Thoughts on the Economy


I don’t like to post on markets that often, as I reserve this blog for more optimistic success-related material that focus more on proactive personal-development than on reacting to news and sentiment.

Nevertheless, in the dog-eat-dog world we live in, I believe its highly important to have a sound knowledge of what the external forces that govern our lives entail.

The one theme I keep noticing time after time in the selective articles I read (no major media, only hand-picked analysts who have proven themselves over time) is: Deflation or Inflation?

Unfortunately, many many people are misinformed when it comes to money. It’s not that they lack an MBA or didn’t understand what they’ve been reading, rather that they misinterpret what seems to be a paradox, but goes hand in hand in reality.

Deflation in Austrian terms is defined as an contraction in the loans of credit provided by a Government (pulling down assets). Inflation is its cousin-scenario where credit is expanded wildly (pushing up assets).

The mistake many make is in confusing the value of the Dollar and the credit/money supply. One is demand, while the other is supply. They may work either together or against each other.

I believe that what we are about to witness, on a grand scale, is a whiplash effect of contracting credit and strengthening currency on one hand, and a failing economy on the other. This will crush the average debt laden consumer as they battle with BOTH rising costs of interests and debt AND the rising costs of living due to monetary inflation.

This is due to a currency who’s printing presses are under no control and MUST outrun any effects of deflation – from real estate, stocks and Dollar buying. The irony here is that the Fed will soon have to choose between letting the Dollar appreciate on its own or pushing it down further. Chances are that they will always choose a falling currency over a rising one due to: a) its bi-centennial policy of monetary easing, and b) the fact that while the US has experienced an intense deflationary scenario (1930-38), we have yet to experience a “hyper-inflationary” one – induced by over-supplying credit and money – at least since Continental scrip was flushed away following the Civil War.

The savvy individual who will deflect such a predicament will be the low-debt high-asset frugal-consumer. This will eliminate high interest payments, appreciating assets and low expenses.

Note that the above applies to both the lower and upper class, since interest on debt and assets effect both the same.

Advice: Own Things! Real estate, commodities, physical gold and silver and strategic undervalued assets all comply. Areas of extreme caution: Stocks of companies that are either overvalued or financially unstable, toxic derivatives and high-interest debt.

~~~

It should also be noted that the generational-trends (10-17 year) remain intact: a) generally rising interest rates b) falling P/E ratios in stocks, and c) a falling Dow/Gold ratio.

This implies that Gold acts a safe haven regardless of whether the Dollar/Economy/Market does well since what we are expecting is not a monetary or nominal increase in price but an aggregate reversion to mean and true value.

Over the long run (next 7-10 years) bonds/fixed-income will mostly outperform capital appreciation for stocks, and hard assets will continue to outperform fiscal contracts.

The mindset will shift from growth to value and from wealth creation to wealth preservation. There will be those who do well, but only those who shy away from the general sentiment of things and focus on their own growth and productivity.

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