We had some major central bank meetings last week, and more political turmoil. But the outcome continues to be higher stocks and a world that's pricing in little inflation risk (commodities are weak, interest rates are soft).
While stocks are up 10% year-to-date, the broad commodities index is down 10%.
The chart above is a frightening chart. You can see how stocks and commodities have diverged over the past four years. Which one is right? The commodities chart is maybe arguing deflation forever. I'd say it's also the most stretched--the most vulnerable to snap back in the other direction (i.e. the most vulnerable to being wrong).
Still, we have stocks up big, commodities down big and the benchmark U.S. interest rate (the 10-year yield) is down from 2.50% at the beginning of the year to 2.20%.
On the deflation note: I watched a presentation at a CFA conference back in 2008, where an economist that specialized in demographics argued that an aging population in the developed world would keep deflationary pressure on prices, and keep us in a very low rate environment for a very, very long time.
Those in that camp are feeling pretty good about their thesis with these data points to observe. What isn't talked about much, though, is the influence of the Internet on prices. With the Internet has come transparency, low barriers-to-entry into businesses (and therefore increased competition), and reduced overhead. And with that, I've always thought the Internet to be massively deflationary. When you can stand in a store and make a salesman compete on best price anywhere in the country--if not world--prices go down.
And this Internet 2.0 phase has been all about attacking industries that have been built upon overcharging and under delivering to consumers. The power is shifting to the consumer and it's resulting in cheaper stuff and cheaper services.
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