Whether you call it a 1970's style stagflation or, as we call it, a
recessflation, investors need to prepare their portfolios to profit from a
protracted period of rising prices in the context of zero growth. Here are
some facts: Growth in the U.S. has averaged just 2% since 2010. However, Q4
2015 GDP growth grew at a 1.4% annualized rate and the Atlanta Fed model has
Q1 GDP growth slowing to just 0.1%. The simple truth is that the rate of
growth is slowing towards 0%, just as asset prices continue to rise to record
levels due to vast intervention from central banks.
The U.S. is now in the process of moving away from an environment of
disinflation and slow growth, to one of inflation and recession. Indeed, the
entire global economy is careening towards an epic recessflation crisis.
Central bankers have bombarded the world with unprecedented levels of QE,
ZIRP and NIRP for the past 7 years, which has produced a significant amount
of inflation in equities, real estate and bond prices--especially in relation
to income and GDP growth. Now, all this money printing has finally started to
spill over into core consumer prices. In the U.S., CPI has risen 2.3%
year-on-year, which is the largest increase since May 2012, and well above
the Fed's 2% inflation target. The home price to income ratio has soared back
to 4.4:1 and the ratio of total market cap to GDP at 117 is in extreme
overvalued territory. This bubble in stock prices is evident despite the fact
that the S&P 500 is in a revenue and profits recession.
But a recessflation isn't just an issue here at home. China exports fell
11.2% in January, while imports dropped 18.8% from the year prior. Yet, that
sign of economic stagnation hasn't stopped home prices in Shanghai from
soaring over 50% from January 2015!
What is the game plan of global governments to combat falling GDP growth
and rising asset inflation? More stimulus of course. Japan's Prime Minister,
Shinzo Abe, has proposed to increase government spending by 5-10 trillion yen
in this year's fiscal budget to encourage more consumption. But Japan has
already run budget deficits worth 8% of GDP for the past several years, which
has piled onto the nation's government debt that is now nearly 250% of GDP.
Nevertheless, despite over three years' worth of Abenomics (money printing
and deficit spending), business sentiment in Japan hit a three-year low this
March.
Over in Euroland, where ECB head Mario Draghi has been busy pushing
sovereign debt into negative territory, he has now resorted to buying
non-bank corporate debt. Indeed, 15 billion euro's worth of business debt now
trades with a negative yield. Even debt in the primary market is being sold
with yields less than zero percent. Mario Draghi has so distorted the capital
markets that corporations are now being paid when they issue debt.
There are now $7 trillion worth of sovereign debt (30% of the developed
world's total) with a negative yield.
Not to be outdone by her foreign counterparts, Janet Yellen (the Queen of
the dole of doves that perch at the FOMC) promised recently in a speech
before the Economic Club of New York to move slower than a frozen dead snail
when raising the Fed Funds Rate. This was a clear attempt to prevent the
dollar from rising any further against our major trading partners.
The truth is governments and central banks "solved" the Great
Recession by creating the greatest global bubble in real estate, stocks and
fixed income in economic history. Now the fuse has been lit for complete
market chaos and the achievement of central banks' inflation goals will lead
to its destruction.
Central banks are incapable of producing viable GDP growth. The only
condition these money printers have ever been able to achieve throughout
history is inflation. But inflation isn't the product of economic growth, nor
does it come from a low unemployment rate--unlike what modern day Keynesians
contend to be fact. It doesn't even come from the piling up of excess bank
reserves. Rather, it comes from a deliberate government-led attack on the
value of paper currency. It is accomplished through direct central bank
monetization of humongous deficits. And, unfortunately for the world's middle
classes, this is exactly where we are headed.
But what central bankers seem unable to understand is that economic growth
comes from productivity; not a weakening currency. Inflation kills growth by
destroying the purchasing power of consumers and savers, just as it also
encourages huge capital imbalances and a massive accumulation of
non-productive debt.
There's a tremendous shock coming to markets when it becomes clear that
inflation and growth are not joined at the hip. And that governments were
competent in their ability to create inflation, but completely whiffed on
producing growth. In fact, history has proven that inflation coupled with
recessions are the more likely pairing of economic conditions.
Until central banks learn that they aren't a viable alternative to free
markets, we will suffer through steep recessions that are also marked with
periods of both deflation and inflation. Investors must now be prepared to
weather such volatile conditions. A dynamic strategy that incorporates the
ability to own precious metals and also short the broader market is an
essential hedge towards the goal of preserving the purchasing power of your
wealth.
