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BFI Perspectives 

Stuckflation - The New Normal


As another year is approaching its end, we’d like to share some of our thoughts on what we can expect in 2020 and on how to prepare for the opportunities and the challenges that lie ahead.


A little over 12 years ago, in 2007, we alerted our readers and clients to the imminent and significant dangers in financial markets. At the time, we recommended getting out of stock markets, and soon. Today, we see many similarities and we recognize there’ll be considerable risks going forward. However, we are not quite as certain about the need to get out of stocks promptly. On the contrary, in our Group’s portfolio management strategy, we remain overweight in stocks. Of course, we combine that with downside protection measures and alternatives.


In our view, the stock market may continue to rise significantly into 2020. Why? Because central banks are back at it, printing money as if there’s no tomorrow. We did adopt a more bearish stance towards stocks earlier in the year. However, we are now somewhat more optimistic, due to the liquidity that is currently hitting financial markets.


Here’s our word of caution, though: While the way we are invested has been profitable, and while we think this will continue to be the case, we also believe that investors should not become complacent. As we all know, markets can turn on a dime and we continue to strongly recommend downside protection measures in conjunction with our stock allocations.


Overall, while we remain cautious and skeptical about the sustainability of global economic growth and especially about the fickle euphoria in financial markets, in times like these, you have to be patient and “go with the flow”, steadily floating upwards, lifted by the tide of liquidity provided by central bankers around the globe.


The New Normal: STUCKFLATION

No, this is not a spelling error and we’re not referring to “stagflation”. The new kid on the block, causing a stir among traders and economists, is “stuckflation”. It describes the current monetary policy stalemate, where central bankers continue to flood the market with liquidity, STUCK in a mode of ultra-loose monetary policy, well aware of the ultimate risk of INFLATION, which itself also appears to be STUCK in its lows despite all the money printing and the lower-than-low interest rates.


Until the end of 2018, Fed officials loudly, confidently and repeatedly declared their tightening and normalizing intentions. However, it wasn’t long before that tune was changed, as the global economy is not as strong as they’d like it to be. We recently reported on the “repo market incident” and the large-scale bailouts still underway by the Fed. Clearly, that “incident” could the canary in the coal mine. When repo rates shot up 10%, that was the Fed’s signal to once again flood the system with liquidity. It is thus clear that they are now back to business as usual, projecting great confidence by day and injecting billions into the system by night.


It makes you wonder how central bankers really expect this global monetary experiment to end. They can hardly be very optimistic. Surely, they understand they must "inflate or die”, as the late Richard Russell put it.


What does this mean for Gold?

As the Fed and pretty much all other major central banks have succumbed to the political and economic pressures for ‘MO’ MONEY!” and lower interest rates, you may ask what this means for the price of precious metals.


We continue to hold our position: the big picture is one of increasing risk and uncertainty. Central bankers will continue doing all they can to keep the gravy train on track. Silver and gold are currently consolidating their impressive gains – from US$ 1,180 per ounce in August of 2018 to US$ 1,550 in September of 2019, a gain of more than 30%! However, you still need to hold physical gold and silver as a hedge against the avalanche of “cheap money” that lies ahead. And, you also need to be ready to move fast and increase your positions when they start to rise again.