It is the simple things in life that matter. Deflationary conditions are characterized by fixed income securities (corporate bonds and treasuries) outperforming commodities and during inflationary conditions underperforming commodities. Yes one could get technical and look at long dated fixed income securities (20-30 yr) vs. commodities but we choose to keep the analysis simple. We know that financial markets move in trends but there is a whole lot of white noise in between. From a simple observation it seems that commodities have been outperforming fixed income securities as a general group since the start of the year. However, the performance of fixed income securities relative to commodities has been negligible since early June. Yes that is stating the rather obvious, of course the million dollar question is; in which direction will fixed income move relative to commodities?
We continue to believe that the charts below will break down. We say this because of the inability of non inflation protected treasuries to break higher against non inflation protected treasuries and due to our fundamental outlook. Yesterday there were two important news releases one concerning New York factories orders and the other concerning US producer prices. In both cases analysts/economists estimates were well below actual figures. This suggests to us that analysts are well “behind the curve” in terms of pricing in inflation.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a9kyqIpQktTg
http://www.bloomberg.com/apps/news?pid=20601087&sid=a0jz9TBzHhxo
Watch the market, it tells you all you need to know about what is likely to happen (human behavior moves in trends). Interestingly enough, when you study the market hard enough, economic news announcements rarely take the market by surprise. It seems news announcements only take those who think they can outsmart the market by surprise.
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