Why the Next Round of Inflation Will Be Different
All right, now we are in a position to understand why this next period of inflation will be unlike any prior period of inflation.
If inflation is the result of a dynamic interplay between money and goods and services, but the money is largely sequestered off in the hands of a supremely wealthy class that cannot realistically spend it as fast as they earn it, then inflation will not play out anything like what we might expect from merely looking at historical examples.
Instead of wondering what the entire country might do, carefully tracking wage and income data at the national level, or peering obsessively at CPI inflation data, we might find better (and easier) predictive results by assessing the wants, desires, and motivations of the top 1% of all earners.
Let's pretend for the moment that you are the manager for a wealthy family foundation with a generational view of money and a desire to keep it compounding so that the foundation can do the good work for which it was established.
As long as the system seems to be preserving the value of your money, you are content to diversify it across a variety of asset classes: stocks, bonds, private equity, hedge funds, and perhaps some international diversification. The usual.
Now suppose that it suddenly occurs to you that the old system of paper wealth is no longer working the way it did. And, worse, you lose faith in the dollar as a store of wealth. You've lost faith in stocks, bonds, paper money, and all the usual suspects. You even come to the conclusion that the old model of “growth as a given” is irretrievably broken. What do you do?
Given that the universe of wealthy people is very small, and given that ideas can spread rapidly through a small community, I consider the possibility that a sudden rush for the exits could occur almost without warning.
The Wealth Trap
The number of outlets of for money outside of the paper-based financial system is extremely small. The doorways are microscopic in comparison to the staggering piles of paper wealth that exist due to the rampant debt bubbles and hyper-concentration of wealth seen over the past few decades.
Let's suppose that you have a billion dollars, held in a variety of instruments, and you're nervous and want to get out of 20% of your paper positions as soon as possible. What would you do? Would you move into farmland? Minerals? Gold? Stradivarius violins?
The answer to this will define your expectations of how the future of both asset prices and inflation will unfold.
My analyses have been trending towards trying to predict where and what the wealthy will do once they see that the old model is broken. This is a partial explanation for why I continue to be an advocate of gold, as it represents one of the larger monetary doorways out there, although it is pathetically small compared to the piles of paper wealth that currently exist.
When the wealthy begin to try and crowd through a variety of entirely too-small doorways, we will all experience this as “inflation” and “rising prices” in some things and declining prices in the paper assets being sold. Like today, it will be a mixed bag, making for a challenging investment environment.
Large portions of wealth, jammed up at the doorways, will be lost entirely. Other wealth will squeak out of the doorway and be late to the party. Only the early money will have any realistic chance of being preserved.
Here I will argue that the traditional sources of wealth - those immediately recognizable to your great-grandfather as items useful to humans - will be the areas that will gain the most. Good land, trees, water, food, minerals, and energy are all items that fit into this view.
Conclusion
Inflation will, over the long haul, be driven by monetary forces, but the most immediate and pressing concern in trying to assess where the next game-changing changes in prices will occur involves trying to predict the next moves of the wealthy.
The process by which perceptions and views change moves at glacial speeds across entire populations, but at increasingly faster speeds as the sample size decreases. Given the propensity of the extremely wealthy to congregate and share their views with each other, we might predict that a change in their investment preferences could shift with startling speed.
Given this, and given the number of people who now seem to be actively questioning the entire premise of our debt- and growth-based monetary system, I think the most predictive value can be gained by trying to guess where and how (and maybe even when, although that’s tricky business) large pools of wealth can be converted out of the usual asset classes and into other things.
It is my contention that “wealth” will begin to revert to a more classical definition that does not entirely depend on the increasingly unreliable measuring stick known as the dollar.
Food, water, land, energy, hard commodities, and other direct and physical expressions of the things that people need, vs. what people want, are all examples of ‘wealth.’ These will be the gainers; many will call this "inflation," but it will really be the shifting investment preferences that is driving the price rather than a large increase in the money supply.
This is why I spend a good deal of time tracking around the edges of the financial markets seeking clues that big money is moving into these areas. The signs are there, but they remain subtle. However, once they become “unsubtle,” the cat will be out of the bag, the early money will have already positioned itself, the next block of money will play the much less remunerative games of chase and catch-up, and the late money will be lost entirely.
Because I see this dynamic as involving the sloshing of large amounts of money from one area to another, we will see both large gains and large declines. I see the gains as being in "things" and the losses being in "paper."
If this dynamic unfolds as I've postulated, the unwary will find themselves stuck in a wealth trap.