Sonders, Hulbert: Inflation Fears May Be Overblown

One of the biggest fears in the investment world right now involves inflation. And, given the huge sums of money the government has pumped into the economy in the past year or so, the fears seem on the surface to be warranted.

But two top strategists, Charles Schwab Chief Investment Officer Liz Ann Sonders and Mark Hulbert of MarketWatch and Hulbert Financial Digest, say a number of factors are conspiring against major inflation — for the short-term, at least.

Sonders tells Forbes.com that sluggish demand continues to hold down spending, lending and run-rates, keeping inflation at bay. Inflation also usually falls for a full year after a recession has ended, she added.

While the government has indeed pumped a ton of money into the system, Sonders says the velocity of money needs to pick up before any serious inflation occurs. “Money creation has surged during the past year, but there are no signs of inflation, meaning a lot of this excess money is going to shore up banks’ capital bases and/or fuel asset price inflation,” she said.

Sonders also says that as long as investors — especially those in the bond market — think there is a credible plan to reduce the U.S. deficit and increase economic growth, an inflation crisis is unlikely, Forbes reports.

Hulbert, meanwhile, has warned of inflation in past MarketWatch columns, but now says he may have been wrong. He notes that bond prices remain high, which usually doesn’t happen when inflation is on the horizon.

“If there were some factor out there that makes bond prices obviously overvalued at current levels, it’s a good bet that traders would be selling bonds in droves,” Hulbert writes. “That’s why I think it’s important to take seriously the notion that bonds are not overvalued right now, even though I have previously argued to the contrary. That, in effect, means taking seriously the notion that inflation and interest rates are not likely to go higher anytime soon.”

Hulbert cites an inflation analysis performed by Ned Davis Research’s Joseph Kalish in providing evidence that inflation may be a ways off. Among Kalish’s points: There is a high level of excess capacity in the economy right now, which puts downward pressure on prices; following every recession in the post-war period, inflation has fallen; while public debt has surged, it has been more than counterbalanced by deleveraging in the private sector; interest rates are actually high in real terms (meaning the difference between long-term Treasuries and the consumer price index), which tends to discourage the use of debt.

“Kalish acknowledges, inflation is a big risk for the longer-term, which he defines to be further than five years into the future,” Hulbert says. “Over periods less than that, however, his analysis suggests that inflation will remain low.”

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