Tuesday, January 14, 2014

SGS Begins Calling Hyperinflationary End Game

I periodically note the excellent economic analysis over at Shadow Government Statistics.  The author, John Williams, began signalling the hyperinflationary end game last week.  I have long anticipated hyperinflation as a likely outcome of the Federal Reserve's uncontrolled monetary stimulus.  My chief difference with the Shadow Stats analysis is the sequence of events in an unfolding economic catastrophe.  I expect a deflationary episode first as asset prices crash, followed by a national policy response that adds hyperinflationary pressure.

SGS is correct to identify the dollar's increasing weakness.  I have considered foreign investors selling dollars in the currency markets or foreign central banks selling US Treasuries as likely triggers for hyperinflation, regardless of any change in policy from Washington.  A collapse in the dollar's confidence abroad would make asset deflation and dollar hyperinflation occur nearly simultaneously in the US, but I still expect at least a minimal time lag as a panicked policy response attempts to reflate asset markets.  The window available for bargain US asset purchases may be as short as a few weeks or as long as a few months.

The lackluster performance of US stock indexes so far in 2014 may be a mere statistical blip, or they may be the latent realization that the Fed's asset pumping has reached its natural limits.  I have no confidence in reports of political deals that continue federal deficit spending, because they cannot and will not avoid the fiscal train wreck from unfunded entitlement spending.

I do not share doomsayers' infatuation with gold as the sole textbook hedge against hyperinflation, although I recognize how my continued position in GDX may benefit during the onset of hyperinflation.  I continue to examine hard asset hedges for my portfolio.  I know what I want to buy and I await desirable prices in the capital markets.