Paul McCulley of PIMCO thinks that we are a long way away from inflation. He believes that with the deflation in asset prices and consequent deleveraging, the surplus in labor and productive capacity will keep inflation at bay for many years. Warren Buffet believes that inflation is not an immediate problem, but that so much money has been pumped into the system that we could have an inflation problem in a year or two. And economist John Williams of Shadowstats thinks that the U.S. is likely to experience hyperinflation as early as 2010.
All three commentators are widely respected for their acumen, but their opinions on inflation cover the entire spectrum. I probably wouldn’t have to look very hard to find another economist with a good reputation that is voting for deflation.
How should you handle this as an investor? If you position your portfolio to take advantage of one of these scenarios, what do you do if it turns out a different opinion was correct? Perhaps a more flexible, tactical methodology is required.
We think this is one of the strongest arguments in favor of a systematic, trend following approach using relative strength. Regardless of the scenario that unfolds, relative strength will identify the strongest trends and get exposure to them.
