I never cease to be amazed at the level of indifference most investors have to the inflationary policies of the government and its central bank. As long as the stock market goes up, nothing else matters to them. Hardly anyone hedges against a crash and most investors are fully committed to equities no matter what.
Apparently it’s boring to hear about inflationary policies. Printing money to pay for runaway government spending doesn’t cause any concern. Neither do record levels of public and private debt. If money creation and quantitative easing causes stocks to rise why not have more of it? Most investors believe the government can control an inflationary or deflationary crisis as it always has and stocks will rise again. Don’t worry about extreme valuations or speculative excess, just buy the dip.
My late friend the economist Kurt Richebacher was a modern interpreter of the Austrian School of economics. The warnings he issued a few years ago would be doubly relevant today. “The U.S. financial system today hangs in an increasingly precarious position, a house of cards literally built on nothing but financial leverage, speculation and derivatives. The decisive cause of every single, serious economic and currency crisis are credit and debt excesses. Apparently, we cannot repeat it often enough: the U.S. credit and debt excesses of the past few years are beyond past experience in history, essentially leaving behind a totally vulnerable economy and financial system.”
He continued, “The crucial thing to see about the U.S. economy is that its growth during the past few years was driven by uncontrolled debt creation for consumption and financial speculation, while in the process domestic savings and the potential for capital investment have been devastated as never before. . .The first thing to get straight is that this was is the most outrageous bubble economy in history, far worse than the U.S. bubble of the 1920s… Debt growth is almost entirely used for unproductive purposes, such as consumption, imports, government deficits, purchases of existing assets and financial speculation. Credit growth in the United States has gone completely insane. This is sheer Ponzi financing – and like all Ponzi schemes someone will end up holding the bag. At the same time, the diversion of credit into bonds, stock and housing has created an illusion of bulging wealth.”
Kurt Richebacher constantly warned about a coming collapse in the bond and stock market. In 2007 he accurately predicted a bust in the “gigantic housing bubble.” He regularly warned about what would happen to the variety of financial asset bubbles in the United States. He wrote about the dangers of monetary looseness and our staggering economic imbalances. Were he here today, he would double down on his warnings.
These days, nobody wants to hear the warning of an old monetary crank. They only want to hear the optimistic stuff. Most certainly they would rather own stocks selling at all-time highs then historic hedges like silver and gold with little downside risk. After all there’s no need to hedge. This time it’s different. What did Kurt Richebacher think about that? “The bullish wave threatens to come crashing down on the hordes of analysts and investors who bet so heavily – and so foolishly – on their dreams of a perpetual ‘stock market boom.’”