With polar opposite forces of money printing (inflationary) and defaults bouncing around the heads of investors, it is not surprising to see schizophrenic inflation expectations. When Treasury Inflation Protected Securities (TIPS) are moving sideways, it is indicative of an uncertain outlook for inflation.
In a debt-saddled world with shaky balance sheets, policymakers want to create positive inflation to (a) keep asset prices from falling, and (b) to “inflate away” debt. All things being equal, central bankers would like to see a healthy TIPS market.
While understandably an extreme example, TIPS consolidated several times in 2007 and 2008 (top portion of chart below), which showed rising concerns about deflationary outcomes. When thoughts of deflation surface, stocks often experience a sell-off soon thereafter (bottom of chart below).
How can this help us today? TIPS have been indecisive for several weeks (see below). If they break below the orange box (< 117.69), it would increase the odds of some type of corrective activity in stocks. The blue arrows show what may turn out to be a bearish double-top.
We have noted recent weakness in gold, which carries similar deflationary messages. Gold is down $16.70 this morning, which is not surprising since Greece has formally decided to break its promises to repay loans (deflationary).