I regularly read a website about overpriced West Coast real estate called Dr. Housing Bubble. The site had an interesting exchange in the comments section of one of its recent posts. One commenter encouraged people to contact their congressional representative and ask him (or her) to ban the foreign purchase of U.S. real estate. A regular commenter then responded with this:
First of all I think any law like that would be thrown out by [the] courts. If Trump can’t ban radical Muslims from entering the country, good luck banning rich Chinese from buying homes.
Second, it is ridiculous to tell foreign people who want to bring money and invest it here “sorry we don’t want your money”. Actually ridiculous isn’t the right word…downright insane is a better description.
I wanted to highlight this quote because I feel it is emblematic of one of the greatest investing conceits of our age – a complete failure of investment imagination. Investors gripped by this dread disease cannot fathom the possibility of a world that is significantly different than the one we currently inhabit. To them we have reached the end of investment history, where current investing trends, tax laws and economic policies must inevitably persist forever.
But a failure of investment imagination can be hazardous to your wealth. In fact, we are already beginning to see the slow disintegration of the old financial regime as economic pressure ratchets ever higher.
For example, in August 2016, the Canadian city of Vancouver instituted a 15% transaction tax on foreign real estate buyers. In April 2017, the entire province of Ontario followed suit with a similar surcharge. New Zealand has just instituted an even more radical policy than Canada, by completely banning the sale of existing homes to foreigners.
To believe that California real estate is somehow immune from these global developments is unrealistic. Yet this Dr. Housing Bubble commenter, along with hordes of property buyers, thinks that U.S. real estate policies cannot possibly change. And while this particular failure of investment imagination is about real estate, it is obvious that a similar mindset is ensconced in all asset classes.
In some ways this is a very natural, very human reaction to the post-Great Financial Crisis investing landscape. For the last decade, markets of every description – stocks, bonds, real estate – have gone nowhere but up. This has made investors complacent and entitled. They cannot imagine a different world, because today’s world is the one they are getting rich in. And they never want to stop getting rich.
The future, however, is likely to be far less forgiving than the present, particularly in capital markets. The metaphorical ground underneath our collective economic feet is likely to shift in a profound, and possibly disturbing, way. Due to a widespread failure of investment imagination, few people are prepared for this brave new world.
What changes will take place in the economy over the next few years? To be honest, nobody knows. The world’s central bankers are currently conducting the largest, most ambitious monetary experiment in human history. As a result, we are in completely uncharted economic territory, and anybody who says otherwise has an agenda. However, I do think there are a few events that we can reasonably assert will happen in one form or another.
First, I think it is highly likely that what has worked for investors over the past 10 years will stop working rather suddenly. Risk-oriented paper assets, like stocks, REITs and high-yield bonds, which have marched relentlessly higher over the past decade, will abruptly lose favor. This will be a tremendous shock to professional money managers and financial advisors, who have built their portfolios around these traditional investment classes.
Second, it is clear that the world will become increasingly localized as globalization at least partially reverses. Money and goods will not flow across borders as easily as they once did, and, in certain situations, they may not flow across borders at all. Neither major corporations nor mom and pop investors are prepared in the least for this eventuality. I detail this concern at greater length in an article titled “Hard Assets in a World of Capital Controls“.
Finally, I believe the future will see a wave of corporate defaults as over-levered companies finally hit the limits of financial market credulity. This will undoubtedly catch large numbers of sanguine investors off-guard. Losses will be steep and the damage will be distributed across a wide range of historically “safe” investment strategies.
The flip side of today’s ubiquitous failure of investment imagination is that alternative assets, like bullion, fine art and antiques, have generally been overlooked. The recent performance of these tangible assets has been rather modest compared to market darlings like crypto-currencies and technology stocks. But then again, you won’t wake up one random Monday morning to discover that half the value of your bullion stash has been wiped out over the weekend.
This nightmare scenario, where the bid for stocks and bonds dries up suddenly, is called a discontinuous market. And it could cause the major market indices to gap down by 10%, 20% or even more in a very short period of time – perhaps minutes. Stop-loss or trailing stop-loss orders which would normally protect your brokerage portfolio would actually be detrimental in this situation, as they would force you to sell into the teeth of the panic.
These dark circumstances in which the previously unthinkable suddenly becomes fact, are, unfortunately, not just possible, but probable. They are the natural side effects of highly distorting central bank policies that have gutted the middle class while simultaneously creating a new gilded age for the ultra-wealthy. As frightening as this bleak future sounds, there is a way to protect yourself. Undervalued hard assets represent a great opportunity to hedge market risks. Don’t let a failure of investment imagination hobble your portfolio.
Read more thought-provoking Antique Sage investing articles here.
-or-
Read in-depth Antique Sage investment guides here.
