Last Monday marked what will become a very typical day in financial markets. The U.S. dollar, oil, gold, and stock markets were all up. Denmark joined the bailout game with their $13.4 billion capital infusion in the banking and insurance company ING. Meanwhile, more U.S. regulators are getting the public juiced up for the next stimulus package.
After the greatest period of nominal deflation in our nation's history, asset prices are at, or nearing, bottoms. The halting of this deflationary period is 100% government intervention. Let's not forget that if the deflation was allowed to run its course, it would have dwarfed the deflation seen in the 1930s. The only way to prevent this deflation is to hyper-inflate the economy via financial markets.
Inflation understood
Inflation, resulting from global monetary authorities creating money out of thin air to bailout financial systems, is beginning to seep into financial markets. At this point of the game we must remember a very important notion. Changes in price, as represented by CPI, PPI, and other government reported price statistics, are not only manipulated through the use of hedonic calculus and other exotic means, but they are also LAGGING, not leading, indicators of inflation.
The only real gauge of inflation also happens to be forward looking. I'm talking about growth in the money supply and credit. Although all of the bailout news requires massive amounts of printed dollars and new credit to finance, it takes time for that to show up as price inflation.
There is a notion that we must understand here. There are a select few who subversively set policy in this country. These few understand what is going on and the rest of your PUBLIC SERVANTS DON'T have a clue. What these select few are doing is ballooning out our budget deficit keeping in mind that massive inflation is on the way. Essentially, we will be able to inflate our deficit away. You see, it doesn't matter what our actual deficit is or our implicit liabilities (Social Security and Medicare) are either. By devaluing a currency through inflation, we also devalue our debt. Therefore, besides the negative economic consequences, it couldn't matter less whether the U.S. runs a $10 trillion or a $100 trillion deficit.
Nominal bottoms vs. real bottoms
With the re-flation on, we must understand a couple concepts that will be essential going forward.
As previously mentioned, a common vehicle to get newly created money and credit into the economy is financial markets. This is an interesting concept to be discussed right now.
Many individuals believe U.S. equities to be at, or near, an interim bottom, but investors are rather clueless, and rightfully so, as to whether or not this bottom will be an absolute bottom.
The problem is that we are entering a period economically unique to the history of our nation: an inflationary depression. The details of that will have to wait for another issue of B&B, but what that means for us is that we can't really look at one specific time in history and apply those theories to markets. Put it this way, we are entering a period that will be a cross between the 1930s and the late 1970s.
What does that mean in drumming up an answer to whether or not this bottom is an absolute bottom? It means that I expect this bottom to be an absolute nominal bottom.
In other words, I expect the massive inflation to also inflate equities markets. If we divide the stock market by money supply in order to obtain the real value (inflation adjusted), we have not reached an absolute real bottom, even though we've probably reached a nominal bottom. Essentially, from this point on, growth in domestic equities will not keep pace with inflation.