Markets Reflect Deflationary Concerns

The weakness in the U.S. Dollar on Thursday, sent a signal to the equity and commodity markets that it should not be considered a given that the U.S. Dollar is a safe haven investment.

The weakness in the U.S. Dollar on Thursday, sent a signal to the equity and commodity markets that it should not be considered a given that the U.S. Dollar is a safe haven investment.
 
Stronger commodity markets and weaker equity markets indicated that investors want to hold on to something tangible at this time even if it does not pay them to do so. Fear may be causing this change; the fear that the U.S. economy is going to get crushed at some point in the future. This has been evident by the continuous buying of the no yield U.S. Treasury Bills and the low yield U.S. T-Bonds and Notes. 
 
On Thursday investors gave indications that they were even willing to take on more risk, not from dividend paying equities, but from non-dividend paying investments such as gold, silver and platinum. This is clearly a sign that holding on to non-treasury U.S. assets carries too much risk at this time. In other words, who wants equities?
 
In an effort to be fair and balanced at this time, it must be stated that the current rally in commodities may be the final surge before deflation rears its ugly head. This rally may just be a set up in an effort for smart money to get short at better prices before the global markets go into a deflationary spin. 
 
Although some are saying that inflation should be feared because the Fed and other central banks have been printing money, one should note that if that were going to be the case, the inflation sensitive Treasury instruments would be trading lower to reflect the decrease in future buying power. If treasuries were breaking and gold rallying then I could believe that inflation was coming. Since treasuries are still rallying, I have to believe that the market is still more concerned with deflation. 
 
News from China will have to back up my conclusion. We have already seen a decrease in imports and exports in China. A forecast by the Chinese government of less than 8% growth in 2009 will be the first sign of potential deflation. Anything substantially less like 5% to 6% will send a serious signal. To the Chinese, a growth rate in this range will feel like a recession.