Inflation, Deflation… Or Both?

The comments below are an edited and abridged synopsis of an article by Mike Savage

A rerun of the great depression, or of the inflationary nightmare of the 1970s? Savage believes we will have the worst of both worlds.

Inflation, Deflation or Both? - BullionBuzz - Nick's Top Six
Hand turns a dice and changes the word “deflation” to “inflation”, or vice versa.

Deflationary candidates are assets that have been propped up by low interest rates (stocks, bonds, real estate). This will lead to lower spending, and it may already be showing up.

In the US, the biggest drop in housing sales occurred in homes that were $400,000 or less, indicating that affluent buyers are still active while higher interest rates are deterring marginal buyers. New home purchases have dropped 10.6% y-o-y, and 14% from March to April. Not surprising: 30-year mortgage rates have doubled in the past 6 months.

Price deflation will occur in luxury assets (TVs, cars, travel) giving way to spending on necessities (food, fuel, electricity). Supply and demand determines what goes up or down.

This is why Savage believes that the price of food, fuel, energy and electricity are in the early stages of increases that many of us will not believe.

Debts and deficits are at unheard of levels, thanks to countries and central banks working together. Now that national economies are in distress, central banks and governments are looking out for themselves.

Investors should be prepared for unprecedented hard times. Hard assets and commodities are likely to far outpace the former high-fliers that were based on hopes and dreams rather than reality.

Some companies with the worst prospects and lack of profits have provided the best gains. Sometimes there were no profits at all, and yet they were valued in the billions. While valuations didn’t matter for a long time (due to ever-decreasing interest rates and virtually free money), it now seems that they may be the most important thing.

Investors must look at revenue, net income and assets vs. liabilities, as they should have been doing all along. Any company that cannot service its debt will be in trouble as rates rise. There are far more zombie companies than many realize; many are household names.

Gold and hard assets will become far more attractive as people become aware of what counterparty risk means: If the person/entity on the other side of your trade can’t pay, you lose.

Gold and silver are assets, not liabilities. In addition to gold preserving purchasing power for 5,000 years, the fact that you own it rather than owe it will become a key factor in the near future.

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