Most rational people with some knowledge of economic history will realise that the US$ will eventually be the victim of hyperinflation. The hard reality is that whenever money can be created in unlimited amounts by central banks or governments, it’s inevitable that at some point the money will experience such a dramatic plunge in its purchasing power that it will be at risk of soon becoming worthless. However, knowing this is only slightly more useful than knowing that the star we call the Sun will eventually die.

The relevant question is never about whether hyperinflation will happen; it’s about the timing, and at no point over the past 20 years (including right now) has there been a realistic chance of the US experiencing hyperinflation within the ensuing two years. Furthermore, the same can be said about deflation. A sustained period of deflation (as opposed to a short-lived deflation scare) will eventually happen, but at no point over the past 20 years (including right now) has there been a realistic chance of it happening within the ensuing two years.

So, when I say that the hyperinflation and deflation arguments are both wrong I mean that they are both wrong when dealing with practical investment time-frames. They are both actually right when dealing with the indefinite long-term.

By the way, when considering inflation/deflation prospects I only ever attempt to look ahead two years, partly because two years is plenty of time to take protective measures and partly because it is futile to attempt to look further ahead than that.

How do I know that neither hyperinflation nor deflation will happen in the US within the coming two years?

I don’t know, but I do know that neither will happen without warning. We are not, for example, going to go to bed one day with government and corporate bond yields near multi-generational lows and wake up the next day immersed in hyperinflation. Also, central banks are not going to be rigidly devoted to pro-inflation monetary policies one day, to the point where theories/models are never questioned and failure is viewed as the justification for ramping-up the same policies, and the next day be willing to implement the sort of monetary policies that could lead to genuine deflation.

Some people are so committed to the “deflation soon” forecast that they ignore any conflicting evidence. It’s the same for people who are committed to the idea that hyperinflation is an imminent threat to the US economy. However, an objective assessment of the evidence leads to the conclusion that it currently makes no sense to position oneself for either of these extremes. The evidence includes equity prices, corporate bond yields, credit spreads, the yield curve, commodity prices, the gold price, and future “inflation” indicators such as the one published by the ECRI.

The evidence could change, but what it currently indicates is that the signs of “price inflation” will become more obvious over the coming 12 months. No deflation, no hyperinflation.

Whenever there’s a major financial crisis, the largest commercial and investment banks invariably take big hits. This causes them to either go bust or go in search of a bailout. In fact, as far as I can tell there has never been a case over the past 50 years of an elite financial institution being on the right side of a major financial crisis. The same goes for central banks. Judging by their words and their actions, the heads of the world’s most important central banks have been blindsided by every major financial crisis of the past 50 years. And yet, I regularly see blog posts, articles or newsletters in which it is explained that the financial crises that have occurred in the past and are going to occur in the future are part of a grand plan hatched by the most prominent members of the financial establishment.

The idea that market crashes and crises are purposefully arranged by the financial elite is what I’ll call the “Masters of the Universe Fallacy” (MOTUF). For some reason this idea is very appealing to many people even though there is no evidence to support it. Furthermore, the simple fact that the supposed master schemers are always on the wrong sides of financial crises is enough to refute the idea.

As far as understanding economics and markets are concerned, the current heads of the world’s three most important central banks are complete buffoons. Obviously, if you don’t have a thorough understanding of good economic theory and how markets work then any strategies you concoct to bring about specific economic and financial-market outcomes are going to fail. The retort is that the heads of the most important central banks are just puppets whose strings are pulled by the real master manipulators. The real master manipulators apparently include the heads of the world’s most influential commercial banks, such as the senior managers of Goldman Sachs and JP Morgan.

Don’t get me wrong; it is certainly the case that the government takes advantage of crises to expand its reach and that the likes of Goldman Sachs and JP Morgan have great influence over the actions of the central bank and the government. This allows them to avoid the proper consequences of their biggest mistakes, but the fact is that they keep making mistakes of sufficient magnitude and stupidity to threaten their survival on an average of once per decade.

Take the specific example of the 2007-2009 global financial crisis. It wasn’t until mid-2007 that the senior managers of Goldman Sachs realised that there was a huge problem looming for the credit markets in general and the US sub-prime mortgage market in particular, but by then the company was so heavily exposed to ill-conceived investments that it was too late to re-position. If not for the combination of TARP, various asset monetisation programs implemented by the Fed, the US government bailout of AIG, Warren Buffett and changes to official accounting rules, Goldman Sachs would have gone bust in 2008 or 2009.

Furthermore, having either died (in the cases of Bear Stearns, Merrill Lynch and Lehman Brothers) or suffered near-death experiences (in the cases of Goldman Sachs, JP Morgan, Citigroup and Bank of America) in 2007-2009, the elite bankers of the world again found themselves in potential life-threatening situations just 2-3 years later due to the euro-zone’s sovereign debt crisis. This time the ECB came to the rescue.

In general, when a financial crisis happens it’s the outsiders who profit from the calamity, not the insiders. The insiders are always up to their eyeballs in the credit-fueled investment boom of the time. For example, in 2007-2008 it was the likes of Michael Burry, Steve Eisman, John Paulson, Kyle Bass and David Einhorn who correctly anticipated the events and reaped the large profits from the market action, while the likes of Chuck Prince, Dick Fuld, Lloyd Blankfein and Jamie Dimon were forced to either exit the banking business or go ‘cap in hand’ to the government.

It will be the same story in the next crisis. Goldman Sachs won’t see it coming and therefore won’t be prepared, which means that it will once again be in the position of needing a bailout to avoid bankruptcy.

So, if you want to make me laugh just send me an email explaining that the periodic crises are all part of a grand plan formulated by members of the financial establishment.

Gold has probably peaked for the year. Not necessarily in US$ terms, but in terms of other commodities.

In fact, relative to the Goldman Sachs Spot Commodity Index (GNX) the peak for this year most likely happened back in February. The February-2016 peak for the gold/GNX ratio wasn’t just any old high, it was an all-time high. In other words, at that time gold was more expensive than it had ever been relative to commodities in general.

Also worth mentioning is that when the US$ gold price spiked up to its highest level in more than 18 months as part of the “Brexit” mini-panic late last week, the rise in GNX terms was much less impressive. As illustrated below, last Friday’s move in the gold/GNX ratio looks more like a counter-trend bounce than an extension of the longer-term upward trend.

The February-2016 extreme in the gold/GNX ratio had more to do with the cheapness of other commodities than the expensiveness of gold, and the subsequent relative weakness in the gold price was mostly about other commodities making catch-up moves. This is actually the way things normally go at cyclical bottoms for commodities. The historical sample size is admittedly small, but it’s typical for gold to turn upward ahead of the commodity indices and to be a relative strength leader in the initial stage of a cyclical bull market. Gold then relinquishes its leadership.

Perhaps it will turn out to be different this time, but over the past 8 months the story has unfolded the way it should based on history and logic. An implication is that if the US$ gold price made a major bottom last December then the general commodity indices aren’t going to get any cheaper in US$ terms or gold terms than they were in January-February of this year.

Around cyclical lows, gold leads and the rest of the commodity world follows.

I was blown away by the following two charts from Jeffrey Snider’s article titled “The European Basis For New Monetary Science“.

As most of you probably know, the Mario Draghi-led ECB embarked on a ‘suped-up’ QE program in March of 2015. The idea behind this program was that by monetising 60B euros of bonds per month the ECB would promote faster credit expansion throughout Europe. The two charts from the aforelinked Snider article show the results to April-2016.

The first chart shows that as at April-2016, 727 billion euros of ECB asset monetisation had been accompanied by an increase in total lending of only 71 billion euros. As neatly summarised by Snider, this means that there was less than one euro in additional lending for every ten in ECB foolishness.

The second chart shows loans to European non-financial corporations, which actually contracted slightly during the first 13 months of the ECB’s suped-up credit-expansion program.

The QE program was therefore a total failure even by the jaundiced standards of the central-banking world, that is, it failed even ignoring the reality that faster credit expansion cannot possibly be good for an economy labouring under the weight of excessive debt. The weirdest thing is, the obvious failure is not viewed by Draghi as evidence that QE doesn’t do what it is supposed to do. Instead, it is viewed as evidence that more of the same is needed. Hence the increase in the pace of asset monetisation from 60B to 80B euros per month announced in March-2016 and implemented this month.

I shudder to think how Draghi’s monetary experiment will end.