Over the past year, the many countries in the world had witnessed a substantial synchronised asset price deflation. In the US, the median property price is said to have fallen 10% over the past year. The property bubble in the UK and Spain is said to be bursting too. Stock prices in China had falling 50% since the October 2007 peak (see Chinese stock market overrun by bears). The Indian stock market is also falling. The Chinese property bubble in major cities such as Shenzhen is reportedly to be bursting as well. The Australian stock market had fallen 18% from its November 2007 peak, with its financial stock index falling 32%. The Japanese stock market is also in a bear market.
Back in March last year (when it was still a bull market), we said in How does the US export inflation?,
That is why when the US opens up their spigot of US dollars and engages in a global spending spree, foreign countries have to follow suit by inflating their own money supply so that their currencies will not be overly expensive relative to the US dollar. The result is worldwide synchronised price inflation and asset bubbles.
Today, the reverse process is active. With the US experiencing deflation (see How money & credit can shrink (i.e. deflation)?), liquidity is being withdrawn from the global financial system, resulting in a synchronised asset price deflation (see Marc Faber on why further correction is coming?Part 2).
Yet curiously, at the same time, despite the asset price deflation, the world is experiencing price inflation for gold, oil, metals, food (see Why are the poor suffering from food shortages?) and other commodities.
Dear readers, do you see that this combination of asset price deflation plus general price inflation is the worst possible combination for investors? The whole point of investing is to increase the investor’s purchasing power in the long run. This inflation-deflation combination works together to decrease investors’ purchasing power. In Australia, with its high and rising interest rates, a saver does much better than an average investor (assuming that the official CPI figures is a reliable measurement of price inflation- see How much can we trust the price indices (e.g. CPI)?). The worst off are those who borrow heavily to buy assets that are falling in value in a rising interest rate environment.
As we said before in Is this sub-prime or solvency crisis?,
The problem is that much of the economic boom that we enjoy over the past several years are financed by the explosion of credit (which is debt on the opposite side of the balance sheet). There is such a colossal amount of debt created and scattered throughout the globe that it does not take a genius to see that massive amount of bad debts have to accumulate and build up in the global financial system. Eventually, all bad debts will be exposed as what they truly are.
Now, we have a money-printer in the Fed who is answerable to the Congress, who in turn is answerable to the mob (see A painful cleansing or pain avoidance at all cost?), we have the situation whereby the US is attempting to print its way out of mass bad-debt insolvency. Adding fuel to the fire, we have two (one is already more than enough!) 600-pound gorillas, namely China and India, devouring the earth’s resources at a ferociously unprecedented rate.
Is this sustainable? The sky-rocketing gold, silver, energy, metals and food prices could be an indication that resource mis-allocation and mal-investments is accumulating in the global economy. If so, we cannot rule out at least one of the 600-pound gorilla stumbling, bruising its bloody nose and knocking things all over in the short to medium term (see Can China really ?de-couple? from a US recession?).
Our hunch is telling us that something just do not feel right. Thus, now is not the time to be greedy about ‘making’ money. Wealth preservation is our greater concern (see Why should you invest in gold?).
