It will come as no surprise to students of financial history that the global monetary system is gradually spinning out of control. Yet most traditional asset classes – including stock and bond markets – remain unnaturally buoyant. This is especially confusing given that the COVID pandemic of 2020 has decimated the fragile, over-levered service economies of the developed world.
Stock markets have been so robust that it has been easy for investors to sleepwalk through the entire ordeal thus far. Provided you didn’t sell into the teeth of the decline in March 2020, returns are looking quite robust this year with the S&P 500 up more than 14% YTD through the end of November 2020.
And yet all is not well.
The U.S. unemployment rate remains quite elevated at 6.9% – a figure that is no doubt understated as it excludes “discouraged” jobseekers. Meanwhile, GDP – although bouncing fiercely off its recent bottom – is still firmly lower than it was at the end of 2019. Combine these with the imminent bankruptcy and closure of thousands of small businesses and you have the beginnings of an economic apocalypse for the average person.
Most U.S. citizens are drowning in debt. They have mortgages, student loans, car loans and credit card debts to pay, not to mention monthly utility bills. These people need a constant stream of dollars to service these obligations.
The pandemic interrupted that vital flow of dollars. As a result, many families are on the ropes, financially speaking.
The U.S. Congress gave temporary respite in March 2020 by passing a stimulus bill back that granted enhanced, $600 weekly federal unemployment benefits and a $1,200 check to every adult citizen. Sadly, this forwarding-looking piece of legislation has not been followed up on as the Republicans and Democrats both angled for political advantage in the lead-up to the 2020 elections.
Now the chickens are coming home to roost.
The stimulus funds disbursed earlier in 2020 are nearly exhausted. And renewed COVID lockdowns mean that employment isn’t returning to normal for the next several years at a minimum. As a coup de grâce, a national moratorium on evictions is scheduled to expire on January 1, 2021.
Barring a miracle, 2021 promises to be an economic disaster of almost unimaginable proportions.
All of this is slowly leading up to the monetary endgame for the dollar (and every other fiat currency out there too). While it has been a long time coming, it is obvious now that future economic policies in the developed world will be dominated by MMT – otherwise known as Modern Monetary Theory. MMT is the idea that a government that issues its own “sovereign” currency can print money without limit or negative consequences. Theoretically speaking, the sole possible undesirable outcome is if the economy should run into physical resource constraints, which would show up as inflation.
In other words, embracing MMT would give governments the philosophical green-light to engage in nearly unlimited fiscal stimulus. They could mail out one-time checks to every adult citizen (and for much higher amounts than the $1,200 stimulus checks the U.S. has already disbursed), send regular monthly checks as part of a UBI (Universal Basic Income) program or decree a (well-paying) jobs guarantee for anyone who wants one.
All of this means that the U.S. dollar’s days as a store of value are numbered. No, the dollar won’t become valueless overnight (or within the next few years, for that matter). And you will still need dollars (or whatever your national fiat currency happens to be) to pay your mortgage, utilities and taxes for the foreseeable future. But the dollar’s (and other fiat currencies’) ability to transmit value over time is clearly eroding.
What is an investor to do?
Should you chase the equity bubble and hope against hope that stock market indices don’t drop by 50% or more in the next downturn? Should you invest in long-dated bonds that only pay 2% or 3% per annum, barely keeping up with inflation?
If the choices available in traditional asset classes seem unappealing, it is because they are unappealing. You can’t expect a portfolio stuffed full of Tesla, Visa and random junk bonds to save you. However, I do believe there is one viable solution that stands above all the others.
You have to be your own central bank.
What do I mean by that? That’s simple. You should replicate the typical central bank balance sheet in your own portfolio (with a few minor modifications).
So what sort of assets do central banks usually hold? Most of the time they own a mixture of sovereign government bonds (often U.S. Treasury bonds) and gold. Interestingly, many central banks have been aggressively increasing their gold holdings over the past decade.
I propose that you be our own central bank by copying this basic template with a few changes. First, instead of longer-dated sovereign debt I think you should stick to shorter-dated, cash-like instruments. Some examples from this category would be physical cash, CDs, savings bonds or a savings account.
The key would be to take on as little credit risk as possible with this part of your portfolio. So only investments in government-guaranteed debt, FDIC-insured deposit accounts or other short-term financial instruments of superlative credit quality would be acceptable here.
The reason the assets should be cash-like is to make sure you don’t run out of liquidity. This might seem counterintuitive considering that I just told you the U.S. dollar is eventually destined for the trash bin of monetary history. But there is a method to my madness.
You see, a be your own central bank portfolio should also have a sizable allocation to tangible assets, with an emphasis on precious metals such as gold, silver and platinum. Holding cash and other safe dollar-denominated assets is just a way to protect these tangible assets against exigent circumstances.
Allow me to explain.
The absolute worst thing that can happen to you when you hold tangible assets is being forced to liquidate (sell) before you want to. You will be on the wrong side of the bid-ask spread during a forced sale and will be at the mercy of whatever market forces happen to be in play at the time. Given that many personal financial crises coincide with national/international financial panics (stock market crashes, currency crises, systematic bank failures, etc.), a forced liquidation of tangible assets is likely to occur at the worst time possible.
As mentioned above, we all still need dollars (or our respective national currencies) to pay our monthly bills. If financial disaster should strike – you should lose your job or face a major unexpected expense – you could easily run out of ready cash if you are not adequately prepared. We want to avoid this possibility at all costs.
If you want to be your own central bank, the tangible asset portion of your investment portfolio must be sacrosanct! And that means never being forced to sell against your will.
And now we get to the really interesting part of being your own central bank: the tangible assets themselves. I think it is vital to stick to investment grade hard assets like high quality gemstones, antiques, fine art and, of course, bullion. These desirable items can be hung on the wall or worn on the wrist. They are oftentimes compact enough to fit into a shoebox. But they are always in demand because of their rarity, beauty and historical significance.
I would like to note that I’m not alone in this analysis, either. While central banks all over the world hold gold reserves as insurance against financial disaster, one institution has taken this idea further. I’m referring to the Russian Gokhran, a sovereign government fund dedicated to investing solely in tangible assets.
In any case, the portfolio weightings you choose can be at your own discretion. A be your own central bank portfolio can be as simple or complex as you want it to be. If you want to just hold all gold bullion balanced with T-bills to ensure adequate liquidity, I think that works. But if you want to own an extensive collection of World War I trench watches or antique Japanese samurai sword fittings as the tangible anchor in your portfolio, I think that works too.
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It is also vitally important that you take physical possession of whatever hard assets you decide to buy. Don’t be fooled into allowing your gold or silver to be “stored” at a third-party vault where you can’t see it or touch it. I don’t care whether you opt for a local bank safety deposit box or a home safe. But you absolutely need to have your tangible assets somewhere you can get your hands on them.
As the old saying in the precious metal community goes “If don’t hold it, you don’t own it.”
The point is that you need to exchange at least some of your dollars for something physical, something real. Our financial system has been swirling around the abyss for years at this point. It isn’t hard to foresee a future where stocks crash and mass bankruptcies gut the corporate bond market. Or maybe our economy will experience an inflationary collapse from the effects of massive MMT-driven cash injections.
The point is that traditional asset classes will undoubtedly perform poorly in the future, although we can’t know the exact circumstances under which our coming investment dystopia will unfold. Hard assets like antiques, precious metals, fine art and gemstones offer the average person a way to sidestep this coming disaster.
Despite their many fine qualities, investment grade tangible assets don’t get a second look from most investors today. This is puzzling in light of the fact that the wheels are slowly coming off the global monetary system. But don’t fret. The foolish investor’s misfortune can be your boon, but only if you strive to be your own central bank.
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