If inflation is really not dead but resting then precious metals and oil are the thing to be buying
Peter Cooper

Buying stocks on the momentum trade as central banks around the world gradually hiked their monetary bases over the past five years has been a winning hand. However, the next stage of the central bank plan is to overshoot on monetary expansion and force inflation to reduce the real burden of debt on the global economy. It has to be done.

Central banks have a long history of talking one way and acting in another. They talk about low inflation, for example, while pumping money into the economy like mad to prevent deflation. And it is deflation that worries the central banks most. A deflationary debt spiral is a slam dunk for a global depression.

Central bank errors

Now history also shows that central banks are very bad at fine tuning their policies. Why did the Fed keep interest rates for so long that the US got its subprime housing bust? By trying to avoid one bust they just ended up getting a bigger one, and they are now doing exactly the same thing.

For if the money printing goes on long enough then it does produce inflation, and that can only happen as the major economies enter a recovery stage as we see in the US, UK, EU and maybe Japan this year. This is the unexpected consequence that comes back to bite the market. Now what happens next?

Interest rates will rise. Bond markets will tank. Pension funds will be screaming. Equities also take a hit because their dividends will be too low in comparison with bond yields, and lower share prices will boost equity yields to compete.

This is where you get back to the classic win-win market for real assets like oil and gold that last existed in its purest form in the late 1970s. It ought to be great news for ArabianMoney and our investors in the Gulf States. Energy prices will let rip. Is that why Warren Buffett likes energy and inflation-protected assets these days?

Gold and especially silver would be the obvious other beneficiaries in a flight from bonds and many equities. The stock market would become as skewed towards Big Oil and precious metal stocks as in the late 1970s.

Gold top

Eventually markets would settle enough for a Paul Volcker substitute to enter and pull away the punch bowl. Mrs Yellen would take her late retirement. Then it would be a time to rotate back out of real assets and buy into bonds or depressed major stocks or real estate.

The problem for readers is that this analysis requires a leap of imagination. It is far from the consensus view. But if you think about it this is far less off-the-wall than just projecting an exhausted stock market rally into the blue yonder. The reversal is starting to happen now, first in tech stocks.

Just because experts are confused about where markets move next will not stop them moving…

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