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...
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter