There is a fierce, ongoing debate about the prospects for inflation or deflation. This article in the New York Times discusses the economic divide that still persists between Morgan Stanley and Goldman Sachs on this issue. (They could both be right, depending on the time frame.)
According to the deflationistas, as they are nicknamed, a new round of stimulus spending by Washington is urgently required to stave off a Depression-like cycle of falling prices and wages that is difficult to reverse once it is set in motion.
Inflationistas, by contrast, worry more about the effect that additional government borrowing could have on the recovery. With the budget deficit expected to hover around $1 trillion a year for the next decade, they say, interest rates could eventually surge, making borrowing — and goods — more expensive. A double dip, they say, is highly unlikely.
Regardless of how things eventually turn out, guidance from major firms often influences the investment policies of their clients and the broader constituency across Wall Street. The market is unsettled right now in part because these two views could lead to very different portfolios to cope with the expected environments.
The beautiful thing about relative strength is that it does not have to take philosophical sides-it will simply go with the assets that are strongest. Right now, our Global Macro portfolios actually have a bizarre mix of traditional inflation and deflation assets. Eventually one side of the argument will overwhelm the other, but it’s good to know that relative strength will always lean to the winning side.
Posted by Mike Moody 
