How many times have you heard the following:
‘If it can’t go on, it won’t go on’.
Only to see it go on, and on, and on…
How many people do you know — or maybe this is you too — who have sat in cash waiting for the inevitable bust, only for it never to arrive?
Who is the greater fool: The prudent saver waiting for prices to come down before investing, or the reckless, ignorant speculator who rolled the dice on the market years ago?
We both know the answer to that, don’t we?
It’s a bitter pill to swallow, but it goes to the heart of investing in this day and age.
The most important thing to understand about investing in the age of the central banker is that morality is dead. Saving is not a virtue. Spending is not a vice.
It used to be that money had virtue. When money was gold, and then when money was simply ‘linked’ to gold, the value of the notes and coins in your pocket had a semblance of value.
An ounce of gold took time, labour and capital to extract out of the earth and refine into coins or bars. This time, labour and capital translated into the value of our money.
Money meant something. You couldn’t just conjure it up. So when it came to money and capital, and where to invest it, price and value was an important consideration.
And because money was tied to gold, it didn’t move around much. The denominator of all financial assets (that is, currency, tied to gold) was rock solid. Instead, the numerator did all the moving.
Let me explain…
During the Great Depression, from the 1929 peak to the 1932 low, the Dow Jones Industrial Index fell more than 80%.
The reasons for such a decline have been endlessly debated. But what undoubtedly made the magnitude of the fall bigger was the fact that the US dollar was linked to gold.
EVERYTHING is relative in financial markets
This is what no one ever tells you about the depression. I’m not blaming gold, for it, but it certainly made things worse. That’s because the central bankers of the day ignored gold by inflating credit too much in the 1920s, and then adhered to the gold standard during the bust.
The problem was that the monetary unit denominating the Dow (the US dollar, tied to gold) was immovable. As a result, the entire economic adjustment had to be borne by stock prices, consumer prices, commodity prices and land prices…not the currency as happens today.
EVERYTHING is relative in financial markets. EVERYTHING.
So if you flip the early 1930s experience around, you’ll see that relative to the Dow, the US dollar soared in value by 80%. The purchasing power of the dollar soared against just about everything.
That’s why the Depression produced widespread deflation. Deflation, by definition, is an increase in the relative value of a currency unit.
The Depression experience was socially traumatic. One of the side effects of it was absolute respect for the value of a dollar. This respect, already built up through the years, was seared into the Depression generation and passed on.
But this all started to break down in 1971. That’s when President Nixon broke the US dollar’s monetary link to gold for good.
Nearly half a century later, and society’s attitude towards money is entirely different. It’s easy come, easy go. Central banks have debased the currency and attitudes towards it.
The upshot of all this is that you cannot be burdened by history when making investment decisions. This is not your grandfather’s money. The modern day monetary denominator is but a shadow of its former self.
If you think the market ‘deserves’ to plunge by 80% — to purge the rottenness from the system, to quote a phrase from the Great Depression — then you have to ask how that is going to happen with our central banking overlords at the helm.
Currency is confetti, not gold. That such confetti would see a relative increase in value of 80% with a crash/depression scenario is a low probability bet.
It’s not impossible, mind you. Anything can happen in financial markets. But to sit in cash 100% waiting for the ‘endgame’ (if it can’t go on, it won’t go on) is putting everything on red (or black).
How do you invest in this day and age then?
Your best bet is to have a bit of everything. Cash, gold, land, blue chips, small-caps, speculative miners and everything in between.
Look for ‘special situations’ — a changing industry and a new market opening up. My mate Ryan Dinse is onto one such idea. It concerns the banking sector. There is a whole new industry profiting from its demise.
Don’t go all in, don’t go all out. Set stop-losses and get out if the market tells you you’re wrong. Don’t hold on stubbornly watching a 20–30% loss turn into a 70–90% disaster.
You’re not going to get them all right. Accept that and have a risk management plan in place.
Be prepared for a bear market and use your cash when stocks become cheap. But understand that cheap today (with government bond yields at 1%) is not the cheap of years gone by.
The world is different. As it is for every generation. Save the morality for your kids and grandkids. Understand that the market operates according to the law of the jungle. In the jungle, the moralisers get eaten.