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Roubini, Deflation, Inflation & Gold

|Includes: DIA, GDX, SPDR Gold Trust ETF (GLD), QQQ, SPY, UUP

Below is an excerpt from this weekend's newsletter.  I personally interpret Nouriel Roubini and what he represents as a signpost I will need in the future when the time comes to position for change once again in the inflation/deflation game of cat and mouse:

Roubini:  “I don’t believe in gold. Gold can go up for only two reasons. [One is] inflation, and we are in a world where there are massive amounts of deflation because of a glut of capacity, and demand is weak, and there’s slack in the labor markets with unemployment peeking above 10 percent in all the advanced economies. So there’s no inflation, and there’s not going to be for the time being.

The only other case in which gold can go higher with deflation is if you have Armageddon, if you have another depression. But we’ve avoided that tail risk as well. So all the gold bugs who say gold is going to go to $1,500, $2,000, they’re just speaking nonsense. Without inflation, or without a depression, there’s nowhere for gold to go. Yeah, it can go above $1,000, but it can’t move up 20-30 percent unless we end up in a world of inflation or another depression. I don’t see either of those being likely for the time being. Maybe three or four years from now, yes. But not anytime soon.”

I found the above quote in an interview titled Big Crash Coming with professor Nouriel Roubini here at something called Index Universe.  The link is to page 2, where the gold segment is, but I recommend reading the entire interview.  It is fairly brief.

On gold specifically I have to disagree with the good professor, just as I do with Prechter and I don’t know how many other deflationists out there.  That is of course because Roubini comes at the subject from the standpoint of ‘price’ as opposed to value.  In my opinion, there is too much focus on the prices of assets, what gluts of capacity and slack demand will do to prices and hence, price inflation or the lack thereof in Roubini’s view.

“So there’s no inflation.”  There is inflation.  Over the last year plus there has been a ton of it and it has been aimed at keeping prices up.  And it has succeeded thus far in its task.  But inflation is not rising prices.  Inflation is what is promoted in the face of declining asset prices.

I will stick by my stance that holds the deflationary pressure Roubini sees is the lever by which future inflationary policy will be pulled into existence.  Okay, I have been polite thus far.  What I actually think is that analysis like Roubini’s above, ends up being a tool for policy makers.  Whether knowingly or unwittingly, prominent economic talking heads (and the media that dote on every word) are important to the cause for business as usual by policy makers.

From last week’s NFTRH55:  “If the current system is to survive, these guys [policy makers] need an event and they need is soon.  That is what I thought I saw on the faces and heard in the voices of Tim [Geithner] and Larry [Summers] last week.”

Roubini’s oncoming crash would be the event.  The event’s fallout would be the lever.  The lever would be pulled and a new round of inflationary policy is all but a given since the public, hysterical and frightened by the event, will support it wholeheartedly.  In other words, confidence, induced by fear though it is (again), would remain intact in our leaders’ ability and willingness to come to the rescue with more ‘policy’.

We here at NFTRH will wish to take risk management steps leading up to the event, and then capitalize on the inflationary results.  Simple, isn’t it?  Well yes, simple in a twisted kind of way.  This is how people are systematically disenfranchised, over cycles and over decades, through misperceptions about inflation and deflation.

Meanwhile, per NFTRH55 last week, money supply graphs from the Fed show money supply having leveled off.  This is the first step to what may one day evolve into deflationist hubris, again.  That will be about the time gold has once again separated itself from the asset pack as a unique holder of liquidity and long-term value.  It will rise relative to everything even if it declines temporarily in nominal US dollar terms.  That would be yet another buying opportunity that the deflationists will miss the boat on.

But we get ahead of ourselves, as this is all just theory for the future.  At the moment we have the inflationists, commodity bulls, peak oil believers, stock touts and their respective hubris to deal with.