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business newsFed to Reignite Agflation in 2012?
Believe like I do that 2012 could be the Year of Reflation? Perhaps it's time to consider the return of agflaton as well.
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-- Ken Burns
Its been some time since I've heard the media use the term “agflation” given that soft commodities (agricultural futures, primarily) weakened last year as eurozone fears flared. Agricultural commodities vastly underperformed equities following the peak in relative performance around September when the Summer Crash began to express itself in commodities more generally. However, the Fed's recent extension of its ZIRP (Zero Interest Rate Policy) from 2013 to 2014 and explicit target rate of 2% for inflation may force TV anchors to start using the term agflation again later on this year.
Take a look below at the price ratio of the PowerShares DB Agriculture ETF (DBA) relative to the S&P 500 (IVV). As a reminder, a rising price ratio means the numerator/DBA is outperforming (up more/down down less) the denominator/IVV.
Notice the unrelenting downtrend and weakness that occurred in the second half of last year and the potential bottom being placed in recent days. While the trend is certainly still down, it may be nearing its end. If the Fed is set on fanning the fire of inflation expectations which were already rising as I noted in my latest Lead-Lag Report, then it stands to reason that anything inflation-sensitive has a high probability of performing well. Believe that 2012 is a bull market for stocks and year of reflation? Then stocks are in a favorable environment to perform in. However, if the ratio above turns around and begins to trend higher, perhaps agricultural commodities actually have a chance to advance at a faster clip.
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