I am reminded of a term from my economics class, cateras parabas – all other things being equal. Today we have two different actions causing economic term oil. The FED printing money at hyper speed which should cause hyper-inflation, but the cateras parabas condition does not hold true.
At the same time we have an economic recession caused by hyper inflated assets like housing and credit card debt which are causing rapid deflation in both real and financial assets. This mechanism is causing losses in income, jobs and demand for services. All additional deflationary impacts.
It could be that stagflation is the more likely outcome. Less costly goods (cost less in real terms because of lower effective demand) being paid for in inflated dollars. Will the dollar deflate in value faster than the value of assets deflate due to bubble bursting and economic slow down? And even more important is “Is it too late to invest in currency independent assets like gold that are already at historic highs?”
Even the new exchange traded funds in currency like FXE dollar vs the euro are only hedges against the losses in the dollar, you can’t actually make more than you lose in dollar value. In the short term, all of those new dollars being printed by the FED need to go somewhere. The stock market seems to be the only place that can absorb enough of it to have an impact – until the next bubble becomes visible.
And I can believe I am saying this, effective stock selection may be the best hedge against stagflation – stocks that do well when the economy tanks like COSTCO, Trader Joes, Liquor sales, etc. Low overheads, high consumer demand. But definitely hedge them with a short hedge like SDS which can make money as the rest of the stock market deflates. (SDS is an inverse hedge fund that goes up 2% for each 1% the S&P falls)