THE INFLATION TIPPING POINT

By John Butler

Financial markets have ushered in 2012 with a collective sigh of relief. 2011, the year of the never-ending crises, is over. Although the crises continue, equity markets have risen moderately month-to-date. There is clearly hope that things in 2012 will improve. While hope may not be a strategy, past episodes of misplaced hope are instructive. With specific reference to the early 1930s, as the US Great Depresson unfolded, the first quarter was always positive for the stock market. Yet these gains, and more, were given up in the subsequent quarter, and the negative trend continued through the remainder of the year. Thinking specifically about 2012, we can see a number of reasons for caution. However, investors must keep in mind that central banks around the world stand ready to print money in response to deflationary pressures, something missing in the early 1930s. As such, while cash continues to provide liquidity, it fails to provide a reliable store of value. [Read more…]