By David Schectman of Miles Franklin Inc
Why deflation is here to stay.
Deflation is not a result of money creation - for if it were, then there would be no deflation. The cause of what we call "deflation" is increased productivity and the Internet. These two things lead to lower prices in spite of currency debasement. Japan has seriously debased the yen for a long time now and yet they are mired in a decades long deflation. The Fed has created trillions of dollars in money and credit and we are experiencing deflation in many areas.
Deflation, or falling prices, is not necessarily a bad thing. Do you mind paying LESS for things you use like gas and your new flat screen TVs? Isn't this increasing our standard of living? It is somewhat independent of the economy. Another factor is that Japan, the Asian countries (other than China, which pegs the yuan to the dollar) and Europe are debasing their currencies. We are in a currency war (read The Death Of Money by James Rickards). The result is falling prices of the things we import from these countries.
There will be a point in time, most likely when the stock market starts to crash, when the Fed will panic and re-introduce QE. It won't work, never has, but it will have a negative affect on the dollar and a positive effect on gold. Don't let all the talk about deflation concern you. It is actually helping you. Gold and silver will do just fine with our without deflation. Down the road a bit, we will experience hyperinflation and it will be 100% a monetary event. And it will most likely happen while we are dealing with "deflation."
Next, I will discuss Larry Edelson's views of where we are headed. The one area we disagree on is the dollar. He is bullish on the dollar and I am much more negative. If it does hold up, it will only be because it is "the last man standing." And it will lose out to gold and silver.
Many of our readers are interested in what Larry Edelson thinks is in store for us. Whether he is correct with his analysis, or not, remains to be seen, but he has been fairly constant with his predictions for the last three years - although his time-line has moved around a bit. He relies heavily on technical analysis, and his reading of cycles, but in a market that is heavily manipulated by the centrals banks, the hedge funds and JPMorgan, I say it is impossible to accurately pick tops, bottoms and exact timing in gold and silver. Trends, yes, but do not expect perfection in the details.
So what secrets did Larry reveal in his video last week?
His premise is that what we see today is unprecedented in history!
Larry refers to himself, as "a student of human behavior; and human behavior is cyclical in nature. He believes that history tends to repeat itself. Markets are bi-polar and swing from extreme optimism to extreme pessimism and back again in a rather predictable manner.
He brags that he has conducted massive amounts of due diligence on cyclical analysis and says that what's most exciting - and frightening - is that right now, many very powerful cycles are converging in the same time and place. He cites the Kondratieff wave that's now turning down, heading into 2020. We also have the Kitchin cycle, which focuses on business inventories and it to is headed down heading into 2020. The same for the Juglar cycle, which also looks at the business inventory cycles and is now pointing lower. All are converging and heading lower as we head into 2020. And then there are the 20-year and 60-year cycles that deal with stock prices and they are headed down into 2020.
Larry makes a big deal out of war cycles. Economic stress leads to war and it leads to tension and it leads to civil and international strife and they are all coming together at the same time.
Larry has a finite date for all of this (and it happens to coincide with another prophesy that has been causing a lot of stir lately, found in a best selling book called The Harbinger by Jonathan Cahn). If Cahn and Edelson are correct, the start of the collapse is just 10 weeks away. That leaves very little time to get your affairs in order.
Here is what Larry says:
On October 7, 2015, we enter a new phase of the global economy, a phase when everything starts to hit the fan at once. It doesn't necessarily mean that a precipitous event will occur on that day. There may be, there may not be. But it does mark a line in the sand between two eras:
* The current era when government debts continue to grow with reckless abandon, when nobody really gives a hoot and ...
* A new era, when we're all going to have to pay a big price for that government debt.
It's a giant shift in the entire economic landscape, a time when governments must finally meet a great day of reckoning. I call it the "Great Convergence."
The last time we've seen a convergence of this magnitude was in 1929. It will be different this time because we are no longer on the gold standard. We will have to pay the piper for all the monetary excess after decades of government mismanagement. Not just here in the U.S. but also in Western Europe and Japan as well.
He says,
We've already seen the decline and collapse of socialist structures in the Soviet Union. We've also seen socialism fade dramatically in China. The next shoe to drop will be the semi-socialist societies of the West and Japan. They will officially default on their obligations. Or they will simply fail to deliver on their promises, while swearing that they have not defaulted. In the European Union alone, there are 28 countries. Nearly all have massive debts. And most of those debts are patently unpayable.
Greece is the canary in the coalmine and they will be followed by Spain, Italy, Portugal and Eastern Europe.
We are headed into a Depression. It will be caused by the sovereign debt going bad and it will be a global event. This debt monster is 15 times the size of stock markets.
Here's what happens in that scenario -
Bankrupt governments behave like cornered animals. They raise taxes. They resort to confiscatory tactics - like we've seen in Poland where pensions were seized. They slap on capital controls - like we're already seeing in parts of Europe, where ATM withdrawals are severely limited. Worst of all, they effectively wage war against their citizens.
Ultimately, more countries begin to look like Greece, where banks were shut down and capital was severely controlled.
The telltale sign: Government bond markets crash. They're already starting to fall.
Here is how he expects things to unfold -
But the more important difference with 1929 is the sequence of events: Europe will go down first, and then Japan. The U.S. will be among the last to fall.
The catastrophes in Europe and Japan will make our economy and stock markets look in the interim, as foreign capital flows to our shores, as the U.S. dollar continues to rise, as our blue chip stocks move higher.
Here is what he say is coming -
A five-year roller-coaster through hell - wild, euphoric rides up the hill ... and devastating falls that could scare the living dickens out of you.
Investors who have loaned money to governments will start snapping their wallets shut. You're going to see governments shed hundreds of thousands of employees. Anyone with a business that depends on government contracts is going to get hurt badly.
Social Security will be on ice. Medicare will be fried. Welfare, food stamps, slashed. Philosophically speaking, that's actually a change for the better. But everyone is so addicted to government safety nets and government promises, it will cause civil unrest as it hits larger segments of the population, especially the middle classes.
How will the governments react? Like a cornered rat.
Any vestiges of privacy we enjoy will be in jeopardy. The government will track your money like never before. There will be ever tighter capital controls. Wiring money out of the country will be increasingly more difficult. Large cash transactions will become largely extinct, and major steps will be taken to shift toward a mostly electronic currency. Some of that is already underway in Europe.
They're moving towards electronic currency. If the currency is electronic, it's far easier to tax and track. This is what Harvard economist Kenneth Rogoff is advocating. Plus, it makes it easier for the authorities to shut down the banking system - almost instantly.
Meanwhile, here in the U.S., the IRS is going to get increasingly more authority to seize assets. Already, every U.S. citizen has to report his overseas banking and brokerage accounts, regardless of the funding source.
When does this crisis begin?
There will be four distinct phases. And each phase will generate enormous opportunities to grow your wealth.
We're in Phase 1 right now. Much like an approaching hurricane, you have the opportunity to prepare ahead of time.
Savvy European investors are already doing it - dumping their euros, buying dollars, and then using those dollars to invest in U.S. stocks, real estate, and even entire U.S. businesses.
Phase 2 is set to begin in October. That's the phase when you'll see the Greek crisis spread, the euro experiment begin to unravel. That's also the phase when the flight of capital from Europe is going to accelerate and we should see the Dow finally break out above 18,500, beginning a long, two-year ascent.
Phase 3 should begin next year, possibly in the second half. That's when I expect Japan will become the next domino, generating a second source of flight capital to the United States.
Here's the key: Between the flight capital from Europe and from Japan, you could see the Dow move all the way up to the 30,000-to-32,000 range by the end of Phase 3.
The U.S. and the U.S. dollar will continue to win the global contest for the "least ugly." Despite all its faults, the U.S. has the deepest, most liquid markets on the planet. We have financially healthy multinational companies offering a combination of stability, dividends and appreciation that are far better than what you can get in virtually any other type of investment.
These are the qualities that today's global money managers and savvy investors crave the most.
Fast forward to the end of the cycle -
You get the tsunami of flight capital into U.S. assets. You have the Dow at lofty levels.
Then we move in to Phase 4. And that's a time of peak risk for U.S. investors.
Look. During this entire bull market period, while the U.S. stock market is moving sharply higher, the U.S. economy will still be growing at a snail's pace of maybe 2%, 2.5% tops.
So the primary bull market driver is not growth. It's flight capital from Europe and Japan. That's not a sustainable kind of bull market.
Yet, at that point, most U.S. investors will think it's all about how wonderful the U.S. economy is. They will be lulled into a false sense of security. That's my biggest worry. The gains will be real. But that's only if you take them off the table.
As America's own problems come home to roost, much of that flight capital can disappear. That's when Phase 4 strikes hard, when the U.S. economy, the last major Western market standing, begins to roll over.
The official debt total in the U.S. is relatively small - $18 trillion. But that's only the tip of the iceberg.
Washington also has at least another $100 trillion in obligations for Medicare, Social Security, Veterans Benefits and more. One Harvard economist says it's closer to $200 trillion. That makes us the biggest debtor in the history of civilization. So when the sovereign debt cancer reaches the United States, we switch from summer daylight to the equivalent of a dark nuclear winter.
What should we do?
If you haven't done so already, your first priority is to get out of all government bonds. Just clean them out 100%. Any kind of bonds.
What about gold?
The next bottom in gold will occur at a time window between November of this year and January of next. No matter what, gold is going to be one of the best plays throughout Phases 2, 3, and 4. Gold could be, by far, the most consistent big winner in Phase 4. The critical period will be between 2017 to 2020. To deal with the chaos, I suspect the G20 will have to get together, shut down everything, and reinvent the entire monetary system.
I expect gold going to at least $5,000, possibly to $7,000.
What about silver?
Right now, I'm more bearish on silver than gold. I expect silver to bottom out around $12 per ounce. That means it has another $2.50 to $3 to fall, another 20% or so.
But on the upside silver also has much more potential because it can easily go to $100 or $125 by 2020.
Traders call silver the devil's metal - and for good reason: Because of its volatile swings. That's a key reason why I tend to favor gold. Its rise will be steadier, more reliable.
As you know, Larry Edelson writes for Money and Markets. He job is to sell subscriptions. These are his opinions and Miles Franklin agrees, in general, with many of them. But like I said in the beginning - picking exact tops and bottoms and laying out an accurate time frame is virtually impossible. That said, the end game that Larry lays out makes perfect sense to me. We will have to live through a massive Deflation (Depression) accompanied by, at some point, a massive debasement of currencies, including the dollar. Yes, Larry says the dollar and the stock market will rise, for a while, but we can never experience $7,000 gold and $125 silver with a strong dollar.
We are most likely at or very near a bottom in the price of gold and silver. If you try and time a bottom, there is the real possibility that the lower prices will cause even stronger accumulation of physical metals and the "premiums" will continue to rise (as they are starting to do now, due to very brisk demand) and though the price may fall, your cost to actually acquire the metals may not change much at all. As an example, the cost to buy a bag of junk silver now is about what it was when spot was $19 or $20 an oz. And you will have a Hell of a time trying to find any. We are nearing a point where waiting to buy physical gold and silver is like playing a game of musical chairs. It will get dicey.
I am taking a different approach personally, than Larry. I am weighted two-thirds silver to one-third gold now. Yes, silver is more volatile and it may fall more than gold before they both turn up, but the gains in silver, even by Larry's numbers, will be over one-third more than in gold.
Based on Ted Butler's analysis, we should be very close to the bottom in silver now and it is starting to get harder and harder to source it. Junk silver is now almost unavailable. The U.S. Mint is having difficulty meeting demand. This trend could get worse. If silver continues to fall, I will continue to accumulate more of it.
To wrap this up, you should consider purchasing The Harbinger by Jonathan Cahn. It is an interesting book. My son Andy read it and it left him very un-nerved. I can't recall him ever being so disturbed by anything before. I think it is a good idea to prepare for the coming storm and hope and pray that it misses us. There is little downside if you take the necessary precautions but if you are not prepared, and these things do come to pass, you will be sorry that you didn't pay more attention to these "non-mainstream" views.
This is not the end of the world. But it may well be the end of an era, the end of stability and easy times that we all have come to take for granted.
Sincerely,
David Schectman
