The impending boom

First deflation, then inflation

Inflation rates are worryingly low globally. Which is why the international federal banks will print even more money. This could create a "crack up boom" in two to five years' time.

At the moment, primarily the shockwaves from China and the discussions surrounding the prime rates in the USA are keeping the stock markets busy - Greece isn't the problem. After the most recent minicrash, the question is where we are at today. Let us assume the following realistic consensus:

  1. Global growth rates in the next few years will at best be below average. The reasons for this include the negative demographic development and low productivity increases.
  2. Companies, private households and countries lack the will and skills to take on additional debts and to push economic growth in this way through investments or higher consumption.
  3. We have probably already seen the climax in terms of company profits.
  4. As demonstrated by the most recent decision taken by the FED, international federal banks have already passed the "point of no return" and are increasingly unable to act. Across the world, companies, banks, private households and countries are in debt at a total of USD 200 trillion. This corresponds to around 11 times the gross domestic product of the USA. If interests rise, the entire globe will be at risk of a gigantic wash-out. The federal banks basically have no choice but to continue to print large amounts of money in order to keep interests artificially low and to generate inflation. If the economy barely grows in real terms, only the devaluation of money remains to reduce the real debt load. By contrast, deflation is fatal in such a scenario because the interest effect alone increases the debt - even without new debt!

Disastrous boom déjá-vu  

Against this backdrop, a so-called "crack up boom" in the next two to five years is becoming more and more likely. Such disastrous booms are anything but new on the stock markets. The most famous ones in Germany took place in 1922 and 1923. 

At the time, the German Reichsbank sped up its printing presses under the pressures of war debts and exploding social transfer payments. The official reason was: "In the interests of protecting the Reich and the German economy, the German Reichsbank must not block the path of the Administration of the Reich to obtain essential funds with the help of a banking credit while this remains the only path available. A negative attitude to this would not only fail to improve existing conditions but also and in contrast result in irremediable deterioration." Somehow sounds like "no alternative", doesn't it, dear German Government of today?

At the time, people greatly and very quickly lost trust in the purchasing power of the currency and fled into shares and assets. Inflation, on the rise since 1914 and flanked by the abolition of the gold standard, grew to become hyperinflation. The little noticed inflation of share prices was also a mirror image.   

What is interesting is that "book profits" for shares in the disastrous boom at the time clearly overcompensated for the loss in purchasing power in the final phase. So on paper, shareholders made profits. 

This miracle lasted all of two years and then vanished with the breakdown of the Reichsmark and the currency reform of 1923. The new Rentenmark was traded at an exchange ratio of one billion to one. Shares, real estate and other assets survived, however - valued in a new accounting unit, the Rentenmark, and as such at other prices, but with comparable values!

The panic hasn't started yet

Today, federal banks are still lacking the panic required to "really" open up those money printing gates. But a start has been made, as demonstrated by the billions of state debts purchased e.g. in the Eurozone, the USA, the UK and Japan. Ironically, the pertinaceous deflationary tendencies might be what will break federal bankers' nerves in the end by slowing down growth at the same time and as such permanently increasing pressure.      

It is probable that the glut of paper money that we are expecting in the medium term will spill over inflation to the so far largely unaffected goods market. The prices on the property, pension and stock markets have in part already increased significantly in recent years. Many asset prices are already experiencing accelerated inflation. Even though consumer prices are slower to catch up, the consequences of the glut of paper money will reach areas where we can all feel it. 

From there, it is only a last step for small savers to seek allegedly safe havens for their increasingly devalued paper money. Because that's when you feel directly how the actions taken by the federal banks can destroy the purchasing power of a currency, and even a currency itself as a unit of measurement. And small savers would recognise that the value of goods might be expressed in different currencies but not determined by them. 

One hundred Euros in 1992 today have a purchasing power of approx. 65 Euros. Shares, gold, properties and other real goods almost always respond to a sustainable increase in the amount of money with price adjustments. 

The actions of the ECB etc. are crucial

Investors should keep a very close eye on the behaviour (not the statements) of the federal banks. It must be assumed that, since they are agents, their political interests are likely to be rather short-term. There might come a time when the "smart money" which has been building liquidity for months will flow back into real goods to prevent an impending inflation.  

In order to be able to assess the level of potential panic at the federal panics, special deflation notices are helpful. The friend of savers and investors, they are the archenemy of debtors. While a deflatory shock is still possible, investors should maintain their spread across much liquidity, precious metals, market-neutral strategies, shares with attractive price book values and, if available, properties - all flanked by sensible hedges against crashes. 

When inflation rates increase while economic data remains weak, this will be the time for panic at the federal banks and of a possible "crack up boom". You will hear from us again then.

Uwe Günther

Uwe Günther is a founding member and Managing Director of BPM - Berlin Portfolio Management GmbH, Berlin. He also serves as co-investment advisor of Mischfond BPM Global Income Fund.


This publication is for information purposes and use by the recipient only. It neither constitutes an offer nor a request on the part of or for BPM - Berlin Portfolio Management GmbH - to purchase or sell securities or investment funds. The information contained in the current publication was obtained from sources deemed to be reliable. However, BPM - Berlin Portfolio Management GmbH does not guarantee their reliability and completeness and accepts no liability for losses resulting from a use of this information.

back to the previous page