A Stroll Down Disinflation Lane

[Last week’s commentary on the gathering economic storm elicited a light-hearted reminiscence from our friend Richard Charles of Alpine Capital.  You’ll find his recollection of some notable deflationists enlightening, and there’s also a new word — screwflation — he has coined to describe a phenomenon that eggheads at some of our finer universities evidently have yet to figure out. RA]

Must have been something stimulating in that New Jersey aquifer we drank from, before saltwater and tritium from the Salem County nuclear plant made Bourbon the safer beverage. Since the Great Depression, an ever-inflating Fed made houses the number one wealth engine for the middle-class American Dream. Our Palo Alto home accidentally saw unbelievable nominal appreciation exceeding the original price tenfold — or a hundredfold if you run the numbers with 10 % down on an adjustable-rate, fixed-payment, negative amortization at sixteen percent that everyone, especially the mortgage broker and realtor, told us was cuckoo.

Merrill’s all-American asset manager back then in the mid-1980s, pipe-smoker Stanley Salvigsen, was a deflationist who actually shorted his home and made money. He was invited to leave Merrill for Comstock Partners before he died at 53 of a heart attack in the mid-90s. His offense: staying too short for too long.

Bucking Merrill Lynch

Gary Schilling had a similar experience in the mid-70s with Standard Oil,  the San Francisco Fed, Merrill Lynch and White Weld. His complaint letter to Don Regan, Merrill’s CEO and former U.S. Treasurer, attested that Schilling’s disinflationary views did not comport with Merrill Lynch’s bullishness on America. This is despite the fact that his unconventional ideas made money for the investment firms’ clients.

Back in Silicon Stanford Valley, the biggest bond bull-market in history bailed us out with rates that ultimately fell almost to 2%, freeing yours truly for a journalism stint at Oxford Blue, the digital student newspaper, and a move to Lake Tahoe before remote workers fleeing the Covid lockdown infected one of Mark Twain’s favorite places with yet more real estate madness.

Then, things began to change in ways that not one in a million, to paraphrase Baron Keynes, understands: screwflation. It is the hot mess that has resulted from having no debt ceiling, a hawkish central bank and high energy prices. The combination has set the stage for wealth destruction on an enormous scale and the death of the American Dream. Homeownership is imploding, along with access to affordable healthcare and a college education for everyone who wants one.

Our suspicion is that what has gone up will come down even more quickly, not necessarily stopping at the old low. Trades in volatility and bullion might make more moolah for the time being, perhaps until Gen-Xers and Millennials get off the government’s matrix and/or parental payroll. That has certainly been the case for our family.

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