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Video: Deflation, Gold, and the Stock Market


Minyanville professor gives his two cents on the issues.


I was on three Tech Ticker segments Wednesday with Henry Blodget and Aaron Task:

Inflation or Deflation?

Ask economists about their biggest concern about the US economy and you're likely to get one of two starkly different answers: America is either about to be swamped by a major bout of inflation or decimated by deflation.

Count Mike "Mish" Shedlock of Sitka Pacific Capital among the deflationists.

While some consumer prices are rising and the Federal Reserve is printing money like crazy, Shedlock says deflation is "definitely" a greater threat than inflation.

"People looking at prices are completely missing the mark," says Shedlock. "Consumer credit is falling, banks aren't lending, and we've got bank failures at a massive rate. These are the same kind of conditions as in the Great Depression."

Indeed, bank lending has tumbled and the Fed reports consumer credit has shrunk for seven consecutive months and was down 5.8% on an annualized basis in August, the most recent month available.

Ignore the Euphoria as Dow Breaks 10,000

The Dow Jones Industrial Average closed above 10,000 on Wednesday for the first time in a year, and more than a decade after first breaking the mark. Since hitting lows in March, the Dow is up an astounding 50%, while the S&P 500 has gained 60%.

Before you get your broker on the phone or start trading that dormant online brokerage account, take heed of this warning from Shedlock: "Five years from now, I think it's quite likely the Dow is not going to be much more than 10,000," he says.

Why so negative?

"We've still not solved any of those structural problems" in the housing, banking, and debt markets that caused last year's crisis, he claims.

Shedlock's advice: Ignore the euphoria, and "take some chips off the table. Now's just not a good time to be invested."

Shedlock thinks investors are better positioned in gold and cash.

Exploding Gold Prices Have Nothing to do With Inflation

If there are two things that just about everyone agrees on these days it's that the dollar will continue to plummet and gold will continue to soar.

The dollar will keep plunging, everyone agrees, because the Fed will keep printing so much new money that soaring inflation will eventually turn it into toilet paper. Gold, meanwhile, will go to the moon as investors rush to try to hedge against this impending monetary disaster.

Balderdash, says Shedlock.

The dollar's a buy here, in part because everyone is so darn certain that it's about to collapse.

And gold?

Well, gold is indeed going higher, Shedlock argues, but not for the reason people think. Gold is actually a lousy inflation hedge, as evidenced by the period from the late 1980s to the early 2000s in which there was plenty of inflation but gold prices plummeted from $800 to $250.

But gold is a good place to preserve value during a credit crunch, Shedlock says. And that's what we're still having here. So Shedlock is long gold, too, even though he thinks everyone else is buying it for the wrong reason.

Via email, AK asks:

Professor Mish Shedlock,

Caught the post on the Tech Ticker (Yahoo site) you did about gold today. The article says "Well, gold is indeed going higher, Shedlock argues, but not for the reason people think." I'm intrigued. Can you point me to a blog post where you explain why gold prices ARE going up in more detail?"

Please also consider:

A Watched Pot Never Boils; Look Abroad Instead

So What's Behind Moves In Gold?

Is Gold an Inflation Hedge?

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No positions in stocks mentioned.
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