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Professor's Lounge

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Thanks guys!

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Editors Note: Our goal in Minyanville is to share our vibes with educational intentions. The following exhange between Professors John Succo and Scott Reamer falls right in that sweet spot.

Succo: Do you think the bond market must go down first, or stocks first? Or you don't know?

Reamer: That is THE question. Ultimately it is either stocks THEN bonds then USD or bonds, stocks then USD. But since I see counter-trend rally in USD for the next few months at least, I think these markets can be delayed from each other in the resolution. If I look strictly at my models, I think Stocks first, bonds 30-60 days later then USD a few months after that minimum. Deflation hits the riskier assets first, then goes for "safer" ones later. So the developing sense of risk aversion should hit stocks first and within stocks, those more risky sectors. This is precisely why I think oil/energy and utes are geting a bid. Dollars are moving out of riskier assets and into those. It's part of the process, just like 2000, same sort of action.

Succo: Instead of deflation, maybe you should talk stagflation: commodity and input prices higher while profits down (eventually producers cannot pass higher prices to consumers, who begin feeling pinch from higher rates)?

Reamer: Yes. I can see that point but my models for commodity prices show the same type of cyclical reflation benefit within a secular deflationary trend that the larger economy is under the influence of. When I speak of deflation I specifically mean asset prices for sure and can 'see' a situation in which financial assets decline (deflate) while input goods inflate but that outcome remains lower probability based on the models than does a general deflation until 2009-2011 and then hyperinflation of the type that makes commodities (and gold/silver specifically) extremely attractive as investments.

Succo: Yes, but we are in an economic situation never before seen (at least to this magnitude): huge debt denominated in the currency of the debtor. So we will continue to print fiat currency to pay debt. This will deflate asset prices when interest rates eventually rise and inflate commoditiy prices as dollar declines (prices in U.S. terms).

Reamer: I agree with the eventuality of that scenario: hyperinflation. But the Fed has been printing money ceaselessly for the past 25 years: M3 up 600+% since 1980 and trended inflation growth has declined in this period. And commodity prices, particularly non-industrial precious types like gold and silver, have barely budged (in fact they are both down significantly in this period of 600% M3 rgowth). Heck, Nixon all but defaulted when he closed the gold window and STILL the world takes the USD, and gold, silver and commodites weren't impacted as traditional econometric models would suggest. The unwinding of all that debt out there - its literal disappearance - will take place no matter what the Fed does on the printing side. They, as usual, are way behind the curve as all bureaucrats removed from market forces tend to be. The deflationary forces of this particular kondratieff cycle have been in place for more than 15 years now. It will lead, as night follows day, to hyperinflation but only after the deflationary forces have run their course in my opinion.

Succo: And we just saw the beginning of it in the 2000 blow-off...

No positions in stocks mentioned.

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