If you have been trading since the end of the second world war you have gotten used to the typical low inflation economy. Yes, we had a spike higher a few times like in the alte seventies but by and large we have had regular inflation. Well gues what? Things trade a lot differently when we are in a deflationary environment. Since most people have not looked at it we will do it here.
In a deflationary environment instead of stocks chasing bond prices they chase bond yields. Where the market usually goes up when bonds rise due to lower rates, in deflation they go down when money goes into bonds. Basically the exact opposite of the stock bond relationshipthat we are used to seeing in an inflationary period.
In deflation the US Dollar and the Japanese Yen go up. During inflation however the US Dollar typically goes down as we have relatively low rates. Relationships like these really affect your trading results. If you are not trading like a macro trader you may not have experienced this type of environment anywhere.
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