What is a Re-Flation trade?
Since the US government has pumped so much cash into the system (increasing the US money supply), this should cause the devaluation of the US Dollar (supply and demand), which would in turn drive up the cost of Commodities causing a surge in prices of goods and services (since commodities are priced in the US dollar).
This fear is referred to as “hyper inflation”. So to trade this hyper inflation you should be invested in inflationary hedges (commodities i.e. gold, oil, etc). This phenomenon last occurred in the late 1970’s early 1980’s which happened to be the last commodities bubble. You should note though that interest rates (mortgages, credit, treasuries, etc) were extremely high (10 Year Treasury was at 15.84% in 1981 compared to sub 3% right now) during that same time period which is the opposite of today.
10 Year US Treasury Yield 1963 till 2009
Commodities prices come off their bottoms over the past few months and the inflation watchdogs immediately brace for hyper inflation. Maybe we should actually read the story before jumping to the end. Sometimes the story is s more interesting then the ending.
The US government has taken these dramatic steps to ward off the threat of deflation. The opposite of hyper inflation would be a “deflationary spiral”. During a deflationary spiral prices of goods and services are falling to catch up with falling demand. A deflationary spiral causes high unemployment which actually accelerates the process (for more information see What is Deflation? ).
Instead of just looking at the prescriptions’ possible side effects, maybe we should look at the illness we are attempting to treat. Interesting how strong the dollar has been over the past year, since inflation would mean a weak dollar.
