Capitalsynthesis

The post 2008 credit crisis has provided a golden 5 year period for asset holders. Fiscal deficits and central banks liquidity injections have expanded money supply without enabling inflation as money velocity has collapsed and the banking sector have retained excess reserves on their balance sheets. Many stocks have risen 300 to 500% in the last few years whilst real incomes have declined. For wealthy asset holders across the globe times have never been better. Staffing wages have declined as assets and incomes have increased. One example would be residential rents to the poor and middle class families. These have increased in real terms as their median household incomes have fallen. For landlords its been a great period with significant income and asset gains, in real terms.

Corporate net earnings are much higher now than they were in the prior boom of 2008 due to the tail winds of zero interest rate policies, redundancies and consolidation. In addition input costs have been in a cyclical bear market for the last 18 to 20 months depending on the commodity class.

Lets acknowledge asset holders that it has been a wonderful time but alas like all parties, even the best ones, they sadly, must come to an end.

The question on many asset holders minds are when and how will this party end?

Last week we saw the dollar basket breakdown. We also have got a likely secular basing of the 33 year old secular interest rate bull market as of 6 months ago. Money velocity in some countries like the UK is starting to uptick. Liquidity injections and fiscal guarantee (off balance sheet) initiatives are as strong as ever. Timing is never certain but the risks are no longer to the downside here but to the upside. That is, when money velocity steps up a gear and commodities end their cyclical bear inflation will be the threat.

History suggests the run up to inflation is always a great party, as above. But that inflation’s return often marks the historic ending of these sort of parties. When it does return it usually a rapid event, akin to a “night and day” event. A quick phenomena. This is not a discussion of indicators etc. We pick up these on the forum and other areas of this site but suffice that the seeds have been sown and we are in the “departure lounge”, in respect of waiting for this market (and likely global) event.

So, given where we are, lets remind ourselves of one extreme episode of an inflationary period.

Here, below, an extract from the inflation experienced by the Wehrmacht republic, written in the 1950s and translated from German.

Recall why this great republic encouraged inflation. They too had a collapse in money supply from WWI, high debts, low money velocity, high unemployment and industry that sought a lower currency exchange rate to promote exports. Do these items sound familiar, they do to me!

Finally, write to memory, the social and political implications when a fiat monetary system encounters systemic issues such as these. Ownership of some physical bullion is wise. Do not over allocate, in my view, to the illiquid physical asset class but own a little. No matter your total wealth if and when the secular trends turn here ownership of some bullion will be needed to safe guard against the challenges the coming period of change may bring. (Treat it as a hedge rather than for monetary or wealth gain, in my view, for now).

Here the historic text extract. Please excuse the literal translation from the historical German text:

inflation-revisited

All the best

Rich