Inflationary depression tells economist something about the future.
Attendance at the recent Cambridge House hosted Toronto Resource Investment Conference was well-down from last year’s event, and given the kind of market beating the sector has taken, it’s not surprising that resource investors and resource companies are afraid to show their faces.
Not Paul van Eeden, however, who is an economist known to many Stockhouse members. Van Eeden gave a talk at the conference called “Measuring inflation.” Those that attended Paul’s presentation at the 2008 Prospectors and Developers Conference (PDAC) in Toronto a few months ago will recall that at that time, van Eeden was a true champion of the inflation argument. He backed up his thesis that the U.S. was running at inflation rates in the low to mid teens by using a reconstituted figure for the no-longer-reported statistic of money supply known as M3.
In a fairly significant departure from this argument for rampant inflation, van Eeden is now using a measurement he calls “actual money supply” (AMS), which is closer to M2, and which tells us that money supply is not growing at the rapid rate that M3 says it is. Using AMS to calculate the rate of inflation in the U.S. puts the figure at close to 8%, van Eeden says.
This led him to peg an inflation-adjusted gold price at $750 in US dollars, and he was very clear: If gold overshoots the $750 mark, sell. When it’s under, buy.
Van Eeden is nothing if not clear and rigorous in his thinking and in his presentation. He spent time ensuring that listeners understood not only the proper monetary definition of inflation (expansion of the money supply), but also of deflation (contraction of the money supply), something that has not been pointed out with enough clarity lately.
Analysts, economists and media representatives have been using the word “deflation” to refer to what in truth, van Eeden argues, is simply asset price decline, and not true deflation. This is why the U.S. is in an inflationary depression, according to van Eeden. Money supply is growing, which is inflationary, yet asset prices in some categories (think real estate, for example) are declining. But because money supply is expanding, not contracting, then it is not technically a deflationary scenario.
Armed with this inflation thesis, van Eeden gave investors a piece of actionable investment advice: short bonds. His reasoning is fairly straightforward. Because of the inflationary policy now in place and accelerating, interest rates will have to rise at the other end of this crisis in order to combat the effects of inflation (rising prices across the board). And when interest rates rise, bond prices fall – particularly at the long-duration end of the spectrum; long-dated bonds are more sensitive to interest rate moves.
Therefore, sell bonds, wait for interest rates to rise and to push bond prices lower, and then buy back at the lower price and profit from the difference.