[This blog post is an excerpt from a recent commentary at www.speculative-investor.com]

Based on their extreme valuations, AI-focussed equities are in a bubble and have been for a considerable time, but what about the investments in AI infrastructure such as datacentres, semiconductors, servers and the associated power supplies? Does the rapid rate of investing in AI-related hardware, software and buildings constitute a bubble?

We suspect that it does, but at this time there is no way of knowing. Investment that turns out to be malinvestment always is based on forecasts of future demand that prove to be far too optimistic, but not all optimistic forecasts of future demand turn out to be wrong.

One sign that the investment underway in AI-related hardware and software constitutes a bubble is the creative ways that are being used to fund it. For example, the following meme reflects how three of the most important companies in the AI world recently funded each other. NVIDIA invested US$100B in OpenAI, which used the money to buy server capacity from Oracle, which used the money to purchase chips from NVIDIA. This circular transaction boosted the equity valuations and the revenues of all three companies involved.

Our 1-2-year bullish outlooks for some industrial commodities, including natural gas, uranium, copper and tin, are linked in part to the AI buildout. Therefore, could the bursting of the AI bubble cut-short the cyclical commodity bull market?

We don’t think so, for six reasons.

First, even if the stock prices of AI-focussed companies were to crash soon, the investment in the associated AI infrastructure probably would add significantly to commodity demand for at least another two years. This is based on the datacentres already under construction and planned to commence construction in the near future.

Second, there are other important potential drivers of increased commercial demand for commodities, chief among them being the rebuilding of Ukraine, the rebuilding of Gaza and the construction of the massive Yarlung Tsangpo Hydroelectric Project in China.

Third, restrictions on international trade are likely to put upward pressure on commodity prices in some parts of the world, including the US, by making the international trading of commodities less efficient. For example, whereas previously it would have made sense to import a commodity rather than produce it locally, due to tariffs it could make more sense to produce locally. However, it generally takes several years to build a new mine and the mine-building process itself consumes large quantities of commodities.

Fourth, the combination of a weaker US$ and increased government spending around the world will both support the commercial demand for commodities and boost the speculative demand for commodities as an inflation hedge.

Fifth, even though investment in ‘renewable’ energy such as solar and wind is now being de-emphasised or actively discouraged by the US government, there continues to be massive investment in these forms of energy around the world and especially in China. This will boost the commercial demand for industrial metals.

Sixth, the gold bull market of the past few years projects a commodity bull market over the next few years (commodity bull markets are just gold bull markets that have broadened).

In our opinion, the rise in the prices of some commodities over the past six months is just a taste of what’s to come.

[This blog post is an excerpt from a recent commentary published at www.speculative-investor.com]

Indicators of sentiment suggest that the US economy is weak, while macroeconomic indicators such as GDP suggest that the US economy is doing fine. This difference between what most people perceive and the performances of economic aggregates such as GDP has been apparent for years, and can be explained as follows.

First, the reality is that people who are asset rich and/or cash rich have done extremely well over the past few years and continue to do so due to higher interest income and equity prices. They have increased their spending accordingly, boosting measures such as GDP in the process.

Second, there has been an investment boom associated with AI that has led to massive capital spending on datacentres. Everything that goes into building these new datacentres has added to GDP while doing very little, to date, to improve the lives or the job prospects of the vast majority of people. In fact, the datacentres are increasing the cost of energy and therefore the cost of living for the average person.

Third, the government has spent rapidly over the past few years and continues to do so, ensuring that there is plenty of ‘fiscal stimulus’ to boost the economic aggregates.

A result is that numbers such as economy-wide consumer spending look good, while for most consumers it feels like the economy is in recession or heading that way. The economy-wide numbers matter for the financial markets and for our analyses, but it’s important to understand why the perceptions of most people don’t align with these aggregates.

Overall, the economic indicators to which we pay attention point to an economy that is far from strong but at the same time is not yet weak enough to be put into the recession category. For example, the ISM New Orders Index (NOI) continues to be low enough to generate a recession warning signal without doing what it usually does after a recession gets underway in earnest: plunge below 40. This means that the NOI has been generating a recession warning for three years now without the overall economy entering official recession territory, which is something that has never happened before.

As we’ve noted many times in the past, something that should happen before a recession gets underway in earnest is a sufficient general widening of credit spreads to push the High Yield Index Option Adjusted Spread (HYIOAS) above its 65-week MA (the blue line on the following chart). HYIOAS generates the occasional false recession warning, which is what happened during the first quarter of this year, but in the past it has never failed to signal an actual recession. In other words, it generates the occasional false positive but no false negatives.

HYIOAS’s current message is that the US economy is not in recession.

The US economy therefore does not appear to be in recession right now, although it would not take much in the way of additional weakness to tip the scales decisively in that direction. This risk is a reason to hold a larger cash reserve than usual, but it is not a reason to avoid investments/speculations in commodities and commodity-related equities. As we’ve noted in the past, commodities and the associated equities performed very well during the bulk of the 1973-1974 inflationary recession (probably the best historical analogue) and also performed well during the first six months of the 2007-2009 deflationary recession.

[This blog post is an excerpt from a commentary posted at www.speculative-investor.com last week]

The senior US stock indices have trended upward with only minor pullbacks since April, leaving them very overbought by most measures and at their highest valuations in history. Furthermore, the Russell2000 Small-Cap Index is testing long-term resistance. At the same time, the economy is weakening under the weight of tariffs, regime uncertainty and many years of malinvestment, pointing to either slower earnings growth ahead or earnings contractions if the long-delayed recession finally arrives. Consequently, the current market situation seems precarious.

It is precarious, which is why our own accounts are now about 50% in cash. This is up from 30% in April-2025 and is the highest cash percentage we have had in many years. However, over the past 18 months we have steered clear of bearish speculations in our own accounts and with regard to TSI recommendations/positions (we have not added a stock-market-focussed put option to the TSI List since March-2024).

As an aside, we came close to adding an IWM (Russell2000 ETF) put option to the TSI List in July of this year, but for the option to be added the IWM price had to test resistance at US$230 before reversing downward. It ended up reversing downward from significantly below this resistance and then rebounded off support, prompting us to write (in the 11th August Weekly Update): “…note that a rise by IWM to resistance at $230 now would constitute an upside breakout and would NOT create a buying opportunity for IWM puts.” A week later we went on to explain: “…the small-cap-focussed Russell2000 ETF (IWM) finally attacked resistance at US$230 last week. The resistance has held for now, but the fact that IWM pulled back to support before attacking resistance makes it more likely that the resistance will be breached.” The resistance eventually was breached and a rise to the next important resistance at US$245 soon followed.

Our interest in equity-index-related bearish speculations diminished greatly after we fully understood the reality that with passive investing strategies having come to dominate the market, the traditional mix of equity market fundamentals such as corporate earnings and valuation had all but ceased to matter. In fact, valuation now works in the opposite way, in that the greater the relative overvaluation of a particular stock the larger the proportion of ‘passive’ money that will be allocated to the stock, driving its valuation even higher.

The situation is precarious, because at some point the system that is putting a relentless bid under the market and especially under the stocks with relatively large market capitalisations will go into reverse. At that point and with valuations in the stratosphere, there will be no value-oriented investors to ‘buy the dip’ and most people will be surprised at how far and how fast the market falls.

The system won’t go into reverse because valuations have become too high, because, as explained above, high valuations are not an impediment to demand if most of the demand is ‘passive’. It will go into reverse because the net flow of money into passive funds stops or simply becomes insufficient. This could happen due to the “boomer” generation withdrawing money from their retirement accounts or it could be the result of much higher unemployment (a recession).

Unfortunately, there is no way of predicting when the major reversal point will arrive. At this time we suspect that the overall bullish trend will continue until the end of this year (with a significant intervening correction), but it could continue for much longer than that. In the meantime, we plan to continue doing what we have been doing, which is 1) adjust our overall cash percentage based on short-term risk considerations and 2) find ways to profit on the long side that don’t involve turning a blind eye to the values of underlying businesses. Fortunately, there have been excellent opportunities in the commodity realm over the past 12 months and we expect that there will be many additional opportunities in this realm over the next couple of years.

[This blog post is an excerpt from a recent commentary at www.speculative-investor.com]

Since 1970, which roughly was when the current monetary system involving no official link to gold was born, the USD/CHF exchange rate (the US$ relative to the Swiss franc) has experienced a repeating pattern of 8-10 years down followed by 6-8 years up. We rarely discuss this cycle at TSI, because it only becomes relevant when the window for a cyclical turning point is entered, which only happens every 6-10 years. We are discussing it today because a turning-point window has been entered.

The cyclical pattern outlined above began with an 8-year downward trend in the US$ (relative to the Swiss franc) during 1970-1978. This decline was followed by an upward trend that culminated in 1985 and then a 10-year decline to a major bottom in 1995. The following weekly chart picks up the story in 1991, which means that it captures the final few years of the 1985-1995 cyclical decline and everything thereafter.

The chart shows that the most recent cyclical decline kicked off at the start of 2017, so it is not a coincidence that the last time we discussed this long-term cycle at TSI was in 2017. An 8-10-year decline from the 2017 high would result in the next major low for the USD being set during 2025-2027. Hence our comment above that a turning-point window has been entered.

It’s worth pointing out that knowledge of the above-described cycle generally isn’t useful for practical trading purposes, because the countertrend moves during both cyclical uptrends and cyclical downtrends can be substantial. However, it is useful to know that previous cyclical downward trends, which culminated in 1978, 1995 and 2011, had large declines during their final 12 months. If this aspect of the long-term pattern repeats, then a large decline in the USD still lies ahead.

So, where does this leave us?

Our view at the start of this year was that the USD was about to embark of a 1-2-year decline to complete a cyclical downward trend. We subsequently refined this view and over the past several months have written that we expected a cycle low to be set late this year at not far below the early-July low. While we continue to expect that this year’s low will be not far below the early-July low, we no longer expect this year’s low to be the ultimate cycle low. Here are the three reasons in order of ascending importance:

1) As mentioned above, previous long-term declines in the USD have involved large declines during their final 12 months. Unless the USD loses about 10% of its value against the CHF within the next three months, the decline during the 12 months leading up to this year’s low will be minor in comparison.

2) Major USD lows have occurred at 16-17-year intervals (Q3-1978, Q2-1995, Q3-2011). The same interval projects 2027-2028 for the next major low.

3) Total US equity market capitalisation as a percentage of global equity market capitalisation reached a peak of almost 70% early this year. Refer to the following chart for the details. There is evidence in capital flow data and in the following chart that a reversal has occurred. Furthermore, the trade-related policies of the Trump Administration will tend to reduce capital in-flows at the same time as they restrict goods in-flows to the US, and US equity valuations are extremely high in both absolute and relative terms. A result is likely to be a multi-year period of weakness in US equities relative to global equities, which, in turn, would mean a multi-year period during which our US$ True Fundamentals Model (UTFM) spends most of its time in bearish or neutral territory.

Chart source: Lord Abbett

Further to the above, we expect that the USD will make an intermediate-term low before the end of this year, but the overall cyclical decline is now expected to extend into 2027. A cycle low in 2027 still would be within the window projected by the 6-8 years up followed by 8-10 years down repeating pattern. It also would mesh with the 16-17-year cycle of major USD lows and our expectations regarding currency market fundamentals.

[This blog post is an excerpt from a recent commentary published at www.speculative-investor.com]

The Trump-Putin summit in Alaska ended with no peace deal, which was not a surprise*. However, we suspect that an agreement to end the fighting will happen within the next few months, because there are strong incentives for all parties to bring the destruction to an end. For Putin and Russia’s political elite, the incentives are economic and are becoming stronger as time goes on.

In our 29th January 2025 commentary we discussed the effects of Russia’s invasion of Ukraine on the Russian economy. Here’s how we described the situation:

“Due to the government’s control of the commercial banking system, there won’t be a [financial/debt] crisis. However, the cumulative costs of waging the war in Ukraine will lead to long-term weakness. In effect, a lot of resources are being drawn from the broad economy and then destroyed as part of the war effort, reducing the total amount of wealth.

The war-related wastage of resources (destruction of wealth) is not evident in the financial statements of the Russian government due to the ‘sleight of hand’ that has been used to keep a large part of the war financing off the government’s books. The sleight-of-hand involves directing the commercial banks to provide whatever financing is required by the manufacturers of armaments…[which] has led to a massive expansion of corporate credit in Russia.

A consequence is that although the government’s balance sheet still looks healthy, the effects of the war-related spending are evident in the inflation rate. The official inflation rate is around 9%, but the fact that the central bank considers a short-term interest rate target of 21% to be appropriate suggests that the actual inflation rate is 15%-20% or higher.

The government’s control of the banking system will prevent a crisis, but Putin certainly has strong economic incentives to bring the war in Ukraine to an end.”

Since then, the war has continued to grind on, with Russia’s invading forces making slow but steady progress. The cost has been high (it has been estimated by the Carnegie Endowment for International Peace that the war will cost the Kremlin about US$170B this year), and making matters worse for the Russian government is that its oil-related tax revenue dropped by about one-third from July of last year to July of this year. This is not because sanctions are working, but because the oil price is now about 25% lower in US$ terms while the Russian Ruble has gained about 10% against the US$.

The following chart shows that the Ruble has strengthened significantly against the US$ since the start of this year (the line on this chart declines when the Ruble strengthens) and is now roughly where it was in early-2022, immediately prior to the start of the war with Ukraine.

As a result of the on-going wealth destruction, the adverse effects of the war on Russia’s economy are becoming increasingly apparent. This is why we say that Putin has an incentive to strike a peace deal that is becoming stronger with the passage of time. In short, the longer the war drags on, the worse will be the outcome for Russia’s economy. However, a peace deal will require the acknowledgement, on the part of NATO/Ukraine, that Ukraine will never be part of NATO and that about 20% of Ukraine is now Russian territory.

*It also wasn’t a surprise that Trump portrayed the meeting as a significant step towards peace. Further to a comment we made a week ago, this could enable him to back away from his “secondary sanctions” threat and substantially reduce tariffs on India.

[This blog post is an excerpt from a commentary published last week at www.speculative-investor.com]

Temporarily at least, we have some semblance of clarity on the international trade front, with a trade deal covering most imports being announced at the start of this week between the US government and the EU. Like the earlier one between the governments of the US and Japan, this deal involves huge and fictitious dollar amounts of promised investments and spending. In this case, the fictitious amounts are US$750B of EU purchases of US energy over three years and US$600B of EU investment in the US.

The investment/spending amounts that have been linked to the deals are made-up numbers that bear no resemblance to reality, because:

1) The parties making the agreements are not the ones that would be doing the investing/spending. For example, the EU is not a legal entity that invests in the US or purchases energy from the US.

2) In order for an investment to be made in the US, an investor would have to believe that the investment will achieve an adequate return. Therefore, the amount that will be invested will be determined as it always has been determined: by the forecast return on the investment, taking risk into account.

3) The only way that the EU could greatly increase the amount of energy it buys from the US would be to change energy trade routes. To be more specific, a lot of the energy (oil, LNG and coal) that is being shipped from the US to destinations other than the EU would have to be re-routed to the EU, and a substantial portion of the EU’s current energy imports would have to be re-routed to other countries. This would result in substantial extra costs being incurred for the benefit of no one other than the energy shipping industry. Perhaps that is why the stock price of Flex LNG (FLNG) was very strong during the first two days of this week and has broken out to the upside.

As an aside, it generally is the case that when one country or region takes actions that hampers trade, trade doesn’t stop; it moves. This concept was highlighted in the UPS earnings call on Tuesday of this week. In this call UPS first noted that during May-June there was a 34.8% drop in the average daily volume in the company’s China-US trade lane, and then noted: “…in the second quarter, we saw volume in our China-to-the-rest-of-the-world trade lanes increase by 22.4%, and we nearly doubled our capacity between India and Europe to meet the growing export demand on that trade lane.”

4) In the way it handled the attempts by Nippon Steel to buy US Steel, the US government has demonstrated that it does not want additional foreign investment in the US.

The reality is that although the recent trade deals have included huge numbers that supposedly reflect additional foreign investment in the US, these deals will not result in any investments that would not have occurred anyway. The touted numbers are solely for public relations purposes.

The recent deals have added some clarity, but the overall level of trade-related uncertainty remains high.

One reason is that there is a 12th August deadline for the US and China governments to do one of the following: a) come to a new agreement on trade terms involving tariff rates and export restrictions, b) extend the terms of a temporary arrangement that was agreed in mid-May, or c) return to the ridiculous tariff rates and restrictions that applied prior to the mid-May agreement. A 90-day extension of the current terms is widely expected.

Another reason for a continuing high level of trade-related uncertainty is that Trump has shortened the time for Russia to strike a peace deal with Ukraine or face secondary sanctions (these would be sanctions on countries that import Russian products). The new deadline mentioned earlier this week is about 10 days from now. This will be interesting, because a) there won’t be a peace deal prior to this deadline, b) China is the main importer of Russian products and c) India gets about 45% of its oil from Russia. The US can’t punish China for importing Russian products, because via its control of REE supply China’s government has the ultimate weapon in the trade war. However, the US could punish India with secondary tariffs, but what would this achieve?

The fact is that all the oil currently produced in the world gets bought by someone, so the only way that India could stop consuming Russian oil would be to take oil that currently is being consumed elsewhere, causing a supply shortage elsewhere that would have to be filled with…Russian oil. There simply is no way to prevent the global consumption of Russian oil and any attempts to do so would have minimal effects on Russia but could cause major problems in other countries/regions.

[This blog post is a slightly modified excerpt (including updated charts) from a commentary published during the week before last at www.speculative-investor.com]

US President Trump threatened on 14th July that if a Russia-Ukraine peace agreement didn’t happen within 50 days, then very high secondary tariffs would be imposed on Russia’s trading partners. As explained below, this is an empty threat.

China is Russia’s most important trading partner, so this is a threat to again impose extremely high tariffs on US imports from China. Now, the probability of a Russia-Ukraine peace agreement within the next 50 days is low and the probability that China will stop trading with Russia in response to this threat is zero, so the likely outcome 50 days from now is that Trump will be forced to either carry out his threat or back down. If he doesn’t back down and makes good on his threat, we know what will happen because we watched the same scenario play out within the past few months.

The unilateral imposition of higher tariffs on Chinese imports to the US would cause China’s government to stop exporting Rare Earth Elements (REEs) and other critical metals to the US. Within a couple of months this would bring the US auto industry as well as US-based production of batteries, turbines, a lot of military equipment and anything that uses an electric motor to a virtual standstill, prompting the US government to strike a deal that substantially reduced the tariffs.

It turns out that the ultimate weapon in the ‘trade war’ is the Chinese government’s control of global REE supply, because the economic impact of stopping exports of these minerals is low for China and extremely high for the US and many other developed nations. This was proved over the past few months and will be proved again if the US government imposes hefty additional tariffs on China after 50 days.

Moreover, due to growing demand associated with high-tech applications, the extent to which REEs are critical will increase as time goes by. This is why we have had a strong focus on REEs over the past five years and why we expect REE mines and processing facilities outside China to become far more valuable over the years ahead.

One of the unintended consequences of Trump’s trade war has been to highlight the risk presented by the Chinese government’s influence on REE supply. This prompted the stock market to start pricing-in the increasingly urgent need to diversify in this area, which has involved some rapid valuation changes. For example, the stock prices of Energy Fuels (UUUU) and Neo Performance Materials (NEO.TO), two of the TSI stock selections that provide exposure to REEs, have more than doubled from their lows of the past four months.

A chart of UUUU is included below. The recent frenetic price action suggests that we are nearing the end of the first leg of a cyclical bull market.

However, there haven’t yet been large increases in the prices of the underlying commodities.

Regarding the prices of the underlying commodities, the following chart shows the performance of Neodymium (Nd), one of the most widely used REEs. The chart reveals that although there has been a steady upward trend in the Nd price since March of 2024, the price remains very low relative to where it traded during the bulk of 2021-2023. Nd is a “light” REE and is not one of the REEs over which China’s government has a stranglehold on supply (heavy REEs such as Dysprosium (Dy) and Terbium (Tb) are more vulnerable to Chinese export restrictions), but as far as we can tell its price performance is representative.

The risk that the stock market has gone part of the way towards discounting is that REE prices are about to accelerate upward as the users of these metals around the world scramble to secure supply. In other words, the risk is that for REE prices we are at the equivalent of mid-2020.

[This blog post is an excerpt from a recent commentary at www.speculative-investor.com]

To our surprise, the US economy has not entered a recession over the past two years. This is not because a recession has been avoided altogether but because the current economic cycle has been elongated.

We use the commodity/gold ratio (the Spot Commodity Index (GNX) or the CRB Index (CRB) divided by the US$ gold price) to define booms and busts, with booms being multi-year periods during which the ratio trends upward and busts being multi-year periods during which the ratio trends downward. The vertical lines drawn on the following GNX/gold chart mark the trend changes (shifts from boom to bust or vice versa) that have occurred since 2000.

It’s not essential that the bust phase of the cycle contains a recession, but it’s rare for a bust to end until a recession has occurred. Usually, the sequence is:

1) The commodity/gold ratio begins trending downward, marking the start of the economic bust phase.

2) The economic weakness eventually becomes sufficiently pervasive and severe to qualify as a recession.

3) Near the end of the recession the commodity/gold ratio reverses upward, thus signalling the start of a boom.

It is not unusual for the stock market to continue trending upward after the bust begins, but in the past the stock market always has peaked prior to a recession getting underway. For example, an economic bust began in October-2018 but the SPX continued to make new highs until early-2020. For another example, during the first half of the 1970s the stock market continued to trend upward for about three years after the start of a bust.

By the way, due to the change in the structure of the US stock market it’s possible that the next cyclical peak in the SPX will occur AFTER the start of a recession. This is because, thanks to the domination of passive investing, the stock market no longer forecasts cyclical trends in corporate earnings, interest rates or economic growth; it simply responds to passive money flows.

In the current cycle the commodity/gold ratio has been trending downward since the first half of 2022, meaning that the US economy now has been in the bust phase of the cycle for about three years without entering recession. This is unprecedented within the context of the past 30 years, but it is comparable to what happened during the 1970s.

A much longer-term view of the commodity/gold ratio is provided by the monthly chart displayed below. This chart uses the CRB prior to 1993 and the GNX thereafter.

There were two long bust phases during the 1970s, the first starting in Q1-1970 and the second starting in Q3-1976. The time from the start of the first bust to the start of a recession (November-1973) was about 3.5 years, and the time from the start of the second bust to the start of a recession (January-1980) also was about 3.5 years. Late this year will be about 3.5 years from the start of the current bust.

Consequently, although the current economic cycle has been elongated to an unusual extent relative to the cycles of the past few decades, it currently is in line with the cycles of the previous period during which inflation generally was viewed as the major economic issue.

[This blog most is a slightly modified excerpt from a commentary published at www.speculative-investor.com about three weeks ago]

We consistently have been predicting lower price inflation for almost three years now, but we also have been predicting that the downward inflation trend would be followed by another major inflation wave. It’s likely that the next major inflation wave will begin this year and continue for at least two years. It’s also likely that it will be driven more by government actions than by the creation of new money (monetary inflation). We’ll now explain why.

Despite the famous Milton Friedman comment to the contrary, price inflation (a rise in the cost of living for the average person) is not always a monetary phenomenon. It also can be a government phenomenon. The reason, in a nutshell, is that government interventionism and deficit-spending can distort the economy in a way that reduces productivity, leading to lower production and therefore to higher prices even in the absence of monetary inflation. In very simple terms, government actions can result in the same amount of money chasing less goods and services, causing prices to be higher on average.

Going deeper and focussing on the US, by its deeds and words it is reasonable to conclude that the US government will be 1) increasing its already-massive deficits over the years ahead, 2) driving up the costs of manufacturing in the US through tariffs on imported materials, and 3) using tariffs as a negotiating tool, thus ensuring that many business leaders remain uncertain about the costs that they will face in the future. There also is a risk that the US government will take actions that discourage foreign investment in the US.

An effect of the above-mentioned government actions will be reduced investment in productive enterprises. We note, for instance, that unless the additional debt issued by the government to finance its increased deficit spending is monetised by the Fed, it will crowd out investment in private businesses (the productive part of the economy). Furthermore, as well as driving up manufacturing costs, tariffs imposed on commodity imports probably will lead to shortages of some important commodities. While this could prompt efforts to increase local supply, due to the time, energy and materials it takes to bring new mines into production this additional building activity would, for at least a few years, have the effect of applying additional upward pressure to commodity prices and popular measures of inflation.

With the government putting upward pressure on many prices by making the economy less efficient, the Fed will not be able to justify the sort of monetary interventions it conducted during 1998-2021. The following chart shows that during this earlier period the year-over-year growth rate of the Core PCE (the Fed’s favourite inflation gauge) never went above 2.7% and spent most of its time in the 1%-2% range, effectively giving the Fed cover to ‘print’ as much new money as it deemed necessary to support the stock market and stimulate economic activity. That cover will not exist over the years ahead.

In addition, with it being obvious to almost everyone that the Fed contributed in a big way to the inflation problem of 2021-2023, from now on the Fed will tread far more carefully with regard to inflationary measures.

Consequently, we expect that for at least the next couple of years the Fed will be unwilling to mitigate the crowding-out effect of the government’s expanding indebtedness.

On a related matter, periodically in the past there would be a ‘deflation scare’ — a set of circumstances during which the Fed and other central banks effectively had carte blanche to ramp up the supply of money. Due to government-created shortages and price distortions, it’s unlikely that there will be a deflation scare within the next few years.

Summing up, the world has changed. For more than two decades every economic downturn or financial crisis was met with a new round of aggressive money creation, each of which set in motion a boom that ended in the bursting of an investment bubble, a deflation scare and another round of aggressive money creation. That won’t happen in the future, because government actions will maintain sufficient upward pressure on the prices of commodities, goods and services to limit the central bank’s ability to inflate the money supply.

[This blog post is an excerpt from a commentary published about two weeks ago at www.speculative-investor.com]

In the latest Weekly Update we wrote that government actions would maintain sufficient upward pressure on the prices of commodities, goods and services to limit the central bank’s ability to inflate the money supply. What we meant is that for the foreseeable future there would not be the “deflation scares” that periodically led to large-scale money creation (QE) by the central bank during 2008-2021. However, we expect that the money supply will continue to grow.

In the US, prior to 2008 there was plenty of monetary inflation but no QE programs. Prior to 2008 the monetary inflation was driven by the commercial banks, which create new money (bank deposits) when they make loans and purchase securities.

The following monthly chart shows the year-over-year growth rate of US True Money Supply (TMS), with a vertical red line drawn to mark the start of the Fed’s first QE program in September-2008. Clearly, there were many waves of monetary inflation prior to the introduction of QE, all of which were due to deposit creation by commercial banks. We expect that there will be waves of monetary inflation in the future, again due to deposit creation by commercial banks. Commercial banks have the legal ability to create money out of nothing, so naturally that’s what they will do in the future just like they did in the past.

A problem will arise when the economy becomes very weak and commercial banks stop expanding credit due to a contraction in the pool of qualified private borrowers. We suspect that this problem will be mitigated by incentivising or forcing the commercial banks to purchase more government debt, which they would do by creating new money that the government would inject into the economy via its spending. What we don’t expect is large-scale asset monetisation (QE) by the Fed in response to future economic weakness, because “price inflation” statistics won’t provide the necessary cover.

Anyway, the point we wanted to make is that there probably will be ‘ample’ monetary inflation in the future, it’s just that the money creation won’t be driven directly by the Fed. Due to the popular inflation indices spending most of their time well above the Fed’s target, monetary inflation will become the purview of the commercial banks — just like it was prior to 2008.