‘Like a Drunk Walking Home from the Pub’

Wednesday, 21 April 2021
Wollongong, Australia
By Greg Canavan

[3 min read]

In Monday’s Insider, I borrowed heavily from Lacy Hunt’s latest quarterly report. If you’ve never heard of Lacy, who runs Hoisington Investment Management in the US, check out Monday’s issue. The guy is a genius of monetary economics. He has got the big picture economic trend right over a very long period of time.

So his views should not be dismissed lightly.

Lacy believes we are still in for a deflationary/disinflationary future. We are going through a reflationary phase now. This phase may last another three, six, or 12 months. Who knows? But the reality is, once the fiscal and monetary stimulus has washed through the system, deflationary forces will exert itself on the monetary system.

Why?

Put simply, the world has too much debt to grow sustainably or at a level that will produce sustainable inflation. Historical research has long confirmed this. High government debt-to-GDP levels have a negative long-term effect on growth. As Lacy writes:

The historical record is consistent with research that the government debt multiplier is negative, not positive, and the high levels of gross government debt has a deleterious effect on real per capita GDP growth. This research indicates that the negative effect begins when gross government debt reaches 40-50% of GDP and the impact rises steadily as the ratio of government debt to GDP moves higher. At the end of 2020, gross U.S. government debt reached a record 129.1% of GDP, with new peaks reached in all major foreign economic countries.

The message is clear. After the current bout of stimulus washes through the system, you’ll see that the inflation is transitory.

Then we’ll be back to the grind. Eking out lower and lower economic growth numbers. That will keep bond yields ultra low and the asset boom going. It will continue to create wealth disparity and the 1% will grow ‘richer’ and ‘richer’.

The fact the deflation/disinflation will be back on the horizon at some point in the future is not a reason to get out of the market. But you do need to think about how your portfolio is diversified and positioned for this possibility.

How do you manage this risk?

I’ll get to that in a moment. But I want you to understand one thing very carefully. The politicians, central bankers and bureaucrats running the show have absolutely no idea what they are doing are where it is taking us.

I don’t say this to have a light-hearted jab at the ‘elites’ and mock them for their wealth. I say it because it’s true.

The global financial system ceased to function properly after the 2008 meltdown. Ever since, the system has needed constant stimulus. This flow of ‘free money’, whether in the form of monetary or fiscal stimulus, provided a big boost to equity and bond markets.

However, there has been a much more pervasive effect. It has corrupted the whole system. The richer are getting richer, more arrogant and authoritarian. The corporate elites are firmly aligned with the government bureaucracy. They see the current system as an easy way to enrich themselves and their families.

At some level, I’m sure you know this. You know the political and financial system rewards corruption. You know that it’s immoral and rotten.

What to do about it though?

Well, it’s one reason why a digital, crypto-based monetary system is growing up around the weeds of the old system. But it’s very early days still. And for most of us, it’s not a solution to how we manage our wealth.

For that, we’re stuck in the old system. A system run by corrupt politicians intent on enriching themselves for the short time they are in power. We are in the age of crony capitalism.

So when deflation inevitably rears its head again, what do you think is going to happen?

These clowns are going to double (or is it tripe or quadruple) down on ‘saving’ the system. By then, central bank digital currencies will be further developed. This will allow central banks to bypass the banking system in putting money into the economy.

Right now, central banks (CB) conduct QE (quantitative easing) via the banking system. The CBs buy bonds from the banks and give the banks ‘reserves’ in return. But these reserves remain trapped in the banking system.

In future, there will be a way around it. Effectively, a digital currency system will allow central banks to finance governments directly. When that happens, let’s have another conversation around inflation.

Until then, expect the system to lurch and stumble, like a drunk walking home from the pub.

Longer term, your wealth isn’t safe hiding in cash. ‘Cash’ is the only unlimited supply ‘asset’ that these fools can produce. So you want to be in real assets and out of cash.

Your best bet in the fight against this corruption is to remain invested, but diversified. Have some inflation friendly assets (commodities) and some deflation friendly assets (bonds and gold). Have some tech and some crypto, small-caps and large-caps.

As you know, we have a range of newsletters that cater to all these sectors. But how best to manage such a ‘portfolio’.

After all, you shouldn’t have the same allocation to a speccy gold stock as you do to, say, Telstra. You want to structure your portfolio in a way that lowers risk as much as possible. And how do you know when to get out if the mood of the market turns, or something goes wrong with one of your stocks? Is it a short-term pullback or something more worrying?

It’s a problem every thinking investor grapples with. If you do too, we think we have found a solution for you. I use it myself. It’s fantastic. It could be especially useful for people with multiple subscriptions, like our Alliance Partners.

I’ll have more information for you on Friday, so stay tuned…

Cheers,

Greg Canavan Signature

Greg Canavan,
Editor, The Insider