Coping with Stagflation: a Gold Trader's Point of View
What can we do to survive the wealth confiscation of government created stagflation?
In my last blog I discussed that the people who are in charge have learned from two world wars that they do not want another, and that depressions and currency collapse cause world wars.
Thy have developed a desire to reduce government debt, and banking debt as a percentage of GDP, and are using negative real interest rates to favour large debtors, while at the same time restricting retail lending to you and me. Therefore the little people are not allowed to get large debts to buy assets with, and then have the debt devalued, but the wealth funds (old money) and banks and government, well this is for them.
Many "little people" who were deliberately encouraged, overborrowed to buy cyclically overpriced properties during the boom times, and these people would in the normal run of affairs stand to gain from debt devaluation. But the inflation ring system rule is that only the “right” people get their debts written down, so such wannabees must have their loans foreclosed and assets taken before the deflation of debt, so that such assets can be resold (recycled) later to another little person in the next pulsation of the inner and outer inflation ring wealth removal scam.
So we arrive at the present, and upon looking around all the signs of financial repression are visible, though covert. Inflation is elevated (not high) and about 2.5 x the official inflation CPI published figure. Taxation is up. Growth is down. GDP growth is low, but if “unofficial” inflation figures are used (Billion Prices Project US Index or shadowstats.com) GDP is actually falling. Real incomes are down. The middle class is shrinking as their assets are monetized and moved into the inner inflation ring inhabitants of the nations involved. The highest class have increasing wealth. That’s stagflation alright! Suck it up!
This takes me back to the recipe of financial repression which I described in my last article here. There will be official low inflation, but actual elevated inflation, creating negative interest rates. To speed up the wealth removal from savers of currency, there will be short bursts of higher inflation, not hyperinflation but more like 9% to 12% inflation. Let’s call it 11% for simplicity. So the inflation target of the Fed and the ECB and BOJ and BOR central banks just happens to be 2%. What a coincidence! I propose instead, that in their private offices the true official inflation target is an actual 7%-9% target, with a periodic 11%.
If they run inflation of average 10% for 8 years starting from 2010 (QE1) then the wonderful laws of half yearly compound interest work in their favour, with a 5% gain every six months. This 5% of the national debt is being confiscated from savers in dollars, and those with cash in their wallets. After my hypothetical 8 years, the amount of the debts will be reduced to 44% of their present size measured in real currency or any inflation proofed asset equivalent. That is a reduction of 56% of the dollar currency holdings out there, including TBonds, foreign held dollars, and the global holders of these dollar denominated paper notes represent a huge taxation base to apply this monstrous debt reduction to.
They’re already doing it, and have been for several years.
Now another problem is that while the debt is being written down, there are supposed to be structural correction put into place. Like for example, the deficit should not be creating new debt faster than the existing debt is being stagflated away from the dollar paid citizenry and external holders of dollars.
(By the way, when I say “dollars” here, I really mean, “Dollars, “Sterling”, “Euros”, and of course “Yen”. Just mentioning that now in case the implication of it gets lost in the telling.)
So banking structural err ... improvements ... are in hand ... sort of. Joe Public is getting structurally adjusted too ... whether he/she likes it or not. But the deficits .... hmmm ... well ... oh ....we’ll definitely get round to it very soon!
So, the debt reduction system is still under construction. And if the governments of the developed countries have not yet cut back their size and spending – the financial repression-stagflationary period has no end in sight yet!
We need to have a way to thrive under stagflationary times.
If we look at the implication of financial repression, and look for an escape route, we see that currency and exchange controls are put in place to close those escape routes off. The attacks on tax haven countries and the banking privacy invasions were coordinated by the same developed world countries during since 2000 with this in mind. So when they say nobody predicted this would happen, how did they begin implementing their side of the aftermath back then?
OK. Let’s get to the point..
- Low growth in indebted countries – get out to other countries where growth will be better, developing nations for example.
- Low growth due to low population growth, move capital to countries where population is increasing faster
- Increasing restriction on movement of capital, move sooner rather than try to do it later and fail.
- High tax on income, move to asset appreciation wealth generation like the people-entities in charge.
- High capital gains tax on the above, or 100% tax on PMs to catch you anyway, get out now, or take gains much later when it’s all over. Be like a multinational corporation and consider where and in what title/name those gains accrue.
- Inflation pulses to speed the debt reduction, watch bank lending to retail to unload that unsold housing stock. The PM rally is connected to that.
- TIPS, Treasury Inflation-Protected Securities, are bonds issued by the U.S. Treasury. They have the unique property that their principal, or face value, moves one-for-one with inflation as manifested in the Consumer Price Index (not seasonally adjusted), while their interest rate remains fixed. The CPI can be a sham, but TIPS can be leveraged. There are alternative assets with similar inflation link properties.
- Stocks are a traditional wealth preserver during elevated inflation, but stagflation is different. In my opinion, stocks outperform some other assets during stagflation, but what I see in the charts during those times historically are rising trading ranges with stocks in them. Patterns very like the multi year rising wedge that large caps are in right now. These historical rising trading ranges don’t look quite so good when detrended against the CPI. Consider external profit source and customer bases for the companies instead of those stocks with income bases inside the developed stagflationary countries. So developing world stocks are very interesting.
And how does gold perform during stagflation and negative real interest rates? Basically we have got a "How to trade gold during bond bear markets" knowledge requirement, and this discussion represents a recognition of requirements, rather than a fully argued conclusion of this matter. We need to look at the 1930s, late 1940s-1950s and early 1980s to see. At these times gold appears to build a base from which to rise when growth or the first sniff of it returns.
I suspect that we are witnessing that base building in gold right now, rather like the consolidation large caps. A pulse of inflation now, is probably not THE gold bull market that the gold bugs hope for, seeing as government structural reforms are not yet in place. Western (+ Japan) governments must remove still more wealth, and therefore extinguish more potential growth.
Therefore the current gold bounce is more likely a reaction to a foreseen possible inflation flash pulse by the CBs/banks to create the necessary conditions to unload surplus housing stock. So a rally now, or off the next low, while it may continue to become substantial, is quite likely to be retraced maybe 50%, and then after that it could hypothetically form a right hand side part of an even bigger base for gold. In that way a rally would possibly form the first wave up with some bigger upwave to follow later after the retracement is completed. That would, if this is a correct interpretation of events, be the rally of precious metals which comes prior to the earliest forecasts of return to growth, and simultaneous to accellerated debasement of some currencies. The end of the greatest stagflation in modern times should be something to remember.
This is not investment advice. It is personal opinion only. It is put out there by the author for discussion purposes and to invite critique, to stimulate debate, entertain, and ideally create a lively beginning for a reasoning process among readers who interact with each other and may lead towards a better financial understanding of the times we live in. People wishing to trade financial markets should get professional advice, and be aware that it is relatively easy to los more than you invest in financial markets.
The publications of Bill Gross and Mohamed El_Erian at PIMCO are quite informative to this discussion. An interesting link that I can suggest to read more is: Secular Outlook: Navigating the Multi-Speed World . It was published in 2011, and I expect he has done several since in a similar vein but more up to date, but this is a good starting place.