If you follow the logic of ‘Code Red’ then inflation is coming as a nasty New Year’s present for investorsPosted on 01 January 2014 with 2 comments from readers
Was that a nine per cent increase in the cost of my monthly haircut that I just paid after the barber complained to me about the 33 per cent increase in his appartment rent in Dubai? Yes that was my New Year’s Eve’s inflationary tale. But then as I have just been reading ‘Code Red’ by John Mauldin and Jonathan Tepper that should come as no surprise.
This elegantly assembled potpourri of macroeconomics and Hollywood anecdotes has one essential conclusion: inflation is still coming down the pike as a result of QE money printing all over the world since the global financial crisis five years ago, and the chances of avoiding it are close to zero.
Second World War
I particularly liked the note about how inflation took off in the late 1940s as a consequence of all the money printing to pay for the Second World War. You can’t change the laws of economics. They just have time lags that allow investors to be lulled into a sense of false security.
That would appear to be almost exactly where financial markets sit as we enter 2014. Messrs. Mauldin and Tepper mull the chances of the Fed executing a perfect exit from the Code Red policies of the past half decade and can find no historical precedent for it happening and not much more than a cat in hell’s chance really.
To deflate would be absolutely disastrous as the Fed’s ruling elite know very well, so the chances of them putting the foot too hard on the accelerator and running over to inflation is overwhelming. Just because it has not shown up in official data is partly because that data is compiled in a misleading and fraudulent fashion and simply down to time lags.
Just as my barber in Dubai raises his prices because his rent has recently gone up due to the world’s highest house price inflation in 2013, so retail price inflation will begin to surface with a vengeance as the bank’s begin to put all that newly minted money back into the economy and its velocity of circulation will pick up from recent lows.
After all it is the velocity of circulation and not the quantity of money printed that actually counts as ‘Code Red’ explains. There are plenty of past precedents for this happening, and none at all for a continuation of low inflation after a massive bout of money printing, just a time lag that deceives many investors.
Inflating away debt
Of course this is also actually what the Fed wants to happen. How else to shrink the debt burden overhanging the global economy? The problem of course is that inflation is generally uncontrollable and quickly gets out of hand. In public the Fed will tell you they can sterilize inflation quickly, in practice things don’t work like that and they admit it in private.
So the authors of ‘Code Red’ discourse ad nuseum the monetary and fiscal policies of the past five years, including a very curious chapter on Japan and its imminent financial collapse. But when it comes to hard investment recommendations it is back to real assets like gold and shares in companies that benefit from inflation.
That sounds very much in accord with the ArabianMoney investment newsletter (click here) whose controversial New Year call is very similar, although we have our own selection of hot tips for our paying subscribers. Why not join them and get on the winning side for 2014?