Over the last several years, I have written a multitude of articles about my conviction that the global economy is destined to collapse on a scale humanity has never experienced before. But contrary to some insinuations, my primary objective with these articles is not to create fear and panic. My goal has always been to disseminate these theories to an audience capable of returning debate and criticism. If I am correct, I would hope to prepare at least some small contingency of readers; as a species, I am convinced human beings must find a new way of doing things — because the consequences of the old ways are descending upon us like a maelstrom. So I ask: when the dollar collapses, where will you put your money?
I must also confess that my writing is also driven by the possibility that I might be wrong about this economic malaise — that is to say, my Keynesian detractors have it right: printing and easing can go on forever. And while that seems preposterous even to consider, if such is the case and I am wrong… well, I would just like to know it as soon as possible.
I have made it clear I believe the stock market is going to fall dramatically in the near future — at least in real terms. As usual, my cautious outlook has prompted countless emails from readers asking what they should be doing with their money. They want to prepare for the impending firestorm of rising prices — deriving from the inflationary printing, and unprecedented credit-easing by governments across the globe.
It’s important to note that, although I refer to “the” collapse of the dollar and Treasuries, these events are not going to happen in one minute, or one day, or even one week. Indeed, since I started writing about this scenario, governments have done much to try to reverse the course of this trend. And yet the cracks have widened. So I do not believe there will be any particular event that will trigger the collapse; I believe it will accelerate with time — ultimately exploding in a quick, catastrophic climax.
I am forever an analyst, but I am no longer an adviser or manager, and I want to encourage anyone investing money to do a prodigious amount of research before committing funds to anything – especially in this environment. Having said that, the best and safest place to start discussing my own opinions about capital allocation is to reiterate what you shouldn’t be investing in: stocks, Treasuries, and dollars.
The stock market may trade sideways or even go higher from here. But eventually, the consequences of the unparalleled governmental printing spree and credit-easing of the last few years will hit the economy. At that point, earnings and dividends growth — which are the main drivers of stocks – will never be able to keep pace with the inevitable and substantial inflationary price increases in the general economy.
This highlights what I consider to be the most dangerous part of the current environment: your portfolio will appear to be going higher, but in real terms, you will be losing money – on a scale greater than that of the 1929 to 1932 collapse. The only thing I can imagine worse than watching the market fall the 90% or so (it did a little more than 80 years ago) is watching a stock market rise in a period in which it is vastly underperforming inflationary price explosions. The drop from 1929 to 1932 may have been painful, but at least it was an honest market.
So where do you put your money?
Shorting the Dollar Index?
The dollar index is merely a gauge of the dollar against a handful of the rest of the world’s major currencies – leading to a general misperception that I call “currency relativity.” Unfortunately, every other central bank on earth is employing the same quantitative easing principles as the U.S., and so their currencies are equally doomed. If you short the dollar, you are merely acting on a belief that the dollar is going to be weak relative to other major currencies. And that probably isn’t going to be the case; they’re all trapped in the same burning house.
On a related note, you may want to pay attention to the fact that Treasuries and gold seem to be decoupling from their heretofore nearly direct inverse relationship with equities. What does this mean? Mainly, in my eyes, it decries the old notion that — just because the stock market goes down — people will run to Treasuries as a safe haven. Apparently the so-called “risk-free” rate of return isn’t so risk-free anymore.
Likewise it would seem that — just because the stock market is going up — people aren’t necessarily dumping gold. And this lends credence to my theory that investors not only expect inflationary pressures to drive stocks higher in nominal terms (but not real terms). It also reinforces my belief that, in order to really survive rising prices, gold is one of the best places to be.
We hit the bottom, and then prices rebounded. But as with the stock market, what does it mean? Yes, housing prices have come back, but will those prices outperform inflationary pressure in the entire economy? Probably not.
I believe the housing market is as phony today as it ever was; the Fed has kept interest rates excessively low for years, and a large justification for that policy has been to reignite the housing market. It has worked. But now what? What is the exit strategy? My knowledge has its limits, but I will say with a great degree of confidence that interest rates cannot stay low forever. What happens to the housing market when interest rates begin to rise? I can’t imagine real estate is a good place to be invested right now.
There is one exception, however, that makes fantastic sense in an inflationary environment: owning a personal residence with a relatively low fixed-rate mortgage is a great position to be in – assuming you have a job, and you are able to keep it. First, there’s the tax deduction on the mortgage interest and the property taxes. But more importantly, a fixed-rate is just that: fixed. Even as all other prices and rates move higher, the mortgage payment doesn’t – making it a progressively smaller part of a household budget.
To illustrate the way fixed-rate mortgages work with inflationary trends, think about the house your parents or grandparents bought for $20,000 many decades ago. Their monthly payment remained fixed at around $200 per month for thirty years, and yet their wages undoubtedly increased over the years. At the beginning, $200 was likely a hefty part of their budget, but toward the end, it was probably insignificant.
Now imagine how much that effect would be amplified by a hyper-inflationary economy – which, unfortunately, our government has all but guaranteed in the coming years. Remember, we all have to live somewhere. If part of your cost of domicile is going toward equity, and the interest you’re paying is fixed — in an environment of rising rates and prices — it doesn’t get much better than that! The alternative is to rent — and leases escalate with inflationary surges.
In general, however, the reason I believe housing won’t outperform inflation is that credit is all but gone; no matter what any of the pundits say on the financial news networks, the stark reality is that a lot of people can’t get loans. It doesn’t take much to recognize that, if the consumer can’t borrow, then he can’t buy a house. And if that condition has become the status quo – and I believe it has – then what will drive the housing market?
People call me a gold bug. I’m going on the record here — I am not a gold bug. I am, however, a fan of commodities right now — and gold is hovering near the top of my list. Gold has almost no industrial value, but I follow it anyway, because it is a nearly perfect metric for the anticipation of future inflationary price-increases.
Gold has a psychological component it shares with almost no other thing on earth — it literally packs eons of historical consistency and value; people have always been passionate about gold, and it has unfailingly been the ultimate measure of economic and financial stability. As such, when people are frightened, they go to the one thing that embodies that stability in order to protect wealth. This means gold will react to inflation faster and more accurately than just about anything else.
Further, gold’s overall popularity means it is more liquid than other scarce metals and stones. All of these variables come together to convince me that, when the bottom falls out of the dollar and Treasuries, not only will gold keep up with prices, but it will outperform as people flock to its empirical safety.
During a panic, everything tends to overshoot intrinsic value – to the upside, and to the downside. Gold’s universal nature will undoubtedly put it at the head of the pack, all but guaranteeing an above-average rate of return – at least until everything stabilizes. Unfortunately, however, I will remind you that I think we are sitting on the cusp of a colossal crisis — the likes of which we have never seen. At this point, economic stabilization seems like little more than a distant dream.
For many of the same reasons I like gold, I also like oil and agriculture. I’ll say it again: getting a loan these days is hard, and farmers and oil-producers are no exceptions to this troubling rule. It’s true that a slow economy means reduced demand for commodities. But demand for food and oil will not simply cease; 2 billion Chinese and Indians may not be buying at the Gap this season, but they aren’t about to stop driving and eating.
Unlike gold — oil and agriculture do have practical aspects to their demand that ensure more than a mere “safe store of wealth.” As currencies falter, prices of oil and agriculture will keep pace; the fact that producers in these industries can’t borrow should limit supply in a world in which demand probably won’t fall all that significantly – relative to everything else. All this will almost certainly equate to better-than-average performance.
I should also mention that governments no longer include food and energy in measures of inflation. They seem like absurd exclusions — after all, energy and food are arguably the two biggest components of our global economy. But I understand why politicians must keep food and energy out: the illusion would fail if official inflation reports accurately reflected increases in food and energy prices.
Of course anyone who regularly visits a grocery store can clearly see that the government’s proclamations about low inflation are clearly false. And this, more than anything else, demonstrates how well commodities are doing in a stagnant global economy.
Shorting long-term Treasuries at this moment may be my favorite investment of all time. Many people disagree with me; they believe Treasuries will remain strong forever. But try not to forget that innumerable people were ridiculed for predicting the failures of the Roman, British, and Soviet empires. And yet those empires did decline. The U.S. has committed itself to tens of trillions of dollars — just to battle this financial crisis alone. The numbers are staggering.
Despite what you may or may not believe about my prediction, shorting long-end Treasuries continues to be a no-lose proposition. If by some miracle, the Fed manages to pull some proverbial rabbit out of its hat and fix this incomprehensible mess, then part of its solution, ipso facto, will necessarily be raising rates to maintain the integrity of the dollar.
On the other hand, if my prediction is correct and the dollar fails, Treasuries will follow all the way down. Yields have been hovering near all-time lows for years. There’s no place to go but up.
Bitcoin is risky, and relatively new. Keeping it secure from hackers and thieves is challenging for now. But that is changing quickly. The technology is disruptive, global and eventually it will be completely anonymous. There will only 21 million ever created, so it isn’t hard to see why the price has escalated several thousand percent since 2009 — as demand has outpaced supply. I don’t expect that to change.
Bear in mind, the new modus operandi of most governments is confiscation. We are at an unprecedented juncture in history in which the storage of wealth may not be what you can get your hands on, but rather what you can keep once you have it. Further, the new metric for wealth preservation might very well be measured by how quickly and stealthily a person can move his assets across the globe. With that in mind, digital currencies have created the perfect solution.
If you’re technologically savvy, and you have some money to set aside in cash, Bitcoin might just be the vehicle for you.