Inflation or Deflation?

There is a war waging right now, between those who say deflation is coming and those who say inflation is coming. The cost of getting the call wrong is very expensive. On the one hand, central bankers are flooding the system with cash, as Bernanke in particular doesn't want to make the same mistake as governments did during the Great Depression. Then again, a contrarian would say that everyone is on the wrong side of the trade (betting for inflation) so it makes sense to bet on deflation. There are strong points in favour, namely a rising unempolyment rate, no wage pressures in sight, deleveraging that still has to run its course, and the prospect for asset bubbles cropping up all over the place with the flood of cheap money. Noted money managers are saying that there is "nothing on the horizon that gives cause for concern". (Isn't that how all corrections start?)

At the same time, it's hard to argue against the facts of the market. (There is only one side to a trade as Jesse Livermore would say, and that is the right side). The right side now is saying inflation is coming. TIPs are back at new interim highs. The forward curves are back in contango, and showing parallel upward shifts over 3 and 6 month horizons. And the bad news asset, gold, is hitting new highs. Seems like inflation is the place to be!

What does this mean for investments? Get long base metals equities, gold equities, agriculture equities, and stay away from long bonds.

Of course the market could reverse on a dime as it has been prone to do in the past. If the market changes course, the correction will be fast and swift. But for now inflation is where it's at!