Hi Ganalane!

Its just too early to know which scenario will be the dominant market force. Yes, price presure is a factor right now, partly driven by weaker employment and asset value writedowns. But to use commodity pricing as evidence of deflation is not going to work. The reason is that there is still a huge amount of speculative capital sloshing around in the system right now. And if the majority of players have decided to place speculative bids to short commodities, that would not represent real deflation. It is more short term noise. Lets consider grain for example. Wheat, corn, rice, etc have given up big chunks of the price compared to just a few months ago. Have people decided to eat less? Is there a glut of food being produced? No. The price weakness is a reflection of speculators putting in shorts on all commodities including food. Is the dollar really getting stronger? Or is the dollar strength just due to speculative capital going long dollar futures and riding the latest trend? And how much has this temporary dollar strength influnenced the short term behaviour of commodities priced in dollars, like oil or gold, which behave in an inverse relationship to the dollar?

There are so many unknown unknowns to consider, we just cannot be sure where we stand today. Any of the above examples can reverse very quickly. There is evidence at hand that the dollar has already begun to roll over. So to put your eggs in the deflation basket at this time is putting too much confidence in potentially false signals.

Does anyone want to make a stand that the dollar cannot fall to a retest of the 80 cent level within a matter of weeks? And if that happens, it is likely that oil could rebound to $60 and gold could easily run to retest $1000. Then how much discussion would we be having here on deflation? Watch how fast the market can reverse and the talking heads will change their tune. I am not saying it will happen, but I am saying that it is a very real possibility. Discussion of deflation is a systemic consideration, not based on short term volatility of certain indicators.

We can make a better call on all of this once more of the noise has been stripped out of the equation. If we are in a true deflationary environment, I think we will see $600 gold, $20 oil, and across the board markdowns in prices for goods and services. How many services are cheaper today? Tried to repair your car lately? Are you paying less in restaurants? Haircuts? Home renovations...?

We are a long way from deflation just yet.

cheers!

mike