Inflation, stagflation, deflation, or all of the above?

Sep.15, 2008 in Opinion

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That was the question that was posed by Brian Beasley (Brian B) on Linkedin.

The reality is that they are not mutually exclusive, which means I am sure we will have “all of the above”. I expect that different parts of the economy will experience one or more of these ‘flations.

If the price inflation secular bulls do not break down, there is hope … well at least for the heavily indebted.

If the secular bull does remain intact then opportunities should be easier than the credit-contraction induced deflation scenario that is threatening to make an entrance in the UK and US.
My big picture is that we are in:

Kondratiev Winter;

Secular Bull for unemployment, in first cyclical bull;

Secular Bear for Western stockmarkets on a P/E ratio. Currently in the latter stages of the first wave of a third wave of a larger degree;

Secular Bear for real house prices and homeownership;

Secular Bull for commodities, but currently in one massive wave 4 counter-trend move, which I expect to be a huge multi-year wedge;

Secular Bear for residential and commercial property on a P/E ratio;

Secular Bull for price inflation, about to enter a cyclical bear, and;

Secular Bull for [consumer] interest rates, in cyclical bear.

If Governments on both sides of the pond can succeed in their continued pursuit of having deliberate inflation, then there is hope. But the fiat fraud used to postpone the recessions of the Noughties now means we get them all at once.

I expect the current recession, UK per capita GDP contracted by 0.15% in Q2, to be the first of several. The obligatory post-Olympics recession does not bode well for 2012.

The re-balancing of private balance sheets will continue to be a drag for many years to come. In simple terms there are many consumers in the UK and US who have effectively indulged in 20, 25 even 30 years worth of discretionary spending in the last 10 years. Most of which was fuelled by debt.

Instead of paying for what they had, accepting that they can’t take a vacation this year because they’ve actually already had this year’s and all of them out to 2016, they will want someone else to foot the bill.

Indirectly this will mean rising taxes, yes I think we are in a secular bull for them too. They will be aimed more and more at anyone who did not piss away the last decade. Anyone who earns a decent income or has savings will be a target … directly or indirectly.

Inflation, the stealth tax of all populist Governments, will be pursued even more fervently than usual. If the usurers aren’t forthcoming, the printing press will have to be started up. Aging infrastructure and assorted ill-conceived meddlefests will receive a large share of the newly minted funny money.

As I said at the start, “if” the inflation secular bull persists then, in my opinion, the above is on the cards. In which case the West will bounce either side of the GDP growth flatline for the next 5 or so years.

That offers the potential for high price inflation not reappearing until post 2014, which is when the next K-wave should start.

If we end up taking a trip to deflationville then all assets have a big decline ahead. The post-WW2 promises of entitlement will be revealed to be smoke-and-mirrors, leaving the indebted multitude as very unhappy campers.

So, when it comes to the ‘flations, I see all of the above. In a Japan-style ‘lost decade’, though it is now closer to two lost decades, I believe we will have, or continue to have:

Asset price deflation, with limited counter-trend moves;
Wage stagnation with wage price deflation in some areas but possible tax-induced wage-cost inflation.
Price inflation in essentials, such as food, fuel, etc.
Deflation in per capita personal debt, caused by contracting credit due to the continued credit revulsion;
Public debt inflation as Government borrowing balloons to fund numerous ill-conceived and poorly executed initiatives, programmes and general bribefests.
Delayed, but likely massive, price inflation when the counterfeit currency, courtesy of the Government’s overworked printing presses, finally reaches Joe Ordinary.