This is part 1 of 2 parts, the second one is here. The Merrill advisers think that the economy will be going more the way of Japan than into the inflation that we have felt was the most likely outcome, arguing deflation over inflation. We don’t agree with this outlook, but it is important to get a view from both sides of the argument. The credit collapse based recession/depression has been seen in the USA (1930’s) and also in Japan (1990’s), the question is which one is the current crisis most likely to resemble? Thought provoking, although not necessarily enlightening.
We have felt for quite some time that the risk of deflation will be met by monetary and fiscal stimulation to the point where it will give rise to several strong years of inflation. This extract is by James Grant of ‘Grants Interest Rate Observer‘. The question of ‘when’ the scales will tip in favour of inflation away from deflation is likely to be at some point in 2010.
This is why we are letting our clients know that we are watching the long term bond yields and when we see a divergence either in short to long or medium term to long we will be encouraging people to consider a longer term fixed rate. When the five year and one year cross that might be a good time, meanwhile, because more rate cuts are expected in 09′ it would not be the time yet for this kind of move.
We don’t have a crystal ball but we are keeping our eye on the bond market so that we can try to gauge …