Journal of a Wayward Philosopher
September 16, 2015
Hot Springs, VA
The S&P closed out Tuesday at $1,970. Gold closed at $1,102 per ounce. Oil closed at $44.59 per barrel, and the 10-year Treasury rate closed at 2.18%. Bitcoin is trading around $227 per BTC today.
Wife Rachel cornered me the other day: "I saw what you did in your newest post!", she said in an accusatory tone.
"Whatever do you mean, honey?", I asked innocently.
"You talked about Madison buying me a walker when I am old!"
I couldn't contain my laughter. It's the little things that I find most amusing.
Last week I delved into global finance and speculated that a currency crisis in the U.S. was on the horizon. It is just unreasonable to create trillions of dollars from thin air on a regular basis and expect the world to accept those dollars ad infinitum. I observed that government has no intention of ceasing its monetary escapades, thus currency ruin is inevitable.
Past currency crises have played out in a similar way on varying scales. The first stage is very gradual in nature: government begins to monetize its debt via currency inflation, but the negative effects are minuscule at first. Prices on everyday goods start to creep upwards gradually such that most people think little of it. The process of debt monetization is exponential in nature, however, so eventually prices rise more and more quickly. When prices begin to rapidly rise, people quickly learn to spend their currency as soon as it is received before its purchasing power is lost. This further exasperates the crisis as it causes prices to rise even faster. Pretty soon basic groceries have one price tag in the morning and a higher price tag in the evening. Then people line up in droves outside the grocery stores and the shelves empty. Fear and panic sets in for a period of time until the old currency is revalued or abandoned enabling the supply chain to stabilize.
We have seen this happen with fiat currencies all throughout modern history. What is happening in Venezuela right now is a relatively minor case - inflation is only running around 70%. Compare this to Argentina in 1990 which experienced a 197% peak inflation rate. Or the Soviet Union in 1992 at 245%. Or Zaire in 1994 at 250%. Ukraine topped out at 285% in 1994 as well. Armenia nearly doubled both of them in 1994, registering a peak inflation rate of 438%. But these cases were just peanuts compared to Zimbabwe, once the wealthiest country in Africa. In 2008 Zimbabwe managed an 8 billion % peak inflation rate. You can surf the internet and find pictures of currency issued by the Reserve Bank of Zimbabwe denominated in One Hundred Trillion Dollar increments. Those 100,000,000,000,000 Zimbabwe dollars barely bought a loaf of bread.
Regardless of the scale, the currency is worthless when the dust settles and those who were unprepared find their savings decimated. If I am correct in my analysis indicating a U.S. currency crisis is in the works, then the time to become antifragile is now.
In Antifragile: Things That Gain from Disorder, Nassim Nicholas Taleb defines antifragility as: the ability to benefit from shocks; the ability to thrive and grow when exposed to volatility, randomness, disorder, and stressors.
What sets the antifragile financial strategy apart from pure speculation is a variation of the barbell strategy. The antifragile barbell strategy places heavy emphasis on both extremely conservative financial positions that are defensive in nature and extremely aggressive positions that are speculative in nature. This strategy places very little emphasis on middle-of-the-road positions such as mutual funds.
Here's my take on what such an antifragile portfolio looks like:
First and foremost at least 10% of assets should be in physical gold and silver bullion with half stored at home in a safe and the other half stored in an allocated, independently audited vault outside of your political jurisdiction. There are numerous companies offering this service in an affordable manner. Gold and silver have both been monetary metals for centuries thus their market value has been relatively stable over long periods of time. Though their price has fluctuated tremendously in terms of fiat currency, their price relative to real goods and services has not been volatile.
This is why at the very least 10% of assets should be in physical gold and silver bullion: we know they will maintain their market value over time no matter what happens to the fiat currency. Every central bank in the world still stockpiles gold. Many eastern cultures still place a heavy emphasis on owning gold in various forms. Silver bullion is still hoarded by investors globally, and the metal is a vital component in many electronic devices. Precious metals cannot be created from nothing by central banks nor can their value be wiped out by wild market swings, thus they are the conservative anchor for an antifragile portfolio.
In my mind, the next step in weighting the conservative side of the antifragile barbell is to build a base level of home resiliency. If the worst should happen then I would prefer not to be amongst those waiting in line at the grocery store and the gas station. Therefore I need to have water, food, and backup energy sources in my home that could last for a reasonable period of time in an emergency scenario. For me the benchmark is ultra-conservative: six months. It is unlikely that a currency crisis would drag on for that long, but I figure it is better safe than sorry where my family is concerned. Please review my previous journal entry on building home resiliency for an outline of specific action items.
The final piece to the conservative side of our antifragile portfolio is to keep a portion of assets in cash. Though we expect cash to devalue significantly over time, it is prudent to keep at least six months worth of living expenses in reserve for a rainy day. Additionally, assets (stocks, bonds, real estate, businesses) always go on sale during times of economic distress when credit is not readily available. Those who keep cash on hand are able to capitalize upon those opportunities when they arise.
At this point we have 10% of our assets anchored in precious metals, and we have established a base level of home resiliency such that we are capable of living comfortably for six months even if major financial dislocations were to occur. We also have a six-month cash reserve in place, and additional cash on hand to purchase distressed assets should an opportunity to do so arise. If we were doomsday preppers then we could now focus on building bunkers and stockpiling weapons. If we instead think the global economy is simply undergoing a period of socio-economic change which will render the current centralized fiat monetary system obsolete then we can now focus on the aggressive side of our barbell.
Unlike the conservative side of our barbell, our aggressive speculations will vary over time according to market conditions. Currently, I think natural resource stocks - especially gold stocks - are poised for a massive upswing. Most of these stocks are down 80-90% from their highs, thus they are hated by most equity analysts.
Unlike physical bullion, gold stocks move through violent cycles of booms and busts. Using the TSX Venture Index as a benchmark, we observed a similar set-up for gold stocks back in 2009. At that time the index had fallen nearly 80% from its previous high and nobody wanted anything to do with the sector. The TSX proceeded to rally 256% over the next two years, with numerous stocks exploding more than 1,000% higher. The index peaked at that point in 2011 and has been falling ever since, but we are now seeing signs of a bottom.
These cyclical moves are normal for gold stocks - low prices lead to booms which lead to high prices which lead to busts and low prices again. Those disciplined enough to buy the bust and sell the boom can do very well in the sector. It looks to me like now is a great time to get aggressive by adding gold stocks to the speculative side of an antifragile portfolio. We are already close to the beginning of a new boom cycle in gold stocks that will unfold over the next few years, and a currency crisis would only further power the boom in gold prices.
A stock portfolio loaded to the hilt with speculative gold stocks goes against everything conventional personal finance stands for. Your stockbroker would be shocked by such a portfolio. "You need to diversify amongst stocks and mutual funds in various sectors!", he would say. But conventional personal finance does not advocate allocation to physical gold and silver bullion or home resiliency so it must be much more cautious with its stock portfolio and forego becoming antifragile. Because we went ultra-conservative on one side of the barbell, we can skip the middle-of-the-road stuff and go ultra-aggressive on the other end.
Shorting stocks and various option strategies are other ways in which one can speculate on the aggressive side of the barbell, but these strategies require timing the market which is impossible to do on a consistent basis. Long dated options help mitigate some of the timing requirements, but even then markets can remain irrational far longer than individuals can remain solvent so these strategies require much due diligence and professional analysis.
As you can see, becoming antifragile is a comprehensive strategy that requires a certain level of commitment and flexibility. I am convinced that such an antifragile barbell strategy is the key to thriving in the volatile times to come, however.
Approximately $1.5 trillion changes hands via economic transactions in the U.S. every month. People go to the store, go to the gym, take their wife out to dinner, pay their mortgage, and otherwise live their life to the tune of $1.5 trillion each month. But there is only $1.2 trillion dollars of physical U.S. currency in circulation, and at least half of it resides overseas. So where does most of the $1.5 trillion in monthly transactional money come from? Easy - it comes from credit. In the aggregate, U.S. consumers pay roughly half of all basic living expenses with credit. More than two-thirds of all commercial transactions are settled with credit.
In a nutshell: the grocery store stocks its shelves using credit then consumers come along and buy food from the shelf using credit. This works fine when the economy is functioning properly, but credit is the first thing to freeze up when monetary dislocations occur.
In 1978 the U.S. national debt was $789 billion and Social Security was comfortably in the green. Today, the debt is north of $18 trillion and the government's unfunded liabilities are somewhere around $200 trillion. The U.S. government will service this debt by creating vast sums of dollars out of thin air which will eventually cause major monetary dislocations in the economy. When the money goes bad, everything goes bad as we have observed throughout modern history. What happens to all of those credit-based transactions when the credit freezes?
Such economic analysis troubled me greatly three years ago. After working to become antifragile, I now view this analysis logically with an even-keel. Such peace of mind is the true power of the antifragile portfolio. Finances play an important role, but true Liberty is ultimately the goal of the barbell strategy. The beauty of this strategy is that it works well even if economic problems never materialize. The ultra-conservative side of the strategy keeps most of your capital sheltered even if your speculations do not bear fruit. Thus you can live to fight another day while focusing on those things in life that truly matter.
More to come,
For more of Joe's thoughts on the "Great Reset" and individual solutions, please read The Individual is Rising: 2nd Edition. The book is available through Amazon and it is offered for bitcoin at http://www.theindividualisrising.com. Please sign up for the mailing list to be notified of other projects as they come to fruition.
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Journal of a Wayward Philosopher