Deflation or Inflation?

That is the big question, because the answer to that question is a key driver for investment decisions.

My answer? It depends. That sounds like a cop out, so I will need to clarify.

Top-down, the answer is that essential goods and services will experience a surge in prices as a by-product of a weakening dollar. We will pay more to heat our homes, fill up our gas tanks, and put food on the table. Why is that, when we have slackening industrial demand? Because we are now competing with a growing middle-class population in Asia--billions of them, in fact. As their standards of living continue to rise, they will eat more meat, putting pressure on grains. They will drive more, and buy more homes as they urbanize. Hence, we should continue to see an uptrend in prices of basic commodities--even as the economy sputters in and out of recovery.

The Consumer Price Index (CPI) may continue to flash deflation, as the US consumer de-levers and cuts back on consumption. A moribund economy will keep a lid on labor rates, which will help control inflation on some services. Not only are home prices declining, but so are rentals. The cost of high-end consumer discretionary goods will also be dampened due to cuts from even the wealthy. The government will declare that deflation is the boogey-man--not inflation, self-rationalizing that continued deficit spending and quantitative easing will be necessary to keep "stimulating" the economy.

Yet, US consumers will feel the brunt of this bifurcation, as our wages decline while the cost of essentials rise. This is a consequence of our economy being driven by the US consumer, who is tapped out. Seventy percentage of the US economy is consumer-oriented. By contrast, only 40% of China's economy is consumer-driven. As their economy matures and continues to fluorish, consumption will surely rise, even as manufacturing exports to the US and Europe decline. A rising Chinese (and Indian) consumer will strain tight supplies. Coupled with a weakening dollar, the US consumer will have to grapple with diminished purchasing power, even though prices for some items will be deflated.

Enclosed is an article on what to expect going forward:

http://www.businessinsider.com/rosenberg-buy-commodities-as-the-trade-war-escalates-2009-9