Hirst: The Best Thing For Asset Prices Is A Deep Recession

Your Real Vision Daily Briefing for August 20, 2020

Ash Bennington and Roger Hirst discuss ongoing global monetary and fiscal policy support and how central banks may need to adjust their course.

  • We may be one inflationary spike away from a deflationary bust because proper inflation will destroy people’s ability to pay off their debt and cause more economic wreckage going forward.
  • Fundamentals no longer drive equities, flows drive equities; the absence of growth is being supplemented by central bank liquidity and being able to borrow at zero.
  • The big risk of inflation targeting is aiming for reflation and ending up with stagflation

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The pockets of inflation we’re seeing now are likely the byproduct of pent-up demand combined with supply bottlenecks, but true inflation and the potential for stagflation may be ahead within the next 12 months, Roger Hirst told Ash Bennington during today’s Real Vision Daily Briefing.

Hirst said that getting the right type of inflation is critical and the right type is reflation, where real wages rise and debt levels stay static to help inflate people’s debts away.

However, the danger of the Fed’s targeting is getting proper inflation, which will destroy people’s ability to pay off their debts and cause more economic damage going forward. If real wages remain relatively static while inflation picks up, Hirst said it will exaggerate wealth inequities and cause stagflation.

Hirst and Bennington discussed how it is difficult for a central bank to precisely target and the fact that there can be side effects of their policies that may prove problematic. Hirst pointed out that central banks can’t predict the future and can’t predict inflation 12 months forward, so they are essentially playing a game of kick the can and hope.

He said that if the Fed keeps yields low across the curve, and 10-year growth expectations near zero, there’s no reason for anyone to invest in productivity; they’d continue to invest in share buybacks and into non-productive asset prices and future growth will remain low, the future velocity of money will fall, future debt will worsen, and and our children will pay for it.

Hirst also said that if you looked at the market right here right now, you’d come to the conclusion that the best thing for asset prices is a deep recession. From the looks of it, asset prices are saying they don’t want growth; they want a really poor economy, he said.

But if interest rates are at zero – which basically says there’s no growth – Hirst asked why is it that the equity market, which prices growth, is soaring to record highs? He said it is because future growth is being supplemented by central bank liquidity and being able to borrow at zero. Equities are going up not because of growth but because of flow, he said. Fundamentals no longer drive equities; flows drive them.

Hirst said the big risk in all of this is not getting reflation and instead getting true inflation, which will hurt the man on the street.

“Inflation is one thing that will cause this market to roll over but they will let it run hot,” he said. “There has to be inflation but stagflation will be the real killer.”