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...