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Fleckenstein: All Roads Lead to Inflation

Folks believed that the wonders of technology automatically meant that tech stocks were great investments. They even thought that two small pieces of paper were more valuable than one larger piece of paper, as they believed that stock splits meant stocks should go up -- though I don't suppose they expected to pay more for a pizza that was cut into eight slices than just four. In short, it was all about confidence and, ultimately, near-arrogance on the part of those involved.

In a period when an Internet "incubator" (whatever the hell that is) like Internet Capital Group could be valued at over $40 billion -- more valuable at the time than, say, Boeing -- and sported a valuation of approximately 150% of all the world's gold companies combined, is it any wonder that no one thought they needed to own gold?

Paper reigned supreme, as people were bursting with confidence. At the peak, Cisco (CSCO) claimed a valuation of over $500 billion. I saved a description from February 2000 by an analyst who followed Cisco and thought that within 18 months, it would be valued at a trillion dollars, never mind that its revenues were on track to be about $25 billion or $30 billion. Here was a company doing, in essence, about one-quarter of 1% of GDP that was deemed soon to be worth 10% of GDP. Those are just a couple of examples of hundreds that I could pick to illuminate the overconfidence of the public at that time.

I believe that as much as the mania for stocks was an expression of confidence in paper, the metals are just the opposite. They are an expression of a lack of confidence. I believe that given the pendulum's extreme swing to the side of confidence, it is now destined to travel back quite a ways in the other direction.

We all know that the government will cheat us over time, via inflation. We just don't know at what rate. While lots of intelligent people believe that deflation is right around the corner, this is not my belief (nor has it ever been). I believe that people have come to confuse declining asset markets with "deflation." Deflation, to me, means that the value of the dollar appreciates against a basket of goods and services.

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