“Excess capacity is temporarily suppressing global prices. But I see inflation as the greater future challenge.” – Alan Greenspan, June 25, 2009
“The US economy may witness double-digit inflation in a few years unless the central bank tightens up its monetary policy… Unless we roll in this whole degree of expansion, we will be in trouble… I am not talking 3-5 per cent inflation, I am talking double-digit inflation in the US.” – Alan Greenspan, September 9, 2009
Alan Greenspan was, in his prime, an economist nonpareil. Recently, however, he shocked many of us by submitting to a political machine that needed to find a scapegoat for the recent economic nightmare. Greenspan has been swimming in the Washington political sea for a very long time, so no one should be too surprised that the bureaucratic ant farm chose him as the fall guy. After all, he was the architect of policies that — for so many years — manufactured the illusion of wealth for the entire globe. He stepped up, rolled the dice, and unfortunately, took the entire U.S. housing market — and subsequently the global economy — down in the process.
While he may have been the architect, these weren’t really Greenspan’s policies; they were the manifestations of many political imperatives, handed down to him by the people who held his reins. And for those of us familiar with the radical nature of his early work, it was always surprising to see Greenspan taking orders and selling out.
I do happen to agree with Alan Greenspan on the particular point of coming inflation, and I rely heavily on the protracted honeymoon economy he helped engineer as the evidenciary basis of my conclusion. He kept rates artificially low for ages, and that’s why I find this part of his observation so interesting:
“…unless the central bank tightens up its monetary policy… Unless we roll in this whole degree of expansion, we will be in trouble…”
To me, that says it all: Greenspan was acutely aware of the consequences his policies would bring to bear. And here we are. So what now?
There are literally trillions of components to the U.S. economy. How will the Fed know the precise moment it needs to reverse policy? Who will argue against the fact that the success of its predictive power has been — at best — questionable? If Bernanke and his colleagues don’t call this one right, the “trouble” to which Greenspan alluded is only going to be compounded by many orders of magnitude.
Dollars, Equities, Housing, and All the Rest of It
Many people believe that, because the stock market is moving up so rapidly, we are in the middle of an economic recovery. I find that conclusion specious. One might argue we are in the middle of a stock market recovery — and based on simple, raw percentages, that position might actually carry some weight. But I do not believe stocks are outpacing inflation — at least in the long-term.
I think about the the first time the Dow hit 10,000 — about a decade ago — and I look at the relative prices of gold (about $250 per ounce in 1999, as opposed to almost $1100 an ounce today) and something starts to become clear: this so-called “stock market recovery” may not be all that recuperative. After all, gold is the ultimate and most efficient harbinger of inflation. And gold is speaking very clearly: it may not come tomorrow, or next month, or even next year. But make no mistake about it… higher prices are coming.
And what about oil? Since its recent bottom eight months ago, it has more than doubled in price. I’ve said it several times: oil, gold, and agriculture are going to be the biggest winners when the dollar starts its slide. This is the way it goes…
Phase One: Collapse in the prices of nearly all global asset-classes.
Phase Two: Global quantitative easing — meaning unprecedented rate-cuts, coupled with unprecedented currency-printing, borrowing, and spending.
Phase Three: Stock market recovery.
The evidence continues to mount — we are not anywhere near the end of the pain. There is a fourth phase to this economic storm: foreign creditors begin to abandon U.S. Treasuries, driving yields higher. Unprecedented printing causes massive inflationary pressure, driving the prices of all asset-classes higher, as major world currencies fail. Most people become euphoric, proclaiming an “economic recovery.” Others buy gold, oil, and agriculture and hunker down for the worst.
The most interesting part of all this to me is watching the business news channels, who focus 90% of their energy on equities. But the stock market is in trouble — even as it continues to rise. So I will reiterate my prediction: in real terms, equities will underperform gold, oil, and agriculture in the long-term, and this necessarily means stocks will underperform inflationary price increases. It’s just math.
Again, it may take years for the government’s shell game to be completely exposed. But when things start to change, they will rapidly, and the conditions I described above will establish for perspicacious observers that things are not as good as they appear.
At my core, I’m a value investor, but I no longer believe there is any real value to be found in this economy. Again, that isn’t to say that the stock market might not go up; I believe it will. But the American consumer — who drove the vast majority of the economy up until two years ago — is dead. How are companies going to make money? Just because stocks are offering the illusion of appreciation — as the dollar falls — does not mean American corporations are necessarily becoming more productive. Can net income outpace inflationary dollar-destruction? I believe the answer is no.