Scholes Sees Stagflation Coming, Suggests Safety To Be Found In Assets Like Gold and Silver

"But never a truth has been destroyed;
They may curse it, and call it crime;
Pervert and betray, or slander and slay
Its teachers for a time.
But the sunshine aye shall light the sky,
As round and round we run;
And the truth shall ever come uppermost,
And justice shall be done."

Charles Mackay

A banquet of consequence is coming, but I am afraid that justice is taking a more circuitous route, thanks in large part to the credibility trap. And the masters of the feast never seem to be around to pick up the check for their revels.

Myron Scholes, of the Black-Scholes Risk Pricing Model, said in an interview from the Milken Conference this morning that stagflation is the most likely outcome for the economy.

Stagflation! And what did Myron suggest that people invest in to protect themselves? Gold and silver, among other hard assets.  He thinks that stocks are due for a decline.

Stagflation is coming, so buy gold and silver to protect at least some of your wealth. Where have we heard that forecast before?

I think a forward thinking person, looking at the nature of the Fed's serial policy errors and the economic abuses that the monied interests have been inflicting on the real economy for quite some time, could have seen this outcome coming some years ago.

And some did.   But it is nice to see the models catching up.  The only surprise is that it has gone on as long as it has.  Never underestimate the venality of unscrupulous greed, and the power of thinking in herds.

And this comes a day after Ken Rogoff has suggested that the emerging markets invest their surpluses in the safety of gold! Which of course any but the most casual observer knows very well that they have been doing, and in size, for some time.

So there we have two major economic thinkers coming out for gold and silver as safe havens this week. One might be excused if they wonder if these are not statements being made ahead of some event to protect a sage's derrière.

There is one major hurdle, however, to executing that strategy to protect yourself by buying precious metals, as depicted in a single chart of a key market factor below.

Myron Scholes Takes Another Hedge Fund to the Brink

Bloomberg
Scholes's Platinum Grove Fund Halts Withdrawals After Losses
By Saijel Kishan

Nov. 6 (Bloomberg) -- Platinum Grove Asset Management LP, the hedge-fund firm co-founded by Nobel laureate Myron Scholes, temporarily stopped investor withdrawals from its biggest fund after it lost 29 percent in the first half of October.

The decline left Platinum Grove Contingent Master fund with a 38 percent loss this year through Oct. 15, according to investors. Funds employing a similar approach of exploiting differences in the value of related securities fell 14 percent last month and 30 percent this year, according to data compiled by Chicago-based Hedge Fund Research Inc.

``The suspension is necessary given current market conditions,'' Rye Brook, New York-based Platinum Grove said in an e-mailed statement today. ``Platinum Grove will use this period to consult with its investors and counterparties, determine their future intentions and manage the assets of the fund accordingly.''

Hedge funds are reeling from the worst financial crisis since the Great Depression, losing an average of 20 percent this year, according to Hedge Fund Research. A surge of investor redemptions forced firms such as Blue Mountain Capital Management LLC and Deephaven Capital Management LLC to freeze funds to stem the tide of withdrawals.

Scholes, 67, winner of the 1997 Nobel Prize in economics, was a founding partner in Long-Term Capital Management LP, the hedge fund that lost $4 billion a decade ago after a debt default by Russia. He started Platinum Grove in 1999 with Chi-fu Huang, Ayman Hindy, Tong-sheng Sun, and Lawrence Ng, who had all worked at Long-Term Capital...