The recent Societe Generale Global Strategy slideshow report is making the rounds today with many fellow bloggers featuring the wit and humour of Albert Edwards and Dylan Grice. The report is 19 pages but it is light fare as it is mostly images and charts explaining the main themes that have been explored in more detail in previous SocGen reports: inflation vs. deflation, debt and deficits, gold vs. US dollar, unemployment, lessons from Japan, etc. You can download it from the Trading Resource Section if you haven’t seen it already.
Instead of that report, I wanted to touch on an earlier SocGen report from Dylan Grice which contained a fascinating thought: “if inflation is mispriced, so is everything else”.
Let’s face it, Mr. Market has no credibility anymore (if it had any to begin with) when it comes to pricing things correctly. It suffers from acute bouts of mania and depression and back again. And while there is no convincing argument that we are in anything but a deflationary state right not, what if inflation is mispriced?
After all, the current implied expectations of inflation are low, even by historical standards. It is almost as if the market believes that governments can spend their way out of debt:
What concerns Grice is not just the total debt that is normally quoted but also the ‘off balance sheet’ debt obligations of Western governments. These include pensions and health promises to a mostly aging population and easily dwarf the quoted total debt statistics.
While Grice is not calling for out of control inflation any time soon, he is questioning the ability to forestall the consequences of the monetary re-liquification indefinitely. To bring this home, he links periods of price stability with price earnings ratio expansion and periods of high inflation with a total collapse in P/E ratios:
Of course, this makes the elusive hunt for ‘profits’ (the E of P/E) a red herring. As I’ve mentioned a few times already on the blog, expansion and contraction in the P/E ratio accounts for the vast amount of gains and losses in the stock market. There are literally thousands of examples where companies were earning money hand over fist but saw their stock prices decline. And vice versa.
Grice ends with a few potential trigger points for inflation. He doesn’t pretend to know when or from where inflation will arise to become a problem but he does raise the alarm that it is out there, lurking. You can download this report from the Trading Resource Section: (Reports & Articles) “SocGen Popular Delusions Nov 2009″.
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