Inflation or Deflation? - SmartMoney Weighs In

This SmartMoney article throws out the pros & cons that I've been wrestling with on the deflationary indicators. I still lean (as does this article) towards inflation. I have the following comments on the counter-arguments:

  • Interest rate cuts signal the Fed no longer fears inflation: I feel the cuts are simply a 'Do Something!" reaction and the Fed is saying "To hell with inflation - we'll deal with THAT crisis later."
  • Commodity prices have cratered: This, I think, is more demand (or lack thereof) driven. Commodities are priced at the margin -- going from a slight excess of demand over supply to a slight excess of supply over demand produces wild price swings.
  • TIPs rates show deflation: I think the record TIPs yields are a result of selling pressure. As portfolios are unwinding their leverage, often a forced sale, they are selling what they can and quality issues are being driven down, thus pumping up the yields.

Proposed Transaction

The following transactions will be made the week of October 13, 2008 subject to noted contingencies:

SELL Vanguard Total Stock Market ETF (VTI) if below $50
BUY Vanguard Health Care ETF (VHT) if VTI sold above
BUY Vanguard REIT Index ETF (VNQ) if VTI sold above
BUY Vanguard VFH Financials ETF (VNH) if VTI sold above

SELL Vanguard Total Bond Market Index Fund (VBMFX)
BUY Vanguard Inflation-Protected Securities Fund (VIPSX)
BUY Vanguard Developed Markets Index Fund (VDMIX)
BUY Vanguard S&P 500 Index Fund (VFINX)