Last week, the world’s financial elite descended on Las Vegas for the annual SALT Conference…
Known as the “Super Bowl of hedge funds”, the SALT Conference was created by global investment firm SkyBridge Capital after the financial crisis to give a forum for hedge fund titans, celebrities, and political leaders to debate economic trends, geo-political events, and alternative investment opportunities.
In other words, it allows really rich people to network and gladhand with one other. Even the promotional materials play up the “insider perks”:
It’s the network. There is no greater potential to make incredibly important contacts. The sense of power and prestige that belongs at this conference is tangible, you can feel it.
And what better place to get a feel for global finance than the world’s gambling capital: Las Vegas. The irony of holding a global finance conference amongst the roulette tables of the faux-Italian palace casino the Bellagio isn’t lost on me…
In any case, it’s basically a fancy cocktail party for the super-rich and powerful, where the elite can spell out their plans to further any agenda they may have. And even the super-rich enjoy their parties with a degree of celebrity gravitas, so the forum had keynote speakers like Godfather director Francis Ford Coppola, House of Card’s Kevin Spacey, and NBA Hall of Famer Magic Johnson…
Now, I’m not terribly concerned about what Magic Johnson has to say about global economics. I was much more interested in the heavy hitters who are actually qualified to speak about such things, like super-shorter Jim Chanos and hedge fund giant David Tepper.
But the panel I was most interested in was an inflation face-off between “Dr. Doom” Noriel Roubini and Euro Pacific Capital’s Peter Schiff. And it didn’t disappoint; in fact, it almost ended in fisticuffs…
Any conversation on inflation can get heated pretty quickly. Some people think we need inflation to help economic growth, while others believe that it simply steals purchasing power from the consumer, retarding healthy, natural economic growth.
So how did these two merchants of doom differ on their inflation analysis?
They couldn’t have been further apart…
“I thought I was ‘Dr. Doom’ until I met Peter,” Roubini said at the beginning of the panel.
“Compared to him, I’m ‘Dr. Boom.’ He has been predicting a collapse of the dollar, gold going through the roof and inflation rising sharply. I just see the opposite. I see the U.S. economy—which, in spite of QE1, QE2, QE3—there’s going to be an economic recovery.”
In fact, Roubini is surprisingly upbeat about the market in general…
- He thinks the dollar will get stronger
- He thinks the U.S. economy has improved for the long run
- He believes we need more inflation to grow the economy
Roubini claimed that deflation just causes consumers to put off purchasing goods until the prices go down. On this point, Schiff called “bullshit” and things got a bit less congenial…
The Battle of the Bears
“I’d like you to give me an example of one product, that you wanted, that you would defer buying for a year because it would be one percent cheaper,” Schiff snapped.
That seemed to shut him up…
Personally, I have never even considered putting off a purchase for a 1% price difference… and I’m a pretty frugal shopper.
It all goes back to consumer psychology. When consumers — Americans in particular — want something, they tend to buy it, whether or not they can actually afford it. The housing market before the financial crisis proved this to a horrifying degree.
Just this month, consumer spending had its biggest gain in over four years. But what exactly has improved? Unemployment is still unacceptably high, wages are stagnating, and savings accounts are almost flat. So why are more consumers going out and buying things?
“Let me give you the facts,” Schiff explained. “Americans use credit cards. They buy things, and they pay 18 percent interest. Why don’t they wait a year, save the money and save the 18 percent? Because they want it now.”
“There is no period in history where consumers have not bought things because they thought the prices would be cheaper. We know the price is going to be cheaper! We all own cellphones. We know if we wait a while, we can get the phone cheaper. But we don’t wait because we want it now!”
So consumers are not putting off purchases because of deflation. Otherwise these consumer spending numbers should be receding, not increasing. The facts bear this out, as Americans currently have an average credit card balance of $7,115. But this is the overall average — including households with no debt at all. When we take a look at American households that are already in debt, that average doubles to $15,252.
And while consumer spending has been inching up, the average credit card debt hasn’t moved in that time frame.
In fact, credit card debt hasn’t really budged since the financial crisis. In January 2009, right in the aftermath of the collapse, that debt average was around $19,000. So how did that debt fall by 20%? Did Americans quickly learn their lesson about saving and spending and decide they would be fools to take on a ton of debt?
Nope, they certainly did not…
But the only reason that the average debt dropped so much was that big banks wrote of tons of debt that they knew damn well they could never collect; the main area being toxic mortgages they had no business signing off on in the first place. Once you wipe those debts off the books, it certainly makes things look a hell of a lot rosier…
Unfortunately, the tactic is so effective that the central banks are trying to do the same thing on a much larger scale…
“The central banks are creating this propaganda because they want inflation; they want to wipe out debt. Inflation is good for debtors, because it allows them to default on their debts. You have all these overly indebted governments, they need inflation,” Schiff told the panel. “They need inflation to prop up asset prices. But the consumer doesn’t need inflation, the economy doesn’t need inflation…what we need is falling prices, which is what grows the economy, that’s what leads to higher living standards.”
While the Feds were keeping interest rates near zero for banks, consumers have not had that luxury.
So more inflation would force actual consumers to pay more year after year, while wages are stagnating and retirement slips further and further away. This will simply build up more debt, strengthening Schiff’s prediction that we’re increasingly becoming debt slaves. He argues that consumers need more purchasing power in order to have the confidence to start spending again. Instead of taking on debt for something like a cell phone, they’ll be able to buy it outright and save accordingly.
But we expect Schiff to be a grumpy old bear. That’s what he does, and we shouldn’t be expecting anything less.
So it wasn’t his Cassandra-like attitude that perked my ears. In fact, most of the headlines coming out of the conference struck a bearish tone. Most shockingly was traditionally bullish hedge fund manager David Tepper, who had some pretty dark predictions of his own…
“I am nervous. I think it’s nervous time,” Tepper told the conference attendees. “It’s getting dangerous. I’m not saying go short. Just don’t go too friggin’ long.”
This is essentially what we’ve been saying for over a year now. The market has rode to artficially inflated highs based on the glut of Fed money being injected into the system. It was fun while it lasted, and we all made a great deal of money.
But trees don’t grow to the sky; when they get too tall, someone is going to come and chop them down. It’s best that you take your lumber before you’re left with a worthless trunk.
Jim Chanos echoed some of the same concerns in his address.
“There seems to be a general unease that with central bank policy, the only thing it is impacting are financial markets. It’s not transmitting to the economy, and I think that is a real, real growing concern. You sort of get a growing sense that this grand experiment may be quite inconclusive when it comes to monetary policy and financial markets.”
Inconclusive would be a blessing. What Schiff is predicting — rapid inflation and a market crash — is really what you should be preparing for.
But if you’ve been reading Outsider Club, you didn’t need a thousand highball-swilling millionaires in a casino to tell you that…
