Coping with Stagflation: a Gold Trader's Point of View

Sun, Aug 11, 2013 - 8:09am

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 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.

    argentus maximus


    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 author posts daily commentary on the gold and silver markets in the TFMR forum: The Setup For The Big Trade. More information about the author can be found here: RhythmNPrice.

    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.

    About the Author


    Green Lantern
    Aug 11, 2013 - 8:28am

    Excellent.  Most Excellent

    Excellent. Most Excellent AM. Off to read that that article

    First, first?

    Aug 11, 2013 - 8:33am

    first first...

    .....Sometimes I think I'm intelligent...then I come hang out here for a while...

    at least I got a first....Interesting and informative post

    Green Lantern
    Aug 11, 2013 - 8:33am

    Old System STruggling and Dying

    More on Financial Repression from Catherine Fitts Austin

    By Greg Hunter’s

    Money manager Catherine Austin Fitts says, “You are seeing a tug of war between the new system that’s coming up and the old system that’s struggling and dying.” Fitts explains it by saying, “Let’s pretend we have a company called USA, and we create a new company called Breakaway Civilization. We move all of our assets out of USA and put them in Breakaway Civilization. We leave union obligations and pension funds . . . in the old USA economy.” Fitts warns, “I think bail-ins are coming . . . the big question is not will we be able to get out insured deposits. I think the big question is how violent will things get?” Fitts biggest worry is not financial collapse. Fitts contends, “I don’t think the people who run the U.S. military or run the United States government are going to say we’re happy to collapse rather than go to war. They are going to go to war. They’re going to shake somebody down.” Fitts goes on to add, “I think gold is the greatest form of insurance you can have during this transition period.”

    Catherine Austin Fitts-The Big Question is How Violent will Things Get?
    Aug 11, 2013 - 8:34am

    oh well...

    ...second rather, thx gl

    Aug 11, 2013 - 9:39am


    Thanks a lot for sharing your thoughts on all of that.

    I see Japan as being the teetering domino that might disrupt the best laid plans or intentions by debt laden govts.

    If the 3rd largest economy falters in some significant or dramatic way it'll have a huge unavoidable ripple effect on everyone else. It could be their rapidly increasing monetary base & GDP/debt ratio that causes their system to become unmanageable and eventually snap.

    Or it could be something like a large scale environmental exodus from the Fukushima fall out that necessitates a large area being evacuated and deserted.

    When the 3rd largest economy and buyer/holder of UST's gets desperate or loses their grip over one or both of their two major problems it'll have a incalculable effect on everyone else imho.

    I hope none of that happens of course, but I can see how Japan might derail some of the scenario you laid out regarding CB's needing time...and relative stability to reduce that debt.

    Japan becoming uninhabitable in some way big or small would be a huge event in the global economy and the possible need for them to sell lots of UST's and/or greatly diminish their purchases would have a significant impact and effect on all other countries bond markets.

    Japan=wildcard.....hopefully not.

    Jakarta Expat
    Aug 11, 2013 - 9:55am

    @Argentus Maximus

    As usual AM another well thought out, well written, thought provoking article from your great mind.

    Aug 11, 2013 - 10:02am

    There are strange

    There are strange possibilities available to come about. The lack of growth at home, reduces money velocity, and this helps keep a cap on inflation, at home, so the home government with the crony banks, and wealth funds, can benefit, nobody else. All the goodness reserved for those who borrowed zero cost fresh money, and bought real assets with it.

    The inflation that appears in eg commodities manifests elsewhere, creating a time-place delay for food inflation. It is rising first in Asia, and later at home in the western countries as a result.

    Now here is the thing I wonder about: I think that the rejection of these western QE'd-to-death currencies should in these circumstances appear first abroad, and later at home. Isn't the USD/JPY carry trade a run on the yen with a yield arbitrage play built in? So if we listen to eg Jim Willie and his reference to BRIICS nations using unwanted TBonds to pay for stuff then this looks to me to be a beginning of something well under way by now - the international rejection of the dollar. But sterling, euro and yen all in the same problem group.

    So it appears that this kind of "sterilized" QE produces money velocity abroad at first, and later it comes home. Intuitively it seems to be so.

    Now the possibility of the fed trying to sterilize against that raises the possibility of a move to "internal dollars" and overseas dollars".

    Home and away currency has been done before, and there is in the background the fact that for some reason they have not yet circulated their new design golden-colour FRN dollar notes.

    I would put no devious scam beyond them. It's a bizarre financial war no rules smackdown contest to the death against all-comers.

    Frankenstein Government¤
    Aug 11, 2013 - 10:05am

    Japan Owes A Quadrillion, They Are Toast

    This week, Japan officially broke the quadrillion yen debt barrier. That is 1000 trillion in debt. At what point do we accept the harsh reality that a country is insolvent?

    The developed world is insolvent. Sooner or later, that truth as stated by Von Mises, will have to be accepted. The reset will in all likelihood... have to occur with a gold standard.

    Japan is toast. How long can this continue? Well, they've been teetering along now for 25 years with a 220% debt to GDP ratio and apparently no one notices.

    I call this phenomenon, believing your own bullshit.

    Jakarta Expatargentus maximus
    Aug 11, 2013 - 10:08am

    @Argentus Maximus

    My wife would agree with you on the inflation here in Asia, SE Asia anyhow. She calculates that we here in Indonesia are experiencing a 12.5% to 13% inflation this month and last in the food and common items she buys for our house. Of course some of this is due to the government reducing the fuel subsidy and raising the price of fuel but of course the Indonesian government is reporting an overall inflation rate of 6% this month and destined to go down. Is there any government in the world now days that is actually reporting the true inflation rate in their country and telling the truth to their citizens?

    القراع عصفور
    Aug 11, 2013 - 10:48am
    Key Economic Events Week of 10/21

    10/22 10:00 ET Existing home sales
    10/24 8:30 ET Durable Goods
    10/24 9:45 ET Markit flash PMIs
    10/24 10:00 ET New home sales
    10/25 10:00 ET Consumer Sentiment

    Subscribe or login to read all comments.


    Donate Shop

    Get Your Subscriber Benefits

    Private iTunes feed for all TF Metals Report podcasts, and access to Vault member forum discussions!

    Key Economic Events Week of 10/21

    10/22 10:00 ET Existing home sales
    10/24 8:30 ET Durable Goods
    10/24 9:45 ET Markit flash PMIs
    10/24 10:00 ET New home sales
    10/25 10:00 ET Consumer Sentiment

    Key Economic Events Week of 10/14

    10/15 8:30 ET Empire State Fed MI
    10/16 8:30 ET Retail Sales
    10/16 10:00 ET Business Inventories
    10/17 8:30 ET Housing Starts and Bldg Perms
    10/17 8:30 ET Philly Fed MI
    10/17 9:15 ET Cap Ute and Ind Prod
    10/18 10:00 ET LEIII
    10/18 Speeches from Goons Kaplan, George and Chlamydia

    Key Economic Events Week of 10/7

    10/8 8:30 ET Producer Price Index
    10/9 10:00 ET Job Openings
    10/9 10:00 ET Wholesale Inventories
    10/9 2:00 ET September FOMC minutes
    10/10 8:30 ET Consumer Price Index
    10/11 10:00 ET Consumer Sentiment

    Key Economic Events Week of 9/30

    9/30 9:45 ET Chicago PMI
    10/1 9:45 ET Markit Manu PMI
    10/1 10:00 ET ISM Manu PMI
    10/1 10:00 ET Construction Spending
    10/2 China Golden Week Begins
    10/2 8:15 ET ADP jobs report
    10/3 9:45 ET Markit Service PMI
    10/3 10:00 ET ISM Service PMI
    10/3 10:00 ET Factory Orders
    10/4 8:30 ET BLSBS
    10/4 8:30 ET US Trade Deficit

    Key Economic Events Week of 9/23

    9/23 9:45 ET Markit flash PMIs
    9/24 10:00 ET Consumer Confidence
    9/26 8:30 ET Q2 GDP third guess
    9/27 8:30 ET Durable Goods
    9/27 8:30 ET Pers Inc and Cons Spend
    9/27 8:30 ET Core Inflation

    Key Economic Events Week of 9/16

    9/17 9:15 ET Cap Ute & Ind Prod
    9/18 8:30 ET Housing Starts & Bldg Perm.
    9/18 2:00 ET Fedlines
    9/18 2:30 ET CGP presser
    9/19 8:30 ET Philly Fed
    9/19 10:00 ET Existing Home Sales

    Key Economic Events Week of 9/9

    9/10 10:00 ET Job openings
    9/11 8:30 ET PPI
    9/11 10:00 ET Wholesale Inv.
    9/12 8:30 ET CPI
    9/13 8:30 ET Retail Sales
    9/13 10:00 ET Consumer Sentiment
    9/13 10:00 ET Business Inv.

    Key Economic Events Week of 9/3

    9/3 9:45 ET Markit Manu PMI
    9/3 10:00 ET ISM Manu PMI
    9/3 10:00 ET Construction Spending
    9/4 8:30 ET Foreign Trade Deficit
    9/5 9:45 ET Markit Svc PMI
    9/5 10:00 ET ISM Svc PMI
    9/5 10:00 ET Factory Orders
    9/6 8:30 ET BLSBS

    Key Economic Events Week of 8/26

    8/26 8:30 ET Durable Goods
    8/27 9:00 ET Case-Shiller Home Price Idx
    8/27 10:00 ET Consumer Confidence
    8/29 8:30 ET Q2 GDP 2nd guess
    8/29 8:30 ET Advance Trade in Goods
    8/30 8:30 ET Pers. Inc. and Cons. Spend.
    8/30 8:30 ET Core Inflation
    8/30 9:45 ET Chicago PMI

    Key Economic Events Week of 8/19

    8/21 10:00 ET Existing home sales
    8/21 2:00 ET July FOMC minutes
    8/22 9:45 ET Markit Manu and Svc PMIs
    8/22 Jackson Holedown begins
    8/23 10:00 ET Chief Goon Powell speaks

    Forum Discussion

    by NW VIEW, 46 min 7 sec ago
    by sierra skier, 9 hours 3 min ago
    by NW VIEW, 9 hours 6 min ago
    by Trail Trekker, 10 hours 26 min ago