Inflation Targeting, or DEFLATION Targeting?

Inflation Targeting, or DEFLATION Targeting?

Wed, 08/22/2007 - 16:42 — moneysage

A great deal of ink has been spilled dissecting the issue of whether the FED should, or will, "target" inflation. The realities, it seems to us, are rather different.
We are, by now, all-too-familiar with the intensifying downward spiral in residential real estate prices. Moneysage has been watching the commercial real estate market with great interest; we believe this market has ALREADY PEAKED AND TURNED DOWN. This asset class has followed the normal cycle, culminating in an 18-month long manic phase in which prices no longer bear any relation whatsoever to the rent roll.
The signal for the top, we believe, came when Sam Zell, very possibly the most astute real estate investor of our era, sold Office Equity. The buyer immediately flipped many of the choicest properties. These late-date buyers will, we suspect, find that they have been caught holding the bag. With the hype over this wildly overpriced asset class reaching a crest (pick up any financial magazine), we expect the bear market in this sector to be a bad one.
The truth about "inflation" is that there is precious little of it. The more than doubling of oil prices has culminated in a core rate of inflation, according to the FED's preferred inflation gauge, the PCE-core, of about 2%! For a variety of reasons, the primary trend in the global economy remains deflationary. The key central banks have greatly reinforced the deflationary productive and economic tendencies with their parsimonious monetary policy.
We expect that the Fed-sanctioned public frenzy over inflation has now crested. In due course, growing FED realization that we are in an increasingly deflationary environment will lead to a regime of much lower interest rates and a return of the deflation worries which tormented the FED at the beginning of the decade.