David Rosenberg makes some interesting comments in his morning...

David Rosenberg makes some interesting comments in his morning note regarding the price action in US Treasuries. He cites the rally as a sign that the world is concerned about the deflationary shocks from rising oil prices.

David Rosenberg makes some interesting comments in his morning note regarding the price action in US Treasuries. He cites the rally as a sign that the world is concerned about the deflationary shocks from rising oil prices.

The Fed??s dual mandate has them tinkering in the markets far more than they should and the repercussions are disastrous psychological impacts. They manipulate rates, bailout the banks, and generally implement policy that is based around creating a healthy banking system. After all, that??s really all their tool set can do anyhow. Not surprisingly, their policies over the last 20 years have helped in significantly financializing the US economy. The results of that world speak for themselves.

Today, in a misguided attempt to create a ??wealth effect?? via equities it appears as though Ben Bernanke has helped to generate a speculative boom in many commodities. This is not the direct cause of the unrest abroad, but it??s certainly not helping. But perhaps more importantly, the environment that Ben Bernanke is creating (commodity bubbles) actually increases the risk that we will relapse into a deflationary spiral (the very thing he is attempting to combat). After all, if the global economy slows once again it is highly likely that we will see price action that was very similar to 2008 ?C a flight to safety in US Treasuries, USD, commodities get crushed and equities sell-off. Today??s action is a small example of that sort of fear trade. And make no mistake ?C this is not hyperinflationary price action. This is deflationary price action.

For now it still appears as though the US economy is strong enough to generate low single digit inflation, however, if the commodity bubble were to worsen or oil prices were to cause a global recession (this looks increasingly likely as we head into summer) we are likely to find ourselves revisiting our deflationary discussions as opposed to fears over hyperinflation. This is not the 70??s and it is most certainly not Zimbabwe or the Weimar Republic. This is still an environment more akin to Japan and the 30??s.

http://pragcap.com/the-deflationary-shock