Saut Confirms Mixed-Flation Theory → Washingtons Blog
Saut Confirms Mixed-Flation Theory - Washingtons Blog

Thursday, September 10, 2009

Saut Confirms Mixed-Flation Theory

I have previously argued that we could have inflation in food, energy and health care prices, and deflation in most other asset classes:

You know from experience that when you're in a national park, movie theater or some other contained place, prices are higher than elsewhere.

Basically, the stores in such places know you can't go somewhere else, so they can charge you what I call "got you" prices. In other words, you're a captive buyer, and they've "got you".

I've noticed the same thing with health care costs. My family's health care premiums increased 6% last year - on top of the 6% increase the year before.

This is "got you" prices. The health care industry knows that Americans are desperate for health care, and that if they raise prices, people will pay.

I've previously pointed out that inflation versus deflation is not necessarily an all-or-nothing proposition: we can have inflation in some asset classes and deflation in others.

So my current theory is that we will have deflation for some time in most asset classes, but inflation in the "got you" classes of basic necessities that everyone needs - food, energy, and health care.

Jeffrey Saut - Chief Investment Strategist and Managing Director of Equity Research at Raymond James - is now confirming that theory:

Inflation, or deflation, the argument rages; yet on CNBC last Thursday I opined that we are currently experiencing both... It appears to me that the country’s top quintile of wage-earners (the folks with the most assets) are experiencing deflation as their home prices have collapsed, their 401K’s are substantially below where they were in October 2007, their bonuses have been “whacked,” and the list goes on.

Meanwhile, the lower-income households are experiencing inflation with their heath care costs rising, food prices escalating, insurance premiums climbing, etc.
Saut thinks inflation will eventually win out:
Our “bet” is that the inflationary forces will eventually win out because that’s the way it has always played since the Great Depression.
But that is not controversial. Indeed, even the greatest advocates of the deflation theory say we may eventually get inflation. For example, David Rosenberg says that deflationary periods can last years before inflation kicks in.

Note: I am sure someone else came up with this theory of food, energy and health care prices versus other asset classes first. I just have never run across it before.


  1. There are many meanings of "inflation" and "deflation." One is monetary, another is price, and another is wage. It is possible to have monetary deflation ( as we are experiencing now due to contraction in money plus credit, with price inflation, as the monetary authority (Fed in US) attempts to reflate to counter deflation. This creation of liquidity flows not where the Fed wants but where there is perception of easy money to be made. As a result we are now experiencing price increases (price inflation) in commodities and basic necessities like health care. At the same time, we are experiencing wage deflation due to business cutting back because of overcapacity in the face of declining demand (consumer purchasing power).

    In short massive deleveraging is leading to monetary deflation, and declining bargaining power of labor is leading to wage deflation. While some price deflation is taking place through inventory liquidation, there is also price inflation due to speculation in energy, etc. Precious metals are also rising in the face of rising future uncertainty and declining trust in institutions and governments.

  2. Inflation is always a monetary phenomena that expresses itself in the form of higher prices. Central banks have been printing/pumping money into the world's economies to create inflation because of the massive asset deflation that they are experiencing due to a Credit Bubble burst. Since no one can either lend or borrow, the speculative bubbles in oil and minerals that is developing is really just the people/institutions with all that extra paper money to find a store of value before their paper money is worthless.


  3. I have been saying this for the last year and is not a big mystery to those of us in the real world. And now some "expert" weighs in and says the same thing and so it now has legitimacy?

  4. To say that inflation is always a monetary phenomena is an oxymoron (since prices are always expressed through money).

    If the definition of inflation is rising prices and if we grant that as the supply of something rises relative to its demand, its price decreases, then of course inflation must be equivalent to a relative increase in money supply in relation to its demand. (Lets include velocity in our definition of supply - since supply is a replenishment process).

    But once defined, you cannot use that definition to explain WHY something happens - that is completely circular reasoning.

    Also, you cannot explain inflation without an appreciation of debt - its not enough to print money, how it finds its way into circulation (via government, via capital spending, via consumer debt) also influences where and how inflation is experienced.

    Finally, people experience inflation in different ways - its probably more accurate to define inflation as a rise in price relative to income - this is the only way to account for the demand for money. This also allows for different social groups to experience inflation differently - which results in different behaviors (like the middle class avoiding the stock market while higher income brackets are starting to catch the fever).


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