I like catchy titles – but yes, what I’m presenting here is the most important chart out there (click to enlarge):

deflation

What it shows is the ratio of total return of commodities spot prices by the total return of a basket of treasury bonds.

You can say that this is an ultimate inflation/deflation metric. Commodities measure inflation, treasuries are the best during deflationary periods. When the trend is up – it is inflation. When down – deflation.

We had a brief and violent deflationary period from October 2000 to November 2001. Then we had a long and clear inflationary period from November 2001 to June 2006. The most strong market rally started around April 2003 – exactly the time when the 300 DMA crossed up through 500 DMA. Then short and violent deflation from July to October 2006.

Then, what all market pundits told us, we started the next inflationary trend, which culminated in June 14, when the inflation index jumped through 300 & 500 DMA.

What I’m saying it was just a bull trap. Today is the day when the ratio dropped back down trough 300 & 500 DMA. Give it another two weeks and 300 DMA will cross down through 500 DMA, starting the next violent deflationary period.

It’s hard to say if current condition is closer to December 2000 or April 2001, but I do not expect the history to repeat itself exactly each time.

What is clear is that the immediate future of economy and markets must rhyme with 2001 and 2002 more than with any of the past 10 years.

Fasten your seatbelts and enjoy the ride! 🙂

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