Investment Office Logo

Bonds Didn’t Get The Inflation Memo

"And in the end, while most economists fret about deflation, it is after weak dollar periods we are most vulnerable."

Joseph Callhoun
Alhambra Investments, Weekly Market Pulse: Bonds Didn’t Get The Inflation Memo, May 16, 2021

"Prices rise for lots of reasons but inflation is not about just some random price hikes. Inflation is a sustained drop in purchasing power, a fall in the value of money. A falling dollar has investment implication way beyond just what might happen to bonds or TIPS. And if there are market/investment implications there are also economic growth implications. And in the end, while most economists fret about deflation, it is after weak dollar periods we are most vulnerable. The weak dollar of the 70s and its implications are well documented but I’d just remind everyone that the S&L crisis followed the massive devaluation of the dollar in the late 80s. And of course, the 2008 banking crisis was preceded by a weak dollar period that ran from 2002 to mid 2008. It is the rapidly rising dollar periods (deflation) we fear because they indicate a lack of global dollar liquidity. But it is those weak dollar periods, when investment is diverted to real assets from intangibles, that leads to the sub-par growth periods that follow. That was true in the early 90s and obviously over the last decade. A strong and stable dollar is exactly what we need to induce recovery. As I look at the trajectory of economic policy in the US – monetary and fiscal – I fear we won’t get it."

 

This text an excerpt from the report Weekly Market Pulse: Bonds Didn’t Get The Inflation Memo, May 16, 2021, which can be accessed under Alhambra Investment Partners.