2013 Financial Prediction, at an Old Friends Site

A prediction from 2013 financial blog. 

I'll take a stab at some of that for you, AR, if you don't mind.

davidshelton - commodities, and especially precious metals, are considered to be a good hedge against inflation; precious metals are also considered a safe store of value in time of economic upheaval. A lot of folks expect to see inflation rising skyward because of all the fiat money printing that has been happening for the several years. Housing is a hard asset and folks expect real estate to rise in an inflationary environment also. CPI numbers are doctored compared to historical measures. In other words, the government(s) have made so many adjustments to how CPI is calculated that looking at a historical graph that plots the official CPI numbers becomes meaningless and misleading. It still has value as a measurement tool, but only in a relative manner, imho.

Long-term interest rates are heading higher because of the risk inherent in investing long-term bonds is rising and investors are no longer willing to accept the puny returns that may not even keep up with future inflation. There is also a point at which, when investors realized that the Fed may not continue QE forever, that the risk of principal loss became very real all of a sudden. Investors decided to demand a higher return to accept that risk. Normally, 10-year Treasuries trade at a premium to current (and expected) inflation instead of nearly equal. To get to a normal premium, we should probably see rates on 10-yr Treasuries at 3.5% or slightly more. The bond market has been manipulated by the Fed's QE and money printing, but that cannot be sustained forever. Eventually, yields will find their way to "normal" levels in spite of Fed action. This happens primarily because the debt levels of the U.S. have passed the point where investors considered further investment to no longer be "risk free." Thus, the effectiveness of QE has run its course and the Fed is no longer in control.

I don't agree with the common wisdom that says that inflation is coming, though. The demographics of the U.S. population don't support continued rising demand. The peak of the baby boomers has past its peak in consumption years and has begun to save, pay down debt, and prepare for retirement. That means less spending by the largest (93 million, adjusted for immigration) and wealthiest (in aggregate) generation in the history of the U.S. is beginning to consume less and this trend is almost assuredly going to continue until the next generation of meaningful size hits its stride in the early-to-mid 2020s. Thus, I expect falling demand in the U.S. (same thing happening in Europe and Japan) to cause deflation instead of inflation. I realize that I am swimming against the current, but this is where all my research leads me.

Initially, if this actually is the beginning of a new bear market (one never knows for sure until it is well underway), then there is likely to be panic by all those who believe they understand what will happen next. Many will flood back into "safe havens" like precious metals and Treasuries pushing prices back up temporarily. But, once the initial wave(s) recede and deflation begins to rear its ugly head, there will be a dash to the exits. There aren't many places to hide in a deflationary environment. Cash is usually king because it will buy more next year, next month, next week, or even tomorrow than it will buy today. Holding fiat money is a scary thing to do in crisis, I know. But that may be the best option. I don't mean holding cash in a bank account, either. Financial institutions are still over-leveraged and profits are being created by paper entries (and can disappear quickly with a small rise in interest rates or a sharp fall in equities or real estate). There is a lot of risk lurking in every direction.

My position currently consists of some silver coins, a little gold, and a lot of cash (building a position over time by systematic withdrawals).

I am not a survivalist (I know it sounds like it). I believe in a self-correcting political and economic system that has swung too far in one direction and needs a major crisis to bring about the necessary adjustments to get the country back on track. It's coming. but then I also believe that the worst will pass after a few years and that a better foundation will emerge from the ashes. If I'm right, there will be a lot of great bargains for those who are ready with enough dry powder and enough patience to take advantage of the opportunities (much lower prices again). Take heart, after the worst comes the best.