Inflation, Deflation, Debt, Gold and a Risky 2022 Ahead

As inflation transitions from temporary to persistent and global policy makers scramble like headless chickens in a financially broken barn-yard, informed and prepared investors can still track simple indicators and market forces to weather the storms ahead.

Throughout 2021, we warned that inflation would be anything but transitory, despite contrary assurances from policy makers and cornered central bankers. By the end of that same year, inflation saw its largest 12-month increase since June of 1982, rising year-over-year from 1.4% to a staggering 7.0%. Our blunt forecasts did not come from luck or tea leaves, but from a simple recognition of converging forces which central bankers like Lagarde and Powell have apparently forgotten…More importantly, these inflationary forces are far from over as we head into a volatile 2022.
 

INFLATIONARY TAILWINDS

Specifically, we are tracking a convergence of inflationary tailwinds driven by: 1) record-high increases in production costs around the world (from 9% in the U.S. to over 20% in the EU); 2) continued monetary expansion despite well-telegraphed central bank “tapering” of the same in order to monetise 3) a 28% rise in global debt since 2020.
 

In short, “tapering” from insanely-loose monetary measures to merely crazy-loose monetary policies, will hardly stem the inflationary impact of expanding money supplies, which alas, is the very definition of inflation.
 

That said, many simply equate “inflation” with rising prices and “deflation” with falling prices. Using such customary understandings, the corollary question on investors’ minds is whether we can expect a “deflation” in asset prices in 2022? The short answer is yes.
 

TAPERING = DEFLATING ASSET CLASSES 

Any headline-making move to raise interest rates in a Fed “taper” will be devastating to the vast majority of stocks whose balance sheets survive off debt-rollovers. Rising rates impact the cost of debt, and as that cost climbs, so does the pain (and hence loss) levels of once popular stocks. It’s just that simple.
 

EXPECTING A FED PIVOT?

Given our belief that the Fed’s true mandate is market support rather than employment or inflation management, we are confident the coming tightening by the Fed will be short-lived and followed by an immediate pivot as markets begin to tank the moment rates are raised. Others, however, are arguing that the Fed won’t blink this time around, but stay a hawkish course. Based on prior Fed behaviour (i.e., Q1 of 2019 or the QE1 through QE4 of 2009-2014), we are less confident in such Fed courage. 
 

For now, we shall have to track Fed moves to track market moves, for hawkish policies mean deflating markets and dovish pivots mean inflating markets. Again, and sadly, it’s just that simple in the new abnormal of artificial and central-bank driven (rather than natural and supply/demand-driven) market cycles.
 

ASSET CLASSES TO WATCH

Near-term, a rising rate environment is effectively bad for just about every asset class but the USD and the VIX. Longer term, however, it is critical for investors to recognise that rising rates do not exist in a vacuum. A key point to remember is that one can not fully gauge the impact of rising rates without giving equal consideration to inflation rates, which are rising faster than interest rates. When inflation rates are climbing well above interest rates, the net result, of course, is negative real (i.e., inflation-adjusted) rates. As the slope and speed of negative rates increases, commodities in general, and gold in particular, become excellent asset classes.
 

GOLD PATTERNS 

As long-term precious metal investors all know, negative real rates create bull markets for assets like gold.
 

 With the foregoing in mind, many investors were disappointed with the sideways nature of the 2021 gold price. After all, with real Fed funds rates showing significantly negative levels of -5% by November (lower than 1975 levels), investors naturally anticipated a surging rather than yawing gold price.
 

In our minds, however, the sideways gold movement in 2021 was neither a surprise nor disappointment, but rather a largely ignored indication of its strength and fundamental advantages. Despite gold critics attacking the metal as if it had tanked by half, the simple fact is that gold traded within the $1700-1900 USD price range in 2021—hardly a crushing disappointment. 
 

After two consecutive years of significant price increases (18.9% in 2019 and 24.6% in 2020), the sideways action for 2021 was in fact a common (two-steps up and one-step back) pattern for gold prior to a subsequent surge.
 

In the last 6 years, for example, gold has moved in a consistent pattern of two rising years followed by 1 consolidating year. After 2 years of exceptional price moves, 2021 was no price shock and gold still served as a sound hedge against Covid-related market vol, recessionary forces, BTC gyrations, inflation dangers and the omni-present risk of black swan events. 
 

Furthermore, the massive 80% move in gold from its 2018 lows to its August 2020 high was a clear warning of the CPI-measured inflation to come, of which we warned investors in 2020 and clearly witnessed in 2021. In short, even when not surging in price, gold remains a loyal asset and portfolio stabilising force for informed investors. 
 

And as for price surges, again, those days are ahead--of this we are supremely confident. Adding to this longer-term pattern and confidence are the combined gold tailwinds of inflation remaining elevated to at least 4%, monetary policies remaining crazily “accommodative” (even with a “taper’), real rates remaining deeply negative to allow debt-soaked sovereigns to inflate their way out of the red, and lastly, gold is still cheaply priced at a significant and opportune undervaluation—at least for those who move quickly.
 

As Egon has consistently reminded longer-term investors, when measured against the expanded money supply, gold remains as cheap at today’s prices as it was in 1970 at $35.00 or in 2000 at $300.00. 
 

THE BIG (DEBT) PICTURE IS ALL THAT MATTERS

Notwithstanding all these converging and highly important forces in motion, the guiding indicator for anyone seeking to make sense of an increasingly senseless global financial system boils down to a simple and staggering figure: $300T. That is the current level of total global debt, a figure so staggering in its levels and implications that historically confirmed patterns point quite plainly to what lies ahead.
 

First, no amount of actual or even projected GDP growth (which currently stagnates at less than 1/3 of global debt) will ever resolve (i.e., cover) such explosive debt levels. Period. Full stop. Such unsustainable debt levels leave the policy makers who created them with very few options, which makes their future actions easily predictable.
 

Toward that end, and despite fork-tongued words to the contrary, global policy makers will have no choice but to encourage rather than combat future inflation, as negative real rates are the only means left to digging broke economies out of historically unprecedented debt holes. This also means that in addition to deliberate yet veiled inflationary policies, central banks and debt-cornered sovereigns will equally have no other choice but to remain “accommodative” with their money-printers.
 

Thus, taper or no taper, pivot or no pivot, central banks will continue to expand their balance sheets well above their current and collective $35T levels.
 

THE CBDC ‘SOLUTION?’

Given the increasingly embarrassing optics of such staggering debts, continued inflation and extreme money creation, the foxes guarding the global hen house have already begun telegraphing COVID (rather than themselves) as the scapegoat for the current financial sham.
 

Despite all of these debt and monetary forces gaining momentum well before the pandemic, COVID’s convenient presence allows central bankers and IMF planners to justify ever more lipstick for the debt pig before them.
 

Specifically, and as early as the summer of 2020, the IMF began telegraphing the need for a Bretton Woods II—which is a nice way of (wrongly) comparing the war on Covid to the Second World War. 
 

This allegedly explains the need for a major currency and debt re-set, one characterised by more debt ahead to be paid for with newly created central bank digital currencies, or CBDCs. 
 

Although such measures may seem clever, they boil down to the same distorted template that brought the world to this financial tipping point, namely the fantastical notion that a debt crisis can be solved with more debt, which is then monetised with more fake money.
 

Replacing prior fiat currencies with modern central bank digital currencies is a distinction without a difference and just adds even more importance to the role of owning real rather than fabricated money, of which physical gold has always been and will always be.
 

As we remind and close, fiat currencies (digital or paper) debased by debt-soaked policies are no equal to real value and real stores of value like physical gold. 
 

When measured against a single milligram of gold, the major currencies of the world have lost greater than 95% of their purchasing power since Nixon decoupled in 1971.   EG