Browsing Category

Investing

World War I and the Looming Global Economic Reset

World War I and the Looming Global Economic Reset

I was watching a fascinating documentary on World War I the other day.  World War I was a truly pivotal moment in world history.  What really struck me about the situation in Europe just before the outbreak of war was how every nation believed it could fulfill its own ambitions without upsetting the prevailing balance of power on the continent.

For example, the tiny Balkan country of Serbia was perennially at odds with its powerful neighbor, the Austro-Hungarian Empire.  Serbia thought it could slice off the Slavic parts of its Austro-Hungarian enemy and fuse them together into a pan-Slavic Balkan state.  And Serbia thought it could do so with few to no geo-political repercussions, other than perhaps giving the hated Austro-Hungarians a bloody nose.

Serbia’s World War I ambitions clearly fall under the rubric of “be careful what you wish for.”  Even though they were one of the few World War I participants who actually achieved their primary war goal (the foundation of Yugoslavia), it came at a terrible price.

Serbia was crushed militarily and occupied by its Austro-Hungarian enemy in 1915.  In 1934, the king of Serbia’s successor state, Yugoslavia, was assassinated by a fascist dissident.  In 1941 Hitler invaded the weak Balkan country.  After World War II, the unfortunate nation and its people were subjected to almost 50 years of a repressive Communist regime.

Finally, in the early 1990s Yugoslavia broke up in an acrimonious and bloody civil war that is best remembered for its systematic ethnic cleansing.  Clearly Serbia’s leadership in 1914 never imagined that achieving their most cherished aim – a unified pan-Slavic Balkan state – would not only redraw the entire map of Europe, but also lead to 80 years of unmitigated pain.

Tiny Serbia was not alone in its conceit.  The powerful British Empire also suffered from delusions that by joining the Great War it could maintain the international status quo.  In 1914, Great Britain understood that it was dependant upon the good will of the other leading European powers, notably France and Russia, to protect its sprawling empire.  So Great Britain rather reluctantly entered the war against Germany in an attempt to assuage its continental allies in the Triple Entente alliance.

The results were predictably unpredictable.  After great sacrifice in men and money, Great Britain was victorious.  Not only did the leading colonial power preserve her existing empire, but she also expanded it substantially.  In fact, the British Empire reached its greatest geographical extent in 1921, in the immediate aftermath of World War I.

But the grand imperial power was now a paper tiger.  Great Britain’s military strength had been hollowed out by the grueling and bloody trench warfare of World War I.  In addition, the financial cost of the conflict weighed heavily on the nation’s currency.  The redoubtable British pound was forced to temporarily abandon it sacrosanct gold standard for the first time since the Napoleonic conflict a hundred years before.

Russia, one of the European powers the British had originally attempted to mollify by entering the war, fell to the Bolsheviks and became fanatically opposed to British interests.  But, in the end it almost didn’t matter.  The British Empire endured another 25 years after the end of World War I before succumbing to the unstoppable nationalist movements of its colonies.

There are frightening parallels between the national experiences of World War I participants and today’s looming global economic reset.  Every major financial player in the world right now, including central bankers, multi-national investment banks and governments, falsely believe they can achieve their own economic goals without upsetting the balance of the entire system.

China believes it can continue to pursue its mercantilist policies by exporting massive quantities of finished goods abroad in order to support employment and economic growth domestically.  It implicitly believes that no major trading partner will dare to erect tariffs or other trade barriers.  Until now, China has been correct in its estimation.  But at some point, the pain imposed on other countries by Chinese mercantilism will grow too great to ignore.

Likewise, today’s central bankers are enamored with the idea of unconventional policy tools.  Quantitative easing and negative interest rates are almost universally seen as safe, effective ways for central bankers to achieve their economic and employment goals when faced with the zero interest rate bound.  And yet, it is obvious that these policy tools have significant consequences that are both unintended and negative.

The ultimate result of these untenable policies will almost certainly be some sort of global economic reset.  This became obvious to me as I was looking at a chart of financial sectors while doing investment research.  Significant portions of the U.S. and global economy will be very different in the next 20 years, if for no other reason than that they cannot stay the way they are today.

The higher education, finance, information technology and healthcare sectors will all experience profound change during the coming economic reset.  As it stands, U.S. universities pile onerous amounts of student loan debt on the young and then we wonder why they cannot get ahead.  U.S. Hospitals charge ridiculously high fees for routine procedures and tests, placing healthcare increasingly out of the reach of average people.  A few large technology companies strive to monopolize people’s online experience, determining the news and opinions they see and hear.

And all the while corporate financial juggernauts trade paper assets back and forth to each other at ever higher prices, misleading investors into believing they are becoming extraordinarily wealthy.  But the global economic reset looms large on the horizon.  It is coming and it will be brutal.  It is merely a question of when.

This is one of the reasons that I advocate holding alternative, tangible assets like art and antiques.  When the inevitable economic reset finally happens, most paper assets, including stocks and bonds, will suffer losses that seem utterly impossible today.  Precious metals, art and antiques will be some of the few assets that avoid the worst of the destruction.

Fine Art as a Claim on Future GDP

Fine Art as a Claim on Future GDP

Almost everybody needs to save for something.  It could be saving for a college education, an exotic tropical vacation or a relaxing, well-deserved retirement.  But what is savings and investment at its core?  In my opinion, when people save or invest they are really trying to transmit the surplus value of their labor into the future without loss.  This is a fancy way of saying that everybody wants to preserve the purchasing power of their savings.

Unfortunately, this is easier said than done.  According to the U.S. Bureau of Labor Statistics’ Consumer Price Index (CPI), the U.S. dollar has lost 86.5% of its purchasing power to inflation over the 50 year period from 1967 to 2017.  And this shocking fact assumes that you trust the hedonic adjustments that are regularly made to the CPI by government bureaucrats.  These black box “improvements” invariably serve to lower the stated rate of inflation, thus making the long term loss of U.S. dollar purchasing power seems smaller than it would be otherwise.

Saving and investing is rendered even more difficult by the asymmetrical, activist policies of the U.S. Federal Reserve.  The Fed has mercilessly suppressed short-term interest rates, resulting in serial asset bubbles in bonds, stocks and real estate.  And bubble-addled markets rarely make good investments.  In short, there are precious few asset classes where the average saver can hope to safely invest for the future.

But there are a handful of exceptions.  Fine art and antiques are the overlooked heroes of the current investment age.  They provide a safe harbor from the coming global financial storm of unprecedented proportions.  In effect, fine art represents a secure claim on future economic output.

Fine art and antiques are among the oldest investments known to man, holding a special place alongside the tangible asset classes of raw land and precious metals.  Ancient Greek statues were widely coveted by the Roman aristocracy.  When Greek originals could not be procured, Roman elites did not hesitate to decorate their sumptuous villas with skillful copies.  The Florentine Medici dynasty was a well-known patron of the arts during the Italian Renaissance, even funding the famous artist Michelangelo.  Napoleon looted beautiful works of art from every corner of Europe, including the famous bronze horses of St. Mark from Venice.

The reason why fine art and antiques have always been so desirable is because of deep-seated human psychology.  According to Maslow’s hierarchy of needs, once people fulfill their lower physical needs, they then attempt to satisfy higher psychological desires like prestige and self-esteem.  Becoming a connoisseur of fine art is a natural way to accomplish this and history certainly agrees with this assertion.  The wealthy and social elite throughout history have always felt compelled to collect and display exquisite, thought-provoking art.

This strong demand from the well-off in society makes fine art an asset class in its own right.  And this fact has important implications for saving and investing.  When we save money or invest, we are really trying to stake a claim on future GDP.  Gross domestic product, or GDP, is the value of all the goods and services created in a country in a given year.  From a conceptual standpoint, fine art, along with the other asset classes, has a strong claim on GDP or economic output.

In other words, stocks, bonds, cash and real estate all “own” a share of GDP and can be exchanged into that share at any point in the future.  The same thing applies to the asset class of art and antiques.  It can be exchanged for its “fair share” of GDP in one year, ten years or even a century from today.  If purchased at a fair price, high quality art and antiques have a tendency to appreciate in line with the growth in GDP, thus maintaining purchasing power.  Fine art is a nearly perfect savings vehicle – a perpetual, tangible claim on future global economic activity.

However, the relative shares of asset classes can – and do – vary in relation to one another.  Therefore, some asset classes can be overvalued at the same time that others are undervalued.  This is the case right now.  Equities, debt and real estate have experienced successive bubbles for the better part of two decades, rendering them hopelessly expensive at the moment.

Luckily, fine art and antiques are currently among the world’s most inexpensive, under-owned asset classes.  This is a boon to savvy tangible asset investors and knowledgeable antique collectors.  It doesn’t matter whether you’re interested in a playful 18th century Japanese toad netsuke carving from the time of the samurai or a set of elegant French vermeil silver teaspoons from the Belle Époque era.  Fine art and antiques give you a convenient way to safely invest for a brighter future.

Hard Assets in a World of Capital Controls

Hard Assets in a World of Capital Controls

You and I live in a world that is essentially borderless when it comes to money.  Goods and services smoothly flow from nation to nation every day.  Store shelves are regularly re-stocked with items from factories halfway around the world.  Likewise, money to finance this robust global trade effortlessly changes hands across borders in a never-ending whirlwind.

However, this state of affairs is by no means guaranteed, or even normal from a historical perspective.  Nations can institute what are known as capital controls.  These are taxes, tariffs or laws that prohibit or deter international trade or financial transactions.  In many instances countries institute capital controls to defend their currency or balance of trade.   Indeed, in the depths of a severe financial crisis, capital controls become almost a necessity for less developed countries.

This impetus to impose capital controls is often driven by an economic conundrum called the Impossible Trinity.  The Impossible Trinity is the realization that a nation cannot simultaneously maintain a fixed exchange rate, independent monetary policy and also allow its currency to be freely traded internationally.  Any two out of three can be achieved, but the third policy goal always proves elusive.

This means that countries sometimes sacrifice international currency convertibility via capital controls in order to maintain the other two policies of the Impossible Trinity.  This isn’t always as bad as it sounds.  For example, during the Bretton Woods era from 1945 to 1971, most of the world was subject to capital control regimes of one sort of another.  In spite of this fact, Japan, Western Europe and the United States still prospered during this period.

However, international finance is very different today than it was during the Bretton Woods era.  Currently, capital controls are more often used as an emergency measure by countries that are suffering from a financial panic or currency crisis.  For instance, capital controls were widely used during the Asian financial crisis in the late 1990s.  Even today, China presently limits the free international flow of its currency, the renminbi, in order to relieve downward exchange rate pressure.

Many times nations institute capital controls because they can’t afford to pay for imported foreign goods any longer.  Venezuela is a country in this sorry situation right now.  As of summer 2017, they have a tiered exchange rate.  The lowest official exchange rate, named DIPRO, is 10 bolivars to the dollar, but the black market rate is over 16,000 bolivars to the dollar.  Needless to say, only the most politically well-connected companies and individuals can get access to the advantageous 10 to 1 exchange rate through the government.  Regular people have to take the dreadful 16,000 to 1 exchange rate from street corner money changers.

Perhaps the worst part about capital controls is that they are a looming inevitability for much of the world.  We can see the warning signs in a country like Greece.  Although technically still part of the eurozone, Greece has intractable financial problems that will only be resolved by exiting the monetary union and reintroducing a new national currency unit.  But the introduction of a new currency will also mean a significant currency devaluation.  Nobody wants to take this loss.

So the Greek financial authorities must prevent every last euro from fleeing the country.  Funnily enough, they’ve already gotten a head start on the problem.  In June 2015 Greece declared an emergency 20 day bank holiday.  They then quickly moved to limit currency withdrawals and severely restrict money transfers abroad.  Worse yet, where Greece has gone, many other Southern European nations – Portugal, Spain and even Italy – will eventually follow.

If these sorts of financial regulations sound bad to you, it is because they are.  Capital controls of this nature inevitably hurt average people far worse than they impact the rich or politically-connected.  In fact, the primary reason capital controls are imposed is to cut off the ability of money to flee before a major currency devaluation is implemented.  The financial authorities want to trap your money.

Most of the assets that people hold – bank deposits, bank CDs, government savings bonds, etc. – are disproportionately affected by currency devaluation.  In fact, any financial instrument that has a fixed face value like a bond, whole life insurance policy or savings account will depreciate significantly under most capital control scenarios.  Even stocks, which are theoretically fractional ownership in operating businesses, generally do poorly under capital controls due to widespread financial chaos.

There is, however, one type of asset that does exceptionally well under capital controls – hard assets.  These include commodities, precious metals, gemstones, fine art and antiques.  Because these assets are all physical in nature, they cannot be arbitrarily devalued at the stroke of a pen by some incompetent central banker or corrupt politician.

Therefore, I recommend that everyone should have, in addition to some bullion holdings, at least 5% or 10% of their investment portfolio allocated to investment grade art and antiques.  The financial authorities may be able to lock down your bank account, but your collection of tasteful mid-century chronograph wristwatches or elegant old mine cut diamonds is completely beyond their reach.  There’s only one catch, you have to buy these assets before the crisis hits.  Otherwise, it is simply too late.

Tangible Investments and the Global Bubble Economy

Tangible Investments and the Global Bubble Economy

Bubbles are dangerous things.  They are slippery, amorphous entities – difficult to diagnose and even harder to avoid once discovered.  They burrow their way into the public psyche, slowly driving otherwise reasonable people mad with both greed and pride.

Perhaps the only thing more financially destructive than a bubble is an entire bubble economy.  Of course, such an unusual phenomenon is incredibly rare, perhaps occurring only once every century at best.  Alas, we do not live in financially normal times at the present.

Instead we labor under the burden of central banks who, rather disturbingly, believe bubbles are a wonderful way to sustainably grow an economy.  This absurd tenet of modern central banking is akin to an irrational, cult-like faith.  In fact, actively striving for a bubble economy is so bizarre that for a long time I couldn’t figure out what the hell the world’s central bankers were thinking.

After all, throughout history, every major financial bubble has been followed by an inevitable economic bust.  And the pain from those devastating economic busts was always commensurate with the magnitude of the preceding bubble.  Simply put, the bigger the bubble, the bigger the bust.  So what central banker is his right mind would want to create a bubble economy?

Then I read an article on the Financial Times’ website titled “The Importance of Bubbles That Did Not Burst” (warning: this article is behind a paywall).  This article posits that while some bubbles burst with disastrous results, there are many that don’t.  This shocking assertion comes via a Yale School of Management professor named William Goetzmann.

A self-proclaimed expert on stocks, hedge funds, real estate and art, Mr. Goetzmann conducted a study that defined a bubble as a doubling of the stock market within a one year period.  This is, of course, a terrible way to define bubbles.  There are many, many instances other than bubbles where stock markets double.  For example, recessions often cause equity markets to overshoot on the downside.  The stock market doubling from such depressed levels is normal and cannot be considered a bubble by any stretch of the imagination.

Predictably, both Mr. Goetzmann and the Financial Times article based on his study conclude that some bubbles are good.  You just have to make sure your bubble doesn’t burst, at which point you are golden!  In light of this terrifyingly naive conclusion, which would probably garner the average elementary school child no better than a C-, the Federal Reserve’s determination to give us a 100% bubble economy makes more sense.

Once we stop laughing (or crying) at the intellectual inadequacy of the unfortunate Mr. Goetzmann, we should cut him some slack.  After all, he’s a finance professor at Yale who has probably never had to change his car’s oil or mow his own lawn.  Like most ivory-tower academics, he is utterly disconnected from reality, including the calamitous after effects of large-scale asset bubbles.

He didn’t see the last financial crisis coming in 2008 and he won’t see the next one either.  When Yale gives you a paycheck no matter how outlandish your ideas are, you don’t need to be particularly bright.  Personally, I’d rather get my financial advice from a community college drop-out than an Ivy League professor.

So what recourse does the average person have?  It is obvious that we are currently living in a full blown global bubble economy.  The S&P 500 is trading near all time highs on several different valuation measures.  U.S. real estate prices are as high, or higher, than they were at the peak of the 2007 mortgage bubble.  Large corporations have been issuing record amounts of debt in order to pay out dividends and buy back shares.  Any of these circumstances is worthy of being called a bubble on its own.  Taken together, they indicate a bubble economy of unprecedented proportions.

In the end, I think tangible assets are one of the few reasonable alternatives in a world plagued by serial bubbles.  Bubbles, by their very nature, represent an economy that has made more promises than it can possibly keep.  Tangible investments that you have physical possession of – fine art, antiques and precious metals, among others – are an effective antidote to the false promises of the global bubble economy.

This is one of the reasons I started the Antique Sage website.  I want to show people that art and antiques are a viable alternative to the overvalued paper assets overrunning our dysfunctional bubble economy.  Our central bank overlords may improbably believe that they can inflate bubbles that won’t burst, but smart investors are making preparations for a very different outcome.