Thursday, May 9, 2013

Inflation or deflation or both

Two new developments overnight:

South Korea joins the competitive race of currency debasement no doubt as a result of Yen weakening.  In a surprise move it  cuts interest rates by 25 basis points.

Secondly, China's CPI comes in at 2.4% signaling consumer price inflation on the rise while PPI (producer price index) dropped 2.6% which was much more than expected.

While there can never be an exact correlation between inflation at the consumer level with input costs at the producer level I believe there is a link in the two stories.

Central bank intervention is struggling with keeping the deflationary monster under the surface.  Persistent monetary accommodation is starting to bleed thru in consumer prices while the underlying theme is one of deflation.

Both situations are analogous of attempting to keep an inflated beach ball under the water.  It just keeps popping up ...

For investors, the market continues its relentless ascent thanks to our friends at central banks the world over.  Enjoy the ride while it lasts.  I'm not a subscriber to Armageddon scenarios but I don't see how this can end well.