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Which risk is higher now: deflation/inflation

Hi Cullen,

A month ago, you've written that COVID-19 is estimated to take a $11T chunk out of USA's GDP, and that the then-estimated $2T of stimulus by Congress will barely make a dent. You then tentatively concluded that deflation was a larger risk.

In your recent Alpha Trader podcast, you stated that the now-estimated $4T of stimulus is 4x the size of the $1T of GFC bailout. You then concluded that, setting aside a depression-like scenario where life goes on lockdown for longer, in the optimistic scenario where some parts of our lives can return to normal the greater risk to prepare for is actually inflationary risk. You then proceed to explain how value stocks historically tend to outperform growth stocks in inflationary regimes and all that...

What's your latest opinion on the larger risk to prep for (deflation/inflation)? What prompted your stance to change between a month ago and now?

I note that another contributor in the fin-sphere that you also speak with recently, Barry Ritholtz, he seems quite sure that deflationary risk is higher.

Thanks so much for sharing your thoughts here and on other platforms, they've been very helpful


Hi @K-HAN,

It all very much depends on the virus outcome. Here's how I see it:

Scenario 1 - the virus slowly dissipates and life returns to normal. In this case I think you could have a somewhat fast snapback to 2.5-4% core inflation because you have supply chain shortages and price hikes that will remain somewhat permanent. Demand is strong-ish because of the massive stimulus and the economy comes back to life during 2021 and things are totally normal by 2022. In this case I think the Fed is perhaps talking rate hikes by 2022 as inflation becomes a worry and the deficit remains large.

Scenario 2 - the virus comes back with a vengeance in the Fall or never really goes away. In this we all get scared again in the Fall, shelter in place well into next winter and spring and the economy is a huge mess for a long time. In this deflation is a disaster. Defaults will be massive. The stock market will crater right back to its lows and lower. A total mess.

I think scenario 1 is the more likely outcome, but I am generally way too optimistic because that's just kinda how I am about life....So, I hope I am right, but I could be way wrong. 🙂

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche