S&P500/ weekly

It should be noted that the only two "meaningful" pullbacks during this entire rally from the March lows occurred at times when this indicator was in the extreme inflation zone. These times are noted with the ovals over the indicator. For a more comprehensive look at this indicator and how stocks under perform when there is either real or perceived inflation pressures (as measured by this indicator), I refer you to the following articles:




While we can argue the existence of inflation or not, the reality is that when the trends in gold, crude oil and 10 year Treasury yields are strong equities face a headwind, and as I pointed out in the article "Inflation Pressures Rising Again", this is a problem that equities will face over and over in this environment of Dollar devaluation. Over the long haul, commodities should outperform equities.

5 comments:

js said...

Can you supply some other historical dates (over x many years) as to when the inflation pressures were signalled ?

Guy M. Lerner said...

JS:

If you go to the article called: "More Headwinds To Worry About" this should help you get started

Anonymous said...

This is very good information. How do you compile your inflationator?
best regards,

Alex

James said...

As an aside, I have an interesting thought on the inflationist policy of the Fed. I see price increases in food and energy but decreases in durables (electronics). Is it possible that by increasing inflation in necessary items the Fed is actually causing deflation in other items with cash-strapped consumer. How will this effect policy since food and energy are not part of Fed's measure of inflation?

Guy M. Lerner said...

James

Just ask anybody who puts gas in a car or pays for health and dental costs or puts the kids in private schools. I am sure Kindles (the electronic book) are going down in price. Isn't Walmart and Barnes and Noble going head to head with Amazon? But I don't need a Kindle no matter how low they drive the price. Your point is well taken