“The bottom line is that we can expect real wages to stagnate for several years, as a predictable reflection of slack capacity in the labor market. While credit concerns will be helpful in augmenting the demand for U.S. government liabilities as a default-(food poisoning)-free alternative to other assets, there is a continued prospect for significant price inflation beginning in the second half of this decade. With the ECB surrendering monetary discipline for the sake of short-term expedience, that prospect has become even more hostile.
I want to be clear that my concern about inflation is not very strong at present. This is important, because investors seem to be chasing precious metals a bit too avidly here. Commodities can experience extremely high levels of volatility. Corrections can be both abrupt and deep, which allow for multiple entry points. But it is important to recognize that this volatility can be quite painful, so very deliberate risk-management is important. We’ve generally found that chasing advances in commodities is unrewarding. Again, our own holdings are fairly restricted here. Reversing our recent sale simply maintains the very small exposure we’ve held for several months.
Longer term, in the name of defending the holders of bad debt, the world’s major economies appear willing debase their currencies. Most likely, we’ve got several years (not weeks or months) before we observe a striking return of inflation, and there will be probably plenty of time in between where investors give up the concern entirely for a while. As always, we try to look ahead at the major risks facing the economy, even if those risks take a while to fully emerge. At present, I believe our monetary authorities are moving down an unfortunate path. This will create opportunities as well, but we’ll move very deliberately.”
My Comment:
Not sure why Hussman thinks deflation would have been such a terrible thing…or austerity measures. Or is it that austerity is just fine for people in the third world but never for anyone in the first?
Also, I’m surprised that he talks about gold shares rather than bullion, because in a market correction the shares are much more likely to fall severely than bullion.
Further points. His timetable for inflation might get derailed sooner than he thinks. I’m not sure if he’s just paper-bugging or whether there is some other reason behind what he says. IMO, some inflation is already here, in a disguised fashion, with more to come.
Frank Holmes at Daily Reckoning has what I think is a better proportion: 10% of assets in gold, half of that in stocks and half in bullion. I assume that’s total assets, not just your investment portfolio….