Helpful miscellaneous articles regarding
our retirement plan and planning. Like
you, I review my retirement nestegg and plan from time to time. Recently, I went though some continued
education for some credentials I maintain and it occurred to me that we all
could use a review about these issues.
So with your help, we will share and post articles and info that may be
helpful and of interest to many of you in this section.
Lately I have been
hearing more chatter about deflation as a possibility for our future. Here below is a discussion about this very
issue that can affect all investors. Mark
FORBES - Jun 10, 2020,
Will There Be Deflation
Or Inflation
In The Post-Coronavirus
World?
There
is only one long-term call in the market now: will there be inflation or
deflation in the post-Covid-19 world? The majority opinion is deflation
because unemployment will be high and demand will be weak, while the supply
chain is resilient and will storm back offering plenty of goods to tempt weak
demand.
The new money pumped by central banks
will allow companies the time to quickly pick up the slack in supply and buy
time for companies to rebuild their business and the economy, but demand issues
will lag supply capacity, driving prices down. Companies propped up by cheap
money will not only be able to survive but will also be able to trade for a
time at a loss, which will let them cut prices. Therefore there will be a
deflationary tailspin.
Quantitative Easing doesn’t create
inflation. New money gained is balanced by less liquid assets lost in exchange.
The new money is encumbered by this process, so isn’t easily squandered on
immediate rash purchases. The economy gets liquid money and in exchange the government
gets assets. It isn’t printing money, it’s issuing it in return for less liquid
assets, further from cash, but still nonetheless wealth.
QE etc. is not petrol for the
economy, it’s oil for the engine. That is why years of QE didn’t create the hyperinflation
everyone expected when the process was invented to sort out the global
financial crisis. QE is no longer “unorthodox monetary policy,”’ it’s a proven
way to manage economies.
The new stimulus will not create
inflation and might not even prevent deflation but it will support and smooth
out the future recovery back to normality.
The proof is in the pudding of the
last 12 years of QE: QE worked, QE is safe, QE doesn’t create inflation.
You simply cannot cancel interest
rates, pump untold amounts of new money into a seized-up economy and expect it
not to create inflation. It always has and it always will. QE did create
inflation. It created it in stocks and real estate and many periphery assets
like art, wine, watches, hypercars. Your low inflation rate is fake data, just
like so much information today. When hotel and restaurant prices double,
somehow magically the effect is cancelled out by broadband speed increases that
didn’t push up my phone bill. The world is awash with empty $10 million
mansions that have grown like a cancer down the coasts of California and any
other juicy spot developers can get their claws into.
These “assets”’ are artificial, a
Frankenstein of QE and the artificially low interest rates that fund these
purposeless constructions. Plastic toys from Asia might not have gone down in
cost, but a packet of candy or popcorn has shrunk in size. Go measure inflation
by 1970s standards and you get a much higher rate of inflation than today’s
headline numbers.
So whatever the real rate of
inflation has actually been, no one is challenging that stock prices are
extremely high or that house prices are way up. That is where QE inflation
goes. Reverse QE was tried in 2018-2019 and what do you know, the stock market
crashed.
You might say this kind of inflation
is great. Inflate houses and pay out the middle classes. Hype stock prices and
give the normal guy a job because corporations can borrow huge sums for nothing
then go ape with hiring, expansion and competition. Go on, use QE to juice the
economy and tax revenue so government can spend, spend, spend. Is QE the first
economic free ride in history or is it building a skyscraper of debt?
You can build a tower of debt, that’s
how bubbles work, but if you keep building it at some point its going to fall.
Now you can prop it up every time it wobbles but your tower gets more and more
convoluted and bigger and bigger and it must at some point collapse. That is
when inflation strokes because it is the only escape.
Out of control economies always end
up in inflation because it’s the only way governments can default on their
debts. The Romans did it. The medieval governments of Europe did it. The
governments of the 18th,19th and 20th century did it and it happens today from Iran to
Argentina, from Turkey to Venezuela. It’s the path governments take when they
can’t afford their budgets or the service on their existing debt and that is
exactly where Europe and the U.S. are now, off the cliff of their ability to
sustain the government systems and their debt mountains.
So
what is it to be? Inflation or deflation?
Clearly the deflationists have ten or
more years of experience of pumping QE on their side and a short crisp
argument. High unemployment and fear equals deflation. New money does not go
into cash but into assets that might get pricey but don’t change the price of
bread.
The inflationist argument is more
visceral. You can’t make money out of thin air without producing more stuff to
buy without making inflation. They don’t have much to say about being wrong for
the last ten years. To inflationists, inflation is just obviously coming. To
inflation believers, a vast explosion of new liquidity simply cannot be matched
with things to buy and therefore must come through into prices rising.
So what is it going to be? I believe
it will be inflation.
Milton Friedman said: “Inflation is
always and everywhere a monetary phenomenon in the sense that it is and
can be produced only by a more rapid increase in the quantity of money than in
output… A steady rate of monetary growth at a moderate level can provide
a framework under which a country can have little inflation and much
growth.”
The point I focus on: Inflation is
always and everywhere a monetary phenomenon.
Inflation/deflation is not
accidental, it is policy. Deflation is not an accident in Japan and inflation
is not an accident in Venezuela. If they were they could simply swap staff at
their central banks and sort their “problems.” Inflation and deflation are the
result of political necessities created by events.
Deflation will make the recovery from
the coronavirus pandemic harder. Inflation will make it easier. Quantitative
tightening has been tried and it failed. QE has been tried and it worked.
Deflation makes the situation worse, inflation makes the situation less bad.
These ‘directions of travel’ means inflation is highly likely.
Will most people even notice 7%
inflation a year? How many faster mobile phones will it take to conceal bread
going up 10 cents a loaf? Rack that up for five years and you have cut about a
third or $8 trillion off the national debt in real terms
Leaving that aside I prefer another
argument. It relies on induction. It goes as follows: The market is always
right. Therefore the current ridiculous price of stocks must have a reason,
based on something in the future more powerful than the biggest dip in GDP
since the birth of the industrial revolution (at least according to the U.K.
central bank.)
Could it be that stock prices are
going up, not because companies are going to do well but because money is going
to nosedive in value? The market is NOT actually going up in value, the market
is preempting the value of money plummeting.
The market is simply seeing stocks,
underwritten in their solvency forever by their governments, as a hedge against
the coming tide of liquidity driven inflation.
Surely if the deflationists are
right, the market is wrong, because you can’t have deflation/recession and also
have rising stock prices. You can’t have deflation and growth, so how can there
be rising stock prices? If the value of money goes up, the prices in money of
stocks should go down with the other goods whose prices are depressed.
You can have inflation, recession and
rising stock prices; you can also have inflation, growth and rising stock
prices.
So is the market right or wrong? If
the market is wrong, the market will crash, if the market is right we are in
for significant inflation. It’s not pretty either way.
But what is an investor to do?
I can only say what I’m doing: 50% in
cash, 25% in special situation stocks and 25% in inflation hedges. That is a
50/50 hedge between inflation and deflation, so I’m taking both possibilities
seriously.
I can scamper really quickly and
cheaply between either poles and straddle them both if necessary. In this crazy
new world it is important to be able to move between the poles of possibility
fast and at low cost because be it inflation or deflation one thing is for
sure, its going to be a volatile future. In such a future there is great value
to being able to move fast because you don’t have to be a genius to recognize
there is chaos ahead.
—-
Clem
Chambers is the CEO of private investors website ADVFN.com and author of 101 Ways to Pick Stock Market
Winners and Trading Cryptocurrencies: A Beginner’s Guide.
Chambers
won Journalist of the Year in the Business Market Commentary category in the
State Street U.K. Institutional Press Awards in 2018.
(As with any of these informative articles,
anyone who needs someone to talk to about
this
very subject contact me and I can direct you to a knowledgeable advisor).
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