- Positivity and overconfidence (psychological biases) which lead to the wrong or no use of theory in investing practice which causes investors to make mistakes and suffer from permanent losses (which can be easily avoided)
- Definitions of inflation, deflation, hyperinflation, reflation and disinflation to build a theoretical typology from where we can understand “what is happening in the real world”
- Deflation (Appreciation/Increase) of USD against world currencies – CNY, GBP, Euro and implications for the US and the type of crisis to come
- The “Great Disinflation of the US” as a pre-condition to bring a deflationary crisis – “The Great Depression 2.0” similar to the “Great Depression of 1929 in the US” or “The Deflationary crisis in Japan (of 1996-2018)” AND NOT a hyperinflation crisis (like in Germany 1923, Bulgaria 1996 or Venezuela 2018)
- Unlikely hyperinflation in the US – 1% probability. I would say, 99% probability for severe deflation crisis for 20 years. 99% Disinflation has already stated, which leads to deflation. Only if the US cannot get obtain credit from other countries there is a 1% chance of a default – hyperinflation. An explanation of the 1% chance for hyperinflation in the US could be that deflationary pressure becomes so large that the US population elects a communist leader which would bring about a total loss of faith in the US, the dollar and capitalism as one possible (however unlikely). This could be a potential reason for other countries not to want to extend credit to the US which could lead to hyperinflation (i.e. economics of politics reason not economic reason). This is to illustrate how unlikely hyperinflation in the US really is (and what would need to happen in the real world) for hyperinflation to take place in the US
Many young and inexperienced investors prefer to learn about investing by “practice”. This usually means putting money in something they do not understand (e.g. speculating about Bitcoin). From there, if it works out (i.e. if they get lucky), they consider themselves knowledgable and take great pride in their success, which is based on I knew this would happen (overconfidence and positivity biases – taking individual credit for all positive results and excluding luck as the primary reason for their success). And if it doesn’t work (because he/she bought the highest price and sold off in panic (at 50-60% loss) or because he/she failed to sell at a high enough prices and failed to realize real return (millions in gains evaporated for Bitcoin Hodlers like this), then they say it is the fault of the market, the whales or the economy – “negativity bias” (the belief that all wrong results have nothing to do with “me” but are due to external causes). With this I am trying to point out the “irrational mind” from which most investment amateur decisions are derived. As such, they lead to great pain and losses in a portfolio but also actual psychological damages to people who lose a lot and get discouraged from investing and having a success one day.
These psychological biases (of overconfidence, positivity and negativity) often play a great trick on us because they make us believe we do not need to know more than what we already know to invest/speculate in the market. In internal voice almost tells us: “If it works out, I am great (internal factor) and if it doesn’t it is someone else’s fault – (external factor)”, so in this way we have nothing to lose as we are prepared for both (but only because we think we can never lose). If we do face the loss, this brings an entire new wave of disappointment and discouragement (that we can never make it back and we are losers). These psychological biases cause us to make so many mistakes (when the markets are up and when the markets are down) that I will devote an entirely new section called – “TheInvestmentShrink (TIS). However, for here, the biggest implication is that one of the most common “mistakes” of OVERCONFIDENCE BIAS is the tendency to ignore or care little about investing theory because “I already know everything” to make this decision (which is true in 1 of maybe 99 cases if I am generous). I also know if such a decision is made why it can be successful – luck, but why it will end up a mistake – lack of experience makes even the lucky eventually lose out (as they gain “overconfidence” that they know what they are doing…). I won’t mention how many friends of mine had an initial 3-5-10x increase on their money (so they thought they knew what was going on) and did not sell Bitcoin at about 16-20k because “they knew it was going to 100k”. They had no investment theory knowledge, did not own any other “investments” out of crypto and when crypto times worsened, they panic sold and or are still holding positions at a 60%-70% minus from their investment in 2016-2017 (nearly 3-4 years now). In other words, “overconfidence bias” made them believe they do not need to understand theory, which cost them real money (as those who do not understand the irrationalities caused by the brain are doomed to be irrational in their financial decision making both on the way up and on the way down.
Those who do not understand the irrationalities caused by the brain (psychological biases) are doomed to be irrational in their financial decision making process both on the way up and on the way down.
By now, it should become clear that one of the most common reasons for inexperienced investors to lose money is the lack of an evidence-based management strategy. An evidence-based strategy aims to optimize decision-making by using the best available evidence (theoretical or other). However, theory and history of financial markets are often dirty words as most people believe “theory doesn’t work” (due to overconfidence bias, people “do not need theory”, they “know”). Alternatively, but equally bad, many use “optimal investment strategies” of the past (e.g. look at what instruments performed well during 2008 crash and try to “predict the future” and make “semi-blind” investments today without asking themselves what were the “defining characteristics” which made that portfolio optimal for that time (and whether they are similar or different today). In other words, they looked at theory but do not really understand the assumptions/determinants of this theory to work. In short, this is a “wrong application of theory” whereby a person wrongly extrapolates “the future will be the same as the past” because there is no understanding of the pre-conditions (what needs to happen in the real world) when that strategy works.
I would say, theory works very well as all my decisions are evidence-based and they work. Rather it is the people, who take theories out of context, misinterpret them, or do not understand their basic assumptions. As a result, they do not fully understand theory, rather they understand pieces of it.. Because of this lack of understanding of financial theory, they cannot make proper predictions because they do not really understand the prediction which can be made with the theory (and which are out of scope of the theory).
In this series (Investment Theory Misconceptions and Investment Mistakes – ITMIM), I will try to debunk some common theory misconceptions. I start with one that has bugging me for the last 2-3 years. This is the investing theory misconception that the US will experience hyperinflation and the dollar will become worthless… And yes, I know US has nearly 300% debt, but so does Japan are you seeing any hyperinflation there for the last 20 years?… And as I say those words, you should already imagine, what the essence of my article will be. I call this period “THE GREAT DISINFLATION CRISIS” which can be followed by “THE GREAT DEPRESSION 2.0” by say 2035-2050. This means the likelihood is that the US will experience a deflation crisis which can last for 20-30 years. It will not be an inflationary crisis like the one US had in 1970s. It is also less than 1% chance that the US will experience hyperinflation like Bulgaria in 1996 or Venezuela in 2018.
My next three next topics in the ITMIM coming weeks will be 1) support-cost averaging vs dollar cost averaging (my own theory vs existing theory), 2) Bitcoin 100k, why is it possible but doesn’t mean what most people think it means and 3) common mistakes with misinterpretation of Elliot Wave theory (and other technical analysis theories).
So before I explain why hyperinflation is not what is going to happen to the US, let us first define what each these confusing terms – inflation, disinflation, reflation, stagflation and deflation mean. Only by understanding, what they mean, we can understand what the assumptions behind are and if this theoretical definition can be used to “describe the world today” and answer the question “is this where we are at?”. This will allow us to have a theoretical basis upon which we can make an evidence-based prediction which we can translate into evidence based investment strategy.
2. Definitions (basic theory)
Inflation simply means rising prices of goods and services across the economy along with the resulting loss of purchasing power. We can see this loss when a steady dollar amount buys less of an item over time. Crowther defines inflation as “a state in which the clause of money is falling i.e., prices are rising. Coulbourn defines inflation as “too much of money chasing too few goods”
The goal of central banks, whether stated or not, is a steady yet low rate of rising prices. In the US., for example, the Federal Reserve System targets the rate at 2 percent.
Author note: I really wished not to have to go into so many details but apart from inflation (in the economy), we can also have the terms price inflation and asset price inflation
Asset price inflation is an economic phenomenon denoting a rise in price of assets, as opposed to ordinary goods and services. Typical assets are financial instruments such as bonds, shares, and their derivatives, as well as real estate and other capital goods.
Price inflation is an increase in the price of a standardized good/service or a basket of goods/services over a specific period of time (usually one year).
***This is what we have had in US since 2000 and 2008, no real inflation, but ASSET PRICE INFLATION and PRICE OF GOODS and SERVICES (increases but not inflation) DURING DISINFLATION PERIOD!. In short, asset prices and prices are increased to make money “chase” assets, products and services. However, money velocity (the actual use of money) reflects that in the US dollars “do not chase goods” which is exactly because consumer prices increased but chase assets whose increase in price makes people richer with deflated dollars (If this is still unclear, don’t worry I come back to it in more details, it was unclear to me too less than a year ago as no economics textbook explains this)
Stagflation is high inflation coupled with low growth and a steadily high rate of unemployment. As you may have guessed, this is a rather undesirable combination. The US went through bouts of stagflation during the presidencies of Ford and Carter.
Disinflation is a quirky middle ground where prices are generally rising but at a decreasing rate. Said another way, it’s a reduced inflation rate where, for example, prices that were rising at 2 percent are now rising at 1 percent.
***This is what we currently have in the US as Consumer Price Index and Production price index are at 0.1% (not even 1%), so large disinflation (I leave this as a note but I get back to CPI and PPI in more details later in this article)
Deflation is the opposite of inflation. Deflation is a decrease in the general price level of goods and services. It occurs when the inflation rate falls below 0%. It increases the real value of money of a nation, this allows one to buy more goods with same amount of money.
***Because inflation rate is at about 0% now, this is where the US will go temporary (for now) and FED will try to reflate. However, this will result into short-term price inflation and asset price inflation but not real inflation. This will bring a bigger deflationary crisis that will come in 2035-2050 because eventually reflation won’t work (you can read more on this in my e-book, also available on LinkedIn).
Reflation is the act of stimulating the economy by increasing the money supply or by reducing taxes, there by seeking to bring the economy back up to the long-term trend, following a dip in the business cycle. Reflation is considered to be an antidote to deflation.
In the US it means – acting through monetary policy i.e. 1) expanding money supply or 2) increasing interest rates and 3) since 2008 – 3) buying certain assets to prevent collapse and create price inflation for those assets. In 2020, the US is doing the third for now, but is likely to do the other 2 – increase money supply and interest rates by 2021-2022. This is also in my e-book.
Hyperinflation – A severe bout of inflation, where purchasing power drops drastically in a very short period of time, is known as hyperinflation and has occurred historically in various countries. Hyperinflation is a term to describe rapid, excessive, and out-of-control general price increases in an economy.
While inflation is a measure of the pace of rising prices for goods and services, hyperinflation is rapidly rising inflation, typically measuring more than 50% per month. It occurs for many reasons, most notably when deflation is so bad and reflation fails, hyperinflation becomes a means to “transfer” from savers to creditors and avoid country bankruptcy (at the cost of individual citizens’ bankruptcies). Hyperinflation occurs in countries which are unable to obtain credit due to wrong political affiliations (in the case of Bulgaria 1996 and Venezuela 2018 – Communistic leaders).
Austrian economics perspective on hyperinflation – it has happened many times before it can happen to the US too… I put the following two pictures of “Why an Economy grows and how it crashes” by one of my most beloved authors (Peter D. Schiff – @PeterSchiff). However, I will question his propositions…. because his book have been a defining element of my education … but I disagree with two specific things, which are of astronomical importance.
Figure 1: Book citation
Disclaimer: I hope I have not exceeded the maximum word count I can show from his book, if I have, please let me know and I will leave only the second picture
These two pictures are from my personal copy of the “How an economy grows and why it crashes”. I focus on two specific parts: 1) the printing of money aspect and 2) the last sentence “if the USD loses its reserve status, then US is just as vulnerable to get hyperinflation as other before….. “
So let us question the proposed arguments…
2.1. Questions and disagreements regarding hyperinflation
So the “US can experience hyperinflation because it has happened in the past” and “it can lose its reserve dollar status”, very enlightening and positive… Also a good way to sell me physical gold so I can protect myself (from Peter Schiff’s company), I see the reasoning… I don’t mind him trying to sell me gold and I would surely buy some physical gold from Schiff if he had explained when and why these things would happen instead of that they are “possible”. There is a difference between possibility and probability but let us not dive into those complicated academic terms.
For now, let us ask .. If the US will have hyperinflation why would it happen and when could it happen? This is not mentioned in the Austrian economic perspective, so even that theory has gap, namely it is the extreme version (of free markets), which is not updated to reflect the pre-conditions which are needed for this to happen (and how the environment has changed since the 15th and 16th centuries – e.g. the emergence of political unities such as the European Union and the United States of American (the “joining together” of US states).
In today’s world I would argue that for hyperinflation to occur in the US this means that the US public will voluntarily elect a communist leader (which I personally find impossible to believe), but this “wrong political affiliation” could be a potential reason for why other “capitalist countries” do not give credit to the US, and a real reason for hyperinflation in the US. In short, for every EFFECT (e.g. hyperinflation in the US) there must be a clear CAUSE (loss of faith in the US, the dollar and everything it stands for, e.g. selection of Communist Leader in the US). I will come back to this point (for now let us also not forget that even GREECE went bankrupt in 2008, but was given credit because they selected a democrat/capitalist instead of a communist/socialist. And let us say that the theory of hyperinflation could be valid, only if a certain cause (e.g. selection of communist leader) brings this effect. Only then, there could be a pre-condition (i.e. the lack of countries who are willing to extend credit to the US) for hyperinflation in the US.
The other thing was – the printing of money from other countries as an example of what the US is doing. This is somewhat correct as M0 (cash money supply) has increased with QE 2008. However, most of the injection did not come in the form of “cash”. The biggest part of the QE and bailout of the banks was done through increasing banks “digital cash balances”. This is an increase in non-cash money supply (but in cash equivalents). As such, there has not been the same amount of real dollars versus digital dollars (which creates deflation of the dollar). In 2020, FED has also not increased real money supply M0. Even now people in the US are given “as stimulus for reflation” $1200 CHECKS (not cash!), THIS IS NOT INCREASING OF CASH AND PRINTING OF CASH, this is an increase of M1 (CASH EQUIVALENTS + CASH) MONEY SUPPLY. There is a tremendous difference between printing cash and increasing M1 money supply. Therefore, there is a difference between US (which is in disinflation while the dollar is in deflation) and Venezuela, Bulgaria and Germany which had hyperinflation as those printed real cash!
At one point in the article I ask the question “before we consider hyperinflation, let us answer the question has there been any real inflation in the US over the last 20 years?”. The answer might surprise you.
If hyperinflation is not the answer, then what is? Now there is a great question. My old management consulting mentor told me “The upper boundary of any advice or piece of knowledge we have” is determined by the questions we ask. This is why we asked the most important question “are there reasons to believe the US can experience hyper-inflation”. To answer that question, we first understood what the terms inflation and hyperinflation mean. We also found out what a key pre-condition for hyperinflation is. Once we discussed that this is a possibility rather than a probability, the question remains, what are the most probable outcomes for the US.
The next section moves onto answering this question and explains why currently we have a “disinflation crisis” and why eventually this will turn to a deflationary crisis (like the great depression. It will also be very different in many ways which I will discuss in a separate article).
2.2. The GREAT DISINFLATION of the US (Theory in practice)
I call it THE GREAT DISINFLATION because we are less than 50 years away from a real deflationary crisis in the US and similar to what has been going on in Japan in and some countries of the European union for the last 20 years. It is scary how many people are actually preparing for an “inflation crisis”, the type of which we have not had since 1970s (as a result of the post WW2 inflation). People have started to think that every crisis means one thing – inflation (and are confusing the terms “inflation” and “price” or “asset price” inflation). This would have not been a wrong assumption say between 1950s and 2000 when the world was rebuilt after the Second World War and new technologies appeared. However, since 2000, the level of inflation in the US has been slow. As such, USA’s economy is in disinflation since 2000. The QE programs of 2008 and 2020 (and smaller ones in-between) are used to “refinance” or reflate the economy in order to tackle disinflation and prevent “deflation” of the dollar and the US economy. In other words, price inflation and CPI increases are not representative of inflation being present because there is no velocity (money does not chase new products at higher prices), but a measure to avoid deflation, which is very very different!). Moreover, increasing debt to create reflation programs, is a temporary solution, which only would result into even more deflation of the economy of the US and more deflation of the the currency (i.e. the dollar will appreciate – increase in value, not depreciate – lower in value) in about 30-50 years. In other words, the “GREAT DEPRESSION 2.0” is yet to come (most probably by 2035-2050). We are currently at the stage of the last pre-condition for such a crisis, which I call “THE GREAT DISINFLATION”. If the dollar continues to deflate and thus to increase against world currencies (I show details on this right below), this does not mean it will lose its reserve status, rather its reserve currency status would strengthen! (as it becomes cheap for other countries to export to US because strong dollar allows US customers to buy more from imports) Stronger dollar means, other countries can get more dollars to back up their weaker currencies with USD and benefit from international trade (this is another point which shows how unlikely hyperinflation is, no one would allow the dollar to hyper-inflate). However, this would be bad for the US economy, labor markets, and overall exports of the country. It will be good for imports and spending abroad (but if jobs are lost, people might suffer as they lose their jobs and entire purchasing power).
Is this still confusing? Let’s start from another point.
For the last 30 days, I have seen about 50-100 articles (on SeekingAlpha, Yahoo finance, WallStreet Journal, Bloomberg, Business Insider and other respectable financial sources) on how people should buy “physical gold” because it is a hedge against an inflation crisis. The explanations continue by explaining how the US can suffer from hyperinflation or even default due to the high amount of debt. Likewise, it is so bad that the US might lose its reserve currency status… In sum, US is going bankrupt, there will be hyperinflation and the USD will go to 0…. I imagine these articles have greatly been influenced by Austrian economics perspective, which I also am a fan of. However, unlike most who blindly apply this theory, I dare to ask but DOES THAT CONCLUSION ABOUT HYPERINFLATION MAKE SENSE? I.e. are the assumptions behind theory of hyperinflation met to consider having hyperinflation?
Not really, the assumptions for hyperinflation are not met, especially given that we do not even have inflation but have disinflation of the economy and DEFLATION OF THE DOLLAR AS A CURRENCY. It should be noted, that even though there are significant attempts to create inflation in the US, the dollar has been deflating against the euro and other major world currencies since 2009 and most notably post 2018. This means, since 2018 the US has entered into a disinflation period whereby its currency is being deflated against other world currencies, (e.g. EURO, Pound, Chinese Yuan). This is due to numerous reasons, the most important of which is the lack of inflation in the US (the disinflation in the US ) which is larger than the disinflation in the European union/China and Great Britain (at least since 2018). Ironically, the dollar might end up appreciating/ deflating more than the Yen (Japan), which would be shown if USD/JPY reaches values of above 130-150 (so 1 dollar buys 130-150 yen, it now buys about 105-108). If that happens, this will give evidence that the type of crisis US will experience is deflationary. I discuss each of these currency pairs below to explain the logic of deflationary evidence.
Since 2018, EUR/USD has moved in favor of the dollar and USD has increased by about 15-20% in the last 2 years. There is such a strong deflation of the dollar, that if the US wanted to buy Eurozone, there would be 20% discount on the price tag of Eurozone because the dollar appreciated (raised in value) due to deflation relative to the Euro (depreciation). However, this depreciation of the euro not due to inflation, but rather due to weaker deflation of the euro (against the dollar).
The fact that USD is deflated means that it becomes cheaper for US citizens to important all goods and services due to the “strong dollar”. On the other hand, this means that local businesses suffer as exports become more expensive for foreign citizens so jobs and company profits in the US are lost. In other words, there is a pressure on US industries as it becomes more difficult for foreigners (e.g. Europeans) to buy dollars and USD denominated products (so a double negative for the US economy). It also means, that it becomes increasingly cheap for US citizens to import European products and forgo local products (so a triple negative for the US economy). This is by no means bad for US citizens in the short-term as they can consume “more for less”, but is bad for the economy, businesses and eventually those citizens as their purchasing power could be slashed to 0 if enough jobs left the country (and individuals lost their purchasing power permanently). That’s why “deflation” has become “the most dirty word in finance” according to the Keynesian perspective. (According to Austrians, this could be good in the long-term because companies will be forced to increase productivity and eventually jobs will be created where the US has an advantage, but the short-term pain is also significant).
The same pattern of DEFLATION of the dollar trend can be observed between USD and CNY (Chinese Yuan). USD/CNY moved from 6.3. to about 7.1 (a 12.7% appreciation of the Dollar vis-a-vis the Chinese Yuan). Again, China also has very high debt, however, the dollar is appreciating against the yuan because there is a higher deflation of the dollar and a lower deflation of the Chinese yuan. This is also true, for USD vs British Pound (GBP).
As a result of this deflation of the dollar against the major world currencies (CNY, GBP and Euro), there is an attempt to fight the deflation of the dollar and the disinflation in the economy by having central regulators such as FED who attempt to “reflate” the economy through “Monetary Policy” (I explained this in the Definitions section). In 2020, the specific actions of the FED are buying bonds and providing people with cash checks (increases in M1 and M2 money supply, but not in M0 – CASH, NO PRINTING HAS YET BEEN MADE!!!) Again, this is called reflation… the attempt to fight disinflation in the economy and deflation of the currency.
To avoid bankruptcies due to lower demand and lower volumes of products being sold, many producers increase their prices (as a response). This raises CPI and many economists wrongly perceive there is inflation. For inflation to exist, prices need to be raised as an (effect/consequence) from money chasing goods (and more money competing for the same goods) – the cause/reason). We can see the process is now inverted and CPI does not even show what it should show because there is no velocity – money does not chase goods, but it is saved and invested! Giving people “checks” and increasing prices, is an attempt to reflate the economy by getting consumers to SPEND AND NOT SAVE (the Keynesian way). To make this happen, commodity other producers start raising the prices of commodities e.g. flour (wheat) or other goods or services in order to stimulate people to “spend this new money” (the checks) on the new “increased prices” (for flour or any other commodity, product/service). So there is an attempt to create inflation in the economy by giving people checks to spend on these higher prices… BUT DOES THAT HAPPEN?!?!?!?!?!?
NO, giving money to people and increasing prices does not mean inflation has been created. For real inflation to exist, this needs to be reflected as an INCREASE in Money velocity (M1) – cash + deposits (and M1 is at a new low as it will be shown in the next paragraphs). For inflation to exist, cash or people’s savings need to “chase goods, services” so that “cash” and equivalents can compete for a limited amount of goods and services and the real inflation can be created. Until then, increasing prices of producers (reflected in CPI and PPI) is just a measure to avoid individual businesses and sector bankruptcies. As I explained above, this is done as a “cause” and not an “effect” which means, money does not support buying these prices but is waiting to increase from investments and only then rebuy with higher purchasing power (due to return on investment and deflation of dollar). This is shown by the fact that in times of deflation, people start saving, they do not spend on products so much. In that sense, price increases are aimed at “going out of disinflation” and helping companies maintain positive profitability (as deflation has caused less customers to consume, so profit margins are dropping and increasing price is the only way to remain with positive profit). However, before saying that this INFLATION ATTEMPT HAS WORKED and there is inflation because CPI and PPI have increased, we must look into whether “MONEY HAS BEEN SPENT” to chase these produced goods and services (or whether it has remained saved and invested)…
The following graphs help illustrate my point…
2.3. Predicting US DEFLATIONARY CRISIS ON THE DEFLATIONARY CRISIS MODEL OF JAPAN FROM 1996
Since I was talking about the DEFLATION OF THE DOLLAR against other major currencies let us look a bit deeper into Japan and the USD/JPY pair. Regarding the currency pair, it can be seen that the only currency against which dollar has yet not grown significantly is JPY, Why? Because for now there is even more deflation in JAPAN and the Japanese Yen than in the US. This makes sense as they have 300% debt and are trying to deflate out of it (this has been going on for 20 years). BUT DID JAPAN HAVE HYPERINFLATION??? NO, they had 20 years of negative interest rates and are trying to deflate their way out of this debt.
*** Practical Homework: Track USD/JPY, if it moves in favor of USD, then the USD is deflating faster than JPY, which means US has more deflation than JAPAN)***
Figure 2. The cycle of Japan
So let us see what happened to CPI (RED LINE) and the Japanese Yen vs the dollar (BLUE LINE) – Figure 2 (above). As CPI increased during 1986 to 1991 it is indicated as “inflation” (a super big mistake). However, the careful observer can see this is CPI and there is no real inflation in the economy but consumer price increases. As I explained for the US, consumer prices increase due to disinflation in the economy and deflation of the currency (prices increase as a cause not a result). This means, there is no actual inflation unless there is velocity. So like in the US, even though there were price increases (from 1986-1996), disinflation and deflation in JPY had already started in 1986 (INDICATING THE FUTURE DEFLATIONARY CRISIS IN JAPAN IN 1996… SO IT WAS VERY EASY TO PREDICT THIS!!!!!. The deflation could be seen from the BLUE graph as 1 dollar bough respectively less and less JPY (starting from 200) and going down to 100 in 1995 (where deflation of the YEN is the strongest). So the deflation of the Yen clearly showed and predicted the disinflation and deflation in the economy…. However, even publishers on this topic are confused between the terms inflation and price inflation.. (and shows the lack of theoretical understanding and mistakes which are made from not understanding these theoretical differences).
The rest are not important from the point of view of this article. But let us continue focusing on the 1986-1996 period in Japan. I explained that the starting depreciation of the JPY in 1886 was already an indicator for DEFLATION IN Japan. Only 10 years after this, the real deflation came to Japan. So what can we learn and use to predict what could happen in the US? Currencies, and this why I spent the entire section above to show you the DOLLAR has been deflating against many of the world currencies, which means that US is on the path of deflation not hyperinflation.
Let us look at a theoretical model and compare it to M1, M2 and commodity prices to get a deeper view. In a few places I have written disinflation began in 2000, in 2008 or 2018. I am not delusional don’t worry. I am talking about the different types of deflation that occur on different levels of money supply, so if you look carefully in my e-book I wrote about M2 money velocity deflation since 2000, M1 money velocity since 2010 and commodity prices are in deflation since 2000 (as M2). I illustrate these below as they help build up the evidence from multiple sources (in academia this is called data triangulation) to build a stronger prediction.
3. Cycle for the US Theoretical framework
Figure 3 is a theoretical model of the economic cycle, starting from Inflation and leading to disinflation and eventually deflation. It can be seen that according to it, inflation comes from let’s say year 0 to year 2000 represented by the red line going up, and say in 2000 disinflation starts represented by the same red line going lower and lower. Deflation begins when the line dips below the initial rate of inflation.
Figure 3, Theoretical cycle
Now the beauty of this model is that is created to look at percentage rates. However, I am extending this theory and I am to show you, you can use it on many levels to understand why it is really valid and predictive of what is about to happen in the US..
So this next picture – Figure 4 is from my e-book and shows COMMODITY INDEX PRICES in the US. Are commodities in deflation? These include oil, wheat, soybeans, gas and many other essential products for running businesses in the US economy as well as for individuals to live on a daily basis. The only commodity which behaves differently for now is gold (and I dare say weed). I have provided further explanations about this in my e-book.
Figure 4. Commodity prices
The key thing to observe is that the pattern of behavior is exactly the same as the theoretical model. Instead of starting at year 0, we start in 1950s and by now we have dipped at least in disinflation… If this is the complete graph, we are already in deflation… It could be that data is missing and that the low point is actually lower. But think about what this graph is telling you COMMODITY PRICES ARE AT A NEW LOW relative to 1995!!!! WHERE IS THE INFLATION?!?!?!?!!?!?!?!?!?! Since 2000, prices have only DEFLATED!
Another reflation attempt by FED, could drive this trend up but most probably it will be in a corrective manner and not a bullish cycle for commodities because of this deflation.. So for all of you that are now buying OIL and anticipating new highs on OIL due to inflation, you might find out how costly not understanding theory really is… There can be a short price inflation of commodities as money remains invested, but this is by no means the start of a new bullish cycle. I come back to this in the “Mistakes section” as it shows how investment losses are made due to lack of understanding of theory.
Another measure which shows that disinflation has already started in 2000 is M2 money supply. As it can be seen from the figure below, M2 has topped in 2000 and since then disinflation can be observed as there is no velocity of the increased money supply. It should be reminded in 2008, the biggest QE was done on M1 and M2 levels, so this did not cause any real change in M2, only a small spike in a downward trend (the third small bump on the way down).
Figure 5. M2 Money Supply – no velocity, no inflation
The last measure according to which disinflation began in 2010 is – M1 money supply. M1 not M0, as “M1 is the money supply of currency in circulation (notes and coins, traveler’s checks [non-bank issuers], demand deposits, and checkable deposits) ” (FRED). So in this way, we look not only at cash (M0) but what people do with it (as debit card money is also considered less liquid cash). On the website it is stated “a decreasing velocity of M1 might indicate fewer short- term consumption transactions are taking place. We can think of shorter- term transactions as consumption we might make on an everyday basis.” (FRED)
Figure 5. M1 Money Supply – also no velocity
This where FED has acted the most in 2008 and is acting the most now (as I mentioned in the US people are given checks – m1) and US is buying bonds (M1-2) – depending on maturity. So in the graph below it can seen that the 2008 intervention did increase money velocity by a bit. However, only in 2010 the trend reversed and has followed the disinflation trend. This means, that M1 most likely is lagging behind M2. While M2 is already way into disinflation to deflation territory, M1 is still only in disinflation. However, I would suggest that the current intervention by FED will not lead M1 to a new high (like in 2010).
So what does the Figure 5 tell us?
As it can be seen, there is a downward trend starting from 2010 (after the 2008 QE, so disinflation has been going on for at least 10 years in the US). In 2008 when the. massive QE of 700 trillion was made by the US, this caused a small spike to a new high from 9 to 10 but did not turn the velocity trend upwards. What does this mean? It means, there was no real inflation created, as money did not start “turning around” (they did not move). It means this money remained invested and saved and is causing a strong asset price inflation in the financial sector and price inflation in certain other sectors. However, overall, the country’s economy remains in disinflation… The price increases, the QE programs have failed to create inflation.. The only remaining short-term exit is – 1) increasing money supply further (could be digital or physical or a combination of the two where digital is largely greater than physical) and 2) increasing interest rates (from 0 – 0.25 to 2.5-3%..). However, this intervention by FED results into deflation knocking on US doors by 2035-2050.
In short, despite all financing attempts of 2008 to reflate the economy, velocity of M1 money supply in the period after dropped from 6.3 to 5, showing that there is no real inflation… what hyperinflation are we talking about? For hyperinflation to be a probability (not just a possibility), we first must have inflation…. there is none..
There is no data for Q1 2020, which is not surprising as the data is likely showing that the trend has remained flat or M1 has dipped even further. If we drop on velocity below 3, the fun in the US will likely begin… As “fun” I mean the “Deflationary crisis” which I call “The Great Depression 2.0.”. Even if there is a spike in M1, this is likely to be a correction within a downward trend (e.g. increase from 5 to 7 and continuing towards 4) instead of a whole new trend of increased velocity, which will prove deflationary crisis scenario. The more likely way as how this will play out is velocity will drop by about 3-4 in 2021-2022, then it will have a slight increase towards 2025 (to say 6-7) after which it will drop to a new all time low, triggering the worst crisis of the US since 1929 in about 100 years after (2035-2050).
***NOTE: There is a horrific case where US lowers interest rates to 0 or minus now, and this brings stock prices (e.g. Dow Jones to a new high in next 5-10 years) and deflation comes immediately after 10 years*** For now, I consider US economists to be smarter than this and to actually try to raise interest rates now (as in 2021-2022) and increase money supply M1-M2 to produce another short-term cycle of price inflation and asset price inflation before the real deflation begins…***
If a whole new trend in velocity starts, I will only then consider the chance of having inflation in the US and if it grows significantly that there is a chance for hyperinflation. For now, however, this remains almost impossible. Let us go back to a theoretical model to provide an evidence-based argument on this.
With the information regarding 1) deflation of USD against major world currencies and 2) the theoretical disinflation model applied to M1, M2, and Commodity prices, I AM GIVING U A HINT ON WHAT is most likely to (highest probability not just a possibility) HAPPEN IN THE US.. the US has about 300% debt too… and too many people are wrongly suggesting the US will experience hyperinflation and the dollar will go 0. This to me is nonsense, the dollar is the reserve currency of the world, so what is more likely to happen is there will be a deflation crisis in the US and the dollar will continue to deflate. This will mean it is a currency which is growing against other currencies and since its growing in value more us debt can be settled. So in time, the deflated dollar will be used to offset debts…
Only if the US is not able to deal with the deflationary pressure over 20-30-50 years when PAYMENTS ARE DUE TO CREDITORS (and NO COUNTRY IN THE WORLD IS WILLING TO EXTEND FURTHER FINANCING TO THE US), ONLY THEN there is a chance of hyperinflation. Only then, there is a chance that the US is NOT ABLE “to pay out” the unpaid debt which will be owed. Only if credit cannot be paid by US to cover this debt, there can be a chance that enough dollar is printed and there is hyperinflation (M0 rapid increase). However, this seems very very unlikely. It seems much more logical that “the us has become a bubble” of a 150 year bull market trend, which needs to have a 20-30 year correction (of a macro cycle degree) maybe in about 2035-2050.
4. Final comparison
But before we ask ourselves about HYPERINFLATION in the US, maybe we should first answer “what happens in the case of US bankruptcy?” from another perspective.
The answer might surprise you..
What are the most recent examples of countries which went bankrupt? I personally remember Bulgaria 1996, Japan 1996, Venezuela 2018 and from my textbooks Germany 1923 (and other countries way in the past).
With the risk of suffering from representation bias, I would say the past cases are not relevant because the politics of the world have changed. In 1923, no one was willing to bail out Germany which caused hyperinflation. In 1996 there was also hyperinflation in Bulgaria and in 2018 there was hyperinflation in Venezuela. The thing all these countries have in common is they selected a COMMUNIST LEADER in the WORLD OF CAPITALISM and DEMOCRACY.
The other 2 cases – Japan and even Greece – received credit. Germany posed a condition that if Greece did not choose democrat, there will be no credit. So it can be seen that even GREECE which had 300% debt was bailed out by the European union. For Japan, a similar thing happened in 1996 (they did not elect a communist leader and thus were able to get credit). From here, a logical prediction can be made about the US.
So I said there is about 1% chance or less that the US experiences hyperinflation. What would this look like – 1) no credit because deflation causes people to be desperate and to elect a communist leader in the USA (so total loss of faith in capitalism, the us and the dollar) and 2) printing real money (expanding M02 money supply – cash) instead of what US did in 2008, adding money on the banks balance sheet but not having to add as much cash. As mentioned, this is not what happened in 2008, but for the hyperinflation scenario, mass printing of “Real money (M0)” needs to have a rapid increase to confirm such a trend.
So hyperinflation is if no one wants to give you debt. Given us has the status of reserve currency and is democrat, what are the odds not to receive credit? let’s be generous and give it 1%. However, 99% odd is, there will be a 20-30 year deflationary crisis because there will be no hyperinflation but deflation, which would allow the US to repay some of its debt and create further demand for its currency.
Note: US is also like Japan in one more aspect, it has a population which is slowly aging (i.e. the number of elderly vs young is increasing).. Hyperinflation happens when there is a growth of population and even bigger competition between people and their money who chase a limited supply of existing goods… (this is what we had in Germany 1923 and Bulgaria 1996) Do we have a growing population in US?… Not really,… so deflation is much more likely as in the case of Japan…
In the European Union, the Netherlands has been in disinflation since 2000, since then the country has lowered its debt to 50% (one of the lowest across EU). The stock market did not have a new high (i.e. there was no asset price and price inflation and no inflation). The US should undergo a similar pattern which should allow it to over 20-30 years period (maybe in 2035-2050) start clearing debt and forget for asset price inflation for 20-30 years (also would clear out the ETFs bubble).
France, Italy and Germany are similar to US, and not similar to Netherlands, so they also have high debt which they need to deflate out of.
5. Implications for investing based on cycles:
5.1. Investment quadrants based on economic cycles
Until now I took the time to clarify the concepts of inflation, deflation, hyperinflation and disinflation in section 2. In section 3 and 4 I explained why the view on US inflation and hyperinflation is outrageously ridiculous based on my own humble understanding of markets and economics. I use this section to provide you with a ready framework.
I like this framework and would like to discuss it further. I would suggest focusing only on the bottom 2 quadrants – Disinflationary Bust and Disinflationary Boom in Figure 6 below.
This might be one of the few frameworks which clearly shows why FED is buying government bonds – DISINFLATIONARY BUST. So, even FED is acting according to this model! But this also shows EVEN FED KNOWS THE ECONOMY IS IN DISINFLATION!!!
Figure 6. Investment quadrants
ARE THERE ANY INFLATION AND HYPERINFLATION BELIEVERS LEFT? PLEASE RE-READ THE WHOLE ARTICLE AGAIN.
This picture also gives us a clue to what I say should be the last bull cycle which has price and asset price inflation within disinflation (or as it is referred here as disinflationary boom). This should be the last boom before real deflation, from where an inflationary boom can start again maybe in 2070-2100 again in the US.
And yes, I have companies – TESLA and NIO – for the disinflationary boom (I have provided a bit more details in section 6, but you can find more in my e-book, also on LinkedIn).
Another nice cyclical visualization:
I somewhat agree and disagree with this evaluation. Firstly, I like the seasons and I also like the focus on gold (but gold mining is better) and cash (if by cash we mean USD).
I disagree with bonds, unless by bonds we mean US Government bonds (1-5 years) and T bills due to yield inversion. If interest rates spike, normal bond prices will drop (a general rule between bond price and interest rates. Thus, it would only make sense to buy bonds when interest rates are up at 2-3% (let’s say). When they start lowering, then the price of bonds will increase (and only then will normal bonds be useful).
6. Investing MISTAKES due to using the wrong perspective (or cycle timing)
Firstly in section 6.1., I outline the mistakes and in section 6.2. I outline the corrections. In 6.3, I have added some additional sectors which I like.
6.1. Investment theory and decision mistakes
Investment mistake N1: buy US TOTAL MARKET EFS (e.g. VTI) at a discount and hold forever
In my e-book I have shown how US indexes have become a 100 year bubble and 50-70 year bubble in ETFs which eventually will correct significantly (but not like most people imagine – with inflation, but with deflation). Most academic authors who are also on the boards of directors of these ETFs write something along the lines of “the longest evaluation of data shows, US Economy always recovers… and betting on US stocks never produces 30 year negative returns” It’s ironic they criticize so much of the existing research based on “representation bias” (choosing to select only most recent data). But the same academic authors actually fail to include for instance data going further the 1900s. The Dutch stock market which has existed since 1600 and is the first stock market in the world data will show that stocks have not been only up for 400 years but rather also in cycles…. And a 100 year bull cycle is not evidence of another 300 year bull cycle, but something else… So to all those hours I wasted reading your books, I thank you because you have shown me how to “debunk your myths”.
And here comes the “BIG POOP” of ACADEMIA and why I would not post this in an academic journal.. FINANCE ACADEMICS HAVE ALL DECIDED TO BE BLIND and propose ETF investing as the optimal way “UNLESS YOU LOSE FAITH IN AMERICA”. Well, I don’t lose faith in America, I don’t lose faith in the dollar, but I do believe ETFs will have another new cycle (to new highs by say 2035-2050)… And soon after, all those ETF investors who have not realized that ETFs are now the new “method of hearding (as in the heard is gathering)” (bias that what everyone does is correct)… will very soon “UNLEARN” that the US STOCK MARKET IS THE BEST IN THE WORLD.. (not because it is not, but because even 100-150 year trends correct eventually).
Final words on ETFs… The last stage of a bubble is people who have no knowledge join in.. well, this is also true for those indexes (Nowadays, ETFs have become so popular that a phrase “better put it in ETFs” than save has emerged).. It is somehow SAD and not exciting as people tend to always do the wrong thing and the wrong time (and masses will again suffer due to lack of knowledge of theory). So this might be a good idea in next 10-20-30 years, but just as those investors of today retire (in about 35-50 years), they will suffer the biggest blow to their purchasing power due to a misinterpretation of theory….
I will devote an entire article and use the methods on books about ETFs and why you should invest in ETFs in the US and use the same methods to show why ETFs will become the worst investment (not for next 10-20-30 years, but for after this). I have also written a bit on this in my e-book where I showed NASDAQ is now trading at 90-120 years to achieve 100% dividend return.. which is delusional..
Investment mistake 2: Buy OIL or OIL companies
If businesses in the economy are expected to suffer is the demand for oil going to increase or decrease? I think many get this one wrong… Oil is a commodity which has a positive relation and is sometimes even said to have a direct impact on inflation. So raising oil prices is argued to increase inflation. Well, I will return the reader to the velocity argument, for oil to drive inflation, money needs to “chase” oil-related products or oil itself….
I personally think, the drop of oil was indicative of the disinflation and deflation which is coming to the US. Many are interpreting this as a bullish sign for oil…. I think oil can increase from prices of 9-3 to say 20-30-40 in the reflation attempts (during 2021-2025) but after this when the real deflation begins it will go to a new low (before ever going to new highs).
At best oil price might try to recover to slightly higher levels, but they will by no means be 100-200% over $70 per barrel as most would like to think… At best it will see $50, but odds are it will not manage to see anything above $40 (and there would be much better investments). Maybe by 2070-2100, oil can begin a new real bull cycle which takes it to $200 (if it was not replaced by something else (e.g. other technologies such as lithium batteries) and does not go to $0)
So I would look at OIL companies for very short-term gains, but personally not use them at all because I would be relying on inflation within a disinflation bust and boom (before a deflation bust).
Investment mistake 3: Buy GOLD as a hedge for “hyperinflation”
Buying physical gold – because of “hyperinflation” or “country default hedge” and HEDGE AGAINST DOLLAR GOING TO 0. I am going to give the 1% chance to this scenario as I gave 1% to hyperinflation of USD.
However, is physical gold really the hedge? The last time this happened in US or in Bulgaria, people’s gold was taken from their homes. If however, USD goes to 0, are we going to use physical gold for exchange or something else, say cryptocurrencies?
Or if we like gold, is it gold or say gold mining stocks? I come back to this in the corrections section.
Investment mistake 4: BUY US REAL ESTATE FUNDS (ETFs) and hold forever
Buying US real estate, as a hedge to stocks.. has emerged as in idea around 2000 when REIT ETFs had positive performance while stocks didn’t. From there, US REITs have been considered a potential hedge against US stock market drop…
Real estate has a near 1:1 correlation to US stocks (however, returns are slightly lower). This means that REIT funds can also like stock funds have 1 more new all time high (in their prices) but post 2035-2050, they are going to turn into very bad investments. A real inflationary real estate boom can only begin with next cycle (post the Great Depression 2.0 of 2035 – 2050 or 2050-2070).
Investment mistake 5: Buy CRYPTO for inflation and hyperinflation
buying physical gold – because of “hyperinflation” or “country default hedge” and HEDGE AGAINST DOLLAR GOING TO 0. I am going to give the 1% chance to this scenario as I gave 1% to hyperinflation of USD. But if USD has hyperinflation, Bitcoin going to 1 million will not be real return, it will be the result of hyperinflation. The real return could still end up being 200-500-1000% despite potential such growth. Therefore to buy Bitcoin and hope for hyperinflation seems like to see a Tsunami and wonder which bathing suit you are going to dress.
6.2. Corrections in decisions according to right interpretation of theory
Correction 1: Buy ETFs only after 2-3 years for the next 10-30 years (if you are focused on US ETFs) or buy ETFs of other countries (e.g. YAO) – Chinese stock market ETF denominated in USD for 30-50 years or Indian or Japanese indexes
Because of the current QE programmes, we can expect a disinflation boom within a disinflationary bust. This could allow stocks to reach a new all time high level (either in 10 years if interest rates are cut immediately) or in about 20-30 years, if interest rates are raised by 2023-2025 and lowered slowly towards 2035.
In both cases, US stocks should reach a new final high before experiencing a 20-30 year sideways to down correction. Therefore, for the short-term, buying those ETFs might be worth it to get some form of growth from investment as well as growth from the deflation of the dollar (in which such funds are denominated).
Correction 2: Buy oil companies who divest oil and look into other sectors
For instance, Shell is somewhere in the middle because it still has a large part of operations related to oil. However, if in the coming years its commitments outside of OIL increase, then this company will not be correlated to OIL and could be good for more than a disinflationary bust.
Do not speculate on oil…
Correction 3: Buy Gold mining stocks due to deflation
So gold prices increase as money supply increases – as there is more money to chase a limited supply of gold. There is price inflation there. This price inflation unlike others is combined with velocity as a lot of money is spent on gold. This means there is inflation in gold but this does not mean there is inflation in all sectors of the economy or the economy as a whole.
Rather gold inflation is due to investors trying to beat each other at buying the most gold to hedge themselves against a crisis. The good thing for them is that whether this is deflationary or inflationary crisis, it makes no difference because gold is considered a safe-heaven. However, if they have bought it to protect themselves against an inflationary crisis (this would show luck) and no apparent skill (which can drive them in subsequent mistakes “due to perceived knowledge” – overconfidence bias). Therefore, to me its important to be clear that I see gold as a deflationary hedge, which will perform well during the reflation attempts of 2021-2025 (i.e. the disinflationary boom).
Second and more importantly, I would focus on gold mining stocks instead of gold for at least 4 reasons: 1) gold miners have a lower cost of mining that we have for purchasing gold, so their profit potential is larger because they can resell at a better profit, 2) gold miners have productivity which allows them to earn extra return due to processing raw gold into bullions and earning extra margin due to these activities; 3) gold mining companies are mostly Canadian companies denominated in USD, so they can grow independently of the US stock market but also provide additional return based on deflated dollars; and 4) gold is not a real hedge against hyperinflation because if you hold physical gold in times of hyperinflation, the country collects all gold from its citizens and those who are unwilling to give their gold away willingly are considered terrorists (at least based on Bulgaria 1996 and US 1929).
Do not speculate with physical gold….
I have a separate article on one miner – Yamana Gold in my InvestmentAddict Series.
Correction 4: BUY US Real estate ETFs for 10-30 years (like O), but also consider Canadian or Chinese, Indian ETFs denominated in USD
For US REITs, same logic as US stocks – one new rally before a big meltdown.
Foreign (Chinese, Canadian, Indian) REITS, denominated in USD could be an interesting new opportunity to diversify out of US REITs.
Correction 5: Crypto because whether it is cash or “digital gold” should grow during disinflationary boom (or even during deflation)
This might be confusing but let us bring the question to what is a cryptocurrency? It is a means of exchange – currency. So if currencies are deflating and appreciating in value (but most are depreciating against the dollar) what could be the case for cryptocurrencies?
Well, if cryptocurrencies are currencies this means that they will also deflate in value and as a consequently they will buy more of the things which have price inflation. So US-denominated Bitcoin will buy more than USD because USD’s supply can be manipulated (and increased) while Bitcoin cannot. Not every cryptocurrency has limited supply but Bitcoin for instance has limited supply. This means that other cryptocurrencies might also deflate but deflate more slowly relative to Bitcoin. So there could be what is known as “alts season” which could be followed by increased Bitcoin dominance (and seemingly impossible prices per Bitcoin of $50,000 and $100,000) but not because of inflation but because of the deflation of Bitcoin and the low velocity of money M1 which will continue even if QE is created. If velocity stays low, this would suggest most money remains saved or invested in Bitcoin (and other assets like gold) to reap disinflationary boom rewards (of reflation).
If Bitcoin is like gold and is bought to be protection against money supply increase, this would also mean Bitcoin would increase because it is not perceived as a currency but as “digital gold” (and speculators value it in the same psychological way as they value gold). So this could show that not all cryptocurrencies are the same and some are suited better for better growth than others. As I explain below, ALT Coins (usually the smaller cap coins) could have a significant rally and even outperform Bitcoin, but then dominance is likely to return to Bitcoin.
However, when the deflation cycle begins (in about 2035-2050), it is more likely that the USD will grow relative to Bitcoin unless for some reason Bitcoin is deflating faster… Bitcoin should not be 100k because of hyperinflation… But maybe because of “the fear of hyperinflation” which is so spread, it can happen during times of disinflation (now wouldn’t that be fun). It would be fun that something is valued as a protection for hyperinflation during a disinflationary bust (maybe just for me). However, the more likely thing is by 2035-2050, Bitcoin will also finish a 25-40 year cycle which will need a significant correction (and will start dropping against the dollar, not go to $1 million as many would predict). That could eventually happen if in next 30-50 years Bitcoin continues to exist and drops from 100k to 5-10k and by 2100 begins a new rally (but I think this is a bit far fetched). However, the idea of cycles and performance has to be understood within the crypto market as well. Otherwise, delusions about $1 million per bitcoin are also dangerous.
I have bought ALTs which I will convert to Bitcoin and hold Bitcoin as a consequence.
6.3. My two individual two sectors picks:
Weed grower companies or ETFs
- MJ – 9% dividend in 2019 = 1/0.09 = 11 years
- HMMJ – 16.7% dividend in 2019 = 1/0.167 = 5.98 year
Copied from my e-book:
“From my perspective, relative to other markets we have discussed (e.g. djia, nasdaq, djt, S&P). weed growers ETF is the most undervalued and thus represents the best market from the point of view of dividend valuation. As I am now 30, it means it would take me 6 to 11 years to double my money from dividends alone.
Industry outlook available here: “the global legal marijuana market size is expected to reach USD 73.6 billion by 2027, according to a new report published by Grand View Research, Inc. It is anticipated to expand at a CAGR of 18.1% during the forecast period”. Source: https://www.grandviewresearch.com/press-release/global-legal-marijuana-market
I hesitated whether to add MO (Altria Group), the producer of Marlboro cigarettes here as it was Tobacco and not weed. However, for me it has been a no-brainer that these companies will take a large stake in weed businesses. Yesterday (20.04.2020), this officially happened, so I will include this stock. MO = 8% dividend = 1/0.08 = 12.5 years! Now, this is an undervalued stock! only 12 years to get 100% dividend from return. This is the type of stock Fisher had in mind to look for as when looking for a company with high dividend and potential growth.”
From the point of view of this article, Weed ETF offer 3 benefits -1) new, upcoming sector 2) denominated in USD so position can grow from USD deflation and 3) separate stock market – Canada.
Tesla and NIO – innovative companies as per quadrants investment strategy they can perform well during disinflationary bust as they can increase productivity and still be profitable.
An upcoming market which can reap great rewards outside of US:
Of course, I have about 50 pages research per company and I will share some highlights in my InvestmentAddict Series, but for now I hope this shows how the use of theory (and examining theories by asking my own questions) has led me to have entirely different conclusions that most authors on the subject of the US crisis.
Unlike many, I don’t believe in the hyperinflation in the US hypothesis. I hope this article serves a way to provide an alternative view of what the US crisis might look like. Moreover, I hope that it makes people ask their own questions and dare to come to conclusions (but only after they have really understood the theories they are using and their underlying assumptions). Lastly, I hope I can transfer from an author who has had the correct types of analyses and no one knew about to an author who is considered to at least have some basic knowledge of economics, finance and investing and educating people on these subjects.
Deflationary crisis (disinflationary bust) is much more likely for the US rather than inflationary crisis. The disinflationary bust, will be followed by a disinflationary boom (which most people will wrongly perceive as an inflationary boom). This will lead them to make too predictable and wrong choices unless they wake up from “the inflation and hyperinflation in the US” amnesia.
To have hyperinflation in the US, the US itself must have such tremendous problems during the times of deflation that they choose to elect a communist leader (like in Bulgaria 1996 or in Venezuela 2018). Only if this happens, there will be a big enough risk not to believe in the US, the dollar and capitalism. Only then there is a chance that no one gives US credit and allows the country to go bankrupt and the dollar to collapse – because of the politics of economics. However, does that even make sense.. I am not sure, but it would be the type of thing which needs to happen in reality for US to have hyperinflation.
However, as it can still happen – about 1% probability, it is worth to discuss it. Because we at least know what to look for and when it could be a good idea to actually prepare “for hyperinflation crisis”. In that situation, buying physical gold will not be the solution too because if gold becomes money and if I own gold and the government needs it, I become a terrorists if I do not hang it over to the country willingly… So, unless the political world plants to allow such S**TSTORM to happen, which I do not think it will, the logical the remaining choices for the US are: 1) 20 year deflationary crisis in the US and bad stock market performance for the period post 2035-2050 to allow the economy to deflate out of debt or 2) lowering interest rates now, going in deflation (faster, say in 10 years), 3) and if FOR SOME REASON US cannot receive credit, the collapse of the dollar – but using cryptocurrencies for exchange and not physical gold as money.
Where I’d bet my money:
The US suffers from disinflation and all monetary policy measures (increasing rates, increasing money supply, buying assets from the market), do not bring real inflation. They represent an attempt to create inflation. However, to have inflation there needs to be velocity of the increased money supply. This means that “new money” or “existing money” has to start “chasing” the “goods and services” at higher prices and have turnover (i.e. that really money is exchanged for products). In reality, velocity in the US is at a new low, this means these dollars represent INVESTMENTS which can only create PRICE INFLATION and ASSET PRICE INFLATION (in the period of 20-30 years), but this will eventually result into real DEFLATION in the US. This is why there is PERCEIVED INFLATION but it can clearly be seen there is disinflation bust and the dollar is deflating against world currencies… (this can be followed by a disinflation boom, but does not equal an inflationary boom).
Think of it a bit like the movie Inception: however, instead of dream within a dream, we have asset inflation and price inflation within a general trend of disinflation of the US economy and a deflating dollar, which will lead us to wake up in a “deflation crisis”, not a hyper-inflation crisis. While companies attempt prices to prevent profits from going negative, they raise prices and in this way they do not realize they discourage people to spend on their products as the deflation creates return for saving (as people can buy at least as much in the future, or even more). So in essence, even if new money comes in, it it saved and/or invested, not spent on goods. Therefore, there is an attempt to create inflation, but no velocity to create it. We perceive this price inflation as inflation but in reality it is only asset price and good and services price inflation (which causes wage inflation – i.e. we spend more if we want to buy those), but in reality given the total supply of cash M0 and M1 (cash + equivalents) there is no inflation. It is just, a temporary bump that is the shortest dream.. and the longest dream… is the deflation which follows it…
So I have taken my picture of this article – https://internationalman.com/articles/what-if-venezuelan-hyperinflation-came-to-the-us/ You can now decide for yourselves, whether the threat of inflation and hyperinflation (the burning dollar is real), or is it my ironic way of saying, are you guys for real?
This is why I have created this education service. I am a summa cum laude graduate who has attended top11 and top50 universities. This does not make me more knowledgable, but it shows at least I like to learn my theory and I pass exams better than others at school.. With this article, I hope I can show you, I can pass better “in life” too with having better theoretical knowledge and in this way help you to find out more about “the merit” of having evidence-based management decisions and solid theoretical foundation.
Deflation is stronger cause than price inflation and asset price inflation (within a disinflation boom after a disinflation bust). Many people get this wrong and assume this is an inflationary boom. If there was real velocity and consumer price index increased due to real inflation – people competing to buy goods and a growing population to support that more people are competing with less money for fixed amount of food, then inflation could offset deflation. However, in today’s case where prices are increased and velocity is going lower and lower and US population is also declining, this is not an indicator of inflation. Rather, as I explained prices as are increased to fight off disinflation of the economy and deflation of the dollar. Within the disinflation, some assets might go up to 50-60% of their previous highs (e.g. OIL) and others can reach new highs (e.g. tech stocks). However, within the next 30-50 years, the real deflation storm should hit the US. If US decides to lower interest rates further (which I also give 1% chance), then it will commit literal suicide and this deflation could start in less than 10 years.
Buying only government bonds shows FED knows there is a Disinflationary bust. QE is done to attempt a final reflation of a disinflationary boom before the eventual deflationary bust.
I have discussed my portfolio allocation and holdings in my e-book. The detail which I imagine no one noticed is above 50% of the companies I own are outside of the US but are denominated in USD. This is a way in which I try to make profit by 1) increase of the prices of the instruments and 2) deflation of USD (so I sell my US-denominated investments to buy back Euros (and more euros because US deflation is stronger vs EUR deflation).
I focus US for another 10-30 years, but I am only invested in EV and US represents less than 30% of holdings. I will allocate some more maybe around the end of 2021 for some gains from US. But over the long term, I expect better stock market performance in JAPAN, CHINA, India during next 30-50 years (or 20 years after the the great depression 2.0 starts and goes on in the US).
Disclosure: This is not investment advice but rather educational content about why I make certain investment choices. I share this content so you can get to know the businesses I invest in. This is by no means a solicitation to buy any of the stocks I hold or the sectors I propose. Rather, it is a summed up version of my research behind why I have made certain decisions and how I think a correct decision-making process looks like . To me correct decisions can only come if they are evidence-based decisions (with real understanding of theories, understanding of assumptions behind these theories, and understanding of my own biases). Whenever you decide to buy a stock or any other investment/speculation vehicle I urge you to do your own (similar or broader) research before making investment decisions.
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@Tesla @NIO @WaveRidersCM
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