Triangulation: Faber, Prechter, Schiff

Getting down to the wire in, oh, so many ways.  (Danger, Danger, Will Robinson!!!)  Kind of nerve-wracking watching Humpty Dumpty weeble-wobble on the top of the wall, wondering just which way he’ll fall.

Yes:  The Inflation/Deflation debate continues, with a bit of heat this past week between Misters Faber and Prechter. (Example here.) 

Arousing disbelief in many quarters, Robert Prechter, of “Elliot Wave” fame, made the “outlandish” claim that the DOW would drop to 1,000.  Guess you could say, Bob’s pretty strongly in the deflation camp.  Actually, that’s not entirely accurate; Prechter is, really, just a “technical” market guy.  He’s just interpreting the charts.  And, as it happens, that’s a pretty useful POV these days, since the vast majority of trading is now driven by computer algorithms.  

And, besides, nobody really has a clue regarding so-called “fundamentals” at this point anyway.  Nothing makes sense on the basis of the usual metrics.  The free market, outside the “flea-market”, is pretty much DOA.  What we have now is something else altogether.  So, this may well be a golden moment for technical analysis or, perhaps, throwing chicken bones. 

Marc Faber, one of the world’s great commodity kings is, naturally enough, firmly entrenched in the inflation camp.  Let’s face it, that’s the best reason to be in commodities.  He (like ex-Soros partner Jim Rogers) has actually moved his operations to Asia, where he expects all the future global upside is going to be.  Let’s see, I’m guessing he’s noticed that they actually produce things people want.  

Bottom line:  these two guys (Faber and Rogers) fully expect the utter collapse of the dollar and, as a result, they’ve gone “all in” to commodities like gold, silver, oil, and farmland.  You know, the basics, the stuff people actually need, or can’t otherwise simply conjure up on the basis of wish-fulfillment government proclamation.  (By the way, one of this past year’s funniest moments, for me, was Rogers telling CNBC’s Maria Bartiromo to become a farmer, embedded below.)

So, how do you reconcile these two, apparently divergent, points of view.  Well, to begin, Faber (in the above referenced article) actually agrees with Prechter on a number of points, notably that a market crash is entirely possible.  In his opinion, however, it doesn’t necessarily follow that all of the associated financial asset destruction will necessarily strengthen the dollar, as it temporarily did last year.  Nor does he believe that the Fed would be completely powerless (or idle) in the ongoing attempt to replace a shrinking monetary base with newly “printed” money.  

The underlying principle here is that, however counter-intuitive it might seem, our currency is a debt instrument.  It is not an asset.  Even the concept of “cash”, the usual metric of asset value, has now been largely eroded by the risk factors associated with a) escalating debt destruction on the one hand and b) active currency devaluation on the other.  What’s missing in all of this is actual money, which once was (and soon again will be) defined as both a medium of exchange and a store of wealth.

So, Prechter imagines – as others have as well – that that asset deflation and debt-destruction go “hand in hand” and that, as a result, the “money supply” will shrink.  Faber counters with the assertion that the Fed, along with most, if not all, of the other central banks on the planet will be forced to print gobs and gobs of new “money”.  Maybe, they’re both right.

Enter:  Peter Schiff.  No, he doesn’t have the education credentials of Marc Faber or the (longer) time tested success of Robert Prechter.  Still, he was also an early prophet regarding the present state of affairs.  In other words, he’s paid the price of admission to this conversation.  His call:  Hyper-Inflationary Depression.  What is that, exactly?

Well, you might call it “Stagflation on Steriods”, I suppose.  But, I’ve recently come to see that hyper-inflation itself is not necessarily “inflation on steriods”.  Inflation itself, after all, is merely the pricing effect produced by too much money in circulation.  Hyper-inflation is something else entirely:  it is the widespread repudiation of a currency, regardless of how much of it is in circulation. 

While it is true that excess money printing will, in extremus, produce both inflation and hyper-inflation, the latter is more a function of confidence than merely the awareness or expectation of declining purchasing power.  In a hyper-inflationary setting, the holders of currency are relatively uncertain whether they’ll be able to buy anything at all tomorrow. 

Schiff contends that this is what you get with a widely circulated, global reserve currency.  When repudiation happens, all of that excess money that’s been shipped off-shore for decades comes flooding back (hmmmm, like chickens to the roost?).  Moreover, attempts by the central bank to avoid defaulting on either sovereign or domestic debt obligations will necessitate the wholesale printing of new money, even in the face of crumbling private debt instruments.  Add to that, I suppose, the taking on of some large share of those private debt obligations through nationalization (i.e. TARP, et al) and you can be rather assured that the debt destruction will be more than offset by newly monetized debt.

And, by the way, when most talk about inflation at all, what they’re generally (if erroneously) talking about is rising prices – in a particular currency unit.  In our case, that means dollars.  A bushel of wheat or a barrel of oil might, in this scenario, actually decline in Chinese Yuan, but skyrocket in dollar terms.  And this, really, is where all of these guys should meet.  I don’t think Prechter gets it, but then, I don’t think he’s a credible economist.  He’s a very credible market technician, however, and for that reason we ought to take note of his market calls, even the DOW at 1000.

Personally, I tend to agree with both Faber and Schiff on some higher point of equilibrium.  Schiff, it may be noted, has long called for a return to a 1:1 ratio between gold and the DOW, which is a very plausible scenario, for reasons I won’t get into here.  But, on that score, we’ve already zoomed past $1,000 gold and, by most reasonable – even “techincal”- expectations, should see it rise to $2,200 at the very least.  Most of the sources that I would call credible seem to make a pretty good case for gold in the range of $5,000.  At 1:1, that still puts the DOW down by more than 50% from here and more than 60% from it’s peak.

Anyway you might triangulate these perspectives, that still looks like the very strange mix, neither one nor the other, of inflation and deflation.  While it can be rather difficult to prepare for both at the same time, that may well be the challenge.

Harry Tuttle


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