Will the Next Recession Be From Inflation or Deflation?
As you are hopefully aware, the US economy is in a bubble. Bonds, real estate, college tuitions and loans, the stock market, just about everything right now is overpriced and ready to pop. Strangely, most of the rest of the developed world is even worse. Japan’s economy remains in a nightmarish Keynesian coma with 0% growth for literally decades. Most of Europe is actually at negative growth, which is a nice way of saying it’s collapsing before our very eyes. Even its current powerhouse, Germany, is leveraged to insane levels and has a demographic problem similar to Japan’s. Even China’s margin debt is now experiencing the longest losing streak in history.
(The difference is that China will eventually bounce back. Europe, being in the West, will not. The West fades, the East rises, despite problems. But that’s a topic for another day.)
Back to the US. I have been fortunate enough to accurately predict every major boom and bust in the US economy since I became an adult in the early 1990s. Sometimes my timing is off by a few years, but I’ve never been wrong. In the 90s I knew that real estate would boom, so I put my money into that sector (instead of investing in stocks like all my buddies did) and did very well. During the dot com crash I didn’t lose a penny while most of my buddies got skewered.
In the early 2000s, I could see that real estate would go bust but gold would boom, so I dumped all my real estate and bought gold. People said I was crazy, but I was right and made a lot of money once again.
Next, I estimated the stock market would crash in 2012, so I stayed out of stocks. I was four years off; the stock market crashed in 2008, but I still was able to survive because I was not in stocks. (I talk about some of this in my book.)
That brings us to today. Another crash is shortly upon us. I don’t know exactly when it will happen, but based on the data available to me and the analysis of people who know these things much better than I do, it can happen anywhere between 6 months and 5 years from now.
The Type of Crash
A crash is either deflationary, like in the 1930s, or inflationary, like the 1970s.
If you’re expecting an inflationary crash, you buy precious metals like gold and silver. These skyrocket during inflationary crashes, and you make lots of money.
If you’re expecting a deflationary crash, you buy very safe bonds or keep your money in cash, then quickly buy assets (stocks, real estate, whatever) at huge discounts once the crash occurs, which makes you lots of money a few years later when prices return to their real values.
Will this next crash be inflationary or deflationary? For the first time in my life, I don’t know. Seriously. I have no idea. It’s a problem. For the first time I’m not exactly sure where to place my money to get a maximum return on the next crash. I have to admit it’s been bugging me. This uncertainty has limited my financial moves over the last year or two. I’ve even delayed purchasing my next house, something I really didn’t want to delay.
Guys I really respect, who are geniuses at this stuff, don’t agree and make great arguments either way. Peter Schiff, who I really like, swears it will be an inflationary crash because of all the money our insane governments have been printing. I agree. Harry Dent, who I also really like, swears it will be deflationary because of the massive amount of debt in circulation that will vanish in the next crash, boosting dollar values but crashing everything else. Again, I agree.
Then you’ve got guys like Michael Maloney, who again I really like, who say that the next crash will be deflationary but precious metals will do well anyway as long as you own them physically instead of on paper assets (physical gold vs. paper gold). There will be a deflationary crash, he says, and the paper value of gold on the exchanges will crash, but the price of physical gold that you own will skyrocket because it will be so hard to get. Again, this makes sense to me and matches what’s happened in historical crashes (including in 2008).
So who the hell is right?
I don’t know.
The only thing for certain is this: the stock market will crash, big time. In an inflationary or deflationary recession, the stock market gets hammered either way. The currently rigged and overvalued Dow could easily drop 80%, at least 40%, possibly even 90%. Therefore, the smart money is to short the US stock market and bet against the S&P 500. The problem is shorting the stock market is often complicated, risky, expensive and involves a lot of money (as in investment minimums).
I’m not going to tell you exactly how I have my money invested, but since I don’t know exactly what is going to happen, I have it arranged in three chunks in order to be prepared for all three possible scenarios:
Scenario 1: Inflationary crash, stock market cashes, precious metals skyrocket, dollar plummets.
Scenario 2: Deflationary crash, stock market crashes, precious metals tank, dollar skyrockets.
Scenario 3: Deflationary crash, stock market crashes, real precious metals skyrocket, paper precious metals tank, dollars goes way up in value temporarily then crashes back down again 1-3 years later.
In any of the above scenarios, I should make money, though not nearly as much money as I have in the past when I was more sure about the nature of the next crash.
Dammit. Oh well. When living the Alpha Male 2.0 life, these are what you call high quality problems.
Just remember that we average one major recession every 10 years, so make sure your assets are arrayed to take advantage of this rather than getting screwed, like the typical societally programmed American, with a bunch of stocks (and not much else) in a government-restricted 401K or IRA.