Gold News

Storm Clouds? What Storm Clouds?

One's the equity bubble, other is inflation...
 
TWO dark clouds hang over the summer fun, writes Bill Bonner in his Diary of a Rogue Economist.
 
First, with stocks at/near all-time highs, there is the threat of a major selloff in the markets.
 
Michael Burry, hero of the mortgage bubble crisis, says it will be the "mother of all crashes." Business Insider is on the story:
"All hype/speculation is doing is drawing in retail before the mother of all crashes," the investor tweeted. "When crypto falls from trillions, or meme stocks fall from tens of billions, #MainStreet losses will approach the size of countries."
Burry added that people's fear of missing out has propelled asset prices to unsustainable levels. "#FOMO Parabolas don't resolve sideways," he cautioned.
 
Nope. Prices don't go up, like a baseball off a bat...and just stay in the air. Gravity brings them back down to Earth. The higher they fly...the further they fall.
 
But wait. What about the other dark cloud – inflation?
 
Won't it keep stocks aloft? Won't the Federal Reserve's money-printing guarantee higher share prices? And shouldn't a prudent investor stick with stocks, at least until the inflationary threat is over?
 
Earlier this month, we found out that inflation in the US, officially, is running over 5% – for only the second time in 30 years.
 
If they calculated it the way they did in the 1980s, it would be over 10%.
 
Tim Congdon is one of Britain's leading economists. Last week, he released a report, Where Does US Inflation Go From Here?, in which he concluded:
"The annual rate of US consumer inflation between now and end-2022 will typically run in the 5%-10% band."
Like a tornado, inflation picks up everything in its path, sends it swirling high into the air...and leaves the ground littered with debris once it has gone. It destroys markets, economies, governments, and whole societies.
 
And with such a funnel cloud approaching, you'd think the feds would want to head for a storm shelter.
 
Instead, they're spreading out a picnic blanket and spraying on the insect repellent. The Fed is continuing its $120 billion per month money-printing.
 
The "dot plot" of anticipated rate increases shows none are likely, neither this year nor next, with two expected in 2023.
 
And Senate Democrats are pushing ahead with plans for a $6 trillion "go it alone" spending extravaganza.
 
The EZ money will keep coming, in other words. And all of this money will eventually show up in prices. Where else could it go?
 
But in the meantime, as the twister draws closer, investors will become unsettled.
 
A study by economists at investment research firm Gavekal shows that rising inflation levels means falling stock market gains:
 
For the last 130 years (the period for which we have data both for US prices and for the US stock market), all the excess return on US equities relative to cash have been realized during periods of decelerating inflation. The excess returns during periods of accelerating inflation have been a robust zero.
 
They go on to say that since World War II, every major bear market (with a drop of 50% or more) has come during a time when consumer price increases are speeding up.
 
Which should investors fear – a crash or inflation?
 
The answer is...both.
 
And herewith our simple Five-Year Forecast:
 
The feds will inflate. The stock market will deflate.
 
And then...the feds will inflate even more...
 
...until the inflation tornado has made a wreck out of everything.

Bill Bonner has co-authored a number of New York Times Bestsellers including Financial Reckoning Day, Empire of Debt and Mobs, Markets and Messiahs. In his own opinion, Bill's most recent title, A Modest Theory of Civilization: Win-Win or Lose, is his best work yet. Bill also founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group have exposed and predicted some of the world's biggest shifts since that time, starting with the fall of the Soviet Union back in the late 1980s, to the collapse of the Dot Com (2000) and then mortgage finance (2008) bubbles, and more recently the election of President Trump.

See full archive of Bill Bonner articles

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