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Bond Outlook September 16 2009

Can the increase in US wholesale prices mean that the switch from deflation to inflation is nearer than we thought? Profits taking may be the best option for bond investors.

Bond Outlook [by bridport & cie, September 16th 2009]

Horror of horrors, we find Greenscam adopting our line, viz, a grave risk of inflation, the need for action now to forestall it and avoid the strong likelihood of “inflation swamping bonds” in 2010, and continued downward pressure on the USD. This appears a bit rich from the person holding more responsibility for the crisis than anyone else (unless you count the Bush Administration as a whole).


The potential for the return of inflation is now firmly locked into the western economies; as Charles Plosser of the Fed points out in Business Week, “if the liquidity added to the banking system were to begin being translated into loans and growth.... it would create an inflation problem”. (We note his worrying use of the conditional and “if”.) In other words, if the stimuli work they will bring inflation; if they do not deflation will persist. Detecting just when and to what extent inflation takes over from deflation remains the biggest unanswered question for fixed-income investors.


Our own assumption that deflation will be the dominant economic factor for several months to come has to be called into question in the light of current data, of which the most significant is the swing from the falling to the rising of US wholesale prices.

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