In a fascinating work on long-run economic cycles, J. Anthony Boeckh’s book The Great Reflation offers up some poignant research on the U.S. economy and its cycles.
The Great Reflation is a non-political, historical breakdown of inflation, monetary and fiscal policies, interest rates, and long-wave economic theory. It was completed in 2010 and made several predictions on the U.S. economy that have turned out to be correct so far.
Boeckh, former publisher of the Bank Credit Analyst, delves into past financial manias, asset inflation bubbles, asset allocation for the aftermath, the U.S. dollar decline, commodities, and the monetary future of the stock market and the U.S. economy.
Here is a summation of Boeckh’s observations:
1. The global financial system will always remain flawed and subject to price inflation and bubbles, so long as it is based on fiat paper money.
2. Before 1914, most Western countries had a monetary regime that legally restricted central bank money creation based on its holdings of gold.
3. Average interest rates fell throughout the 100 years leading up to 1914.
4. In the absence of a financial system based on discipline and restraint, all anchorless fiat money systems (especially the U.S. economy) are destined to suffer inflation and instability.
5. Investors will be playing cat-and-mouse with the Federal Reserve for years to come—a problem caused by excessive private and public debt.
6. Deleveraging of the private sector bodes well for the transition process to the next long-wave cycle (2015+).
7. If the U.S. economy can’t help reduce the debt-to-gross domestic product (GDP) ratio in a timely manner, investors will face a public-sector debt supercycle larger than the post-1982 private-sector supercycle.
8. In the short term, deficits and extreme monetary expansion help the private sector repair balance sheets, but they cannot raise the standard of living for the average person.
9. The real total return of the S&P 500, deflated for inflation, is remarkably consistent over a long period of time.
10. Tactical asset allocation is the key to wealth creation and capital preservation.
11. In a world of economic fragility, investors want stability in the U.S. dollar, but the long-term outlook is bearish.
12. Gold is a crowded trade, but it’s useful as an insurance/inflation hedge in portfolios. Gold is an emotional purchase. Financial/investment demand for gold differs greatly from consumption.
13. Long-term returns from commodities as an asset class are unreliable and they trade in manias.
14. Historically, rising fiscal burdens hasten the demise of empires. The U.S. economy can chart a positive new path, but only with the removal of the political stalemate of vested interests.
15. There will likely not be any effective reform of the global monetary system anytime soon. Greater price inflation is coming.
16. The stock market has proven it does well following long-wave troughs after major financial crises.
17. The long run in this investment world no longer exists. Wealth preservation and portfolio safety are critical.
18. The music has started playing again, but there aren’t enough chairs for when it stops.
The Great Reflation is a very thoughtful historical look at the long-run economic cycles experienced by the U.S. economy. (See “Equity Flux: The Stock Market’s Latest Problem.”)
The U.S. economy has been consistently swept away by asset bubbles and financial crises, and Boeckh clearly demonstrates how monetary policy so powerfully influences cycles with changes in interest rates and price inflation.
Looking at the data and tables presented, the inflation-adjusted long-term uptrend in the stock market (since 1929, including dividends) averages just under seven percent annually. This is littered with long periods of extreme undervaluation and overvaluation.
Boeckh’s best advice is to employ “tactical stock market reallocation” to continually adjust your exposure to equities as monetary policy perpetually changes the inflation/deflation cycles experienced by the U.S. economy.