Of Deflation

Long term readers will not be surprised by this morning’s Bloomberg headline:

Bonds Tumble With Stocks as Gold Drops in Rout on Fed

Basing my views on the work of Elliott Wave International (EWI), I’ve been preparing myself for the Grand Supercycle Bull market in social mood to segue into a deflation which will take all asset classes save cash down as though they were one market. The driving force for the decline is the pattern of social mood, which peaked in 2000 and has been in a topping phase ever since. It now appears that the four year long corrective wave ended May 22, and the final wave down to the cycle lows of 2016 is underway.

A decline of this magnitude (Grand Supercycle) will usher in an extraordinary contraction in debt. Social mood will turn so negative that borrowers won’t borrow, and lenders won’t lend. Consumers will drastically curtail spending, causing a severe economic depression, making it extremely difficult for governments, businesses and individuals to raise cash to service debt. In a situation like this, everything is for sale to get desperately needed cash, and there aren’t many buyers.

Stocks, precious metals, oil, other commodities and real estate are more leveraged now than at any time in history. The drop will start with hedge funds. They have the most leverage. It will generate margin calls in the accounts of individuals and other institutional investors on margin. Forced sales to meet margin calls will bring all markets down to the point that investors without debt in their accounts will panic and sell.

Bonds will continue to fall because investors will need to sell them to raise cash, and, under the pressure of a sharp drop in business, bond issuers will be defaulting. The worst place to be invested now is in junk bonds.

The business depression will cause unemployment to double or triple the present level, and very little can be done to stem the tide. The dollar will rise ever more sharply because it is the global reserve currency and all entities around the world will be scrambling to get dollars to stay afloat financially.

I could go on some more about the situation, but what’s the point? It’s going to be awful.

Cheers,

Rod

No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

 

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