I can’t see hyperinflation but I can see the Fed and central banks round the world creating inflation of say between 4% and 8%. They do this by creating debt-free money and handing it out on condition that people clear their debts first. Helicopter money. This erodes the debt in two ways, firstly by enabling some of the debt to paid back and secondly via inflation At the same time it would encourage spending by savers, again in two ways, firstly directly from the free money and secondly because they see their savings being inflated away. Gold - compulsory purchased and outlawed.
The most interesting question here is why is the Fed doing what it is doing. Despite the popular idea that the Fed has the ability to hold the economy together and keep the stockmarket elevated, it has suffered three major market meltdowns since 2000. Markets rise and fall with little regard for the conceits of Greenspan, Bernanke, Yellen and Powell. Markets undoubtedly anticipate the economy with market tops usually preceding economic deterioration by 3-9 months and market bottoms preceding economic upswings by similar time periods. The economic collapse this time was virtually at the same time as the stockmarket collapse because of the instant effect of Covid-19.
It is easy to blame economic conditions on the virus but things were looking wobbly with at least 3 steep stockmarket falls from early 2018 until the huge drop this year. If the FOMC is being unduly influenced, then it could only really be pressure from the commercial banks on each of the 12 district reserve banks because they have to own stock in those banks to be members of the reserve system. Given that rates have been effectively zero for a decade, apart from from the one attempt to raise them, I think what we are seeing is just the same herd-like behaviour as we see in the stockmarkets. The same thing has been happening all over the world. Rationality is not and never has been a prime cause for the aggregate level and direction of markets. Interest rates and stock prices are inherently uncertain and driven by the prevailing mood. We then ease our uncertainties with post-purchase or post-sale rationalisation which will be the prevailing narrative.
Danielle’s assertion that there are “no-brainer” methods of protecting portfolio is wishful thinking because although there are correlations in markets from time to time, no correlation is permanent. In other words, financila markets are always surrounded by risk and uncertainty. Ironically, she is correct in her use of the term “no-brainer” because that is exactly how most of us make market decisions. We act on deep primal urges in situations of great uncertainty. The same instincts that tell us to fight or flee. You don’t sit around discussing such actions - if you see your mates running for their lives, you do the same. It’s natures way of protecting us.
Unfortunately, it is not helpful in financial markets - people tend to pile in when they see everyone else doing so, which is usually near a market top, or hold on when markets are creeping down in the hope that they will turn up to at least get them out at a better price. All the time they are looking to see what everyone else is doing, which is usually nothing much. So they stick with their weakening stock until the market panics near the bottom and they finally sell to committed buyers who drive the market back up again. We have all done that and it is incredibly hard not to because, as much as we like to think how smart we are, we are driven far more in life by basic urges rather than rational objective thought.
So here we are looking at the most extreme market in history which we can’t really explain but, being uncertainty-hating rational humans, we have to make an attempt to set our minds at rest! Astonishingly, we still hold tight to the Fed narrative. Well, it’s nice to blame someone but in reality we have all been complicit in borrowing unbelievable amounts of money to indulge our desires in real estate, travel, cars, collectibles etc etc and generally holding onto the idea that “this time it’s different”. My point is that we are all, in aggregate, complicit in building the largest debt bomb in history and believing that nothing could go wrong. That positive and complacent mood is rapidly running out of steam now.
Adam, have you ever approached Robert Prechter or one of his team from Elliott Wave International for an interview?
Timeandtide, I really agree with your post! Well written. Thanks for taking the time.
One comment: instead of looking to Prechter for the explanation, I recommend looking to Michael Green.
Why? Prechter’s thesis has been shown to be wrong, especially over the last decade. I used to think Prechter was generally correct pre-2008, but he (nor I!) never anticipated the government’s illegal and reckless response to the expected deflation (which Prechter predicted very well). But Green? Continuously correct, and his thesis has made a lot of money.
Green’s thesis? Index funds (now 40% of the market, up from 1% since 2000) are removing real-live-humans from the natural value-investing process. We can’t all index off the efficient market hypothesis if there are no intelligent humans left picking the stocks. This then equates to a new, momentum-based-investing (flash-crash style market), one that must march forward irregardless of “value”. Green believes most “market makers” like Buffet are cynically aware value doesn’t work anymore and profiting on this and keeping mum. Myself, I’ve been doing likewise…but with firm stop-losses :-). In this market, it must get to unreasonable heights, and double many times from there. We haven’t even started yet.
Green also has a clear grasp of the demographic nightmare we face, and how the Fed really messed it all up, starting with Volcker.
That video on national debt is pretty misleading. Notice it doesn’t mention Japan, the poster child for crazy levels of debt…yet Japan is a very, very nice and productive place to live. So why leave them out? Because they have a great economy and don’t fit the narrative.
What matters regarding debt is what the debt was used for. Useful infrastructure? That’s like an investment in productive stocks that may pay more than it costs. But useless consumption? C19 virus baloney? War? That’s bad debt, gone forever. But it still drives the velocity of money, which may be all that is needed, like WWII - bad debt, but enough to get out of the depression.
The idea that we “must” pay off the debt is also a joke. Remember the old saying: “If I owe you a thousand bucks, I have have problem; If I owe you a million bucks YOU have a problem.” It can just be ignored or written off; that’s what QE is all about. It works. Plus, if you own the money to yourself, or other nations that trade a lot with you, that’s fine, as all the payments go to into your own economy and people. If it’s owed to other nations? Well, then it depends on if the debtor nation needs the goodwill of the lender nation or has their own effective economy. If the latter, they can just ignore it and walk away. But wasted countries who cannot feed themselves like Greece? Well they are dependents so must pay their debts or stop the imported goods. But productive nations like the US? All we need to do is refuse to pay with little repercussion except to return our factories back to our own nation…which is where they belong, and this would be a good thing. The problem of debt is only for nations who have no effective production due to political decay or failed local economies. Basically the lazy and politically corrupt nations. The US doesn’t fit (yet). Japan doesn’t fit. The creditors? They will likely never get their cash back, and who cares? We don’t need them, they need us.
Hi MKI - thank you for your kind comments. I would love to know who or how Prechter’s thesis was proved wrong. I am not quite sure what thesis you are referring to. First there is Elliott Wave Theory which is not Prechter’s but which he rediscovered and spread widely. Then there is Socionomics which is Prechter’s theory and which does explain many aspects of human social and economic behaviour which are conveniently ignored or side-stepped by other economic theories. Where he has been wrong is in calling market tops. Almost every top that he has called has been a top for a while but then is clawed back. His calls are always based on probabilities surrounding a set of rules developed by R.N.Elliott. Prechter’s great contribution to the theory has been in creating a logically consistent explanation for why Elliott Waves are real. He demonstrates how stockmarkets emulate natural systems of growth. He shows how the Fibonacci sequence is a crucial part of growth. He reverses cause and effect. He has come at his explanations with Occam’s Razor and reduced human behaviour and growth to a simple dynamic which revolves around the aggregate mood being either up or down or in transition. Mood is not driven by anything. It is inherent or endogenous and does not appear to be affected or influenced by any outside force. This aspect of mood, its inability to be influenced or subject to feedback, is the part of the theory that most people find difficulty accepting. I do too because nature is full of feedback systems. However, I find the essential tenor of the socionomics thesis a better and more realistic explanation for human history than any other. I don’t think there is any right or wrong about it. Like all theories it will evolve and adjust but it has not been disproven because the market has continued to rise. At the moment this only points to the far greater effect that a grand super cycle wave has on humanity as reaches an extreme of complacency.
Your idea that the US is borrowing from “creditor” nations is quite misleading. There are no creditor nations. The US is in a slightly different situation to all other nations in that the US$ is the world’s reserve currency. The US can buy as much as it wants from other nations because it can print as much as it wants to pay for its purchases. No other nation has that advantage. President Trump lambasted the Germans over the cost of Nato without understanding that the massive US support for Europe (not just Germany) is part of the trade-off for having the reserve currency. Not forgetting that Europe is a huge market for the US too.
US debt is essentially being borrowed from US taxpayers/citizens even though they are not actually lending directly. In other words if it all goes pear-shaped, it is US citizens who will be bailing the government out via higher taxes, loss of services and general mayhem.