Inflation volatility takes over

Inflation volatility takes over

We are in a period of "inflation volatility" - a perpetual state of uncertainty, teetering between deflation and hyperinflation. We can never be entirely confident about which direction it will take.

I have always believed that it would be inflation that caused the collapse of the economic bubble. Inflation threatens the stability of our monetary system by eroding its value. It has compelled Central Bankers at home in Canada and the world's largest U.S. economy to increase interest rates and curb excessive spending. Consequently, imprudent investments and speculations made under lax lending standards and suppressed interest rates would face significant liquidation. Or so we thought.

As early as 2014, I accurately predicted the resurgence of inflation while on the air doing a radio show I did back then every week, which, at the time, prompted me to invest heavily in both gold and silver. Now, we are witnessing the eruption of inflation on a global scale. As anticipated, Central Banks worldwide have taken measures to restrict excessive spending. We are witnessing one of history's most vigorous campaigns of interest rate hikes and monetary tightening.

Yet, surprisingly, we have not witnessed significant consequences. There have been a few failed banks, some defaults in commercial mortgages, and a recession in the oil industry. However, overall, the situation appears to be pseudo-stable. There has been no substantial liquidation in the asset markets or the real economy. For the moment, real estate in Canada has peaked but not pulled back significantly.

The Wall Street Journal recently reported that central bankers have been astonished by the resilience of their economies in the face of higher borrowing costs. If anything, sentiment has shifted from predicting a "hard landing" to a "soft landing" or even no landing.

I'm skeptical about how to interpret this situation. One possibility is that there is a time lag. Central bankers started applying the brakes a year ago, and now we are waiting for the full effect. Historically, there have been approximately twelve to sixteen months of delay between the Central Bank's rate hikes and their impact on the economy and stock market. The effect is straightforward: an economic recession and a stock market correction with a boom in safe-haven hard assets, such as gold and silver.

Take a look at the chart below.

In summary, the last four recessions (Marked by the grey areas on the chart) only began after the U.S. Federal Reserve started reducing rates, followed by stock market corrections.

We cannot be sure if the U.S. Federal Reserve has finished raising rates after the recent pause in the June meeting. Additionally, we do not know if inflation will persist. However, historical patterns indicate that the U.S. Federal Reserve typically reduces rates in response to "credit events" in the markets. If history is any guide, we should expect a recession and market correction in such circumstances.

Another possibility is that the tools employed by central banks, such as interest rates and quantitative tightening, may not be as effective as previously thought. Out-of-control government debt and deficits could be overpowering the efforts of central banks. Bizarrely, higher interest rates might exacerbate deficits, thus stimulating the economy.

In other words, we might be on the brink of an unexpected hyperinflationary surge. This could result from excessive currency printing and distribution during the pandemic, which has left substantial liquidity in the system, still earning interest. Policy changes might not take effect until this liquidity has been drained. Gold and silver would thrive beyond anyone's belief in this situation, and the whole effect should, by historical example, leave both metals numerous multiples higher in price.

I refer to this as "inflation volatility" - a perpetual state of uncertainty, teetering between deflation and hyperinflation. We can never be entirely confident about which direction it will take.

The dominant belief in the market indicates a downturn looming on the horizon for Canadian and U.S. markets late in 2023, accompanied by sluggish expansion in developed markets. However, caution is in the air as investors remain vigilant, mindful of the historical delay in the effects of monetary policies on economic performance. Their apprehension stems from the lingering possibility of an imminent and formidable descent, leaving them on high alert for a potentially harsh landing that may yet unfold.

Historically, this is partly why investors have utilized the summer doldrums to accumulate gold and silver. It's the "Kiyosaki" system in that you buy when people are afraid and sell when people are greedy. This is a time when people are afraid. Regardless, I am not inclined to gamble on these macroeconomic fluctuations with traditional stocks, bonds and cash positions. I will stay diversified and remain vigilant, adding gold and silver consistently.

Yours to the penny,

Darren V. Long