Money Sage

Let us begin this analysis with what we know.

We know, with a high -- though not perfect -- degree of certainty, the following:

--Few investors actually make money over a long period of time;
--Investors act primarily on the basis of emotion, liquidity, and the consensus of the investment "professionals" as it is fed to them in the form of easily digestible pap by the "investment community" as refracted through the media and through the army of brokers, salespeople for mutual funds and managed accounts, etc etc.
--The consensus of the mass of investors is generally wrong, particularly at major turning points;
--The consensus of the "experts" is also generally wrong, not only insofar as investments and timing are concerned, but also as regards the economy;

To put the matter another way, the more certain the experts and, derivatively, the universe of investors is, the more llikely it is that they are wrong, usually DEAD WRONG.

Looking at the current consensus on inflation -- and there is a very strong consensus among both experts and the public -- we must presume that this consensus is wrong, probably -- though not certainly -- dead wrong. This presumption is grounded in the solid historical data and the high degree of frequency with which the consensus "logic" and derivative conclusions are generally totally off base, and, if followed, have a high degree of assurance of damaging seriously investor net worth over the course of future months and years.

Excluding all background "noise" and all arguments, articles, theories, books, learned hypotheses, media blather, and self-interest inspired investment community assessments, we confront a near universal consensus that INFLATION -- and a BIG INFLATION at that -- is on the way. Deflation will be short-lived, or so we are advised daily, hourly, even minutely. Of course, the bugbear of inflation fears, if implemented in investment strategy, would have deterred the purchase of long-dated Treasuries over the past quarter of a century, when the annualized yield on such securities was in the solid double digit range WITHOUT ANY RISK OF CAPITAL LOSS if such securities were held to maturity. Following the advice of investment gurudom would have led the investor to purchase only short-term Treasuries and roll them over repeatedly at EVER DECLINING YIELDS, in contrast to defying the consensus and locking in long yields of 12, 14, 15% for many years.

In sum, what we know about the validity of the consensus and the returns produced by herd following places the burden of proof on the contention that a BIG INFLATION IS LOOMING DOWN THE ROAD.

Now, what we think is that the community of economists, investment gurus, and popularizing media are laying out an investment path which will prove very harmful to investor financial well-being in future years, as per usual. In short, we think that the consensus UNDERESTIMATES, BY ORDERS OF MAGNITUDE, the severity and profundity of the deflationary pressures crushing the global financial system and the global economy. These deflationary and contractionary forces are likely to eventuate in economic stagnation and feeble pricing for many years to come, attended by a very protracted period of extremely low interest rates.

This then, is what we think.

Moneysage 2009 - copyright