Deflationistas, Unite!

Lately, I have been eagerly following the Inflationista vs. Deflationista debate personified by Russ Winter and Mike "Mish" Shedlock. While each is right according to their own definition of inflation, I think their future predictions are vastly different.

I have found myself lately in the middle of the two camps. So far they have been both right: Russ with his predictions of "Mad Max" commodity price hyperinflation fed by a dollar collapse, and Mish with his predictions of a deflationary collapse in banks and the auto industry.

Into this situation comes the latest news from Starbucks: "Starbucks to cut up to 12,000 jobs, close 600 stores." Excuse me, but this is not inflationary. However, it's not good news for the dollar either. Will Mish be right in the near future? Will commodity prices collapse? If they do, will it even happen this year?

So, what is the story here? What's weaker, the world economy or the dollar? I think that the dollar is clearly weaker. Fund managers calling for a bounce in the dollar are premature.

However, we can see the weakness spreading slowly. New Zealand's economy contracted last month. Great Britain's housing market is plunging. So is Australia's. Europe is suffering from a slowing economy as well as high inflation.

Well, I couldn't resist a trade on this spread of the global housing implosion. I shorted FXA, the Australian Dollar ETF today, with the Aussie very near a 52-wk. high. I wanted to short Sterling as well, but the ETF is so oversold it's unshortable. Too bad. Maybe I'll look for a UK equity index to short instead.

In the meantime, I will continue to take my time and try to understand both the price inflation resulting from a weak dollar and the deflation resulting from the collapse of peak credit. There is no need to rush. These cycles will take months, if not years, to work themselves out.