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October 23, 2017 | A Warning to Deflation’s Skeptics

Rick Ackerman

Rick Ackerman is the editor of Rick’s Picks, an online service geared to traders of stocks, options, index futures and commodities. His detailed trading strategies have appeared since the early 1990s in Black Box Forecasts, a newsletter he founded that originally was geared to professional option traders. Barron’s once labeled him an “intrepid trader” in a headline that alluded to his key role in solving a notorious pill-tampering case. He received a $200,000 reward when a conviction resulted, and the story was retold on TV’s FBI: The Untold Story. His professional background includes 12 years as a market maker in the pits of the Pacific Coast Exchange, three as an investigator with renowned San Francisco private eye Hal Lipset, seven as a reporter and newspaper editor, three as a columnist for the Sunday San Francisco Examiner, and two decades as a contributor to publications ranging from Barron’s to The Antiquarian Bookman to Fleet Street Letter and Utne Reader.

A recent Morning Line drew flak from one Rantly McTirade, a lurker who posts occasionally at Rick’s Picks under that pseudonym.  ‘Rantly’, while evidently impressed by the accuracy of my technical forecasts, took me to task for ‘mouth-farting’ and ‘pontificating’ about some of the big themes, most particularly a deflationary bust that I have long viewed as inevitable. I responded that if my 0.6% forecast for the long bond, for one, proves correct, he’ll be eating a ladleful of shit somewhere down the road. I got argumentative support from ‘Farmer,’ whose interesting posts in the  Comments section of Rick’s Picks have gained him a devoted following in that forum. Read his response to Rantly and you’ll understand why:

Your comment might be amusing McTirade if what was coming were not so damned alarming. You did however hit the key words “deflation and housing” and that’s where the most pain will be felt when asset prices begin to fall back to Earth once more. Sorry, but we are not at a permanently high plateau nor will prices just keep rising indefinitely. And yes, things are going to be just as bad as the deflation theorists have argued all along (if not a whole worse). This can be demonstrated with a number of charts but the one I will link is perhaps most appropriate for today.

Home-Price Index Nightmare

The Case-Shiller home price index going all the way back to 1890 is tracing out the worst possible pattern for homeowners that anyone might have imagined. After peaking in 2006 and crashing for several years it has bounced off its bottom seen in 2011 (just as gold peaked) and is making a run for what will undoubtedly be an ugly double top within the next two years. Time of arrival can be comfortably measured by the angle of attack on the chart and the number of years for each period of the rise and fall. Click here to view the chart.

We are not there yet of course, but the set-up is damning and does warn that every bubble eventually has its day. What is harder to guess at is how far down we will fall once the final top has arrived or how many years it might take for the housing assets to fully deflate. Suffice to say that many millions of Americans (and Europeans, Canadians and Japanese too) are going to have a lot less of a retirement fund to work with than they might currently imagine. To make matters even more painful we will be seeing commodity inflation on the rise just as homes, stocks and bonds are on the wane.

A Perfect Storm

I predict a nasty long-term deflation in asset prices intermingled with flat wages due to automation. This will happen during a period of low growth caused by millions of retirements and as that happens we will see rising inflation in all the wrong areas (food, fuel and medical services) as commodities reassert themselves. What we have coming might just be the worst combination of circumstances lining up to create a multi-decade stagflation that simultaneously eats away at both our retirement wealth and our discretionary pension income.

Best to start preparing now, McTirade. What goes up eventually comes back down and what is priced for the trash bin always catches a bid when there is nothing else to buy with upside potential. What I am saying is that sometime in the next 25 months, gold will have finally hit its cyclical 8 year bottom while stocks and homes will have finally hit their tops and if you still have that smug attitude of yours and not rotated out to greener pastures you will be one of the bag holders when the next “Great Deflation” gets under way.

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October 23rd, 2017

Posted In: Rick's Picks

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