Interesting questions Bevan.
An example of a puzzling phenomenon is Japan flat lining for 20 years. I know that their bubble burst in the early 90's, but wow- 20 years without growth in the stock market WITH a very diligent and productive workforce. It boggles my mind.
..i guess the bottom line might be as Buffet says... when everyone is excited be very cautious and when everyone is scared be bold
Japan has been suffering from a deflationary spiral. Simplistically inflation is too much money chasing too few goods. Deflation is too many goods looking to be spent with too little money around to buy them. The money obviously has to be freely floating and be spent in the population, not locked up in investments etc. Japan is a notorious nation of savers who all withdrew their money from the system, whilst supply of goods remained strong. Tough to inflate the economy that way...
The wider world going forward is really interesting now... We are printing more money than ever before and people are expecting massive inflation to kick in. But, unless this money actually finds its way into the population that's not going to happen. Depending on how this helicopter cash is distributed now, will impact markets quite differently.
Assuming they follow the 2008 model of rescuing the banks then the way they did it was to lower rates and issue bonds, notes etc. via the banks. The banks used all of this QE to invest and distribute into the market and all that cash ultimately found its way to the stock market. So we've had the largest bull run ever over the last 10 years, completely unwarranted according to value investors, and giving most stock market investors a dose of sleepy confidence. We haven't seen any indication of inflation because all that QE hasn't flowed into the real economy.
This time I suspect is going to be very different. It's not the banks that need saving now, it's the lower to middle classes. It's the real economy. The money printers going brrr now should result in at least some of that money trickling down to the lower levels. Of course the monetary system is still completely broken, because money should be created when workers create products and services, and not arbitrarily printed when the Fed panics, or when a computer solves a math problem, or when some rich IT geek "stakes" their digital wallet.
Whilst much of the helicopter money will still be sucked up now by the banks, wealthy investors, corrupt politicians and sheer bureaucracy, there should still be enough left when it reaches the real economy. This is going to result in the mother of all inflationary bubbles, especially in the US.
It helps to think of the global monetary system as wanting to always try and balance itself. However, the balancing mechanism is a lagging effect. So, all of the productivity and wealth creation over the last 100 years has been building up slowly amongst the wealthy, escalating the growing divide between rich and poor i.e. the poor produce the wealth and investors keep the wealth. So that's been the primary flow of productivity based wealth creation. There have been interesting secondary flows e.g. in 2008 the middle-classes started accumulating significant wealth in property, a trend fed by the banking sector, allowing house owners to use their properties as ATM's.
That subsequent collapse in housing wealth was quickly re-inflated by the Fed with most of the QE going to the 1%. The gap between the very rich and very poor widened exponentially. That bulk of cash was now the target for the balancing mechanism, with everyone sensing a stock-market collapse being imminent. That has happened and many pension funds and investors have been hurt. But the Fed and US govt. are re-inflating again.
In the meantime where has all the clever, safe money run to? To the USD of course, the one place it can't get hurt as the US can print money with abandon as the whole world's goods are its playground, not just its own country's goods. We've also seen a decent dead cat bounce in the market over the last few weeks but that is a minor blip. The great balancer is still coming... I suspect it's coming in the form of synchronised, massive global inflation over the next few years. Unfortunately the real economy is going to get pretty rough. Stagnant growth and high inflation = stagflation. A fate far worse than Japanese deflation. The USD should still perform its safe haven status, until such time as the world finally loses faith in the US' ability to repay its debts. The US has kicked the bankruptcy can a long way down the road now, but inflation is going to bring it forward quite quickly now.
Inflation is the one thing that will see the wealth of the 1% eroded. But it will also mean that the poor cannot afford to eat. The entire global system is fundamentally broken and I cannot see how it can be (peacefully) fixed. I expect generally self-sufficient countries such as South Africa and China will fare much better than the generally importing countries of Europe and America. Yes, the ZAR may get to 100 to the USD before the implosion but that will be our pressure release valve. Our gold miners and food exporters will make a fortune. One thing is for sure. Change is coming.
(Apologies for the long and opinionated piece but I hope it gives some food for thought...)
