Global Economics

Cart Before Horse


Trams pass through Paradeplatz in Zurich, the center of the Swiss banking industry.

Photograph by Mark Henley/Panos

Trams pass through Paradeplatz in Zurich, the center of the Swiss banking industry.

In the short-term, the prospect is for deflation in the United States and Europe despite the immense amount of money creation by the Federal Reserve, and the 1 trillion euros through two LTROs. So, commodities including gold appear to be a poor investment. Deflation will make the dollar strong in the short-term.

—Komal Sri-Kumar, The TCW Group, Little has Changed, by e-mail, 10 July 2012, 4:44 p.m.

There are enough moving parts in the above paragraph to give one pause. You may disagree here, there or everywhere, but there is no disagreeing that markets leading events is only slightly more frightening than events leading markets.

I am struck by Sri-Kumar’s outlier path to deflation.

Trust me, it is a lonely Company betting on price decline. (Observe Switzerland for the flight-to-quality combo of negative nominal rates and deflation.) To points West, think TCW, 90017, also the upstarts in Newport Beach, 92660 (and for that matter, add in the up-upstarts at DoubleLine Capital, 90071), and you form a picture of the few attempting to place horse before cart.

Their July view is not July consensus. Consensus is inflation.

Komal Sri-Kumar connects the dots. As do the Left Coast’s Gross, El-Erian and Gundlach. (Does that mean David Rosenberg’s Toronto is the North Coast? And A. Gary Shilling’s New Jersey is …)

Wall Street and the City have a deep and vested interest to wish-upon-a-star of avoiding deflation. Consensus is certain inflation is here, there and out there: cart before horse. Discuss.

Keene hosts Bloomberg Surveillance 7-10 a.m. ET on 1130 AM in the New York metro area and nationally on SiriusXM 113.

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