John Hussman: Inflation Is Just Around the Corner

Excerpt from the Hussman Funds' Weekly Market Comment (3/23/09):

The reason we're not seeing inflation here and now is that despite a near doubling in the monetary base, we've seen a buildup in goods inventories combined with a surge in safe-haven demand for government liabilities. So investors have absorbed the increased supply of government liabilities without a collapse in their marginal utility. This will not persist indefinitely, so unfortunately, any nascent economic recovery in the next couple of years will be against the headwinds of both Alt-A mortgage defaults (coming to your neighborhood in 2010), and inflationary pressures as soon as safe haven demand for Treasuries eases back even moderately.

Milton Friedman was mostly right about inflation – inflation may be a monetary phenomenon, but only because governments ultimately can't help but monetize huge amounts of spending (as the Fed is doing now). He was entirely right about fiscal discipline – “the burden of government is not measured by how much it taxes, but by how much it spends.”

Comments

[guzzii:]

very good.

Mar 23 10:41 AM

[Larry House:]

There are a number of things that can kill any market attempt at a long-term rally--inflation, a spike in oil prices, continued collapse in consumer spending, lack of available credit, increased government regulation, more "surprises" from banks, etc. It is uplifting to see the market up, but don't quickly lose a sense of caution. It will take years to right our ship, not months.

Mar 23 10:45 AM

[User 283977:]

John, I think the current rise in oil prices were caused by the FEDs recent monetary actions. Consequently, inflation is here and now. The problem is the metrics for measuring inflation significantly lag the market.

Mar 23 12:43 PM

[kelm:]

We will start importing inflation as the dollar sinks. Further, commodity producers have closed mines and smelters and have pulled back investment on upgrades to producing operations so any uptick in demand will be met with a supply base that is reduced from where it was a year ago. Inflation is coming. How fast and when remains to be seen but I doubt we will have long to wait.

Mar 24 10:18 AM

[warwick lucas:]

You're right Larry, the market was very short going into both futures close out and the fund managers quarter end coming - so no surprise that some short sellers did a runner. Remember - a chicken is not a bull!

Mar 24 12:52 PM