Monday, January 11, 2010

The 2009 Inflation-Deflation Timer model update

As I went through the year-end discussions over the holiday season, it struck me that the inflation-deflation question remains stuck in a lot of peoples’ minds. As examples, Zero Hedge pointed out this paper by Brait Capital Management, and recent instances of the inflation vs. deflation debates continue here and here.

In the meantime, my Inflation-Deflation Timer model has remained at an inflation reading since July 2009. The table below shows the returns of the Inflation-Deflation Timer model compared to other asset classes. All returns are denominated in Canadian Dollars.

(click for a bigger picture)

The returns for the Inflation-Deflation Timer model was a very respectable 18.1% in 2009, which is roughly in line with a 60/40 balanced fund benchmark during normal periods but it performed best during recent deflationary crisis periods.

Model signals
The chart below shows the returns and “signals” of the Inflation-Deflation Timer model of the last couple of years. The grey zones show periods when an "inflation" signal was in flashing, the pink zones indicate a "deflation" signal and the white zones indicate a neutral signal.

As the chart indicates, the Inflation-Deflation Timer model was able to successfully navigate through difficult asset deflation periods. The model protected earlier gains by switching to the default-free U.S. Treasury long bonds during the asset deflation periods. In 2009, when the model indicated inflation, the model moved to riskier assets, namely equities and commodities further advancing the model’s performance.

Further reading

  1. Inflation vs. deflation (Calculated Risk, April 2009)
  2. Inflation or deflation? The Fed could wind up with both (Newsweek, June 2009)
  3. The inflation vs. deflation debate (CNN Money, June 2009)
  4. What’s next? Inflation or deflation? (Bill Fleckenstein, July 2009)
  5. A look at inflation vs. deflation (Chicago Sun-Times, August 2009)
  6. Inflation vs. deflation (John Tamny, Forbes, October 2009)
  7. Inflation vs. deflation: Be prepared for wild swings (CommodityOnline, October 2009)
  8. Inflation vs. deflation: should you worry? (CBS Moneywatch, November 2009)
  9. Economic Smack-Down: Inflation vs. Deflation (CBS News, November 2009)
  10. Inflation vs. deflation (Investment Week, November 2009)
  11. Jean-Francois Tardif: inflation vs. deflation (Finance Trends Matter, December 2009)


Trailblazer Wannabe said...

thanks for your post but your first link doesn't work.

David Shvartsman said...

Hi Cam,

Thanks for linking to our recent inflation vs. deflation post. I hope your readers find Mr. Tardif's take on the subject as interesting as I did.

keithpiccirillo said...

Thanks for taking the time to post this, I'm sure a lot of time and work went into it.
The first Brait Capital links did not work, sometimes when a typo is corrected, the link gets broken, and you have to re-paste them.

It seems that a fund like LOMMX (70 stock/30 treasury bond) or a comparable one, is a more reasonably appropriate benchmark than a stock fund.
What are the differences between the dictum's that you propose and what Meb Faber's Ivy Portfolio (timing/moving averages across 5 asset classes) follows?
I read your August 10th post that explains it, but what generates a "trend" signal, if you can divulge it, the same moving averages others use?

Cam Hui, CFA said...

The link to the Brait Capital paper has been fixed.

Apologies to everyone.

keithpiccirillo said...

Correction: THe LOMMX fund is a more reasonable slot for ME, to limit volatility than a straight stock fund.
I did not mean to say that it should replace your 60/40 mix.
The Brait link is rather complicated, but I have been reading about Hugh Hendry via TraderMark and MarketFolley links.
It's all about drawdown avoidance, a very difficult task.