Saturday, February 13, 2010

Beyond Fear: Moving Beyond the Peter Schiff Scenario

In Fear Takes the Wheel, Peter Schiff does a solid job of explaining part of current market dynamics. He's sees current market movements as a tug-of-war between inflationary forces and those of deflation. This to a degree is true.

He attributes the deflationary forces to fear. This is part of what is occurring.It is what I have been calling the extreme desire to hold cash balances, but there is more to the deflationary part of the equation than fear. It is the very real slowdown in money supply over the last year as reflected in minimal M2 growth. You can be as bullish as you want to be, but if you don't have money in your pocket to buy stocks, you are not going to be pushing stock prices.

As far as the inflationary part of the Schiff scenario, he is correct that a large part of the climb in assets is a belief that inflation will return. Indeed, it is difficult to explain a gold price over $1,000 for any other reason than people are buying it as an inflation hedge. But, I repeat, there is little monetary inflation at this point (Again see M2 growth). Without new money entering the system to bid up gold, it is likely to slide downwards. The current price activity in gold suggests this is what is going on. With up spikes in gold at successively lower price points, it means there are not enough new buyers to meet overhead selling. To me this means in the short-term that gold will fall under $1,000 per ounce.

It's hard to believe that the Fed will stay tight with the money supply on a long term basis, given the amount of debt the government is about to issue, but that's a long term issue, and may mean that gold somewhere under $1,000 an ounce will be a great buy. But let there be no confusion, the slowdown in money growth has clearly put deflation in the driver's seat. Inflation may be lurking in the back seat of the car, but it will take a good punch, I'm talking a real good punch of monetary inflation, before inflation can unseat deflation at the steering wheel.

1 comment:

  1. I love this endless discussion of deflation vs. inflation. While economists argue, prices go up. Every utility bill goes up. I have to pay for garbage pick-up; I've never seen that bill go down. Certain foods are going up--sugar just went up 30%! And the argument about China providing us with cheaper appliances and electronics doesn't hold water because they produce shoddy goods with a high failure rate. You ask the average American about a recovery and you'll get derisive laughter in return.