Nothing is cheap in todayâ€™s investment world. Because of the trillions of currency units that governments all over the world have created â€“ and are continuing to create â€“ financial assets are grossly overpriced. Stocks, bonds, property, commodities and cash are no bargains. Meanwhile, real wages are slipping rapidly among those who are working, and a large portion of the population is unemployed or underemployed.
The next chapter in this sad drama will include a rapid rise in consumer prices. At the beginning of this year, we saw the grains â€“ wheat, corn, soybeans and oats â€“ go up an average of 36% within one month. In the same time frame, hogs were up 30.7%. Copper was up 29.1%. Oil was up 14%. Cotton was up 118%. Raw commodities are the first things to move in an inflationary boom, largely because theyâ€™re essential to everything. Retail prices are generally the last to move, partly because the labor market will remain soft and keep that component down, and partly because retailers cut their margins to retain customers and market share.
We are in a financial no-manâ€™s land. What you should do about it presents some tough alternatives. â€œSavingâ€ is compromised because of depreciating currency and artificially low interest rates. â€œInvestingâ€ is problematical because of a deteriorating economy, unpredictable and increasing regulation, rising interest rates and wildly fluctuating prices. â€œSpeculationâ€ is the best answer. But it may not suit everyone as a methodology.
There are, however, several other alternatives to dealing with the question â€œWhat should I do with my money now?â€ â€“ active business, entrepreneurialism, innovation, â€œhoardingâ€ and agriculture. Thereâ€™s obviously some degree of overlap with these things, but they are essentially different in nature.
Few large fortunes have been made by investing. Most are made by creating, building and running a business. But the same things that make investing hard today are going to make active business even harder. Sure, there will be plenty of people out there to hire â€“ but in todayâ€™s litigious and regulated environment, an employee is a large potential liability as much as a current asset.
Business itself is seen as a convenient milk cow by bankrupt governments â€“ and itâ€™s much easier to tap small business than taxpayers at large. Big business (which Iâ€™ll arbitrarily define as companies with at least several thousand employees) actually encourages regulation and taxes, because their main competition is from small business â€“ you â€“ and theyâ€™re much more able to absorb the cost of new regulation and can hire lobbyists to influence its direction. Only a business thatâ€™s â€œtoo big to failâ€ can count on government help.
Itâ€™s clearly a double-edged sword, but running an active business is increasingly problematical. Unless itâ€™s a special situation, Iâ€™d be inclined to sell a business, take the money, and run. Itâ€™s Atlas Shrugged time.
An entrepreneur is â€œone who takes between,â€ to go back to the French roots of the word. Buy here for a dollar, sell there for two dollars â€“ a good business if you can do it with a million widgets, hopefully all at once and on credit. An entrepreneur ideally needs few employees and little fixed overhead. Just as a speculator capitalizes on distortions in the financial markets, an entrepreneur does so in the business world. The more distortions there are in the market, the more bankruptcies and distress sales, the more variation in prosperity and attitudes between countries, the more opportunities there are for the entrepreneur. The years to come are going to be tough on investors and businessmen, but full of opportunity for speculators and entrepreneurs. Keep your passports current, your powder dry, and your eyes open. I suggest you reform your thinking along those lines.
The two mainsprings of human progress are saving (producing more than you consume and setting aside the difference) and new technology (improved ways of doing things). Innovation takes a certain kind of mind and a certain skill set. Not everyone can be an Edison, a Watt, a Wright or a Ford. But with more scientists and engineers alive today than have lived in all previous history put together, you can plan on lots more in the way of innovation. What you want to do is put yourself in front of innovation; even if you arenâ€™t the innovator, you can be a facilitator â€“ something like Steve Ballmer is to Bill Gates. It will give you an excuse to hang out with the younger generation and play amateur venture capitalist.
This argues for two things. One, reading very broadly (but especially in science), so that you can more easily make the correct decision as to which innovations will be profitable. Two, building enough capital to liberate your time to try something new and perhaps put money into start-ups.
In the days when gold and silver were money, â€œsavingâ€ was actually identical with â€œhoarding.â€ The only difference was the connotation of the words. Today you canâ€™t even hoard nickel and copper coins anymore because (unbeknownst to Boobus americanus) thereâ€™s very little of those metals left in either nickels or pennies â€“ both of which will soon disappear from circulation anyway.
Weâ€™ve previously dismissed the foolish and anachronistic idea of saving with dollars in a bank â€“ so what can you save with, other than metals? The answer is â€œuseful things,â€ mainly household commodities. Iâ€™m not sure exactly how bad the Greater Depression will be or how long it will last, but it makes all the sense in the world to stockpile usable things, in lieu of monetary savings.
The things Iâ€™m talking about could be generally described as â€œconsumer perishables.â€ Instead of putting $10,000 extra in the bank, go out and buy things like motor oil, ammunition, light bulbs, toilet paper, cigarettes, liquor, soap, sugar and dried beans. There are many advantages to this.
Taxes â€“ As these things go up in price and you consume them, you wonâ€™t have any resulting taxes, as you would for a successful investment. And youâ€™ll beat the VAT, which weâ€™ll surely see.
Volume Savings â€“ When you buy a whole bunch at once, especially when Wal-Mart or Costco has them on sale, youâ€™ll greatly reduce your cost.
Convenience â€“ Youâ€™ll have them all now and wonâ€™t have to waste time getting them later. Especially if theyâ€™re no longer readily available.
There are hundreds of items to put on the list and much more to be said about the whole approach. This is something absolutely everybody can and should do.
During the last generation, mothers wanted their kids to grow up and be investment bankers. That thought will be totally banished soon, and for a long time. I suspect farmers and ranchers will become the next paradigm of success, after being viewed as backward hayseeds for generations.
Agriculture isnâ€™t an easy business, and it has plenty of risks. But thereâ€™s always going to be a demand for its products, and I suspect the margins are going to stay high for a long time to come. Why? Thereâ€™s still plenty of potential farmland around the world thatâ€™s wild or fallow, but politics is likely to keep it that way. Population wonâ€™t be growing that much (and will be falling in the developed world), but people will be wealthier and want to eat better. So you want the kind of food that people with some money eat.
Iâ€™m not crazy about commodity-type foods, like wheat, soy and corn; these are high-volume, industrial-style foods, subject to political interference. And theyâ€™re not important as foods for wealthy people, which is the profitable part of the market. Besides, grains are where everybodyâ€™s attention is directed.
But there are other reasons Iâ€™m not wild about owning any amber waves of grain. Anything you want to plant will practically require the use of a genetically modified (GM) seed from Monsanto. Iâ€™m not sure I really care if itâ€™s GM; all foods have been genetically modified over the millennia just by virtue of cultivation. And $1 paid to Monsanto typically not only yields the farmer $5 of extra return, but produces lots of extra food â€“ which helps everybody. But I wouldnâ€™t be surprised if someday the giant monocultures of plants, all with totally identical purchased seeds, donâ€™t result in some kind of catastrophic crop failure. This is a subject for another time, but itâ€™s a thought to keep in mind.
In any event, agricultural land is no longer cheap. But I donâ€™t suggest you look at thousands of acres to plant grain. Niche markets with niche products are the way to fly.
I suggest up-market specialty products â€“ exotic fruits and vegetables, fish, dairy and beef. The problem is that in â€œadvancedâ€ countries â€“ prominently including the US â€“ national, state and local governments make the small commercial producersâ€™ lives absolutely miserable. Maybe you can grow stuff, but itâ€™s extremely costly in terms of paperwork and legal fees to sell, especially if the product is animal based â€“ meat, milk, cheese and such. Niche foods are, however, potentially a very good business. Eternal optimist that I am, I see one of the many benefits of the impending bankruptcy of most governments as again making it feasible to grow and sell food locally.
Above all, though, this isnâ€™t the time for business as usual. Youâ€™ll notice that â€œWorking in a conventional jobâ€ didnâ€™t occur on the list above. And I pity the poor fools working for some corporation, hoping things get better.
for The Daily Reckoning
Keeping Capital in a Depression originally appeared in the Daily Reckoning. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Bill Bonner, the founder of the the Daily Reckoning released his latest book Dice Have No Memory: Big Bets & Bad Economics From Paris to the Pampas in April 2011.
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Keeping Capital in a Depression
The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.