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Is Inflation Dead?

Yes, the feds, the professors, the politicians (including Donald Trump), and the business elite all think the same thing – that a little inflation is a good thing. They worry now that there may not be enough of it.

That fear was ably expressed in Bloomberg’s Businessweek (BW) with what might become another landmark cover story, the kind you remember for many years, and laugh at each time it’s mentioned.

“Is Inflation Dead?” is the headline. It immediately reminded us of the famous Businessweek cover from 1979 – “The Death of Equities.”

That cover turned out to be excellent timing – for contrarians.

Equities had been in a bear market for the previous 14 years. And inflation had been going up. The geniuses at BW could only imagine that the two trends would last forever.

And thus, within months, began one of the biggest turnarounds in market history. Stocks, as measured by the Dow, went up more than 1,000% over the next 20 years. Inflation went down.

Pundits now believe inflation is dead and the bull market in stocks will live forever.

Our guess is that they are wrong about both.

This is it. The Doom Index just hit 8 – triggering the tattered crash flag.

As we covered in our crash alert earlier this month, our indicators suggest that the great bull market of 2009-2018/2019 is coming to an end.

To be clear, this doesn’t mean we will see a market crash tomorrow… or next week… or even next month.

That’s because nobody can perfectly time tops and bottoms… Not even our vaunted Doom Index. As the old Austrian economist Friedrich Hayek demonstrated way back in 1945, information is dispersed throughout society.

What is known by any single entity is only a small fraction of the sum of knowledge held by all members of society… That’s why no single person or institution can have all the answers.

That said, we built the Doom Index to monitor the financial and economic indicators that give us an early warning of trouble ahead. We designed it to tell us when conditions are ripe for a crash, supported by back-tests of the previous two market crashes in 2001 and 2008.

And now, the Doom Index says conditions are ripe.

Businessweek was wrong in 1979. Stocks weren’t dead. They’ve been going up – with only short interruptions – for the last 39 years.

Meanwhile, inflation has been going down… and seems moribund. Lifeless. And now BW says inflation is dead. Is it wrong again? Most likely.

Which is why we’re whispering. Shhh…

Neither stock crashes, nor inflation is dead. They are just resting, like bears in hibernation, sleeping in a cave. When they will wake up, we don’t know.

But they are sure to be hungry.

According to Goldman Sachs, net buybacks averaged $420 billion annually over the last nine years – by far the biggest source of demand in the market. Net, average annual demand from households, mutual funds, pensions funds, and foreign investors was less than $10 billion each.

Third, the feds pumped “stimulus” into the economy in the form of “quantitative easing,” negative real rates, and deficits. It didn’t stimulate the economy, but it was catnip to Wall Street.

In the pseudo emergency in 2009, the feds panicked. They cut rates and borrowed heavily. Then, 10 years later, the Fed – which had been cautiously returning to a “normal” monetary policy – chickened out.

In the fall of 2018, stock prices had begun to sink. But the Fed couldn’t bear the thought of a correction… neither of the stock market, nor of the economy. It let investors know that it still had their backs… and that it would continue to lend money at real rates close to zero, perhaps forever.

And so you see. Stocks may be up. But not “on earnings".

We never trust any “fact” we find on the internet… unless we make it up ourselves.

And yesterday, we reported an item from Goldman Sachs researchers that was so perverse… so weird… and so staggeringly sinister, that we doubted it could be correct. We went back to the research department twice to make sure. 

But it seems to be right. Over the last 10 years, for every stock bought – in net terms – by the public, foreigners, pension funds, investment funds, or other institutional buyers (the normal buyers of stocks, in other words), the corporations themselves bought nearly 50 of them.

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