Inflation or deflation?

Abraham George Market Musings

Inflation or deflation? That’s the million dollar question! The structural decisions we make based on what will eventually play out in the markets should largely determine how successful we are in the markets.


If we take the history of the Fed, for most part they have been reactive. They are fire fighters. But still with a 1000 PhD’s working at the Fed, we believe collectively they know things better than us. In all my ‘Fed watching’ of over 40 years, I have never seen the Fed acting like, “we surely know what we are doing”. Every time the Fed Chairman Jay Powell and the Treasury Secretary Janet Yellen has taken the opportunity to communicate that the inflation we are seeing now or the inflation that we see in the future will be “transitory.”

In the last thirty years of Fed officials in office there has never been a permabear on interest rates as much as Janet Yellen. I have followed her from the time she was the San Francisco Fed president. There has also never been an official who became a Treasury Secretary after being a Fed Chairman. So she has a lot of say in the current policy matters of this government.

The Fed and treasury are not likely to flinch in the face of obvious data and real world observations of rising prices. They continue to dismiss on the grounds of ‘base effects’ and ‘bottle necks’. Their argument is prices look higher because it’s measured against a very low base of last year, when the economy was virtually shut down (base effects) And then they go to the supply chain ‘bottlenecks’ argument. They want everyone to believe the disruption in supply chain will normalize. Very reasonable.

What they don’t talk about is the 30% growth in money supply and more to come. The 30% more money in the economy, is chasing a relatively fixed amount of services and goods. That surely is inflationary.


Both the Treasury and the Fed are not worried about the actual data. They are more worried about the inflation expectations and how they can explain the situation away. They both think they can manipulate perception to get their desired outcome. As long as you don’t think prices are going to run away they are happy. You are not spending hastily to save against higher prices, the Fed is relaxed.

In addition to all this, the Fed is using a tool that is in their complete control right now and is sending a strong message. The Fed is fixated on the treasury market. Think they have pinned the yield on the 10 year Treasury note back down to 1.3% in the face of an economy running at better than 7% growth and more in the face of prices (month over month basis) rising at a double digit annualized rate. The Fed so far is surely winning, as the latest July fund managers survey says 70% fund managers think inflation is temporary. In my next report, we will discuss what some of the biggest fund managers and economists are thinking.

Leave a comment

Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.