This stock market surge you’re seeing is an illusion. While equity prices will undoubtedly go higher, productivity and earnings are not going to outpace inflationary price increases — simply because consumers are not going to have the power to fuel corporate profits as they once did. Words: 825
The comments above & below are edited ([ ]) and abridged (…) excerpts from the an article by Paco Ahlgren (BottomViolation.com)
Sure, you’ll get a good return from the stock market — in nominal terms — in coming years but in real terms, it’s unsustainable and unrealistic. Oil, gold, and agriculture are going to be the biggest winners when the dollar starts its slide.
Here’s what the common wisdom is saying:
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.
Suddenly everything is fine, right? No! Everything is not fine. Unfortunately, the evidence continues to mount that we’re not anywhere near the end of the pain. There is a fourth phase to this economic storm:
PHASE FOUR: 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.
In real terms, however, equities are going to underperform gold, oil, and agriculture for a long time, and this necessarily means stocks will underperform inflationary price increases. It’s just math. In fact, all asset classes are going to go higher when the dollar disintegrates! That’s the way inflationary pressure works! Remember: just because asset-classes are moving inversely to the phony currency in which they are denominated (by definition) does not mean we are in the middle of an economic recovery!
Our foreign creditors — like Japan, China, and Saudi Arabia — are now talking about ditching the U.S. dollar in favor of another reserve currency. Do you really believe they’re going to continue to lend to the United States at absurdly low rates, in perpetuity? Our government has committed itself to spending $20 trillion dollars on this economy. Where is that money going to come from?
I assure you, printing dollars in current quantities is the death knell of our beloved currency. I equally assure you our creditors are neither naive nor stupid, and they are not going to simply keep dumping money into a debtor economy whose currency is in jeopardy, whose savings rate is almost zero, and whose consumer has run out of leverage. Why do you think the Chinese — for instance — have bought U.S. Treasuries for so long? Because they knew the American consumer would return the capital to the Chinese economy many times over – but the American consumer is now out of fuel. So what now?
Here’s the deal. Just as every asset-class in the universe collapsed starting in 2007, the massive implementation of quantitative easing that ensued is going to ensure equally massive inflationary pressure on most — if not all — of the world’s currencies. So your job, as an investor, is not to try to figure out which asset-classes are going to increase in value, because they all are — relative to the currencies in which they are denominated.
No, your job is to figure out which assets are going to outpace inflationary price increases. I’ve already given you one clue: this stock market surge you’re seeing? It’s an illusion. While equity prices will undoubtedly go higher, productivity and earnings are not going to outpace inflationary price increases — simply because consumers are not going to have the power to fuel corporate profits as they once did. Sure, you’ll get a good return from the stock market — in nominal terms — in coming years and maybe that’s enough to get you excited. I watch CNBC enough to know that there are a lot of people who believe this rally is authentic but in real terms, it’s unsustainable and unrealistic. It won’t be long before the smartest investors recognize stocks are not going to outpace inflationary price increases and thus begins Phase Four.
So what asset-classes will outpace inflation? Do I have to say it again? Precious metals, energy, and agriculture. These assets are no longer mere hedges against inflation. Not only will they continue to elicit demand from investors seeking return, but many of them have industrial value, as well — increasing the likelihood of increased demand and superior returns. There’s one more thing I have to add – if you can get into any superior-performing assets using leverage at a low fixed-rate of interest, you’re rate of return is going to be exponentially higher.
Phase Four. The train is starting to pick up speed. If you [haven’t been paying attention], I hope you will now!
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