Astute investors will have a rare window of opportunity to accumulate tangible assets cheaply over the next decade or so. And this is likely to be the last good chance for a very, very long time to come indeed. Many years from now, when we reflect on how ridiculously cheap rough jade or medieval illuminated manuscripts or Edo era Japanese netsuke were circa 2015, we will wonder why we didn’t buy more. This is one of the great ironies of human nature as applied to investing. People don’t feel compelled to buy great assets when they are inexpensive. Instead they wait until after an asset’s value has been widely recognized by society and its price has already ascended to the heavens.
Over the coming years, the U.S. dollar will rise significantly against almost every other currency on the planet. There is a simple, but poorly understood reason for this prediction. Fiat currencies derive their strength from two key sources. One is the government’s acceptance of money in receipt of tax liabilities. So when an individual or company generates income, a portion needs to be retained and remitting to the government in the form of the prevailing legal tender. This creates a sustained demand for the national currency unit in question.
The second major source of demand for a fiat currency is debt service. Money is constantly in demand to satisfy the principal and interest payments on existing debts such as mortgages, car loans, corporate bonds and bank loans, among others. This is the larger of the two sources of demand for the U.S. dollar. According to the Federal Reserve Bank’s Flow of Funds (Z.1) report, U.S. dollar denominated debt outstanding as of Q3 2015 totaled over $44 trillion dollars. This almost unimaginably large sum of debt voraciously consumes dollars like a money vortex that is never satisfied.
Debt in U.S. dollars actually denotes an outright short position in that currency unit. When an investor shorts an asset (including currency) he does so with the hope it will decline in value in the future. But over the coming years the opposite is almost certain to happen to the U.S. dollar. This is because too many people owe too many dollars on outstanding loans. This is the equivalent of a massive short position in the U.S. dollar. This will likely trigger an event called a “short squeeze” during the next period of financial uncertainty, prompting everybody to frantically exit their short positions simultaneously. In this case, people will try to pay back all their dollar-denominated debts at the same time. This situation will cause the international exchange value of the dollar to skyrocket as everyone – consumers, businesses and financial institutions – scrounges madly for dollars in a desperate attempt to retire their outstanding loans.
But won’t the Federal Reserve just print more dollars to offset this sudden demand? Well, yes, I certainly believe they will try. In fact, I fully expect the Federal Reserve to engage in substantial additional quantitative easing (QE) by printing money to buy government bonds, mortgage securities, corporate bonds and even stocks! However, central banks worldwide have had a poor track record of satisfying the sudden, overwhelming demand for their national currencies in times of crisis via this method. The Bank of Japan, in particular, is a poster child for the futility of this strategy.
So the dollar will inevitably rise in the coming years. But there is an intriguing corollary to this scenario. As the U.S. dollar rises in value, tangible assets of all kinds will become (temporarily) cheaper. We’re already seeing this in the commodities market, where gold, for example, has lost over a third of its value in last few years. Art and antiques will most likely experience a similar scenario as the dollar strengthens and over-indebted individuals are forced to sell assets at fire-sale prices.
At this point you may well question why one should invest in tangibles if prices might decline in the near term. The answer is straightforward; in finance nothing goes up (or down) forever. While a strong dollar is more or less a foregone conclusion over the coming years, it really represents your best, and perhaps last, chance to build a discriminating collection of fine art or antiques cheaply. Eventually, after a monumental struggle, I expect that the Federal Reserve will succeed in its misguided effort to debase the U.S. dollar. I would much rather be holding high quality, investment-grade tangible assets when that time finally arrives rather than stocks or bonds.
