‘As for financial crises…well, haha, it would perhaps be presumptuous to say that a financial crisis will never occur again, but with our current knowledge and tools for prudential monetary policy, certainly we can say that a financial crisis will not occur in our lifetimes.’
Former Fed chief, now Secretary
of the Treasury, Janet Yellen
Janet Yellen was still alive in the first half of 2022. And there it was. Only months after saying such a dumb thing…came the proof of how idiotic it was.
The first six months of the year were almost unbelievably bad. Stocks and bonds went down. Cryptos vanished. A traditional, balanced portfolio — 60% stocks, 40% bonds — had never had such a bad time of it. And a recession began.
Ms Yellen had no idea what was happening. But we wanted to know. So we put two simple questions to our most experienced and most thoughtful analysts:
‘What do you think is going on?’
‘What are you doing with your personal money?’
Unsurprisingly, the answers were as varied as the experts themselves. Some said, ‘hold em’. Some said ‘fold ‘em’. Some said, ‘walk away’. And some said ‘run’.
A few readers asked for our answers. At the risk of repeating much of what we discuss every day, herewith, we give them:
What do we think is going on?
We believe we are in the early stages of an about face in the Primary trend. From bull to bear…low inflation to high inflation…from low interest rates to high ones…from order to disorder…and from bad to worse.
Since the new money was introduced in 1971, US markets have been more responsive to the Fed’s liquidity than to real changes in the economy. GDP has risen about 20 times since then. But the stock market rose twice as much. The more ‘liquidity’ (money printing and ultra-low interest rates) coming from the Fed, the faster stocks and bonds went up. Marty Zweig, an early investment newsletter guru who lived in the most expensive apartment in the US, on the top of The Pierre on 5th Avenue in New York, understood what was going on long before we did. ‘Don’t fight the Fed’, was his sage advice.
Had you followed it, you could’ve simply bought the Dow and rode it up from 900 in 1982 to 36,000 in 2021. The Fed was paying the band. Everybody was dancing.
The climax of this hoedown came in 2020–21, when the Fed turned up the volume, with an additional US$4 trillion in brand-new money…used to finance the federal government’s stimmies, PPP loans, and unemployment boosters. The combined effect of COVID shutdowns, supply chain disruptions, money printing, and deficits was to push bonds to their peak in the summer of 2020 and stocks to their tippy top at the end of the following year.
Then, with consumer prices butting up against double digits…the Fed was forced to change course. That is the big difference between this and every other downturn since 1982. Now, if you don’t want to fight the Fed, you’ve got to turn around. Because the Fed is draining liquidity out of the market. It is deflating, not inflating. Very slowly. Hesitantly. But so far, steadily.
Until 2020, bonds had been going up for 40 years as the Fed consistently cut interest rates. Now, the Fed is raising interest rates. Stocks and bonds are going down. And if this is the Primary trend we think it is it will continue for many years.
So what to do now? More precisely, what are we doing?
First, we don’t have unlimited confidence in our own guesswork, so we keep about a third of our family wealth in Chris Mayer’s Woodlock House Capital Fund. Chris is smarter than we are. He buys quality stocks and sticks with them. Good companies produce real wealth. Over the long, long run, owning them will pay off.
Second, we have another third in cash, gold, and energy. In the short run…which could be 10–20 years…there are problems to be reckoned with. How it will all shake out, we don’t know. So we keep some physical gold, some gold stocks, and some coins. We don’t regard gold as an ‘investment’. It’s simply a way to hold wealth for future generations. Perhaps, someday, gold will be upstaged by some form of cryptocurrency. In the meantime, we’ll stick with the yellow metal.
Energy, on the other hand, is an investment. We expect fossil fuel providers to do well as governments try to put them out of business.
Third, we have the rest of our money in quirky investments that we’re almost too embarrassed to mention. Property, for example. Business start-ups. A marble company in Latin America. A book publisher in England. A little of this…a little of that.
In one portfolio, we choose the worst performing stock markets in the world…and buy them. We know nothing about them. We are simply relying on ‘regression to the mean’ to bring them back to normal.
Has it worked? Yes…and no. Russia, for example, was one of the worst stock markets in 2021. So we bought it for 2022. Disaster! There are always surprises…most of them, unwelcome.
We are also buying farmland in South America. This is a fluky situation, too, more of an adventure than a real investment.
Cropland varies greatly in price and productivity. In this (relatively poor) region of France, it goes for about US$5,000 an acre. In Midwest US, it’s more like US$10,000 an acre. In Ireland, it can go for US$20,000 an acre. But in Bolivia, a large tract of cultivable land will sell for US$1,200/acre. Given likely assumptions about crop prices, fuel, fertiliser, labour, etc., we can project a 10% return on investment.
The odds of an ignorant foreigner, like us, actually making this work are very slim. And we certainly wouldn’t advise anyone else to try it. But we’ve been raising cattle in Argentina (at a loss!) for more than 15 years…and every year we learn a little more…and every year we think we’ve finally got it figured out.
So we’re not going to stop now! Not when we are getting so close.
For The Daily Reckoning Australia