Inflation Is the Boogeyman

by Susan C. Walker

Stocks or bonds? Coffee or tea? John or Paul? We’re all different – that’s why they make vanilla and chocolate ice cream. Different strokes for different folks. One person’s trash is another person’s treasure.

The choices we make reflect our biases. For instance, some people take more risks with their investment money to try to gain bigger rewards (while hoping to avoid bigger losses). Others who don’t like to risk their retirement funds put their money into T-bills or money-market funds. These decisions proceed from a fundamental choice we each make: should we be more optimistic or more pessimistic about the future?

Not every choice is so weighty, so have some fun and make your picks from the list below. And don’t talk to me about false dichotomies – I know there can be more than two choices for each, but what would be the fun in that?

Rebel or Yankee?

“Once you label me, you negate me,” said Soren Kierkegaard, who was neither a Rebel nor a Yankee, but instead a Dane. Well, we may not label ourselves as Southerners or Northerners, but the phrases we use and how we pronounce words labels us just the same. Thanks to the Alpha Dictionary Web site, you can find out how close you are to being a Rebel or a Yankee, based on a 20-question quiz. It’s a hoot. Be prepared for questions like this: What do you call that carbonated sugar water – soda, Coke, pop, soft drink, or tonic? How do you pronounce the word “caramel,” with two syllables or three? When you address a group of people, do you say you guys, you all, youse, you’uns, or y’all?

Bull or Bear?

What else reflects our biases? The way we look at financial markets, either from a bullish or a bearish point of view. Bears tend to think that bulls are overly optimistic, while bulls tend to think that bears are depressive sorts who wallow in pessimism about the markets and the economy. I don’t know of any pop quiz to test biases in this area, other than the way people invest or trade. If you’re buying and holding, you’re probably a bull; if you’re selling short or you’ve taken your money out of the stock markets, you’re probably a bear.

World Cup or World Series?

This one is easy – if you’re from any country but the United States, you vote for the World Cup now being played in Germany as the most important sports championship in the world. “Futbol” rules everywhere but here, where we Americans call it soccer. Ours is also the country that named our major league baseball championship the “World Series,” even though it can include teams only from the United States (oh, and one from Canada).

Inflation or Deflation?

Moving on from festive sports to dismal sciences, we read news stories every day about whether our economy is facing inflation or inflation. You read that last phrase correctly – hardly anyone suggests deflation as a choice. According to my sources at the Elliott Wave Financial Forecast, in the month of May, a survey of five major daily newspapers showed 165 references to inflation and zero mentions of deflation.

Inflation is the boogeyman that has been with us for so long that hardly anyone can see past it. Robert Samuelson’s recent business column, titled “Facing Up to Inflation,” is representative. It includes this sentence: “We have an inflation problem that we need to cure before it gets worse.” (Washington Post, June 21, 2006)

Doesn’t anyone consider deflation to be a possibility? There are a few voices in the wilderness, including Elliott Wave’s Bob Prechter, who writes in his most recent Theorist:

“A flood of articles insists that the stock market is being ‘spooked by inflation’ even as silver crashes 30 percent, gold 20 percent and copper 25 percent. The Fed agrees and vows to ‘fight inflation’ with higher interest rates. Economists are looking at lagging indicators, such as gasoline prices, and warning of more inflation to come. But rising commodity prices are typically the result of past inflation, not gauges of future inflation. The question is what the major event will be, and as far as I can tell Elliott Wave International is the only firm that houses analysts warning of an inevitable, full-scale, economically devastating deflation.”

Soft Landing or Hard Landing?

It’s true that most economists see inflation as the only worry. When I worked at the Federal Reserve Bank of Atlanta, I became well-versed in the Fed’s standing orders: to nurture price stability (Fed-speak for ‘keeping inflation contained’); to encourage job growth; and, if the economy somehow got overheated due to the Fed’s maneuverings, to try to help bring it down for a soft landing rather than a hard one. But even the Fed realizes it can’t fine-tune the quality of the economy’s landing. At some point, it’s all just on a wing and a prayer.

Bill Bonner, who is based in London for The Daily Reckoning, points out a recent article in the Financial Times that reported 240 economists surveyed all said that the U.S. economy was heading for a soft landing. Here’s his clear-eyed view:

“No, it is not the landing we doubt. That is a known and well-reported fact. It’s the qualifier ‘soft’ that we wonder about. How do 240 economists know we will have a landing that is soft rather than hard?…They don’t. They have no more idea than we do. But their unanimity gives us a clue about where the money will be made. With so many people betting on a soft landing, the long odds on a hard one are bound to be attractive.” (The Daily Reckoning, June 21, 2006)

As they say here in Georgia, the economy looks like it’s fixin’ to fall out. Are you preparing for inflation or deflation? As for me, I’m fixin’ to go get a Coke, although a true Atlantan calls it by its full name, a “Co-co-la.”

Editor’s Note: Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. She has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor relations executive and a speechwriter for the Federal Reserve Bank of Atlanta. She is a graduate of Stanford University.