INK Ultra Money: Will deflation strike back this summer?
The past month has been a good one for the G-economy scenario which we characterize as an environment dominated by government-led inflation. However, it is probably too soon to rule out deflation as a potential force that could lead us to a D-economy which is dominated by falling prices as a result of record debt overhang. Today on INK Ultra Money, we hear from former Morgan Stanley market analyst Gerard Minack who makes the case for a return to disinflation later this year.
Fiscal policy could be a game changer (premium video)
However, Minack can see a return to inflation following a year-or-two of weak prices as policy makers realize they have to provide fiscal stimulus to boost growth.
The problem I have with the disinflation case is the assumption by Minack and other deflationists that the economy will operate at 85% to 90% of pre-crisis capacity which will put downward pressure on prices. Instead, I tend to agree with Stephen Clapham, founder of Behind the Balance Sheet, who appeared on Real Vision May 28th and suggested that much of the pre-crisis capacity will not be coming back.
For example, there may just not be as many aircraft in service by year-end. That will support higher air fares. In the labour market, I can see a scenario where some people choose not to go back to work unless a vaccine is found. Stagnant or falling labour force participation does not sound deflationary to me as it has the potential to decrease the supply of workers in the economy.
Realistically, we likely have both inflationary and deflationary forces at work. As we discuss in our free spring INK Canadian Insider Index presentation, the issue is which one will prevail. To tackle the question, we employ our G- versus D-economy framework for asset prices. It is a handy straight-forward framework that we use daily in our analysis.
Speaking of deflation, in the Monday INK morning report, we present a bearish case for the Village Farms International (VFF) share price. You can watch the premium video summary here.
Remember every trading day we post the free Real Vision Daily Briefing on INK Ultra Money, usually an hour or so after the close.