Friday, May 18, 2012

Inflation Fears Are Misplaced

Fears of an imminent collapse of the US dollar seem quite unfounded to us. Rather, we think the dollar will continue to appreciate over the next several years. (Did you know the DXY index actually troughed in the Spring of 2008?). US inflation remains mild, and is likely to continue to be mild until credit growth meaningfully accelerates to over-stimulate demand. That might be a decade or more away.
Along with that, we caution against ignoring the inflation problems in the emerging markets. Fund flows suggest that investors believe inflation is not an issue in the emerging markets, but the data strongly indicate that the emerging markets are where the real inflation threat lies. Money and credit growth is substantially higher in many EMs because they are using additional credit in an attempt to maintain growth rates as their economies slow.
Investors often believe that investing for yield is safe, but higher absolute yields can be alluring like a Siren’s song. Ignoring the inflation risks in the emerging markets in order to grab high fixed-income yields may be such a Siren’s song. If the US dollar appreciates and emerging market inflation increases, then today’s high yields in emerging market bonds might be a trap.

Read it at Advisor Perspectives
You should worry about EM inflation. Not US inflation.
By Richard Bernstein

The BRIC countires are currently trying to stem high inflation while not inducing a rapid slow down in economic growth. To my knowledge, no country has ever successfully achieved this "soft-landing". Weaking currencies against the dollar will not make the task any easier. However, if Europe continues its deflationary trajectory than inflation may no longer be the problem but rather dwindling exports. 

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