Dalio, Tax Cuts, AAA, the Fed…?

I would like to take more time every few weeks to address some of the questions we get. And I want to hear more from you. Share your successes with me. Share you concernrns. Ask questions. Challenge my arguments. That’s the only way we grow. That’s the only way we can use our unique demographic and cycles research to help you achieve your financial and investment dreams. Remember, this isn’t a one-way street. This is a conversation. So, speak up.

Speaking of, here are some questions I’ve gotten lately. You might find the answers useful…

Why Does Dalio See the Opposite of What You See?

Steven G. emailed wanting to know why I see a deflationary scenario like 1929-33 ahead while Ray Dalio sees an inflationary one like 1935-40.

That’s a good question!

Here’s the thing…

With rare exceptions, debt bubbles, which also create financial asset bubbles, end in deflation as loans and financial assets are written down and money and wealth disappear.

My long-term models show that we should have been in a deflationary mode from around 2008 through 2023. It’s a time I call the “Economic Winter Season.” But, QE was designed specifically to thwart that.

But think about that for a second. “We” printed $12 trillion and only got 1% to 2% inflation. What would we have gotten without that unprecedented QE policy?

Yup: deflation!

That’s the real trend.

Many economists also think you can just skip stages like deflation and deleveraging. History begs to differ.

I’ve spent 30 years studying economics, demographics, cycles, history, and bubbles. But, I’m not an investment manager.

Ray Dalio is one of the very best investment managers. But he hasn’t spent three decades studying economics, demographics, cycles, history, and bubbles. He should stick to his area of expertise, just like I’ll stick to mine.

Next up…

Wrong About the Tax Cuts?

John B. and John B. (two different last names) recently argued that I’m wrong about the tax cuts because small businesses like theirs needed them. They are looking to invest more. And hey, I need a gift from the governrnment too.

The thing is, any positive impact the tax cuts could have had on small businesses like theirs and mine don’t hold a candle to what impact they had on the massive corporations, who then turnrned around and used them on stock buybacks, etc.

There are 14 million small businesses in this country, but most are very small. For two people to tell me that they re-invested the returnrns from the tax cuts doesn’t make for a very good sample size.

And while small businesses may create most of the jobs, they’re very fragmented and don’t drive the economy as much as many think.

All I can look at is the macro figures and they say companies are not re-investing like expected. That makes sense to me as we have had a low interest rate and growth environment for a long time now and businesses DO, like everyday investors, tend to over-invest when things are good for too long…

John’s, you might be right, but I’m not seeing it and can’t make financial or investment decisions on something I can’t see. Over-all we and the world don’t need a lot of new capacity currently, so why not buy back your own stocks or speculate in the markets instead.

Will You Tell Us When?

Another question came from Cynthia H. She asked, “Will you be telling subscribers when to buy AAA corporate and Treasury bonds.”

Cynthia, yes, this is a major trend I’ve been monitoring and will do my best to give the green light when the time comes. At this point, it’s more likely that bond yields go back up near recent peak yields of 3.46% on the 30-year Treasury and that would be the time to buy. Currently bond yields are trending down a bit and I would like to see them go higher first. My best estimate right now is we could see that happen in early 2020.

What’s to Stop the Fed from Printing Even More?

The last question for today is from Ian S. He asked if I see a trigger that will start the decline and what will stop the Fed from printing more money again.

Ian, the initial broader trigger appears to be corporate bonds around the world at record levels of GDP, with defaults beginning especially in emerging countries.

The biggest problem is that the economy has been stretched so far that it could melt down even faster than it did in the second half of 2008. Back then, the Fed and central banks responded too late. They’ll be late to respond this time around as well.

Also, think about this: If we printed all this money on a scale that no one would have thought possible, and we go into a deep crisis… is the public going to let central banks do it all over again, but at much higher levels?

$30 trillion?

$50 trillion?

$100 trillion?

There is now over $300 trillion in financial assets that could melt down. It could take $100 trillion-plus to offset that level of deflation.

And when (not if) China finally blows… how much money can you print here to offset that tsunami as it reverberates around the world, especially in global growth and real estate prices?

Thanks for the questions and comments. Keep them coming to economyandmarkets@dentresearch.com.


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