Continuing our ongoing discussion of inflation and deflation, we read in Barron’s today that Paul McCulley, managing director at PIMCO — the largest private money manager in the world –has some thoughts on the subject:

“Serious inflation is of no concern now, with all the excess labor and industrial capacity that exists and the speed with which wage cuts are occurring in this cycle”  (from ”Cataclysm Averted, Expectations Diminished“).

Of all market participants, bond investors have the most to fear from inflation.  A prolonged surge of inflation is bad for stocks, but it is absolute destruction for bonds.  So, the fact that one of the chief decision makers at the largest bond fund manager in the world sees no real risk of inflation certainly strengthens our case that deflation — not inflation — remains the threat. 

That’s our story, and we’re sticking to it.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy