Financial catalysts often ignite that alter the course of markets. We’ve seen this happen during the Fukushima crisis in the uranium sector, the credit crisis of 2008, and even a little farther back with the energy crisis of the 1970s. Of course these are only a few of many that have occurred throughout the life of stock markets in general. We’ve also seen different individual cases that have in fact affected the markets positively for that matter.
Deflation is something that could come around in the near future; many experts are even predicting this such as Harry Dent. Additionally, Kyle Bass is the founder of Hayman Capital, a Dallas-based hedge fund who is predicting a deflationary wave to eventually enter the markets because of what is happening in China.
Some people are saying that the Chinese economy is slowing down; Bass is saying that it is not only slowing down, but it is contracting. The annual growth rates for China was actually negative when looking at the fourth quarter of 2013 compared to the first quarter of 2014. Interestingly enough, the Chinese Central Bank has been even more aggressive in its QE than our very own Federal Reserve which is just an institution for wasteful credit expansion.
Through Bass’ research, it is really clear that potential deflationary forces are on China and the world’s horizons and we need to be prepared for such an event. China’s bank assets have grown to over 100% of its GDP in the last three years. These assets total 25 trillion which is almost three times the size of their 9 trillion dollar economy!
Much of the loans that were made were to construction companies that depend on a booming economy to be profitable. The same thing was seen in our economy in the housing bubble burst when construction companies took the hardest hits during the financial crises in 2008.
It is likely that we will see China attempt to devalue the renminbi to stimulate their exports. This would also help to side-step threats of deflation in their currency. The question is will it work or will the bubble burst, sending shrapnel across international borders and fuel global calamity?
Bass points out that the U.S. will in fact feel the blow from deflation Chinese deflation. This isn’t even counting the fact that the Fed is tapering already and likely to raise interest rates in the near future. This could bring adverse effects on the markets and unemployment.
A deflationary shock to the markets is a reason why people should have some cash on hand to be able to make purchases of assets when prices come down. This would not be a recommendation to sell your positions, but just to remind everyone that it is nice to have some powder left in the chamber for asset accumulation during a deflationary shock to the world’s economy.
Ultimately, I believe inflation and even hyperinflation is coming for the U.S. economy, but that does not mean we won’t see a contraction of the money supply as people liquidate in a rough time and prices come down, before the consequences of out of control government and debt take its toll in the opposite direction as runaway prices. This is why it’s best to be positioned correctly so you are set to thrive no matter what happens.
Chief Editor at CrushTheStreet.com