I am semi-educated in finance – books more than practice. 3 years of public accounting and an MBA in finance from a very prestigious Ivy League school notorious for producing Wall Street types who end up in federal prison for white collar crime. Might be a few alumni on the hook at BSC. The following is my (lengthy) and humble opinion:
My take is that our fiat money will allow the necessary pain of correction to be spread over time and across several diverse groups – domestic and foreign. The powers that be can generate literally an endless supply of dollars to keep things from seizing up the way they did in November 1929. Economic activity was so frozen that it was difficult for farmers to get money to plant food, and there were tremendous dislocations of families and communities. No one came out a winner – well almost no one. We may have dodged a similar bullet last week. There may be a few more bullets to dodge. My take is that the current bear market rally is the market’s recognition that this Fed is willing to print as much money as needed to keep the economy from locking up. That’s the good thing about fiat money, and Heli-Ben is no Roy Young. The financial system will be kept lubricated and running. Period. Even it the dollar gets beat up in the process and hurts dollar savers, T-bill investors, CMO investors, foreign manufacturers, and domestic fixed income retirees and wage earners.
The bad thing about fiat money is that it does not function as a perfect store of value. Over time inflation erodes the value. Right now, the rate of erosion is increasing and that is destroying some wealth but not nearly as much as would be lost in a 1930s style scenario. People on this board write glibly about the ’30s, but the truth is there was not enough food to go around then. Like parts of Africa today people went hungry. Try telling your kids that they aren’t getting dinner for a couple nights in a row. Inflation is a lot better than food riots.
So, even if we end up with South American style hyper-inflation (extremely unlikely), the sun will come up every morning and people will go to work, earn wages and engage in economic activity. Period. Everyone should take comfort in this.
As far as how to hedge against further declines in the dollar – hell, one of the best dollar shorts around is a fixed rate 30 year mortgage. Fiat money begs to be gambled, borrowed and lent – after all, it is not real – it is ephemeral and meaningless – it is just an image, a shell, an emotion and a feeling. If you think the dollar is going down the toilet, just short it (i.e., borrow it at a low fixed rate of interest and pay it back later using post-inflation money). Lock in 5.75% for 30 years and laugh as inflation reduces the true value of what you owe. And you even get an income tax break along the way. Just gotta find the right situation so the depreciation of the collateral asset you purchase doesn’t eat into the gains from your short position. I did this and got a nice 30 year fixed on a property one block from the beach with a good future as a weekly rental – or a vacation home if I don’t need the income. Bring it on Bennie – drive that dollar into the dirt! After inflation and after taxes my cost of money is right about zero and may soon go negative. I think I’ll go sneak a corona on the sand tomorrow afternoon and think about this with a smile. I love getting a “free” 30 year short position on the dollar, especially when the valuation cycle of the collateral used to buy the position is 5 to 10 years.
If you have a more immediate investment horizon, you could look at equities, which tend to do OK during inflation. Double down with foreign companies. Look at some Hong Kong equities. China has a real economy now so even if the USA stops buying from them you could get some good exposure there. The patriotic way to play the declining dollar would be to buy shares in a domestic company with dollar costs and non-dollar pricing (i.e., they make stuff here, not in Mexico and sell it anywhere but the US off a price sheet that uses the buyer’s currency). Great concept, not so sure too many of these exists. Not yet anyway, but they may soon evolve.
Rather than dig a fox hole you should get flexible, diversified and fight a guerrilla war – hit and move, don’t play by the “rules”. Spread your chips around the table and expect to take some hits. And don’t forget that the Fed is going to do whatever it takes to keep the market liquid – $200BB, $600BB, $1TT, $2TT – whatever it takes – even if it means hyper-inflation (it won’t). It’s a no limit table and there will be no food riots. Inflation will take its vigorish and we will all be bit poorer because of wasteful practices like war. Despite Ron Paul’s protestations to the contrary, the shell game of fiat money makes us wealthier not poorer.
