Depressions Compared and "Are We There Yet?"
On the subject of inflation, I listened to an interesting audio interview by Jim Puplava of Financial Sense Network a few weeks ago. Jim has some very good interviewees in his podcasts. The link is available at the end. I recommend it as worth a listen, and hope readers will find it worth their time.
The interviewee in this one was Ronald Marcks. Marcks was a practising lawyer during the 1970s and is better known under his pen name Jens O Parsson, as the author of the excellent book “Dying of Money”. His comments about reservoirs of inflation are very interesting. Marcks considers that Milton Friedman did not look at all of the places in which inflation could be “stored” rather like water accumulated in a reservoir, and from which it would emerge later.
Dying of Money is one of the really good books that gold bugs should consider as required reading. It will not help you trade any better, as it is not about the markets as such. It is a fine economic book about inflation in the modern era, and that’s a big compliment to its author, because he wrote it back in 1974, the last major depression-inflation phase. Well worth reading, whether you get a copy or find a pdf on the internet.
The inflation period that brought his book back into everybody’s awareness was back in 2010. Stagflation, or financial repression as it is also called, followed that inflation. But what will follow the stagflation we are presently in, and when?
Looking back, our present depression phase began back in 2000 and we are 13 years in now. So we have had stagflation pretty much since 2000, certainly since 2009. If this period is examined closely it can be seen to be alternating pulses of inflation, followed by deflation, and then inflation again. The powers that be are hoping that time will heal the economy while we all run on the spot for all our worth. And time really does heal things. But here is the problem, if the depression is artificially made shallower by QE money printing, will the time required to complete the bear market be extended? This remains to be seen.
So while we are in financial repression/stagflation necessary goods rise in price and costs rise, but incomes are held down reducing our ability to pay these rising costs. Capital may wish to flee to places with a nicer financial climate - if there is one - but controls are being installed, and interest rates are kept below the inflation rate so that the loans of the indebted sovereigns and banks will shrink under inflation, and creditors gains are stolen as a result of artificially low returns.
The taking of investment capital and savings by government during stagflation also destroys growth potential and that is where the stagnation in the word stagflation comes from.
A look at US stocks shows a giant trading range clearly on the monthly chart:
The red one is the 1970s bear for comparison. As you can see, a certain form or generalized pattern looks to be repeating but the present day version (the black chart) is incomplete.
Trading range markets are to be expected where inflation rises faster than stocks are rising. However if the bull swings are traded and other markets used for the bear swings, then money can be made during this period. Unfortunately the Fed and Central Banks have countered this strategy by increasing misinformation with “a strong guidance policy”. Basically this means that they switch on and off their monetary intervention at unexpected times to prevent the markets from exploiting their actions.
But if inflation is only half of the time what do we do about the other half? We endure deflation that’s what, and we see a decline of real assets during those periods.
- We can observe the actions of the insiders via mandatory disclosure, but this is of limited value because their actions tend to be disclosed at about the time that they reverse their investing strategy anyway.
- Inventory study, like the COT reports are one of the semi visible manifestations of insider s trading the realtime Fed policy. But unfortunately those are a broader guide and are not good for precise timing.
- Looking at CB balance sheet growth is another way.
- Range trading the markets is possible, being careful to not let a deliberately mal intentioned monetary pulse catch our trades on the wrong side.
- Margin levels are another metric that seems to work around now, due to the banks and exchange members wanting to take the players money, and operating their margin levels as an expansion-contraction scam. They raise margin requirements and cause retail longs to dump and flee. Then they pick up the disgorged assets cheaply. High margin levels warns they are about to change the rules and do it again.
Here is the 1930s-1940s depression period:
The 1930s-40s depression ended with a similar series of rising lows after a trading range, but before that it faked a recovery but then sank back for another few years in the depression trading range before it eventually built a genuine rising trend towards new highs and exited the trading range for good.
So what happens as the present period moves towards its end? We currently have a trading range in stocks which has lasted for a decade, and are rising to the exit, or a fakeout moment. The trading range in Japan was a declining range. Japan printed less money than the US at the start, but are making up for it now, whatever that may bring as a result! Usually the stagflation trading range contains a severe down-leg at some stage. That is a deflationary crisis. That may have been the one seen in 2008 but it is possible that a second dive may be still to come. The exported inflation begins to return home in rising living costs but wages are held down due to poor business conditions and it morphs into stagflation. The stagflation bites and people find it hard to pay for food, transport and energy.
Over time, labour mobilizes, strikes and protests will rise as middle class and working class people find it difficult to survive and demand wage increases. (See McDonalds and Walmart strikes already.) They agitate for change and more pay. That is when more people become angry and try to get their public representatives to actually represent them.
During the stagnation phase, the politicians realize that their personal income and career prospects are eroding. The politicians develop a concern about a possible end of their career within a luxury segment of society. They realize that the masses are mobilizing and uniting and require real respect to some degree, so they become motivated against further taxing of “their subjects”. Then they may begin to turn on those they previously served as power-business partners. Bank executives will lose their power when this stage arrives. Power beats money when the going gets tough.
Severe declines in stocks cause leaderships to order the Central Banks to open the money printing presses to a greater degree than before. This will cause inflation assets like stocks to rise permanently into higher trading ranges.
At some point genuine green shoots of growth appear and Central Banks will pull some stunt to “mop up the excess capital”. Sudden rule change warning! Gold bugs beware, and real estate owners watch your property taxation valuations, they may exceed the resale valuation by a large margin. The CBs will try to capture new personal wealth for their political bosses.
Here is the current trading range (SPX) with the broadening or megaphone trading range. Every high, and every low so far was a false breakout as you would expect in today's markets. The exit trend looks very steep, and more like the false breakout trend of the 1930s, than any of the genuine breakout trends seen in the charts above.
This particular view of the next 3-5 years is not really a forecast in the usual sense of the word. It is merely my recounting of historical events that happened in the 1930s, 1950s and1970s which were similar economic periods to now. I have recast those historical events in the modern context of the way that recent events are being currently handled by those in charge. Out of self interest the different social groups in society can be expected do the exact same things now as they did in previous waves of the same cycle, but in the context of the modern situation there will be differences. The time gaps between these bear markets is very long to attempt comparisons at all, but what I've done here is hopefully useful for readers.
A major issue would be if this is an 18 year bear instead of a 13 year bear, in which case it’s not finished yet, but has 5 years more to go!
At the moment stocks are building an extremely steep rising trend to find out if they can find the exit. If there is more stagflation to endure first, the S&P will fall back from this breakout and re-enter the range for another period before trying again. It did that in the 1930s.
You can find the Jens O Parsson interview I described here: http://www.financialsense.com/financial-sense-newshour/guest-expert/2013/08/24/jens-o-parsson/dying-money