There seems to be a fair amount of knee-jerk enthusiasm about inflation and inflationary assets, though according to some analysts, its too early in the offing to be taking a big stance in that direction. We've covered this off in many stories during the course of the year.
Everybody is reading from the same story book, but many of us are skipping to the end of the story, instead of fully appreciating the economic forces which have led to Fed's decision to adopt quantitative easing, by adding a trillion dollars to its balance sheet. Bill Gross, PIMCO Managing Director, echoes that we will only see inflation as of 2010-2011. Here are some additional comments:
From Reuters:
Not all analysts agree the plan is a good idea or that it will cure what ails the heavily indebted economy, but many expect it to bring the benchmark 10-year note yield back down to the 50 year lows seen around 2.0 per cent seen last December.
"They can hold them down as low and as long as they want because they can print as much money as they want," said Marty Mitchell head of government bond trading at Stifel Nicolaus in Baltimore.
"Yields can stay low and probably are headed lower."
Inflation will ultimately become an issue, Mitchell said, but the more immediate concern was the prospect of a downward deflationary spiral in prices, wages and economic activity.
This means inflation is not on the agenda and will not be for at least a matter of months and possibly a couple of years.
"Inflation is tomorrow's end game," Mitchell added. "Right now they're fighting off a deflationary environment."
Mary-Ann Hurley, VP, Fixed Income Trading, D. A. Davidson says:
"While we're not concerned about inflation right now, boy we potentially have a huge problem down the road. I don't think it's this year or next year's problem but maybe 2011."
"We've got a huge amount of stimulus and how is the Fed going to unwind all this? I can see a scenario where interest rates go up dramatically, which will hurt the economy. So, it's a mess."
Howard Simons, Bianco Research:
"We've crossed the Rubicon," said Howard Simons, strategist at Bianco Research in Chicago. "We have absolutely severed any connection between our dollar and reality. It's as fast as you can print it right now."
The Feds decision is more likely at this stage to be bullish for bonds than for equities, as the rest of the developed world is forced to swallow the QE pill. There is also the age-old adage, "Don't Fight the Fed." If the Fed is buying bonds...for the time being in any case.
After all, how many of us really understand deflation?
Source: Reuters, Fed Plan May Lower Rates, But at What Cost?, March 19, 2009
