“We are exiting the eye of the giant financial hurricane
that we entered in 2007, and we’re going into its trailing edge. It’s going
to be much more severe, different and longer lasting than what we saw in 2008
and 2009… The U.S. created trillions of dollars to fight the financial crisis
of 2008 and 2009. Most of those dollars are still sitting in the banking
system and aren’t in the economy. Some have found their way into the stock
markets and the bond markets, creating a stock bubble and a bond
super-bubble. The higher stocks and bonds go, the harder they’re going to
fall.” – Doug Casey, Casey Research
“This huge recession that started in 2007, and the bottom
was 2009 and 2010, has cyclically recovered. So, people think it’s going to
be happy days again, but it’s not… You’re going to see very high levels of
inflation. It’s going to be quite catastrophic.” – Doug Casey, Casey Research
“Bond investors are signaling to us that they don’t
believe the Fed is in control anymore. The Fed by contrast is brushing aside
the market’s deflation concerns. It all feels very much like Japan circa 1995
in the wake of the yen’s then surge. . . The collapse in inflation
expectations tells us that the market believes the central banks, despite
their monetary profligacy, are failing to prevent the western economies from
turning Japanese, and thus at risk of repeating their devastating slide into
outright deflation in the 1990s.” – Albert Edwards, SocGen
 
MK note: Markets, we are told, are predictive. If so,
what is the stock market telling us at current levels? What is the bond
market yield telling us? What is the gold market telling us? Of the three,
only stocks are predicting a bright economic future. Gold and the bond yield
are both telling us that the global economy is in the grip of disinflation
and perhaps on the verge of going over the cliff – to a full blown deflation.
The St. Louis Fed’s inflation expectation index for five
years out is now at levels not seen since the 2008 crisis and an indication
how markets see the situation. That expectation could change in a
heartbeat, but it gives us an idea what markets are telling us now.
Stocks, having returned to old highs, are obviously the
outlier, and one wonders what it is that motivates the upside. This morning’s
Financial Times ran a headline that reads “Central bank moves drive equities”
and quotes HSBC’s Ben Ladler as saying, ” [Central bank action] makes people
feel more confident when they know policy-makers are on their side.
People had gotten too bearish.” Really? Odd that the same
policy that drove gold down because the Fed came off “hawkish” would drive
stocks up. One wonders to what degree the retail public is involved in
all of this – either the stock or gold markets. We have pointed to the
artificiality in the stock market as something to be concerned about – that
concern is boosted by the headline and remarks in this morning’s FT.
So, which market[s] is telling us the truth and which is
peddling fiction?
I’ll put my money on the bond and gold markets, and
remind our readers, that gold performed extremely well during the
disinflationary period both before and after 2008. We should also keep
in mind that very strong global demand pushed prices only after it became
clear that the previous financial bubble had created widespread systemic
risks that threatened the viability of the system – the very same set of
circumstances both Casey and Edwards predict above.
Doug Casey, as you can see from the quotes featured
above, sees a turnaround from the current disinflationary environment to
“catastrophic” levels of inflation. Albert Edwards sees it a bit differently
– disinflation, perhaps deflation, first, then inflation. “I have not one
scintilla of doubt,” he says, “that the western central banks have set us up
for an even bigger version of the 2008 Great Financial Crisis/Recession – but
this time rock bottom interest rates and large fiscal deficits will mean only
one thing; QE will be stepped up to such a pace that you will hear the
roar of the printing presses from Mars.” As hinted earlier, I come down
in the Alberts camp.
That said. . . . .
Both analysts recommend gold and that is a good thing
because gold will protect the private investor no matter which way the
economic rabbit jumps – deflation and hyperinflation and all stops in
between. When considering a monetary era when one could hear the roar of the
presses from Mars, Edwards sees gold as a “must-have holding.”
Doug Casey offers this summation of gold’s recent price
history: “There’s no question that gold has had a severe retracement since
its high in September of 2011. I understand their feelings. But we’re not
talking about feelings here; we’re talking about markets. Markets cycle. This
one has cycled about as low as any gold market in past corrections, and now I
think it’s time for it to cycle up again.”
As for stocks, the outlier in this comparison, Deutsche
Bank’s Alesandar Kocic says, “given the current [low] level of inflation,
S&P should be trading at half of its value.
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