We are on the verge of a dollar shortage – a monstrous, massive global dollar shortage. The kind of dollar shortage that goes down in history as a singular, unprecedented event. And it represents a great opportunity to make money in the tangible asset space.
It has been apparent for some time now that financial conditions are tightening. The Federal Reserve has been raising short term interest rates relentlessly since December 2016. They have also been engaging in quantitative tightening – the slow, but persistent shrinking of the Fed balance sheet – since November 2017.
These developments are beginning to have an impact on global liquidity, especially against a backdrop of inflated bubble financial markets. This means that the dollar is getting stronger versus just about every other currency out there:
The Brazilian Real declined from 3.3 to the dollar a year ago to 3.85 today, a -14% loss.
The Turkish Lira had a rough time, moving from 3.84 to the dollar to 5.38 at the end of 2018, a -29% drop.
The Iranian Rial’s black market rate plummeted from 41,000 in November 2017 to 117,000 in November 2018, a stomach churning -65% fall.
The Argentinean Peso hardly did any better, experiencing a -54% depreciation from 17 to the dollar at the beginning of the year to 37 at the end.
However, the worst of the lot was the Zimbabwean Zollar, a debt instrument issued by the African country’s central government that circulates like currency. Each Zollar is supposed to be worth 1 US dollar. But that didn’t stop the Zollar from collapsing from 1.4 to the dollar during the summer of 2018 to 10 to the dollar a mere six months later, an astounding -86% decline in purchasing power.
I won’t even bother mentioning Venezuela, which is currently experiencing a crippling hyperinflation. Its currency is quite literally not worth the paper it is printed on.
The global dollar shortage isn’t just limited to basket case emerging market currencies though. Other financial markets are also starting to break down due to a lack of dollars.
The crypto-currency complex is a prime illustration. The much hyped Bitcoin is down a breathtaking 72% for 2018, from $14,100 at the beginning of the year to less than $4,000 right now.
Lower-rated corporate debt is also feeling the heat of the dollar shortage. Yield spreads on junk bonds are up over 100 basis points in just the last 2 to 3 months.
Even the poster children of our current Everything Bubble – the FANG stocks – have lost their sizzle due to the sudden dollar shortage. The FANG stocks, consisting of Facebook, Amazon, Netflix and Google (now Alphabet), have dropped by a shocking -20% over the past 4 months.
As harrowing as this flood of bad news might seem, we are at the very beginning of the global dollar shortage. It will get much, much worse before it gets better.
All of this means that you’d better have some safe, liquid assets in your portfolio – things like U.S. Savings Bonds, U.S. Treasury securities, or an FDIC insured bank account/money market account.
Of course, the Fed won’t stand idly by while the financial world burns down around them. They will leap into action, pumping unbelievably large amounts of dollars into the world’s financial system in an attempt to stem the global dollar shortage.
Unfortunately, the Fed is almost guaranteed to overreact to the financial panic by printing far more dollars than it should. In the last financial crisis, the Fed increased the size of its balance sheet from about $900 billion to $4.5 trillion. And honestly, that barely got the job done, spawning the most tepid recovery in U.S. post-war history.
This time around I expect the Fed to balloon its balance sheet to nothing less than an astounding $20 trillion dollars. The sums involved are so large as to almost be beyond comprehension.
But suffice it to say that all this money printing is ultimately bad for the value of the dollar. Every new dollar that gets created dilutes the existing supply of dollars.
This is why I recommend that everybody store a portion of their wealth in portable tangible assets – things like precious metals, fine art, antiques and gemstones.
Now here is the tricky part.
In the midst of this unprecedented dollar shortage, the Fed will be rapidly debasing the dollar by handing out fistfuls of them to foreign central banks and too-big-to-fail financial institutions. But in spite of this massive debasement, the dollar will still temporarily strengthen for a period of time. This is precisely the moment when you must be trading your dollars for tangible assets.
This is actually a lot harder to do in reality than it sounds. You will need to be selling your dollars when everyone else is desperate to hoard them. People have an inherent herding instinct, especially in financial markets. From an emotional perspective, a contrarian stance will be incredibly difficult during this time.
But if you can pull it off, some of history’s greatest tangible assets bargains will be yours for the taking. Precious metals, investment grade antiques and gemstones are all screaming bargains right now. And I suspect they may get a little bit cheaper yet during the depths of the crisis.
But Rome wasn’t built in a day and neither is a solid tangible asset portfolio. Slabbed coins, antique silver and vintage watches all take time to properly evaluate and acquire. Even commodity physical assets like gold and silver might be difficult to acquire at reasonable prices on short notice during an intense financial crisis.
So the smart investor will leg into a tangible asset position. The few dollars you might save trying to time the exact bottom of the market are likely to cost you a lot of lost profits.
I already suspect that we are seeing the lowest prices (on a valuation basis) in recorded human history for some segments of the antique market.
How cheap are antiques right now?
Right now (December 2018) you can buy a random date, PCGS certified MS-63 U.S. Liberty Head gold eagle ($10 coin) for $700 on eBay. The bullion value of this piece (with spot at $1,234) is $597. You are only paying $103, or 17.3%, in premium over the coin’s melt value.
Not only that, but these desirable pre-1933 gold coins are eBay Bucks eligible. During one of eBay’s frequent promotional periods, it would be possible to get 8% to 10% of the gross purchase price back as an eBay Bucks voucher. This would bring the effective premium over melt down to just $33, or 5.5%.
Think about it for a moment. You can buy a beautiful and historic 100 year old U.S. gold coin in Mint-State for only $33 more than its scrap value. That is simply mind-blowing to me. It is undoubtedly the lowest percentage premium these coins have carried since the late 1930s/early 1940s.
That isn’t the only tangible asset deal out there either.
I recently stumbled upon a luscious 0.34 carat old mine cut diamond on Etsy for $375. The old mine cut was used in the diamond trade from the 18th century until the end of the 19th century. These vintage gems are a favorite of sophisticated gem connoisseurs because of their tremendous presence and charm.
As an added bonus, the seller recently marked the stone down by 10% to $337.50. This comes out to only $10 a point, which is ridiculously cheap for a lightly-included, 19th century diamond of excellent color. I remember seeing similar prices for antique cut diamonds back in the 2002/2003 recession, except that those stones weren’t as high quality. $10 a point is less than 60% of the cost of a similar modern-cut stone, which is shocking when you consider that the old mine diamond is hand-cut and has 150 years of history behind it.
But the thing I love most about tangible investments is that they all possess optionality. Optionality is any element of a financial instrument that you don’t pay much for right now, but might be worth a lot in the future.
Think of it as a lotto ticket.
The only difference is that when the drawing happens on Friday night and you don’t have the winning numbers, the average lotto ticket becomes instantly worthless. But optionality on a tangible asset is like a perpetual lotto ticket. There is a drawing every Friday night, and if you don’t win this Friday night, you can just hold onto the asset and wait for your winning number to come up on a future Friday night.
Right now tangible assets have substantial optionality. And the looming global dollar shortage of 2019-2020 will be one of history’s best opportunities to accumulate these overlooked assets at deep discounts. Don’t blow it.
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