Inflation Watch – Cam Hui edition

Another chapter in our ongoing quest to divine the direction of inflation. Cam Hui, who maintains a proprietary inflation-deflation timing model, joins the deflationist chorus (see blogroll). While not revealing the actual model to non-clients, he does reference the technical indicators on commodities such as copper, which have broken rising price channels. We should point out that energy is hanging tough, but welcome to the dark side, Cam.

We’ve been in the deflation camp for some time now, even though the economic data in the US had shown a little bit of spunk. Leading indicators are turning down with a vengeance, and today’s housing starts and building permits numbers were dismal. Oh, and while we’re on the subject, Fannie & Freddie were de-listed from the NYSE. Tomorrow we get core CPI numbers, which should be interesting.

We aren’t likely to get much help abroad. With policy makers panicked by public debt loads, austerity programs are spreading across Europe: Germany, the UK, of course the PIGS (not Italy – yet) and eastern Europe. China and India are battling asset price and core inflation, respectively. Japan remains firmly in the grip of deflation.

A number of prominent economists are speaking out against the unfortunate timing of austerity policies in a deflationary environment (Martin Wolf in the UK, DeLong and Krugman in the US), but it looks as though policy makers are bent on economic implosion. Not a promising picture for longer term equity investors.

In this context, our week-old rally had just regained the 200 day on the SPX, but ran out of steam today in choppy trading . Look for a pullback going into the end of week and option expiration. It’s likely we’ll give back the 200 day but important that we hold support just below the 1050 level. I might be tempted to take some of the very short term profits on my positions, and buy them back again when (if?) support firms up.

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