This week I finally declared "The Bear Market has Begun" on MarketWatch. If you are sitting 25% to 50% cash as I suggested repeatedly earlier this year, even with haircuts on the energy stocks we've accumulated, you are sitting in a good position to buy great companies at panic pricing in the not too distant future. As we accumulate, remember, it's not about catching the bottoms, it's about investing below the mean pricing we expect over a full cycle. 

Here are some thoughts about what is going on and what is likely to happen. Take a look at my report at Bluemound Asset Management as a preview.

Central Banks, Governments, Inflation, Volatility and a Shift to "Need" Assets

As we all know, there has been massive monetary intervention by central banks around the world expanding their balance sheets and increasing money supply. The impact of these interventions are not well understood by most people. Because of the newness of quantitative easing, I would say most people have a lot of skepticism about it. That is in large part why we've seen people hunkering down for the better part of a year now as they crossed the even point from the financial collapse of 2008.

Much of the money creation is a form of deferred inflation. Today, the money creation merely offsets deflationary pressures such as demographic trends, accumulated debt and temporarily cheap energy. Someday, that money has to come off of the central banks balance sheets. They'll have no choice but to print money if there isn't new tax revenue to pay the bill. I suspect there won't be more available tax revenue. Thus, expect outright money printing someday. Unwinding the quantitative easing will be very difficult at best and highly inflationary at worst - think a few years of 10-30% inflation (actual inflation, not what they tell us).

Ultimately, I am banking on inflation occurring. Currently however, we are seeing deflationary pressures play out as accumulated debt and demographic pressures hamper growth throughout much of the globe. I talked about this in an article titled "Global Growth Will Never be the Same Again."

Governments at some point will fully recognize that global growth is not going to be the same as before. They'll be faced with depression or stimulation. They will stimulate. What they will most likely do is borrow money, which will then be monetized with money printing, to rebuild a deteriorating infrastructure, in particular for water.

Some stupid elected officials will insist on tax cuts. That has worked one time when tax rates were much higher - Kennedy. It has never worked since. When Reagan and Bush Jr. did it, we ran up enormous debts and had little to show for it other than even greater wealth inequality. We'll see how it plays out in legislative branches, including the U.S. Congress. If we go for tax breaks, expect a collapse before inflation. That would be the one catastrophic scenario I see possible. 

Until governments decide to something constructive, expect market volatility as people have more fear of a 2008 repeat, than faith in the slow growth economy. This is psychological and emotional, but also reality. As investors we have to be aware. 

When inflation does come, expect to see resource based investments rally off of the current troughs. Due to climate change we know that agriculture is suffering. We see oil and gas cratering. Copper crushed. Gold and silver down. I can keep naming them. With capex falling and financing likely to become more difficult through banks, shortages will develop at the same time that monetary inflation and stimulation hit. In America, we will also see a housing boom soon as Millennials and immigrants put pressure on the still slow housing market. 

My short advice, buy great franchises or high growth in technology and health care if prices come down significantly, find ways to invest in building or real estate and load up on energy, agriculture and water soon.

Kirk