Inflation vs. Deflation: Who's Winning?
It is said that a picture is worth a thousand words. The saying refers to the ability of a picture to take a complex idea and make it so much simpler. The point is to make it possible to absorb large amounts of data quickly. Knowing this, perhaps we can use a visual aid to better understand the complex inflation versus deflation debate. Dollar Bulls Back in February in our Technical Forecast published on 2/10, I laid the groundwork for why the US dollar is currently a good buy. I wrote: "The U.S. Dollar has already broken out of its downtrend channel and provides a buy signal for aggressive traders in the PowerShares DB Bullish Fund (NYSEARCA:UUP) or in the PowerShares DB 3x Levered long (NYSEARCA:UUPT)." This was in spite of media and Wall Street's negativity toward the greenback (NYSEARCA:UDN) and bullishness toward gold (NYSEARCA:IAU) and silver (NYSEARCA:AGQ). That trade worked out well as the dollar rallied from below 80 to over 82.50 in a month. The PowerShares DB 3X levered long was a similar story and rose over 10% from its low of $19.29 on 2/01 to over $22 in March where we advised taking profits. The dollar chart below from our 3/17 Technical Forecast shows the setup and progress of that trade, but there is also something much larger going on with the dollar.
The Big PictureUsing a picture helped us stay bullish the U.S. Dollar and bearish the Euro (NYSEARCA:FXE) over the shorter term even as countless arguments were made by "experts" to the contrary. There are many negative fundamentals cited for a bearish outlook for the dollar. Unlimited money printing, growing debt burdens, and hyperinflation are just a few. But, most of these theories are incomplete and misinterpreting the core meaning of inflation, which is simply the decline of your purchasing power. All of this may eventually come to fruition, but that debate is left for another time. For now, I trust my eyes, and glancing at the next chart tells me perhaps there are other factors that are mitigating real inflation and proving the decline in purchasing power (NYSEARCA:TIP) thus far is an overblown facade. Looking Beyond the Surface The trade weighted dollar bottomed in 2008, formed higher lows, and is in an uptrend (or at worse a sideways consolidation). Would you believe the dollar is actually higher today than it was five years ago, before Mr. Bernanke ever started any QEs? Don't believe me, just look at the picture below. Thus far, all the money printing isn't causing your dollar purchasing power to decline. The chart shows that so far the inflationist is wrong. It seems there are larger underlying factors counteracting any inflationary policies by the Federal Reserve. Perhaps too, this is why it continues its QE programs "indefinitely"? Perhaps the deflationary risk is larger than many actually believe, and it is showing up in the dollar's picture. This theory as I outlined in the latest issue of our ETF Profit Strategy Newsletter is supported by other pictures as well. If inflation was such an issue then why is it that the precious metals are the only main commodity group up in price since 2008? Agricultural goods (NYSEARCA:DBA), energy commodities (NYSEARCA:DBE), and industrial metals (NYSEARCA:DBB) are all down in price, some greatly, since 2008. Their facts show their prices are deflating, not inflating. The short dollar/long gold (NYSEARCA:GLD) trade is a crowd favorite, and when trades get popular they're often wrong. This bearish dollar stance has been the pundit status quo for years even though the pictures tell us otherwise. This is similar to the sell Treasuries (NYSEARCA:TLT) status quo which has been wrong for five+ years and counting.The dollar picture paints a thousand words, and shows that the status quo dollar bear crowd has been wrong. In the meantime, we will continue to use the charts and common sense to help find high probability trading setups. The ETF Profit Strategy Newsletter monitors global events and formulates profit strategies based on fundamental, technical, and sentiment research so that investors can stay ahead of market trends.