Mr. Market, our old friend, who is never meant to be wrong, says it is inflation. It’s tough to agree with Mr. Market because most of us spend all our time trying to beat the market and prove it wrong. However, anyone who has been through a few rounds trying to outsmart the market will likely admit, for an old fool, Mr. Market lands plenty of mean punches if you believe you can make a chump of him. So, on balance, the market pointing to inflation is a pretty strong sign. You might say, where exactly is the market indicating inflation is on the way? Of course, the precious metals couldn’t be clearer on that, but you could argue that’s just the old “never wrong” gold bugs at play, bigging up their precious asset with their considerable Boomer reserves.
It could be, but for me, the clear indication that inflation is coming – and is, in fact, already here – is the market as a whole. The Fed Ctrl-P approach has gone straight into the stock market and will dribble out, and in due course, even cascade out like a broken water tank through the ceiling of the economy and do its inflationary work. The original QE – and this new QE-esque process is similar – and this dribble down is exactly how it is supposed to work. However, this time, the scale of new money, the multi-channel nature of the distribution and the likely rolling nature of the printing will make the outcome different from the previous bailouts. The credit crunch was a momentary removal of money from the system caused by a liquidity collapse because the system was poisoned by a sliver of bogus financial instruments; QE refinanced the system. This time around, the very core of the economy has been truncated. People are making less stuff and have – on a global basis – been cowed into consuming less. The whole economic process has been dialled back 10-20%. Meanwhile, money has been dialled up 20-30% (and more). That is the basis of the inflation argument, and slowly but surely, it is being acknowledged.
Meanwhile, the deflationists say a lack of demand will create falling prices. Period. Yup, there is more money, but it’s not going anywhere, maybe ever. We are doomed to be misers, many of us rich misers, and the money is going to stick in the stock market and remain stuck in the plumbing banks, sunk like a treasure ship in an unfathomable ocean. Inflation? Yes, please, though we won’t be getting any of that, but it would be good.
I think this is wrong, but what if it isn’t?
Can we protect our money anyway?
I say put your assets into 33% cash, 33% stocks and 33% gold/crypto, but that might be rather dramatic for many people. So, here is a thought for the cash-loving who idolise their regal cash and would be sad to part with it, even while the spectre of inflation looms…
Spread your cash as follows: 33% USD (probably the most inflation prone), 33% euro (printing but not like the confetti folks at the Fed) and 33% yen (Japan practically invented deflation, and for a good reason (spoiler): they like it.
Japan is Warren Buffett’s idea of an inflation hedge, which is why he is buying Japanese stocks: Mitsubishi (OTCPK:MSBHF), Mitsui (OTCPK:MITSY), Sumitomo (OTCPK:SSUMF), Itochu Corp. (OTCPK:ITOCF) and Marubeni Corp. (OTCPK:MARUF). You don’t have to be a genius to see the inflation concern at Berkshire Hathaway (BRK.A, BRK.B) and a sudden shift of risk to gold (once lampooned), deflationary seasoned Japanese stocks and sketchy unicorn pre-IPOs. Japan is nicely typified by the yen. If inflation hits, Japan will be at the back of that conga line, and if deflation hits, your cash will appreciate the most in the land of the rising yen.
Europe is less frenzied in its money printing, so should deflate more or inflate less than the dollar. Meanwhile, the dollar looks to be the benchmark for the whole process in any event, and likely the one you are denominated in anyway.
If you suddenly get a whiff of high inflation, you can then start pumping your cash across the equity/gold/crypto spectrum, but if inflation creeps up on you, then having spread over less potentially inflationary currencies will blunt the blow.
This inflation/deflation scenario is not going to unfold quickly, but if inflation takes hold soon, it will be a sign that it is coming hard and fast. That would be very bad, and it is a strong possibility, in my mind. Yet, it is absolutely possible that we will get a short burst of deflation in certain areas first as distress selling hits sectors. If deflation is patchy, as I believe we might see, that in itself will be a prelude to inflation, as liquidation actually shrinks supply in the medium term, while squashing prices in the short term. However, if this happens and islands of strong price increases are to be seen, that will be the long-term outcome, not the short-term “going out of business” sales.
Right now, the deflationist and inflationist arguments both carry weight, but on one side are economists and on the other side are the market, apparently Warren Buffett, jaw-dropping numbers from the Fed and my churning gut. I feel the economists are outnumbered and outgunned, because you can be sure if economists were any good at predicting the future of money or markets, they wouldn’t be teaching class, they’d be on their yachts.
But being snarky aside, they could be right, so the way ahead is to position your assets to pivot with what develops rather than be locked into adverse conditions.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I hold all currencies mentioned and am long GOLD.