No Exit – The Coming Wealth Trap

Tuesday, October 13, 2009

Executive Summary:

• A large investment theme and strategy is discussed.
• A hyper-concentration of income gains towards the top over the past thirty years is shaping our story.
• A rapid and large shift in investment preferences could entirely reshape the investment landscape with startling speed.
• Those early to the game win; those late will find themselves stuck in a wealth trap. 

This week’s report was supposed to be an extension of last week’s, but I need to take a little detour here.  I received quite a few responses to The Sound of One Hand Clapping, and it occurred to me that there is a very important bit of thinking that needs to accompany that article.

In this report, I will tell you exactly why I am convinced that the next round of destabilizing price adjustments – adjustments that will completely reshape the value of your income and assets – will not follow any prior historical model.  Fortunately, with a bit of analysis, I think we can predict what sorts of changes will happen well in advance and get ourselves properly positioned.

Here is a representative question, asked by enrolled member Eric, who raises an important point:

I agree with your analysis in one hand clapping.  Can you address how inflation will take hold if the new money is only in banks’ hands?  I can see the banks piling into various assets creating bubbles, but I don’t see where the common man is going to get access to this extra created money unless it is sent directly from the government in the form of stimulus checks.  Otherwise, I cannot see runaway inflation occurring.  Thanks, Eric

Great question.  How can inflation occur if people can’t afford to pay for things?  Given that both earning and borrowing money seem to be depressed avenues for most people, where will the new buying pressure come from that will stoke inflation?

This is a good question, and it leads me to another insight that I’ve been nursing for a while.  I realize I may not have shared it yet, at least not directly, and that certainly needs fixing.

When we talk about conventional inflation, what most people are referring to is a period of generally rising prices for the necessities of life, along with a parallel, if not usually slightly retarded, rise in wages (or income).