Monday, March 14, 2016

Deflation Is Coming

In my previous post I was dealing with investment policy of Fairfax Financial Holdings, a Canadian company run by Prem Watsa. Today I want to show an interesting long-term chart, which demonstrates what Mr. Watsa is betting on. Please, look at the chart below:


The large chart shows the spread between TIP (10-year inflation adjusted bond) and 10-year treasuries. As the chart shows, since 2014 this spread has been in its downtrend. It is something similar to developments, which started in 2005 and were a prologue to the last financial crisis.

Let me cite Mr. Watsa (page 17):

"Early in 2016, ten-year TIP spreads (i.e., the spread between ten-year inflation adjusted bonds and treasuries) have made new lows, second only to the 2008/2009 lows. Declining TIP spreads,  reflecting lower inflation expectations and higher volatility, result in higher prices for our CPI-linked  derivative contracts."

It looks like the history is going to repeat...

1 comment:

  1. Another interesting article. Most people only think gold goes up in an inflationary environment. Deflation can also cause a loss of trust in currencies, especially in this negative interest rate period.