Will the Next Recession Be From Inflation or Deflation? - Caleb Jones

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.

15 Comments on “Will the Next Recession Be From Inflation or Deflation?

  1. Yep it’s coming, I expect a huge crash and I think it will be long before 5 years, possibly even this year or next. Some bloggers in the UK that I’ve been reading expect it to be a deflationary crash next time.

    Caleb, as a UK resident I feel the economy in my country seems to rely on constant and infinite growth in order to be sustainable. Surely this is a completely impossible long-term system? Even China has seen it’s growth slow down recently.

  2. Forever growth is sustainable, as long as:

    1. You’re not in a rush.

    2. You tolerate the occasional recession.

    3. You keep government the hell out of the economy.

    If you study the economy of the United States since its inception, there are booms and busts, but the general trend is always upward, even adjusting for inflation, except for the last few decades. Why? The problem is the goverment interference grows too great and stifles the natural growth of the free market. It’s same deal with China. (And Europe, and Japan, and…)

    This is because goverment violates rules number 1 and 2 above. It tries to artificially “push” the economy, and it never wants recessions (making sure to print more money, artificially lower interest rates, bail everyone out, etc). The problem is regular recessions are needed for a healthy economy to grow and prosper long-term.

    Since every prosperous society eventually falls prey to their needs for big goverment, in a roundabout way you’re right; forever growth actually isn’t sustainable because of human beings’ need to screw up a good thing with too much goverment.

  3. CJ,
    I’m a newb in economy and used to have the typical socialist societal programming; have been slowly drifting away from it in the last 5 years, but still not 100% convinced by capitalism (I’ve read your series How To Handle The Poor, by the way). The ideological pressure to doubt every proposed system in existence is very strong and I’m skeptical of my own ability to judge as a non-expert, so I stayed on the fence.
    I’m just asking, is there ANY scenario in your opinion where socialism/big government COULD somewhat work ?

  4. No system is forever-sustainable because of the human nature I mentioned in the prior comment. Every system eventually turns into something else. Communism to collapse, collapse to revolution, revolution to capitalism, capitalism to socialism, etc.

    But barring the above, socialism could possibly “work” in a very tiny country, like a small island nation with a million people, especially if it had access to natural resources, which is how the Scandinavian nations have pulled it off so far (the oil in the Norwegian Sea). Notice I use the word “work” in quotes though, because I still wouldn’t choose to live in even in a tiny “working” socialist country like that.

  5. The trouble with predicting a recession/crash is that it is so unbelievably painful to not be invested in the markets when it is going up and all your friends are getting rich. I have been predicting trouble since 2013. I have been way too early with my defensive posture (AKA WRONG) up until now. Being right at this point still doesn’t feel good, because now that the market is going down I feel that I am not defensive enough.

    You’re going to be wrong for a while no matter how you do it. If you sell too early, you hate yourself for sellling too early. If you sell too late you hate yourself for being late. The only people that sell at the top and buy at the bottom are liars.

  6. You’re going to be wrong for a while no matter how you do it. If you sell too early, you hate yourself for sellling too early. If you sell too late you hate yourself for being late.

    You’re right, it’s emotionally hard no matter what you do.

    However, hating yourself because you sold too early is a mistake, because you made money while everyone else lost. I sold “early” in the 2000s with real estate, and you could argue I could have mode more if I had stayed in and magically gotten out in right around early 2008 instead of around 2005, but what would have happened is I would have lost my ass in 2008 just like everyone else.

    Getting out a little too early never really hurt anyone. Getting out too late always does.

  7. If you allocate your money according to Harry Browne’s permanent portfolio then you don’t have to worry about predicting anything.

  8. Correct! I do a variation of that myself. However it won’t help with speculation, only investing and retention.

  9. Caleb, do you think that investing in bitcoins is worthwhile? It is estimated that their value will skyrocket in the summer, because their mining is going to half.

  10. Caleb, do you think that investing in bitcoins is worthwhile?

    As a speculation, absolutely. I own some myself.

    As a solid investment, no.

    It is estimated that their value will skyrocket in the summer, because their mining is going to half.

    I never, ever act on any predictions that are that precise about the timing, even if they’re given by men I trust. They’re always wrong.

    My guess is that bitcoin will eventually go up, though I have no idea when. At the same time, bitcoin could also go to zero at some point. That makes it a speculation (though not a bad one).

  11. “As a solid investment, no.”

    What do you mean by ‘solid’?

    “I never, ever act on any predictions that are that precise about the timing, even if they’re given by men I trust. They’re always wrong.”

    You trust predictions when they not time-specific, right? Or else you wouldn’t make decisions according to an upcoming recession or inflation.

  12. What do you mean by ‘solid’?

    As in it’s not something I would rely on as a core part of my long-term investment strategy. I view it as a speculation, which means it may go way up, or it may go way down.

    You trust predictions when they not time-specific, right?

    If they make sense based on all the other data I have, yes. But as soon as someone gives specific timing for their predictions, I start to tune out. I just consider the timing on these things “some time in the next 1-10 years.”

  13. If I am not mistaken, you said that you have never lost any money in investments. So you have accumulated all this knowledge about inflationary and deflationary crashes, not from mistakes, but based on the backed data of specialists. How were you so sure that this data was not wrong? I am asking because I am also interested in making solid investments.

  14. If I am not mistaken, you said that you have never lost any money in investments.

    So far, that’s correct.

    So you have accumulated all this knowledge about inflationary and deflationary crashes, not from mistakes, but based on the backed data of specialists.

    Right. Mistakes made with my investments costs too much money so I don’t do that. I’d rather keep my investments in cash (for example) than lose money.

    How were you so sure that this data was not wrong?

    I was never 100% sure, but reasonably sure. One can never be 100% sure, but you can get up to 85%+ sure. As always, I play the odds.

    I just read a lot and did my research, and kept my emotions and Societal Programming out of it, as always.

    One could also argue I’m a bad investor since I’ve never made a killing in my investments either. But I don’t lose money.

  15. It will be deflationary.

    Consider:

    1. Unemployment levels and LMCI – low unemployment, positive LMCI, against a backdrop of low workforce participation, and stagnant wages. All deflationary forces.

    2. Oil prices – Low oil prices, low oil demand, all deflationary.

    3. The real story here is no growth, slow growth – deflationary.

    4. The US Fed – will probably never cut rates again until another crises hits – deflationary

    The markets right now are too hot, too high, and need to come down. Typically unemployment stats get worse before that happens. They aren’t really deteriorating enough to be signalling a recession. My guess is that some sector in this economy is going to get caught with their pants down and it’s going to start a contagion that will bring on the next recession, which will be deflationary.

    The response of the US government will be inflationary. Oil will turn around about 2020-2021 and contribute to inflation. The ensuing “recovery” will mirror the current one, no growth/slow growth, crappy fundamentals, in this case everything improving on paper because of inflation and continued decline in workforce participation and increase in low wage employment.

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