Prepare For Deflation

February 28, 2022

[The following is a reconsideration of a Morning Line commentary sent out to you earlier this evening. RA ]

Prepare for Deflation!

I spent the evening with a woman whose well-informed take on current events has caused me to reconsider my remarks earlier this evening concerning the effects of Ukraine on the markets. From a geopolitical perspective, it would seem that the cause of peace can only benefit if the world succeeds in getting the schoolyard bully to back down.  That's assuming Putin hasn't flipped his lid, as many seem to think, and go for broke with more annexations in Eastern Europe. But a quite plausible alternative scenario suggests that Putin's defeat would provide only a brief respite from events that could lead to global economic depression and a world war fought over oil.

The price of crude is up 6% tonight at $97 a barrel, underscoring the credibility of this threat. It has reminded us that however plentiful underground sources of crude oil and natural gas might be, disruptions in the distribution network could cause fuel to become scarce everywhere overnight.  On top of scarcity, a steeply rising dollar will make energy even more expensive for every country other than the U.S.  There is also a strong possibility that Russia, whose economy is based largely on energy resources, is headed into bankruptcy,

Choking Off Demand

All of these factors are massively deflationary, and anyone who suggests otherwise -- i.e., that rising oil prices and supply chain shortages will cause inflation to steepen -- is not thinking clearly. Although it's true that higher oil prices will raise the cost of nearly everything, this will eventually choke off demand so tightly that only deepest recession (a.k.a. Depression) could conceivably result. That would cause financial assets that are hyper-leveraged to energy resources to implode, deflating a $2 quadrillion derivatives edifice as well as paper assets that lie outside this market.

A given at this point is that U.S. stocks are in the early stages of what stands to be the worst bear market in history. That, too, would be powerfully deflationary, as would the collapse of home prices that have risen to absurd levels in the last year.  Most deflationary of all, however, is the strengthening dollar, which is raising the real burden of debt for virtually everyone who owes dollars, including Uncle Sam.  This is one more reason why I continue to hold fast to my prediction that the next move by the Fed will be to ease, rather than tighten.

Concerning my advice to buy stocks on weakness, I hereby recant it. The thieves who make their living manipulating stocks in the wee hours might succeed at exhausting sellers sufficiently to propagate a short squeeze on Monday, as suggested above. But the much larger force will be a bear market that began with the record high achieved on the first trading day of the 2022. The deflationary noose is about to tighten just as most pundits are ratcheting up their expectations for sharply higher prices for food, automobiles, energy and much else that we consume. With wages lagging badly and asset valuations about to deflate across-the-board, where will the money come from to feed inflation?


During 1500s the Spaniards had taken 16,000,000 kilograms of silver from Peru.

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