Sunday, June 3, 2012

Global Weakness and the Dynamics of Inflation and Deflation

Last week’s troubling economic data included 1) a report by the U.S. Bureau of Labor Statistics  that 69,000 jobs were created in May (150,000 jobs were expected) and unemployment increased to 8.2%, 2) in the Eurozone, Eurostat reported that May unemployment was 11% (22.2% for those under 25 years old) with Spain at 24.3% (51.5% for those under 25) and Germany at 5.4% and 3) in China, the purchasing managers’ index (PMI) for manufacturing fell to 50.4 in May – while it represents expansion, the number has been declining in recent months.

MY TAKE

  • As the global financial crisis continues, it is important to understand that the dueling forces of deflation (a painful and value destroying process) and inflation (challenging but more manageable) will continue to drive significant market swings.  Some political leaders and central bankers may continue to print money to address the problems caused by too much debt - potentially stabilizing and/or inflating real estate, equity, commodity and bond prices.  Other players believe that “natural forces” should address economic imbalances - potentially resulting in deflation.
  • Bottom Line: Most equity and commodity markets continue to lose value and wage growth for many workers remain stagnant – this could lead to deflation. Investors need to understand the changing economic bias (inflation or deflation) and act accordingly.

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