Finding Good Investments in an Inflation Driven Crack-Up Boom

There are good booms…and then there are bad booms.

A good boom is like the one following WWII. Real money was invested. Production increased. Real savings were spent. Wages increased. Profits increased. At the end of the boom, people were wealthier than they were at the beginning of it.

A bad boom is based on bad money. When the United States Treasury prints up an extra dollar bill, the gesture lacks sincerity; like a duelist who first smiles and shakes your hand, then walks back twenty paces and pulls a trigger; you know he didn’t really mean it. Instead of being built on real savings, the faux boom is built on monetary inflation and credit. And when it comes to an end, people are no better off. Their money is worth less than it used to be. And the average fellow has dug himself deeper into debt in order to enjoy the boom years.

“But many people really have gotten much richer during this boom, haven’t they?” you might ask.

Yes, a crack-up boom is fundamentally a financial boom. Money comes into the system – a lot of it. People don’t know it’s phoney money; they can’t tell the difference. This money hangs around the financial industry and everyone there has a good time. But society, as a whole, is not any richer because Monet paintings are more expensive…or because stocks are more expensive…or because a hedge fund manager makes a billion dollars. Society is richer when people generally earn higher wages, stash away more savings, and pay down debt. That is not what is happening.

“Well, okay, maybe in the end, a lot of people regret it…in the meantime, why not join the fun?”

Be our guest. Buy a Warhol. Put some money into China. Get a parking space in New York for US$225,000.

Better yet, start a hedge fund. That’s the best way…make “2 and 20” on other peoples’ money. Take big risks…the bigger the better. Heck, the bigger the risk, the more you’ll make…right up until the end. Then, of course, the hedge fund will get wiped out. But what do you care? The investors will take the loss.

Which, of course, raises a key question: “When will this boom end?”

Heck…if we knew that…we might even be tempted to charge something for this Markets and Money, rather than give it away for free.

But our dear readers, being persistent fellows, have more questions.

“Well, why do you keep your Crash Alert flag flying?” they want to know. “Isn’t it because you expect a crash?”

Actually, we confess we don’t. You can’t predict how these things will go. We wouldn’t be terribly surprised to see US stocks shoot up a lot higher, for example. There could be a kind of hyper blow-off in several financial markets, before the end comes. Or, the Dow could crash tomorrow.

We fly the Crash Alert flag to remind ourselves – and you – that this is a very dangerous market. Since it is a crack-up boom, and not a healthy boom, it is fundamentally unstable. And we do not see any easy investment opportunities in it. Yes, there are plenty of speculative opportunities. There are plenty of things that could go higher. But there are relatively few that are priced so low – stocks that give you so much value for your money – that you don’t care if they go up.

Remember, a good investment is something you want to own – because it is a solid, growing business that pays you a nice dividend. “Tangible assets that sweat”, as our friend Chris Mayer calls them. He looks for companies have assets with real value in the marketplace – hard assets that the company actually owns – cash, land, equipment.

A good investment is not something you buy hoping it will go up so you can sell it to someone else.

Remember too, that most people earn their money from a business or a job. The stock market is merely a place to put money so it will be available later in life – modestly enhanced by time and compounded earnings. The worst thing that can happen for most people is to place their money in a speculative market and then lose half to two-thirds of their wealth. In other words, the risk of losing money in the stock market trumps the hope of making more.

“So what should we be doing with our money?”

Of course, there are still good investments – even in over-priced, over-hyped, speculative markets. Not many, but there are some. A good stock researcher can always find them.

And there are some stock markets that offer better value than others. Japan, for example, looks like a good bet. While the Dow generally rose, over the last 17 years…the Nikkei Dow generally fell. Now, stocks in Japan seem to be finding their feet. Japan has a huge trade surplus. A deep well of savings. Efficient, productive industries. And it seems especially well positioned to benefit from economic growth in Asia, generally.

Japan offers another advantage – currency diversification. Besides the real danger of a stock market crash, there is also the real danger of a dollar crash. In fact, the whole worldwide super-bubble can be traced to the inflation of the buck. Eventually, we expect the world will get sick of dollars.

It seems like it already has. Just last week, for example, Iran told its Japanese customers that henceforth it wanted to be paid in yen. It is not the first country…and won’t be the last…to want to turn its back on the dollar. Americans might do well, too, to keep a little bit of their wealth out of dollars…just in case.

A crack-up boom is an inflationary boom. Inflation of the currency typically leads to inflation of asset prices followed by inflation of consumer prices. While the rich enjoy it when their assets go up in price, the poor and middle classes get cheesed off when prices of milk and bread rise. They stop spending as much. And sooner or later, investors begin to worry whether the boom is all it is cracked up to be. That is when they begin buying gold, first to protect themselves…and later to make speculative profits.

Paul Kasriel of Northern Trust suggests that the second quarter slow down in consumer spending this year will cut into growth later in the year. As a result, he predicts, real GDP growth (which rebounded slightly in the second-quarter), is going to fall back in the second half to about 1.7% annualised rather than the consensus forecast of 2.7%. But, although Kasriel suggests that the slow down in spending will hold some consumer prices down, he still thinks food and energy prices will go up. Even if the boom starts staggering, your gas and your groceries are going to cost you a lot more.

Yet, on paper…officially…there is very little consumer price inflation now…and very little gold buying.

Not even any speculative frenzy in the US stock market. And, of course, we’ve yet to see a crash. We’re thankful. That means there’s so much more to look forward to!

Bill Bonner
Markets and Money

Are there good stock investments to be found at the moment? Leave a comment below.

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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4 Comments on "Finding Good Investments in an Inflation Driven Crack-Up Boom"

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When do you foresee the next stockmarket crash? Also,what do you think will happen to stock prices for the rest of the year?

Rob Sequin

Searching around and found this article. Very interesting.

What do you see as a good investment if/when inflation comes around?

Kaleen Lye

Stockmarkets are very complicated things…

Biker Pete

Great questions, Kathyp. Oh, while you’re at it, I’d like Saturday night’s Lotto numbers, please, Bill…! :)

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