The Great Debate: Inflation Versus Deflation

Over the years, I have witnessed a number of debates over a wide variety of topics that ranged from capitalism-communism (1960s), civil rights (1960s), Kennedy assassination (1963), Turner vs. Mulroney (1984), Benson vs. Quayle (1988), and finally, my favourite debate of all time, the famous Ballanger vs. "the room" debate of 1990, where I attempted to argue why Winston Churchill was not the "Greatest Man of the Twentieth Century" for his role in defending the Free World, but rather John Lennon for his creation of the song "Imagine." Liquid libation notwithstanding, I thought I made a strong case at the time, with the operative part of that statement being "at the time."

As great a job as I did arguing my case for Lennon vs. some old English statesman, the fact remains that I obviously have great affection for historical figures from a tiny little island in the North Atlantic that is barely the size of Manitoba and that just happened to rule the entire world for nigh on three hundred years, holding sway over 24% of the world's population.

In the interest of full disclosure, all four of my grandparents immigrated from England to Canada in the period of 1893 to 1910, and my paternal grandfather, Roland William Ballanger, served in the Canadian Infantry in WWI. My father, William Roland Ballanger, served as a navigator in the Royal Canadian Air Force during WWII, so let it never be said that my bloodline carried anything vaguely similar to "pacifist loyalties."

That, I hope, explains the bias I carry in life, and the sense of duty and loyalty to the monarchy. While younger readers will most certainly question that, I would point out that it is not the nationality that I revere, it is the discipline passed down from generation to generation that keeps me riveted to the notion that the principles of the Magna Carta from the 12th century might be re-implemented here in the Year of our Lord 2021.

As the saying goes, "Good luck with that."

As I dispense with all fantasies of a return to a "realm of rationality," it is important that you all know why. It is my implicit desire to have my children raise their children with the same strict adherence to discipline that allowed me to have develop my sense of ethics, resolve and endurance during my sixty-eight years on this planet. The term "discipline" is not meant to be a verb; it is meant to be a philosophy. I hate it when I hear a parent say, "I had to discipline my four-year-old this morning." If you teach the child to understand restraint, he/she will practice the same. Buddhist monks and Jesuit priests practiced a sectarian form of discipline long before athletes found the term and as such, you have billions of global inhabitants that live by a form of discipline that was, years ago, used as a "control mechanism" to be used to control the masses.

Just as thousands of well-heeled investors are now following the "Fed Directive," hell-bent on driving the valuation gauge to unthinkable levels, the need for a Churchillian call-to-arms for "Restraint!" (cigar smoke wafting into the picture) has now been rendered irrelevant and is screaming to the point of irreverence. Since "irreverence" is defined as a condition which conveys "a lack of respect for people or things that are generally taken seriously," the actions of the central banks toward the sanctity of money (and its purchasing power over time) demonstrates that very condition. It is precisely why we are seeing food prices soar to unimaginable price levels.

There was a time when I used to read Joe Granville's market letter, and at his peak, Joe was awesome. At his worst, Joe was a classic example of a simple man who rose to fame and then, failing to understand that "fame is fleeting," he let hubris govern his judgments. Once the discipline of truly interpreting charts became secondary to giving interviews, his advice began to deteriorate, and once he became bemused with the thought that the interviews and coverage might influence markets, he was total and absolute toast.

This is what we are seeing with frightening repetition in the cryptocurrency space—the cryptojunkies have gone into the business of marketing, instead of creating or managing, to keep a bid under their precious positions. Once they are keeping one eye on the tape and one eye on their net worth statements, you just know that the income statement and the balance sheet are secondary.

Markets today are no longer allowed to trade freely; they are constantly and consistently respirated by narrative-puking CEOs that have just exercised "incentive options" to monetize work deemed as "shareholder friendly" by those fund managers who have 9.9% (non-reportable) positions.

Worse than that, the central banks view the stock market as an industry, not unlike the auto or textile manufacturing or airline industry, whose jobs have been largely outsourced to countries that can offer cheaper labor rates and less regulation. The insanity of current policies, both fiscal and monetary, is that they use concerns over climate, civil and social rights, and energy to over-regulate and under-protect those industries that create employment while under-regulating and over-protecting service industries like the financials, which essentially create only white-collar jobs while producing only money-related, fee-based revenue—but nothing one can actually take home with them. Sadly, you would never see American or Canadian financial service jobs outsourced, because there are no countries anywhere in the world that can protect the Golden Goose stock markets like they do in North America.

The type of financial markets in which I gained knowledge over the years were markets that were seen as "barometers," as opposed to "thermometers." As a boater on the Great Lakes, the barometer is a valuable tool, because when it begins to drop like a stone, the skies can be sunny and the winds calm, with nary a cloud on the horizon, but invariably that all changes by the time you make it to a sheltered anchorage. Similarly, markets that were left alone and allowed to drop served a valuable purpose for corporate CEOs because they could set capital expenditure and hiring plans using the Dow Jones Industrial Average as a guidance tool. Sadly, with the proliferation of Federal Reserve "management," these interventions have eliminated all functionality for markets to portend anything. Business decisions must be made on any data set unrelated to stocks, which is a crime.

This chart of gold since 2015 illustrates the discounting effect of gold prices. Note how gold began to rise in mid-2019, long before Jerome Powell ended his futile and comical attempt at "balance sheet normalization," only to punctuate that inane endeavor with the "Powell Pivot," which suddenly and violently began spewing billions of dollars into the "financial system" in order to "improve liquidity." As it would turn out, this was an emergency tactic used to bail out a large number of over-leveraged bond funds that were simply mirroring what the Fed was doing.

I would contend that gold "got it right" in its ascent to mid-$1,550s, but was caught in the COVID vortex that created a liquidity crash. Again, gold smelled the Fed's presence in the room by late March and then embarked on a move to all-time highs by predicting the extent of the Fed stimulus long before markets would know just how big the Fed balance sheet would get. Incidentally, it is now nine times its pre-Great Financial Crisis (GFC) number, due to purchases of mortgages from the banks and hedge funds that had made dumb moves in terms of leverage and selection. The question that is still looming resolves around whether its recent weakness is discounting a deflationary (or at least disinflationary) wave on the horizon.

The chart of copper is offered as an illustration of the Fed managing expectations, especially related to prices, because copper was halted dead in its tracks by the surprisingly hawkish "trial balloon" floated out by non-voting Fed governor James Bullard. Since then, however, we have seen no fewer than ten Fed officials walk back the Bullard remarks in order to—once again—manage expectations and emotional responses of stock investors. That copper has responded chapter and verse to the dovish Fed recantations is testimonial to just how enslaved the Fed is to the levels of the S&P 500 and NASDAQ.

This "Great Debate" to which I refer in the title has most notable economists and market watchers lodged either in the "inflation" or "deflation" camps. The former believe in the very old horse chestnut that says "inflation is like toothpaste; once it is out of the tube, it is impossible to get it back in." The latter group points to the artificial or "transitory" effect of supply chains being constricted by the pandemic, and now that the global economy is coming out of COVID hell due to (largely untested) vaccinations, supply will flood the markets to quickly capture these historically high prices.

While some very bright people carry opposing views on the future of commodity price inflation, what I know for certain, from forty-five years slashing and burning my way around the capital markets is this: The Fed balance sheet will never shrink to the pre-GFC (2008) levels ever again. The counterfeiting exercise of which I have written since pre-2008 is only a criminal act, if it falls outside of "national security," and while I heard some lady last week state that the Fed "must act in the public interest at all times," I refute such a claim because the Fed is not owned by the citizens of the United States. Its shareholders are banks—period—and when was the last time a bank ever acted "in the public interest"?

So, how is my portfolio positioned? If an inflationary wave continues and supply does arrive to dull the price increases and fails, then I am happy to own commodities with developers carrying the greatest leverage. If the stimulus efforts dissipate at both the fiscal (Treasury Department) and monetary (Fed) levels, this artificial monetary velocity that has been fueling markets is doomed.

At the end of the day, I agree that the Fed is trapped and nothing they can do can soften the inflation rate without causing a massive dislocation in fixed income sectors, but as I wrote last week, if they need to prevent social unrest, complete with pitchforks and torches, by crashing the real estate market in order to make the cost of lodging more affordable, they will whisper their intentions to a select few banks and make their hawkish moves only after their precious bankers have adequately hedged themselves.

Keeping a close eye on the chart posted above will provide a clue of sorts as to whether such a dislocation is probable. Strong financials always portend strong markets, a rule passed down in the 1980s by those much wiser and much smarter than me at the time.

In the end, the Fed's mandate is to make sure the banking system in insulated from risk, and to think for a moment that the average citizen will be included in that financial lifeboat, remember the immortal words of George Carlin: "It is one big club and guess what? You and I ain't in it!"

Originally published Friday, June 25, 2021.

Follow Michael Ballanger on Twitter @MiningJunkie. He is the Editor and Publisher of The GGM Advisory Service and can be contacted at [email protected] for subscription information.

Originally trained during the inflationary 1970s, Michael Ballanger is a graduate of Saint Louis University where he earned a Bachelor of Science in finance and a Bachelor of Art in marketing before completing post-graduate work at the Wharton School of Finance. With more than 30 years of experience as a junior mining and exploration specialist, as well as a solid background in corporate finance, Ballanger's adherence to the concept of "Hard Assets" allows him to focus the practice on selecting opportunities in the global resource sector with emphasis on the precious metals exploration and development sector. Ballanger takes great pleasure in visiting mineral properties around the globe in the never-ending hunt for early-stage opportunities.

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