Up — Down — Sideways
I have spent the last 60 years working in and around the worlds of economics and finance. And, I must admit that I have no idea what is going on in that world today or why. Consider three facts:
- fixed income markets which yield virtually no return.
- equity markets that have been at or near all time highs in recent months.
- labor markets with unemployment at levels unseen since the 1930s.
I have been looking everywhere for any analysis of what that brief synopsis may foretell?
Many (most) analysts stop before they start and say, ‘we can NOT forecast the future’.
No experienced, intelligent person expects any explicit forecast. But, they can and do look for help in analyzing what an array of possibilities might be, to enable them to consider, for themselves, what the future might be holding in store for them in their respective positions.
Some people say to me “it sounds like you think you may have some answers.” I don’t believe I have any answers – yet – but I am looking hard to get a better sense of the direction and magnitude of what lies ahead.
As I said in starting, the normal financial indicators, which historically worked more or less in tandem, are more out of line than they’ve been since the early 1930s.
The almost complete lack of return on all government and most corporate debt is primarily the result of the VAST increase in debt needed to keep the States, corporations and virtually all entities dependent on cash flow from falling into bankruptcy.
The equity markets are at and near all-time highs, which suggests that investors have expectations that corporate earnings will at some not too distant point grow enough to have consistently good earnings and some dividends.
The starkly shrunken labor markets foreshadow low pressure to improve wages and continuous need for support beyond standard unemployment insurance.
The first big risk is INFLATION. Typically, when these levels of debt are reached, they create a major incentive to use the power of inflation to reduce the relative impact of the debt on businesses, governments and other borrowers. It is counterintuitive that inflation reduces new borrowing costs—as long as you are not the borrower!
The second big risk is that the relatively high level of current equity values will prove no match for underlying performance, and if earnings fail to meet increasingly lofty expectations (measured by market share) stocks are likely to sink to far lower values that we’re seeing today.
The third big risk –perhaps the worst of all –combines inflation with deflation and is called stagflation. (Which means that the stagnation of no/slow growth, at the same time as inflation, leads to the worst combination—of loss of values at the same time as rapidly rising costs.)
The coming together of the three phenomenon suggests that it is possible, if NOT likely, that that we could be looking at a period ahead of inflation, bankruptcies and weak equity markets and a lot of unemployment.
Together the three big risks today are inflation/deflation/stagflation.
They very rarely occur all at the same time, but when they do, the combination can result in serious economic wreckage.
How can prudent people protect themselves from this picture of the future?
All cash is not an answer.
Gold may be a partial answer.
Critically needed land, perhaps?
And a few of the exceptional companies like Google, Amazon and Apple.
Or space itself??????? If there is any room left?