The Inflation Predictions Weren’t Just Wrong, Many of them Are Hurting People

Remember back when QE started and we saw charts of high powered money going vertical all over the place and everyone who didn’t understand modern banking said that the reserves would flood out into the economy causing high inflation or even hyperinflation?   And do you also remember how most of those same people also said that the only way you’d be able to protect yourself from this hyperinflation was by owning hard assets like gold or silver?   Well, the inflation never came.  The most recent reading of 1.7% pretty much proves that we’re much more Japan than we are Weimar (and yes, even independent gauges confirm the low inflation story).  And now the portfolio recommendations are falling apart as well….

It’s one thing to be wrong about the way banking works and the way inflation might spread.  But most of these people were explicitly recommending a substantial overweight in gold and silver as well.  And they’ve  been annihilated in recent years.  Gold is down 33% from its 2011 highs. And silver is down a staggering 60% since the time I started referring to it as a bubble.  These are massive moves and if you’ve been substantially overweight these metals in your portfolio then you’ve experienced substantial pain based on sheer misunderstandings by people who are posing as experts.

The thing that really drives me crazy about this is that so much of this has come from the ideologically driven groups who were really selling nothing more than fear and hatred of the Fed and the government.  Look, I know the government hasn’t done everything right and I am certainly no Federal Reserve apologist, but that doesn’t ever justify bad analysis and specific portfolio recommendations that are simply irresponsible.  And that’s all we’ve seen here.  People selling an ideology based more on politics than knowledge….


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Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  1. Well I still hate the Fed for creating bubbles all the time in gold, in stocks, in oil, in HY, in houses… And for pushing for unfair bailouts of the banks thus increasing moral hazard, corruption, crony capitalism and unfair wealth redistribution, deepening inequality. But I am not a hyperinflationist, rather a deflationist.

  2. Regarding gold and silver:
    – Gold I sold at $1750, as it went parabollic and close to its 1980 real price peak – a bit too early, but still ok
    – Silver went parabollic to $50 and I managed to sell at $49 two days later

    Now looking at Didier Sornette’s work, the S&P 500 looks quite bubbly.

    And as he points in his paper the credit bubble is the one that drives them all – debt/GDP rising is not “normal”. His models seem to predict a burst in that bubble (you can also call it FRL, abetted by fiat bubble) around 2017-2018. There will be an accelleration before the burst. So we can still get the “crack up boom” and a huge bust afterwards, although currently such developments are not visible. We live in interesting times indeed.

  3. I do not know if you have been negative gold since the start of its rise or from the peak. However it seems easy to criticise after the event or during a well needed pause in the rise.

    Printing unlimited amounts of money cannot continue forever and look what happens as the markets sense a stop is coming. We live in a global market and there is no anchor. I think the jury is still out on gold and this could be the greatest opportunity ever to buy gold shares when sentiment is universally negative.

  4. From when I started silver has gone from $12 to $20 and gold from $800 to $1300. It has been a wild ride, but it does not seem right to say we were wrong on gold and silver. Some like Peter Schiff were in much earlier at much lower prices.

    I talk about why the inflation predictions were wrong in my Hyperinflation FAQ. Search for “wrong” or “prediction”.

    I would be very happy if you could point out anything in my FAQ that shows I don’t understand how things really work.

  5. “The thing that really drives me crazy about this is that so much of this has come from the ideologically driven groups who were really selling nothing more than fear and hatred of the Fed and the government.”

    Don’t see your point… plus how do you call all those pundits who still advise poeple to buy stocks even though they are clearly overvalued?

    And talking about ideologically driven groups, who more than the FED and our politicians would fit that description?

    The gold bubble was not generated by ideologist or even gold bugs. Take a closer look at the chinese shadow leverage conduits in copper, silver and gold. it wasn’t Jo sixpack who pushed the price of gold to those levels, and he is for sure not selling at the moment.

  6. You shoud rewrite the title as follows:

    Most of Predictions Weren’t Just Wrong, Many of them Are Hurting People.

    There is now another much worst prediction around: that the US will be the new Saudi and people are believing that. When around 2017-2018 this so called miracale will reveal itself as a lost opportunity to keep at least some reserves at home, the consequences will be dramatic. Selling the future to serve the present interests of a few is the main problem of this dark age. We will regret leader like Ike forever.

  7. The Gold Bubble was caused by the negative real rates of the Bush years. Real rates are not as negative anymore, mainly because US inflation is going down.

    Of course, China has had negative real rates for a very long time, and Chinese shadow banking has been driving a lot of the metal price action.

  8. Cullen,

    I feel for you ; it must be depressing to spend so much time and energy trying to better educate people but then they just keep on repeating the same mistake.

  9. without first planting the seed that “inflation is coming”, the sell-side has a hard time moving product. without inflation, a portfolio long bonds and cash is ideal. and there’s much better money made selling products designed to ‘save’ a portfolio from the effects of inflation.

  10. My bars of physical are still the same as they were a year ago.

    You can’t have them.

    Maybe in a few years when the world has changed, you can have them then.

    PS! Compare gold to the S&P over the last 10, 15,or 20 years.

  11. You use words he won’t understand. He hates gold as he can’t charge fees on it, simple as that.

  12. InvestorX,

    Good for you to pick the top in Gold and Silver. You should run a hedge fund.

    Regarding Didier, does he distinguish between private and public sector “Debt”? If not, his model may not be very meaningful.

  13. Give it another 4 to 5 years, and inflation will be a pain the you know what. Right now, the QE is negating any deflation we might expect from a recession.

  14. A question for you. What is the point, if there is one for you, where gold would not be a “greatest opportunity”? Serious question, basically because I always seem to ready after every drop in PM that this may be a great opportunity, so exactly at what level would you say it wasn’t one.

  15. IMO, gold price is not necessarily a reflection of inflation, but rather an inverse sentiment of the US dollar. With so many problems around the world, particularly Europe, governments and citizens are selling their own currencies for dollars. This will eventually end, by the Fed’s own hand, since it will strive to devalue the USD, despite what happened the last two days. A strong USD is very bad for our exports, and a deflationary environment is very bad for tax collection and gov’t dept repayment, so it will be stopped. Gold will return as it always has. Especially after one or more “failure to deliver” scandals.

  16. Actually after listening to crap since 2008 I am ready to embrace the idea that “not being an economist” might be a benefit rather than an hindrance. Think little conceptual baggage to blind you.

  17. Precious metals are an investment like anything else. There are fanatics & haters like anything else. A lot of people made a lot of money in Gold/Silver; most were right for the wrong reasons, but that’s the game, and we don’t go on a vindetta against retail investors in equity after every cyclical ebb (c. 2000 & 08) like we have against PM investors throughout this secular cycle.

    Gold bugs are an extreme faction like momo equity traders. It’s an idealogical vindetta to say “the market was wrong when Gold was $1900,” then string-up investors by their heels and drag them around the city behind your chariot.

  18. I was screaming to the roof to buy bonds and the dollar beginning the end of 2010 and sell golda and silver. I was a smidge early in both.

    By comparison, gold and silver look awfully attractive today, at least in my opinion. I am buying silver, I’ve gradually increased my position over the past month or so.

  19. Inflation is in Emerging Markets. People borrowed in dollars and bought property, bonds, equities in emerging markets. So even though there was no growth or inflation in developed world, there was plenty of both in developing world, lifting the developed world’s stock market. If taper dries up funding for emerging markets, there may be great unwind and deflation.

    There might be no inflation because wealth distribution is so skewed. Only the wealthy benefited from QE. And all their money will hav eto go somehwere. Wealthy are not going to buy more dishwashers or paper towels. They’ll buy luxury items, precious stones, land, art-work and possibly gold. So that’s where inflation is going to be.

  20. I still like the philosophy of thinking of gold as insurance. Just buy monthly, dollar cost average if you will, only buy physical, sit back and one day you will be happy to have a portion of your assets in gold.

  21. I’ve been very clear in my writing about the role of commodities in a portfolio (it doesn’t exist). Gold is a minor exception due to its currency aspects, but should never be treated as a core holding. As a rule, I’d never recommend holding more than a 5% allocation in gold.

  22. Cullen-If you’ve read the comments down to this point and haven’t been tempted to slit your wrists, you are to be congratulated. I’ve got to leave this post before I lose my mind.

  23. Gold is not an investment, it’s an insurance and how much money to reserve to it depends on your wealth. If you are extremely rich, your investments are probably not very liquid so it’s better to have a larger insurance. If you are very rich, you don’t care about the value of gold, you’re followig the other investments knowing that if (or when) they collapse probably you will have enough gold to rent a small army. Invest in gold if you have a secular time view otherwise is just a rigged, paper trade like all the others. Gold was and is the money of the kings. Are you a king ?

  24. Gary, I don’t sell gold or investment vehicles to anyone. I am an independent consultant which is why I have the freedom to provide honest opinions….

  25. Cullen,

    You’re absolutely correct. I haven’t met a politician I’d trust for financial advice. Why accept it from an ideologue?

  26. While I still own silver that I bought in the 70s you may be right. June is usually a good month to buy silver, but when the major market vectors are pointing down be careful. I wonder if we will see a July ramp like last year?? (and then an August dump)

  27. Yeah, that script error is back and I don’t have time to deal with it today. So I had to scrap some stuff. I’ll have someone look at it.

  28. I agree with many of your toughts but regarding gold my position is really different. There should be no space on the typicall small portfolio; parking 5% in gold to ensure what ? It’s meaningless. But for a very large portfolio with a secular time view it’s totally different. I don’t have to tell to the very very rich that he has to have a lot of gold because he knows it. Gold is not an inflation hedge is a hyper inflation hedge, is a war hedge, is a famine hedge etc… events that are extremely rare but happen. We can debate for ever but remember that some very rich families are rich from centuries, they’ve lost their lands many times, their buildings too but they had a lot of gold, silver, diamonds… So we’re really saying different things. Do you know that just about 20% of gold is owned by central banks ? All the other is in private hands. Some rich families survived many nations, many wars, they are still here, they are still powerfull, they are plenty of gold and they don’t tell us how much and where it is. Are you a king Cullen ?

  29. script error: that’s too bad. What do you think about putting up another “Open Questions” post today? I’ve got a couple.

  30. Off-topic, but I thought you all might enjoy this quote from a Bloomberg article that I just read titled “Housing Seen Shrugging Off Loan Rate Rise as Banks Loosen”

    “If people believe house prices are going up, credit availability will evolve,” said Paul Willen, a senior economist at the Federal Reserve Bank of Boston. “There is too much money to be made lending to homebuyers. Lenders will find a way.”

    Lending and money creation really is that simple to understand.

  31. No, I’m not a king. I don’t think Soros ever was either, but he owned gold. Is that ok? I know hundreds of retail non-kings who’ve made money in gold too.

    If I owned $GLD at $50 and sold it at $170, what would you call that? Nobody really cares whether it’s an investment or trade or fairy dust; what matters is that you made money. The market is always right; even if you’re content being wrong for the right reason. Don’t hate the player, hate the game, guys. If your problem is the game, redirect your anger toward the market–whether or not specs should be allowed to trade commodities.

    I heard David Kelly (JPM) on CNBC this morning, and he scolded the market pullback, saying “it’s ridiculous for anybody to trade stocks in the short term due to things like a Fed press conference.” Who are you to tell people what their timeframe is? In fact, the market requires diversity of holding periods.

    I love when advisors look at any client’s portfolio and say, “your allocation should be XYZ” as if there’s a right answer. If you want to use past performance to justify future results, then gold belongs in every portfolio. I’m more tactical, so I don’t own gold because I see no psychological or technical reason to.

  32. Cullen,

    The sad thing is type of economic theory is not limited to PM fund managers or snake oil salesmen like Schiff. I was on the horn yesterday with 3 economists from Capital Group Companies (American Funds). One was assigned to European Markets, One to Asian, and one to US markets. Both the Asian and US markets economists said that QE didn’t cause inflation because banks didn’t lend reserves like expected, however, when they start lending all the “dry powder” will cause inflation (just a matter of time!). I just started cringing when I heard that. They also put up charts showing what treasury rates would be based on the p/e levels for the markets. This was historical treasury rates vs historical p/e’s and they came to the conclusion that rates should be around 3.5% – 4.5% without QE. They didn’t even realize that Fed policy changed significantly when they were allowed to set the overnight rate on excess reserves. Long story short, vertical money supply and monetarist theory is prevalent at some of the largest money managers in the US, these guys are advising their fixed income group. I should note, however, that the European economists knew what he was talking about. Broke out a sectoral balance chart for Europe. Talked to him briefly about a European Fiscal Union and he indicated that it would have to happen or the euro would inevitably fail…or at least sustainable long-term growth would never be feasible. My two cents on it.

  33. Be quiet man. You were not investing in gold, you were speculating or trading in gold. There is nothing bad, just different things, everything that can be traded and is legal is ok but investing is not trading. Ok ?

  34. Yes Mr. Schiff was and still is wrong, but also Mr. Wagner is wrong. Gold prices start increasing 10 years before QE so what the connection? Simply there is no connection. A lot of people are bamboozled by recency bias. Both gold buggers and anti gold buggers want to find some arguments for their thesis, they will always found more than one, and they are all wrong.

  35. The ad hominem again. If this were my site, I would have banned you some time ago. Not for disagreeing, but for being a prick about it.

  36. “Managers should never forget one of Abraham Lincoln’s favorite riddles: “How many legs does a dog have if you call his tail a leg?” The Answer: Four, because calling a tail a leg does not make it a leg.”
    — Warren Buffett

    Excluding any hedging, gold and silver are still up far more since 2000 than US stock markets.

    Profits and increased net worth is what investing is all about, and precious metals are still big winners. Attempting to redefine them as not investments when they’ve hugely outperformed doesn’t hunt. Same thing with most commodities.

  37. The historical record from 1974-76 and it’s comparison to now is clear.

    And interest rates *did* go up while gold went up from 1976-1980.

  38. Who cares about those labels? I think the term “investing” is overused, but it’s hard to shake off because it sounds so much more dignified than “trading” and more exciting than “saving”.

  39. I see your point now.
    but with all due respect, my previous statement still stands:
    “Talking about ideologically driven groups, who more than the FED and our politicians would fit that description?”
    I sincerely don’t know who is worse, simple minded nutjobs like Palin or sophisticated hypocrites like Krugmann?

  40. Most people won’t even have enough money to buy one ounce though. Doesn’t sound very practical.

  41. “And talking about ideologically driven groups, who more than the FED and our politicians would fit that description?”

    Let’s see… there’s Peter Schiff, Rick Santelli (who recently said that all those excess reserves are just being temporarily “penned in” “like in Jurassic Park” — but they’re certain to escape soon and cause terrible inflation! –of course he was literally ranting when he said this), Robert Murphy… what about Jim Rogers? Certainly Rick Perry (he threatened Bernanke with being “treated ugly” down in Texas if he “prints any more money”) — but then he’s still a politician, and Ron Paul. Rand too? Not sure. Mark Levin pitches over-priced gold w/ Beck for Goldline… certainly him, no? How about Alex Jones? David Stockman has suggested “buying gold and canned goods” but I haven’t heard him talk abut inflation. I’m just scratching the surface here, aren’t I? There’s GOT to be a lot of other examples…

    All the old time monetarists… Art Laffer, Allan Meltzer, the WSJ editorial page, … there must be plenty of ideologically driven “inflation hawks” .. Martin Feldstein? John Cochrane? … how about Mario Draghi? Angela Merkel? Romain Hatchuel, Larry Kudlow (I think Kudlow has recently “repented” however)? How about other Austrians like Lew Rockwell? Murray Rothbard?

  42. I care about the difference between “Investing and Trading”, a lot. For a start if you do the latter rather the former then you will be the benefactor of the system churn as I love to call it. That is you are taking much higher transaction costs funding the system and probably the tax man assuming you are good enough at it.

  43. This site is obviously an American one, but in the country I live and others like Brazil or India, inflation is becoming a problem (I mean in Brazil street protests were sparked simply by the increase in public transport fees). Does anyone here know what causes inflation in these other countries ?

  44. Well thanks for the compliment, but I do not get everything right
    Besides as HF manager nowadays you need a lot of good policy maker and other connections.

    Regarding debt: Sornettes models are on total debt but I am sure they would show the same with private debt only as the latter is about 2/3 of total. Besides govt debt acts as debt on the end if it is not QEd. So I do not see a major problem with Sornettes models in that regard

  45. Those of us “who don’t understand banking” remained convinced this will end ugly. I for one never claimed to know the timing, or if hyper inflation will arrive. Maybe it will simply be 12 or 18 percent inflation for 8 or 10 years, or maybe something else tragic will occur. But to suggest we can print 3 trillion dollars and have it not end badly, be it in one, 5 or 8 years, is naive to a fault. Every banana republic has tried it and failed. Our economy is strong enough to temporarily mask the effects, but they will arrive. The hubris of the fed and people like Alan Blinder who say when inflation begins they can raise rates and tamp it down is so silly as to not deserve a response. Throughout US economic history there are examples of inflation rising 10 percent or more over a year or two. And they think raising rates will stop it once it begins? Your voice may be independent, but it is also naive.

  46. from what you said, Japan would have had hyperinflation for years. They printed money like crazy. Did they have hyperinflation?

  47. Hi Michael,

    I could be naive. But I think I also understand the dynamics of QE pretty well. Why would it be inflationary for the private sector to obtain cash in exchange for bonds? That’s all QE is. The Fed prints a deposit into your account and takes your tbond out of the private sector. The Fed doesn’t go spend the tbond or buy things at WalMart. That bond is outside the pvt sector and unused. It doesn’t exist for all practical purposes. So all that’s been done here via QE is an asset swap.

    Now, the deficit has expanded the supply of outstanding tbonds (which you could call money printing I guess if you wanted to). But that’s barely offset the amount of deleveraging that’s been done over the last 5 years. So why should we expect this to all result in higher inflation?

  48. Cullen,
    Thanks. Pragcap has opened my eyes. I came in touch with pragcap in early 2011 It has helped me understand modern banking and taking sound investment decisions.


  49. Twenty five ounces of gold could buy you a Model T 100 years ago; today the same 25 ounces of gold can buy you a new car.

    An ounce of gold could buy 700 cups of coffee 100 years ago; today the same ounce can buy you 700 cups of coffee.

  50. Reprising this from my SeekingAlpha thoughts this morning:
    ‘Channeling my inner Lord Denethor this morning: “Fly! Flee! Run for your lives! Save yourselves!!!!” ‘