The late Kurt Richebächer addressed the subject of inflation and deflation in a 2006 newsletter. Among others, he quoted J.M. Keynes who in his A Treatise on Money, first published in 1930, commented on a table about bank credit, the wholesale price index and stock prices thereof as follows: “Anyone who looked only at the index of prices would see no reason to suspect any material degree of inflation; whilst anyone who looked only at the volume of bank credit and the prices of common stocks would have been convinced of the presence of inflation actual or impending. For my own part, I took the view at the time that there was no inflation in the sense in which I use the term. Looking back in the light of fuller statistical information than was then available, I believe that, whilst there was probably no material inflation up to the end of 1927, a genuine profit inflation developed sometime between that date and the summer of 1929. Plainly, thinking on the issue was much more profound at the time than it is today, with the narrow focus on consumer prices. In particular, the causal connection with credit excess was well understood” (emphasis added).
Richebächer hit the nail right on the head when he expressed the view that central bankers and contemporary economists (especially the ones linked to the financial sector) have a “narrow focus” on consumer prices when they discuss “inflation” rather than focusing on credit and money excesses, which can cause dangerous asset inflations such as we find currently among residential, and commercial properties (until 2018), equities, bonds, collectibles, Cryptos, etc.
On another note: According to Yahoo Finance, “Target earnings miss the mark as inflation-battered shoppers avoid buying things they don't really need. Blame inflation-battered US households, its execs say. The ‘biggest challenges’ Target is hearing about from its shoppers are ‘inflation in food and household essentials,’ chairman and CEO Brian Cornell said on a call with reporters detailing first quarter results. Cornell added that inflation is putting a ‘strain on the consumer wallet.’ Cornell went on to say sales trends are ‘normalizing’ in categories where inflation has eased. The strain weighed most heavily on Target's bread and butter - physical stores - where traffic and the number of transactions fell in the quarter.”
According to the NewAmerican¸ More Than Half of Consumers Say We’re in a Recession.“The results of a poll conducted by Harris for The Guardian are driving Biden supporters crazy. After all, ‘Bidenomics’ is working: inflation is down, job creation is up, so where’s the beef? The exclusive Harris poll was clear: ‘55% believe the economy is shrinking, and 56% think the US is experiencing a recession.’ In the poll, 70% of Americans said their biggest economic concern was the cost of living. 68% said that inflation was top of mind.”
Worst of all for me! According to Josie Clarke, PA Consumer Affairs Correspondent, “Over two-thirds of UK beer and wine served in pubs and bars is short measured,” a survey by Trading Standards suggests. Officers who visited 77 pubs and bars were served 96 short measures out of 137 orders, meaning approximately 70% were less than the prescribed quantity required by The Weights and Measures Order for pints and half pints and 175ml glasses of wine. Of the short measures, 41 were under by 5% or more – 29% of the 137 drinks tested.
The other day, I read a column by Noah Feldman about the fact that The Supreme Court Doesn’t Agree on What Racism Is. I want to make a similar observation about Inflation. Different experts have different views about inflation. As I observed above, people who make a living in the financial service industry and people who benefit from rising asset prices tend to downplay the destructive nature of the loss in the value of paper money, but more serious economists are well-aware of every inflationary upswing being followed by a corresponding collapse. In the case of us being investors, my view would be that the correct forecast about future inflationary trends will make or break the future performance of your assets due to the gargantuan size of the global bond market and its impact on the real economy.
I need to add a cautionary remark. Let us assume that the value of our assets consisting of stocks, bonds & cash, real estate, and precious metals is 100. Could our assets appreciate to 120 or 130 over the next 12 to 24 months? Quite easily, provided the Fed would, as Ludwig von Mises suggested, “reduce the rate of interest in the short run” and/or “issue additional paper money” and “open the way to credit expansion by the banks.”In this seemingly heavenly scenario, the question would arise about the returns in inflation-adjusted terms and or in gold terms because it would involve meaningful monetary inflation.
Now, let us also consider that our assets, which are valued currently at 100, decline over the next 12 to 18 months to around 70. Given the inflated price of most assets and the mature phase of the business cycle this is not a scenario, which should be dismissed entirely. In this scenario, which assets would likely perform relatively well and which asset would be particularly vulnerable?
In my opinion, this scenario would lead to a panic as investors are poorly positioned for declining asset values (especially homes and stocks). A panic would likely involve a flight into precious metals. In a financial panic, it is probable that the magnificent 7 and especially its golden calf Nvidia (NVDA), would be particularly vulnerable while bonds, and interest sensitive stocks such as property companies, utilities, and REITs would benefit in relative terms.
Finally, my readers should clearly understand that as Ludwig von Mises so well formulated, “Credit expansion is the governments' foremost tool in their struggle against the market economy. In their hands it is the magic wand designed to conjure away the scarcity of capital goods, to lower the rate of interest or to abolish it altogether, to finance lavish government spending, to expropriate the capitalists, to contrive everlasting booms, and to make everybody prosperous.”
With kind regards
Yours sincerely
Marc Faber
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