Inflation-Deflation Debate Goes On

RIA: Disinflation Is A Bigger Threat Than Inflation

The 3-D’s suggest inflation will give way to deflation, economic strength will weaken, and over-zealous investors will once again get left holding the bag.

Be careful chasing the wrong asset class.

If we are correct, bonds will likely be the best performing asset class in 2022.

The inflation-deflation debate can be boiled down to one chart, whichever way you like it: the ratio of copper and gold. The gold/copper ratio crossed 365 in September 2011 and hasn't looked back. That was also right around the time gold was setting a new all-time high that wouldn't be broken for nearly a decade.

The ratio fell below the trendline I have drawn in February 2021, around the 436 level. Since then, interest rates have spiked and speculative growth stock have been crushed. From the current price level, a Nasdaq bull market requires commodities falling faster than gold prices. Gold rising faster than commodities would be the worst case scenario, since it would imply investors were hoarding commodities to protect themselves from rising inflation.

Here is the ratio alongside ARKK. The correlation increases as the ratio moves into and out of inflection points.

The gold-copper ratio says inflation is winning for now, but it hasn't yet achieved dominance. The ratio that held for the past 10 years is still holding.

The other asset to watch is bonds. If that topping pattern completes, everything changes. A continuation of the past requires a failed H&S pattern giving way to a major bullish breakout that would probably take the 10-year yield to zero percent. I am focused on the short side in equities because I expect they fare poorly no matter how the gold-copper ratio resolves in the near-term.