Investing

Gonzo investing means buying alternative assets like this 124.9 gram off-white, Siberian nephrite jade river cobble.

We live in a weird, weird investment world.

And as famous gonzo journalist Hunter S. Thompson once wrote, "When the going gets weird, the weird turn pro."

For those of you unfamiliar with it, gonzo journalism is an iconoclast form of reporting where the reporter eschews objectivity and throws himself headlong into a news story, often becoming a part of its narrative.  Now I have no strong opinions about gonzo journalism.  But I do think we can apply its radical outlines to investing.

That's right.  I'm advocating for gonzo investing.

Welcome to the funhouse of mirrors that is our 21st century capital markets.  If the Federal Reserve insists on debasing the currency in order to prop up our Potemkin stock market, then why can't you and I invest in the most esoteric, unappreciated assets we can find?  Enter gonzo investing.

But what exactly is gonzo investing?

I would define it as purchasing alternative assets that are currently ignored or outright hated by the financial establishment.  The premise behind gonzo investing is that you want to be where "they" aren't.  You want to zig when "they" zag.  You want to be so far ahead of the curve that you're falling toward the horizon, not running to catch up in a rigged financial game you can never win.

And right now "they" (Wall Street dealmakers and the big banks) love SPACs, private equity funds, passive ETFs, Bitcoin, FAANG stocks and anything with a lot of beta (a measure of sensitivity to broad market movements).

Therefore, according to the rules of gonzo investing we should pursue assets that have been left behind - things like precious metals, antiques, gemstones, fine art and other tangible assets.

As an aside, I'm going to leave it up to the reader whether to include crypto-currencies in their own personal gonzo investing universe.  But I will say this: Bitcoin can't be a gonzo investment.  It is the subject of intense Wall Street interest and admiration.  It has futures contracts trading on it, for God's sake!

Bitcoin is crypto-currency 1.0 - the least technologically advanced of all the cryptos (with the exception of its clones).  Even Litecoin (a near copy) is significantly more capable than Bitcoin!  Bitcoin's first-mover advantage is the only reason it has captured the demented imagination of Wall Street…for now.

What I'm saying is that if you intend to indulge in gonzo investing with cryptos, please stick to altcoins.

Anyway, I went "pro" (read: weird) with my own gonzo investing about a week ago by purchasing a water-worn Siberian nephrite jade cobble from a vendor on Etsy.  Jade is a wonder material - a substance that is somehow both eminently tangible and mysteriously ethereal all at once.  Venerated for thousands of years by the Chinese, Maori and ancient Meso-American peoples, jade has been sacred to every culture that had the good fortune to develop in geographical proximity to high quality deposits of the stuff.

The gem quality nephrite jade cobble I bought is a phenomenal specimen.  The soft, waxy luster of the 125 gram off-white river cobble is breathtakingly seductive.  The piece is such a fine example of a river jade that it is probably worth more as a mineralogical specimen than it could ever be as jewelry.

A pure white, known as mutton fat, is the most desirable and expensive type of nephrite jade in the world.  True mutton fat jade can sell for more than $50,000 a kilo.  The stone I acquired is off-white in color - most decidedly not mutton fat - but then again I only paid around $900 a kilo for it.  So I have no complaints.

But let's face it: using Etsy as a substitute for a brokerage account is a strange experience.  This is definitely gonzo investing at its finest.

Gone are the days when you could mindlessly dump your money into an S&P 500 Index fund or corporate debt ETF and expect non-negative future returns.  Savings accounts pay next to no interest.  Real estate is a minefield due to COVID-related rent moratoriums and the related collapse in demand for corporate office space.

What are we left with?

Bizarre, strange stuff, that's what.

The investment landscape is so distorted that we need to be willing to invest in things we might never have considered under more financially stable circumstances.

As a result, gonzo investing is the new black.  Not because we want it to be, but because the central bankers of the world have left us no choice in the matter.

When I was browsing on Etsy recently, I came across this gonzo worthy investment: a lot of eleven vintage fountain/ballpoint pens selling for a grand total of just $125.  Highlights of the group include a circa 1960s to 1980s Parker fountain and ballpoint pen set, a higher-end vintage Waterman pen (according to the seller; the pictures aren't clear enough for me to tell which one it is), and a 1930s or 1940s Sheaffer fountain pen with its original desktop stand and solid 14 karat gold nib.

A lot of 11 vintage fountain/ballpoint pens listed for sale on Etsy.

Photo Credit: OtherPeoplesStuf

There is more than enough in this lot to keep a vintage pen aficionado happy for quite some time.  I also have a sneaking suspicion that several of the pens may have solid karat gold nibs (beyond the one I verified).  This means you could potentially recover most of the purchase price in intrinsic gold value!  Of course, any vintage fountain pen collector worth his salt would instantly offer you 2 or 3 times melt value for any old gold nibs if you were inclined to sell.

Regardless, most of these pens would be worth much more restored to their former glory than they would be parted-out (provided they are in any kind of reasonable condition).

Now some people may hold the opinion that vintage fountain pens aren't much of an investment, but consider this.  They represent the romance of a time gone by that we all yearn for.  More and more people are becoming interested in reclaiming the small joys of the analog past in a world increasingly dominated by sterile digital interactions.

The supply of vintage fountain pens is also strictly limited.  They sure aren't making any more!

Although originally produced in sizable quantities, attrition has steadily eroded the population until only a small remnant survives today.  And as we all know, limited supply and high demand equals rising prices.  Buying vintage fountain pens is definitely gonzo investing at its weirdest - and I mean that in the best possible way.

Another slightly unhinged gonzo investment that I made earlier this year was the purchase of a 2021 Saint-Gaudens "$100 Union" silver fantasy coin in proof-like condition by Daniel Carr.  Although dazzling in its own right, the piece bears a striking resemblance to the famous Saint-Gaudens gold double eagle $20 gold coin that was struck by the U.S. Mint from 1907 to 1933 - a series widely regarded as one of the most beautiful U.S. coins ever struck.  This is because Carr's unique winged Liberty design was derived from an early sketch concept of American artist Augustus Saint-Gaudens' namesake double eagle gold coin.

Daniel Carr's $100 "Union" silver fantasy coin side-by-side with its inspiration: the Saint-Gaudens $20 gold double eagle.

Photo Credits: Wikimedia Commons and The Moonlight Mint

As a fantasy issue, the silver $100 Union's face value is strictly symbolic; it is in no way legal tender.  But if anyone ever offers to trade you one of these magnificent pieces of exonumia for a crisp C-note, take them up on it!  The massive coin weighs in at an astounding 100 grams of .999 fine silver and has a diameter of 50 mm (much larger than either a U.S. silver dollar or a gold double eagle).  To add to its allure the $100 Union is struck in gloriously ultra high relief; in effect it dances on the border between coin and sculpture.

I ordered this fantasy masterpiece directly from Daniel Carr's Moonlight Mint website at a cost of $240 (plus $10 shipping).  That translates into a price of almost $80 an ounce - fully 3x the spot price of silver bullion at the time of purchase.  Although it seems like an outrageously high premium to pay over melt value, there is a lot to like about these coins.

Daniel Carr struck the silver $100 Union fantasy piece for a limited three year run: 2019, 2020 and 2021.  Each of those years had a mintage of only around 100 pieces.  If you had purchased all three at Mr. Carr's original issue price it would have cost you $625 in total (plus shipping).  Due to the fact that only about 100 sets could ever be completed, it is easy for me to envision a time 25 or 30 years in the future when a complete set of these unique coins sells for 10 or 20 times the original issue price.

This is gonzo investing par excellence.

Unfortunately, Carr's silver $100 Union silver fantasy coins are sold out in his shop and therefore only available in the secondary market through venues like eBay.  If you are interested in reading more about Daniel Carr and his Moonlight Mint fantasy coins, I wrote an in-depth investment guide on the topic recently.

Daniel Carr Fantasy Coins & Overstrikes for Sale on eBay

Long-time readers of my site may have noticed my budding obsession with jade.  In true gonzo investment style, I have been building myself a rough jade portfolio over the last couple of years.  I will happily admit that this is a very unusual investment position to be taking.

But there is sound logic behind it.

Our financial system is swirling around the toilet bowl of history at present.  We don't know when the flushing will truly commence, but it is coming.  This will not only permanently restructure our monetary and corporate systems, but also our global supply chains.  In other words, the world will become much less connected by trade than it currently is.

Deglobalization is coming.

Much of the nephrite jade I've been accumulating originates from Siberia.  Most of these deposits are found to either the northeast of Lake Baikal in the Stanovoy Range or to the southwest of the lake in the Sayan Mountains.  This is incredibly remote backcountry.

Nephrite gradually weathers out of its host rock in the mountains over the course of countless millennia.  These newly freed jade nodules then wash into mountain streams and rivers where they are subjected to relentless wear and polishing from constantly flowing water.  Lesser materials are pounded into clay and sand - indeed almost all foreign matter associated with the jade is stripped away.  What is left are tough, compact water-worn cobbles of the highest quality Siberian nephrite.

Then some intrepid Russian jade prospector has to hike deep into the wilderness looking for that one in a million jade pebble sitting in an ice cold mountain stream.  He can do this for perhaps three months during the summer before the onset of colder fall weather puts a stop to his efforts.  Assuming he isn't rich enough to rent a helicopter (and he probably isn't), he must haul all those kilos of jade cobbles back to civilization using nothing but his legs.  This part of Siberia has few roads and little infrastructure of any kind.

Finally, if you pay him a pittance (usually just a few hundred dollars, give or take), he will happily ship a beautiful, satiny jade pebble straight to your door.

This is what I'm after - all of the treasure with none of the fuss.  Welcome to the world of gonzo investing.

However, it isn't hard to see how this mutually beneficial arrangement will all come to a screeching halt one day in the not so distant future.  First, there is a well-established pattern in jade mining where secondary deposits (usually alluvial - river - in nature) are mercilessly exploited until no more can be found.  This has already occurred in Wyoming, British Columbia, western China and Burma.  Siberia and Guatemala are currently in the process of being mined out.

Siberian Nephrite Jade River Cobbles for Sale on Etsy

Siberian Jade River Cobble

 

$340 USD

Siberian River Jade Cobble

 

$390 USD

Siberian River Jade Cobble

 

$275 USD

Siberian Dark Jade River Cobble

 

$150 USD

Siberian River Jade Rough

 

$250 USD

Siberian White River Jade Cobble

 

$110 USD

Siberian River Jade Cobble

 

$245 USD

Siberian White River Jade Cobble

 

$115 USD

Siberian Jade River Cobble

 

$315 USD

Siberian Jade River Cobble

 

$160 USD

Of course, once the secondary deposits are gone, prospectors can still mine the primary (hard rock) deposits.  But this is a very expensive proposition.  It requires massive amounts of mechanized equipment and well trained crews.  In addition, the jade extracted will often be of lower quality because the less-desirable material won't have been eroded away by nature yet.

The next problem is one of international trade.  COVID has shown us that our Gold Rubergesque, just-in-time global supply chain was a ticking time bomb.  Although it will be a painful and slow process, I'm certain that supply lines will inevitably become more regional in the future (probably continent-wide versus our current worldwide).  So one day the parcels full of wonderful treasures straight out of the Siberian wilds will probably cease to arrive at my local post office.

But until that day comes, I will continue to be a gonzo investor.  And you should be one too.

Read more thought-provoking Antique Sage editorial articles here.

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Photo Credit: Orange County Archives

We are currently living through the largest financial bubble in the history of mankind.  Stocks, bonds, real estate, private equity, crypto-currencies, and even some collectible categories are all grossly inflated in value.  Our current financial mania is broader in scope and larger in magnitude than the 1990s Dotcom bubble, the 1720s South Seas bubble, the 1980s Japanese Nikkei bubble, the 1920s Dow Jones bubble or the 1630s Dutch Tulipmania.

It is the perfect setup for a devastating market crash.

Now I understand full well that making predictions about the financial markets is a quick way to become a liar.  They are so unpredictable that you can simply never say never.  And indeed, what reasonable person would have thought that the U.S. stock market would exit the 2008-2009 Great Recession - the worst economic contraction since the Great Depression of the 1930s - and then proceed to bloom into the greatest financial apostasy of all time?

I have to admit that I didn't see it coming.

Of course, the real question is where do we go from here?  The conventional wisdom is that we've entered a new era of perpetually rising asset prices.  Stock market indices, real estate markets and crypto-currencies of all types will simply waft forever higher on their own smug sense of self-satisfaction, while their owners become rich, rich as Nazis I tell you!

Reality, however, is a harsh mistress.

I suspect that rather than spiraling higher into the financial stratosphere over the next few years, we are much more likely to experience a destructive market crash, or a series of lesser market crashes.  The historical parallels and mathematical realities governing our current predicament are just too brutal to have a happy outcome.

But why would I forecast a market crash when such events are rare throughout financial history.  Is our current "Everything Bubble" really that bad?

In a word, yes.  The Everything Bubble is so enormously overvalued as to be obscene.

For example, the S&P 500 index sports a sky-high price-to-sales ratio of 3.21 as of July 2021.  From the late 19th century right up until 1995 this ratio averaged around 0.8.  Since the Fed began blowing serial bubbles starting in the mid 1990s, the S&P 500 has averaged a somewhat higher ratio of around 1.5.  But this still pales in comparison to the 3.21 price-to-sales figure the index currently enjoys.

A 50% haircut in the major U.S. markets would barely bring this ratio down to an "elevated" average.

I like using the price-to-sales ratio as opposed to price-to-earnings ratios for a couple reasons.  First, sales tend to be far less volatile than earnings.  It isn't unusual during recessions for earnings to turn negative, but sales rarely drop by more than 10% or 15%, even in highly cyclical industries.  This makes movements in the price-to-sales ratios far more subdued, which in turn gives the observer a much clearer view of the economic fundamentals.

Earnings are also subject to a tremendous amount of hype and fluff.  For instance, companies will often tout misleading EBITDA (earnings before interest, taxes, depreciation and amortization) or operating earnings (sometimes known as EBBS or "Earnings Before Bad Stuff") to pump up their quarterly numbers.  And it is difficult to know whether the P/E ratio you're looking at is using trailing 12-month GAAP, forward 12-month estimated GAAP, trailing 12-month operating or forward 12-month estimated operating earnings in its calculations.  No such confusion exists with price-to-sales numbers, which always use the actual trailing 12 month values.

Finally, it is far easier for an unscrupulous company to alter its earnings in a fraudulent manner than it is to fake sales data (although both can happen).

Looking at a chart of the S&P 500 index's price-to-sales ratio is enough to induce vertigo.  Being a valuation metric, this ratio should lazily meander around a perfectly horizontal average with relatively modest variation on either side.  Instead we see an ascent on Mt. Everest, with the ratio blasting off from the COVID 2020 lows in a nearly vertical manner.  These sorts of blow-off top moves are a hallmark of late stage asset bubbles and nearly always resolve in a market crash.

A chart showing the S&P 500 Index's Price to Sales Ratio from 2001 to 2021.

Photo Credit: multpl

Another key indicator flashing red is the market cap of all U.S. stocks and bonds outstanding compared to GDP.  Much like the price to sales ratio above, this valuation metric is very, very reliable.  I first wrote about this important barometer back in 2018, but since that time it has gone completely bonkers.

As of Q1 2021 the total U.S. securities outstanding-to-GDP ratio stands at an unprecedented 565%, having risen sharply in just the past year.  But before 1991, the ratio had never risen above 200%.  Indeed, even during the very worst of the 2000 Dot Com bubble and 2007 Housing bubble the ratio never surpassed 380%.

This valuation measurement is so important because it not only takes into account the stock market, but also the bond market.  In fact, the well known Buffett ratio, which tracks the total market cap of U.S. stocks compared to GDP, is just a subset of this valuation metric!  But the total U.S. securities outstanding-to-GDP ratio is a more holistic tool than the Buffet ratio in isolation.  Every time a barely solvent company issues an ugly looking CCC-rated junk bond or a unicorn technology startup goes public, it is reflected in this all encompassing ratio.

To call total U.S. securities outstanding-to-GDP's current level repugnant is an understatement.  If we were to return to the historical norms that prevailed pre-1990, both the stock and bond market would have to take a combined 73% loss.  And because stock investors sit in a first loss position vis-à-vis bond investors, it implies a truly disastrous Depression-level event for equity indices - potentially an 85% or 90% market crash!

Either that or we avoid a market crash via hyperinflation.  Fun choice!

But hyperinflation - a crutch leaned on by far too many financial pundits these days - is an unlikely outcome, even against a backdrop of trillion dollar deficits and an ever expanding Federal Reserve balance sheet.

Under more normal economic circumstances, high inflation would mean rapidly growing nominal GDP and falling real debt loads.  This would make equities a more enticing proposition versus bonds because companies have an implicit inflation-adjustment mechanism - they can just raise prices for their products (if the market will bear it)!  These increased prices lead to additional revenue and earnings for firms in a persistently inflationary environment.

Market crash averted, right?

Not so fast.  The problem is that empirical observations of both U.S. and foreign economies do not reveal much evidence of inflation (excepting the temporary post-COVID spike).

Instead we see a troubling pattern where each successive recession leaves corporations, governments and average citizens more heavily indebted than before.  As the economy gradually becomes debt-saturated, more and more resources are diverted to paying the interest on these crushing obligations.  Consequently, non-essential economic activity slowly gets choked off leading to loss of pricing power, stagnant wages and disinflation, not inflation.

We can verify this by looking at a chart showing year-over-year nominal U.S. GDP growth rates over the last few decades.  I've added trendlines in red to show the average growth rate during periods of economic expansion.  The evidence is unambiguous - average nominal growth has been lower in every successive expansion since the United States cut the dollar's last link to gold in 1971.

The Financial Crisis of 2008-2009 was particularly damaging, with nominal GDP averaging 5.3% before the crash and only 3.7% afterwards.  It is anybody's guess just how low average nominal GDP will go in the aftermath of the COVID recession.  But there is at least one indisputable conclusion we can reach: absent massive changes to existing fiscal/monetary policies, nominal U.S. GDP will be lower over the course of the current expansion than the miserly 3.7% rate it achieved during the last expansion.

Persistently low growth and future disinflation does nothing to mollify fears of an imminent stock market crash.

Although I've peppered you with a multitude of frightening looking charts, one does have to exercise a degree of caution with valuation tools.  They can't be used to time markets.  There have been countless instances when an already overvalued market simply ignored reason and became even more overvalued.  And there is nothing to say it couldn't happen this time either.

But there are signs everywhere that this market cycle is far advanced, stumbling ever closer to a treacherous peak than any sort of harmless trough.

The first exhibit in our menagerie of speculative excess is the crypto-currency market.  Bitcoin, of course, needs no introduction, but it is the other, lesser cryptos that I would like to focus on for a moment.  These less well-known - although perhaps more infamous - crypto-currencies are often collectively termed "shitcoins" by a skeptical crypto community.

I measure speculative fervor in the crypto-currency space via two methods.  The first is the total market cap of all cryptos put together.  Because the space is dominated by Bitcoin, that particular token constitutes the bulk of outstanding market cap (usually between 40% and 70% of the total).  Aggregate crypto-currency market cap peaked in May of 2021 at an astounding $2.5 trillion.  To put this amount into perspective, it is believed that all of the above-ground gold in existence is worth perhaps $10 or $11 trillion.

Although the total market cap metric is quite useful, it has limited applicability with regard to shitcoins because they tend to have small market caps relative to Bitcoin, Ethereum, Tether and the other big boys.

That is where my other measurement tool comes into play - tracking the number of cryptos that have individual market caps greater than $1 billion.  In spring 2021 we hit 105 cryptos - mostly shitcoins - with a market cap of at least $1 billion.  This includes illustrious and desirable virtual currencies such as Ox (ZRX), Avalanche (AVAX), THORChain (RUNE) and my personal favorite, SushiSwap (SUSHI).  BakeryToken (BAKE) was a close second.  With names like these, how could you not be assured of great future wealth, honor and surgically enhanced women hanging off every arm?

That last sentence was sarcasm, by the way.  In reality, the price action we are seeing in shitcoins is a classic sign of financial mania.

Gold Bullion Coins for Sale on eBay

The speculation in the crypto-currency space has become so extreme that otherwise intelligent people are "investing" in shitcoins that they know are probably fraudulent because the allure of easy money is simply too great.  Bloomberg recently ran a great article on the topic titled "Crypto Scammers Rip Off Billions as Pump-and-Dump Schemes Go Digital".

Here are a couple money-quotes from the article:

"'Everybody I know has gotten rug-pulled [been the victim of a pump-and-dump scheme],' says Titus, a 38-year-old butcher in Salem, Oregon.  'You know, you win some, you lose some.  Hopefully, win more than lose.'"

"Many who feel they’ve been ripped off just shrug. They chalk it up to the cost of doing crypto, the price of buying a lottery ticket that maybe just might hit that big jackpot."

My God, is humanity dumb.  We keep repeating the same financial mistakes again and again, apparently forever.

Fortunately (or maybe unfortunately, depending on your viewpoint), this intensity of speculative fervor can't persist for very long.  The crypto space will either have to continue delivering amazingly high returns (even taking into account all of the pump-and-dump schemes), or it will implode in on itself in spectacular fashion (while taking many peoples' savings with it).

In any case, a future market crash is assured; it is merely the timing that is uncertain.

Another area where we see speculative price action reaching a frenzied peak is in that old favorite of market gamblers everywhere: the S&P 500 Index.  I've created a chart showing the S&P 500 from the spring of 2009 (which was the bottom after the Great Financial Crisis) to July 2021 (the latest data available).  I then segmented the chart into 5 distinct rallies during that 12 year period.  Finally, I drew a linear trendline in red through each separate rally.

The results are stunning.

It shows that each successive resurgence in the S&P 500 during the recent bull market has enjoyed a steeper slope than its immediate predecessor.  As "investors" (I put that term in quotation marks because they are really gamblers) become more assured that the stock market is a perpetual escalator up, they buy the next dip more aggressively.  As a result, each subsequent rally is more extraordinary than the previous one.  It is true that each runup in stocks is interrupted by a brief sideways market action or minor decline, but this merely serves as a prelude to the next dramatic ascent.

When you zoom out, it is clear that the entire edifice takes on the appearance of an exponential curve - a hallmark of financial market manias spanning the ages.  Perhaps most worryingly, the trendline angle of our current rally is well in excess of 70 degrees - a thoroughly unsustainable angle of attack.  For all you geometrically challenged people out there, a 90 degree rally would be perfectly vertical.  This doesn't mean we can't have another market drawdown or consolidation followed by an even more extreme melt-up, but such an outcome is cosmically improbable.

Instead it is far more likely that our speculative mania reaches its natural endpoint and swan-dives into a magnificent market crash - Fed be damned!  Few financial market participants are prepared for an event of this magnitude.

The final area where speculation has exploded within the past couple of years is certain niches within the collectibles market.  Magic the Gathering cards, comic books, modern sports cards, video games, sneakers and Pokémon cards are all collectible categories that have experienced frenzied trading and price increases.  Although an important catalyst for these moves was undoubtedly the spring 2020 lockdowns associated with COVID-19, pricing has since taken on a life of its own.

For example, a 1993 Magic the Gathering Black Lotus (alpha) card is more than $50,000 in the summer of 2021, a 300% increase from its price just 3 years ago.  A 1999 Pokémon Charizard Holo 1st Edition certified PSA 10 is $350,000, a nearly 800% increase over the same time.

Meanwhile, in the world of vintage video games a factory sealed, Wata 9.8 certified copy of 1996's Super Mario 64 for the Nintendo 64 console brought a cool $1.56 million in a July 2021 auction.  And that record-breaking sale eclipsed a Wata 9.0 certified early production run Legend of Zelda Nintendo game cartridge from 1987 that had sold for $870,000 just days earlier.

The speculative excess in these collectable categories is truly breathtaking.

Here is a chart showing climbing market prices for a Magic the Gathering Black Lotus card (alpha).

Photo Credit: MTG$

If you read my website at all, you know I'm a proponent of using fine antiques as an investment vehicle, but that enthusiasm does not extend to the collectible space.

The collectibles that are skyrocketing in price are largely made of plastic, paper and cardboard.  Most can't even be used for their originally intended purpose without destroying their value as collectibles.  They are nothing like the antique jewelry, sterling silverware, old coins and other high value objets d'art that I recommend savvy investors accumulate.  These venerable antiques are made from some of the most enduring, desirable substances on earth - stuff like gold, silver, gemstones and exotic woods.

I would also like to point out that the piranha-like price action in the vintage collectibles space is tightly confined to those items from the 1980s, 1990s and early 2000s.  This is not a coincidence.  I believe that collectibles from this time period are shooting up in price for one very good reason.

The Millenials in their 20s and 30s who are speculating on these items have never seen a real market crash in their adult lives.  The last truly significant market decline was the 2008 to early 2009 timeframe.  Since that time, the Federal Reserve's Everything Bubble has persistently risen regardless of the macroeconomic backdrop.  Young people - anyone below the age of about 35 or so - have come to believe that bursting bubbles and crashes are myths told by old investors to scare them out of the markets.  They have also conflated gambling with investing due to having no point of reference for what a normal, reasonable market looks like.

In contrast, most collectibles from the 1960s and 1970s - Hot Wheels cars, Barbie dolls, PEZ dispensers, Hummel figurines, etc. - are dead in the water.  These older collectibles have seen effectively no price bump at all during the last few years.  In fact, their prices have been declining!  I attribute this to the fact that older collectors who would normally be buying these items are too experienced to fall for the ridiculous arguments about never ending demand and perpetually rising prices.

We are in the midst of the greatest investment mania of all time.  But as euphoric as investors, speculators and gamblers in various asset markets are today, there are sure to be tears tomorrow.  A market crash is coming.  I can't tell you when and I can't tell you how, but it is coming.

I will leave you with a quote that famed economist Roger Babson made in a speech on September 5, 1929, just weeks before the Dow Jones bubble burst:

"Sooner or later a crash is coming, and it may be terrific."

I believe we are living in similarly dangerous times.  Protect yourself.  Buy cheap assets like precious metals and high quality antiques.  Make certain to hold large cash reserves.  Don't use leverage.  A market crash may be frightening, but you can survive it if you act now.

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Hyperinflation is on everyone's lips today.  Investors are scared to death that they will wake up one morning and look out the window only to find that the world has devolved into a monetary Venezuela.  In this fantasy world, desperate people will frantically shuttle around huge stacks of rapidly depreciating cash in wheelbarrows, all while looking in vain for a business or shop that will exchange their increasingly worthless fiat for something - anything - of value.

Unsurprisingly, I have a different opinion.

I think the developed world is currently experiencing a multi-decade long "soft" depression, where economic growth, wages and consumer demand all remain stagnant.  In this scenario it is disinflation, not hyperinflation, that we need to watch out for.  Disinflation is defined as a monetary phenomenon in which inflation is still positive, but tends to move asymptotically towards zero over time.  It is important to note that disinflation is distinct from deflation, where prices tend to decline over time.

For now, though, it is hyperinflation that has caught the imagination of nervous investors.  In February 2021, genius hedge fund manager Michael Burry (who was favorably portrayed in the movie The Big Short) publicly warned that the United States is going down the same hyperinflationary road as Weimar Germany.  Since then, the financial media has been filled with breathless articles about how we are teetering on the brink of a dollar collapse as we transition into a hyperinflationary regime.

But I want to focus on one specific article I recently read titled Trading "Project Zimbabwe".  It was written by "Kuppy" of the Adventures in Capitalism blog.  I've referenced him before in a post I wrote in the summer of 2020 called Money Printer Go Brrr - The Hyperinflation Myth That Won’t Die.  I chose to highlight his latest work because it is typical of the hyperinflationary scare genre that is so popular right now.

I'll excerpt a few choice quotes below:

"I like to joke with friends that if they want to hedge their portfolio, they should buy the 2022 SPY $1,000 call [with a strike nearly 2.5x current levels] because they probably do not have enough right-tail [inflation] protection.  They roll their eyes or laugh a bit, but this is only because they have not studied the period we are about to go through."

The author then follows up with this gem:

"Part of what is so misunderstood about the Weimar period is the extreme volatility. Traditional charts simply show an index going parabolic. Even log charts look rather similar.  However, there were multiple dramatic market crashes along the way.  There were many speculators who recognized what was happening, pressed too hard and got liquidated during one of these crashes.  Others survived the margin calls but sold out through sheer panic.  Even if you know the road-map, you can get whipsawed."

Then he finally knocks it out of the park:

"I have written about this multiple times in the past year, but put selling is literally the gift that keeps on giving…in a world where JPOW has eliminated the left tail, yet retail investors are crazily overpaying for calls, implicitly juicing put implied volatilities, why would I do much else but write puts with my capital?"

This investment strategy is a huge red flag to me.  I have a fair amount of experience with options and writing puts is effectively writing an insurance policy.  You are pledging to bail out the put buyer if anything goes wrong with the underlying stock.  It doesn't matter whether it is an adverse political event, generalized financial collapse or company specific fraud - the put writer will be forced to deliver cash and take devalued shares in return.

It is akin to picking up nickels in front of the proverbial steamroller.  Everything might go swimmingly well for years at a time, only to have your carefully constructed strategy spin apart in a couple days dominated by "impossible" multi-sigma moves.  Financial history is littered with the corpses of similar trading strategies that, although back-tested perfectly over a 5, 10 or 20 year time period, nonetheless failed spectacularly within a few years of their implementation.

My philosophy is that if you write put options on overvalued or junk stocks you will, sooner or later, end up being the proud owner of a portfolio full of those same loathsome stocks.

Now Kuppy is no fool.  So why is he so enthusiastic about a trading strategy that has bankrupted countless speculators before him, especially when he understands the concept of tail risk?  What is really going on here?

In my opinion, Kuppy is getting rich by speculating.  He, along with most other market participants, has discovered that you can throw your money at almost anything during our ubiquitous Everything Bubble and still make good money.  But the problem with participating in a financial bubble is that it is a case of easy come, easy go.  You will inevitably lose any money you've made if you don't cash out.  But cashing out means walking away from future easy gains and few people have the intestinal fortitude to do that.

Therefore, most speculators resort to rationalizing their bubble antics instead.

The conventional wisdom right now is not that we are experiencing a series of obscene bubbles rife with grave financial risk, but instead that we are facing the progressive, accelerating debasement of the U.S. dollar.  This renders savings, conservative investing and prudence ineffective - indeed downright stupid - but only if the hyperinflationary narrative is true.

Unfortunately for Kuppy and company, I think disinflation is a far more likely monetary outcome over the course of the 2020s.  And if disinflation doesn't happen, then deflation (not hyperinflation) is next in line as being the most likely result!

I hold this unpopular opinion for a multitude of reasons.

First, it must be unequivocally stated that commercial banks, not the Federal Reserve, have been the unquestioned driver of money creation in the United States since World War II.  A commercial bank is just a fancy term for any deposit-taking institution that also engages in fractional reserve lending.  In our modern world, governments located in developed economies made a deal with the devil whereby politicians effectively outsourced money creation to the commercial banking system.  This means that it is private bank loan creation that drives growth in the money supply, not the Fed printing up new reserves via quantitative easing.

U.S. banking system loan growth from 1953 to 2020.

Photo Credit: Alhambra Investments

As you can see from the chart above, private lending in the United States has been anemic ever since the 2008 Financial Crisis.  And why wouldn't it be?  Consumers and small businesses that might need or want a bank loan are already debt-saturated.  Everybody has much weaker balance sheets than they did just 20 or 30 years ago.  Most banks take one look at the credit risks involved and sensibly walk the other way.

As a result, the growth in borrowing in our economy is currently driven by governments, government agencies and mega-corporations - all of which have relatively strong balance sheets and direct access to capital markets.  But floating a new bond issue through an investment bank isn't fractional reserve lending; hence it results in no new money supply growth.

I would be much more sympathetic toward inflation fears if we did not have any good data on the subject.

However, we have two modern counterfactuals that cast doubt on an inflationary outcome: Japan and the Euro area.  Both of these economies lowered their interest rates to zero (or below zero in some cases) and had central banks that engaged in rampant balance sheet expansion.  Regardless, inflation rates in both regions have been perennially lower than in the United States for many years running with no prospects for an imminent change in the situation.

The U.S., Japan and Europe have been engaging in remarkably similar fiscal and monetary policies for some time now.  Disinflation, sometimes devolving into outright deflation, has dominated in the latter two cases.  So why in the world would we expect there to be a different outcome in the U.S.?

Securities markets agree with my assessment as well.  Both U.S. Treasury bonds and the foreign exchange market have been remarkably sanguine about the future of the U.S. dollar.  If hyperinflation - or even simply elevated inflation - was lurking on the horizon for the dollar, you would expect bond investors to be a little skittish about tying up their money for 10 years at a nominal yield of only 1.5%.

Yet that is the going yield-to-maturity on a 10 year U.S. Treasury note as of June 2021.  It sure smells like disinflation to me.

Naysayers claim that the Fed's $120 billion per month purchases of Treasury and agency debt invalidate any pricing signals coming from the bond market.  But it is important to note that out of the approximately $4.5 trillion of net new Treasury issuance in 2020, only around $2.4 trillion was purchased by the Federal Reserve.  The free market happily absorbed the other $2.1 trillion with nary a complaint - and all at or near record low yields.

And that leads us to our next problem.

Economists really don't have a proper definition for the U.S. dollar and, therefore, can't accurately measure its supply.  I know, I know…the green paper stuff in your wallet is dollars.  That is absolutely true, but physical currency makes up a tiny fraction of the dollars in existence.  Most dollars these days are purely digital in nature, existing only as a series of 1s and 0s in some database.

Not only that, but dollars don't even have to be domestic to be considered dollars.  The Eurodollar market refers to all the U.S. dollars that are deposited or domiciled outside of the United States.  These are typically concentrated in tax havens like the Cayman Islands, the City of London, Switzerland, Singapore, etc., but they can reside in any foreign locality.  The Eurodollar market is massive and has a huge influence on interest rates and international capital flows.

In any case, we don't have a good definition of exactly what a dollar is.  After much contemplation, I've come to the conclusion that the commonly cited monetary aggregates published by the Federal Reserve - M0, M1, M2, MZM, etc. - are far too narrow in their scope to be useful.

The closest I've come to a good definition is this: the dollar is a currency unit that can extinguish U.S. tax liabilities and dollar-denominated debts.

But even that leaves a lot of wiggle room.

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Is your money market fund dollars?  Probably not, considering that it holds short-term corporate or government debt (which is a pledge to pay dollars in the near future, but not quite yet).

How about an Amazon gift card?  It might be denominated in dollars, but you sure can't pay your income taxes with one.

And what about stable-coin crypto-currencies like Tether?  They are pegged to the dollar and (purportedly) backed by reserves, but they ultimately aren't dollars either.

In spite of these monetary instruments clearly not being dollars, they can all act very cash-like under many circumstances.  During the good times, these cash-substitutes (which are typically privately issued) proliferate, leading investors to falsely believe there is far more money in the economy than there actually is.  But when the bad times come and people need money, they quickly discover that cash-like doesn't always mean cash.

As you can see, this gets very messy, very quickly.

It also leads to the next reason I believe disinflation is in our future rather than rampant inflation: deflating asset bubbles.  Bubbles are both self-referential and self-reinforcing due to their intrinsic nature.  Persistently rising prices in an asset class (any asset class) gradually draw in more and more speculators who believe they are making a one-way bet.  Eventually, even otherwise conservative investors buy-in, deluding themselves into thinking they are prudently investing when they are really gambling.

Although primarily financial creatures, bubbles create a host of real world side-effects in the mainstream economy.  The first is the infamous wealth effect, where investors spend lavishly on vacations, home improvements and fancy dinners because they feel flush with unrealized portfolio gains derived from skyrocketing asset markets.  This is the transmission mechanism that the Federal Reserve is explicitly targeting with its reflation-oriented, low interest rate policy.

Unfortunately, the wealth effect is much less powerful than central bankers originally believed.  Rich people own most of the world's assets, but have already bought as many Greek islands, Rolex watches and bottles of vintage wine as they care too.  Piling another million or two on top of their already prodigious mountains of wealth is unlikely to spur much more consumption.  On the other hand, your average 401-k investor with a 9 to 5 job is probably not going to splurge on a new $50,000 SUV just because his Apple stock netted him a cool 10 grand.

But where bubbles really do goose the real economy is in respect to employment and wages!

The investment banks that are cranking out worthless technology IPOs by the dozen need an army of bankers, lawyers, accountants and marketers to do the grunt work involved.  Likewise, our gargantuan housing bubble is keeping an entire fleet of real estate agents in the lifestyle to which they have become accustomed.

Perhaps most interestingly, the profitless prosperity companies - Netflix, WeWork, Tesla and others like them - are directly pumping up employment in a big way.  These are often good jobs that deliver high salaries and generous bonuses.  Private equity is the typical funding mechanism for pre-IPO profitless prosperity firms.  And much like workers in investment banking and hedge funds, private equity employees also receive generous compensation.

Taken together, it is clear that the true transmission mechanism for low-interest rate fueled bubbles is through the salaries and bonuses they provide to those employed in bubble sectors.  These strong wages help keep consumption and, by extension inflation, higher than it would be otherwise - probably much higher.

Of course, we must naturally ask ourselves what happens when our dear bubbles inevitably burst?

It is difficult to see how it couldn't be a massacre.  Layoffs will be widespread and disproportionately hit bubble employees making relatively high salaries.  The freshly unemployed will be forced to tap equity portfolios and retirement accounts in order to put food on the table, but those securities will be worth much less due to falling markets.  Many formerly middle-class peoples' houses will be repossessed as continuing to pay the mortgage, property taxes and insurance will prove to be untenable.

This is the stuff of nightmares.  It is the reason the Federal Reserve is so frightened that the bubbles they've created will collapse, dragging the economy down with it.

Here is the kicker though.  The inflation rate in the U.S. since the 2008 Financial Crisis has been anemic at best.  And this is with the benefit of the Everything Bubble pumping up employment and wages.  In fact, the United State's prominent position as bubble factory to the world is probably one of the only reasons why our inflation rate has been consistently higher than in either Europe or Japan.

It isn't too difficult to imagine a near future where the bubbles stop bubbling and disinflation or deflation results.

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There are other good reasons to expect disinflation, of course.

The rapid expansion of private sector debt during the 2020 COVID debacle springs to mine.  Additional borrowings by large corporations, small businesses, landlords and their tenets (leases are just another form of debt) will all weigh on future economic consumption.  All that new debt will eventually have to be repaid (with interest) or defaulted upon - a highly disinflationary prospect.

We can expect tax rates to climb in the future as well.  This will be driven by the need for the U.S. government to appear at least somewhat responsible in the face of continually escalating deficits.  Tax increases, even if insufficient to close the budget gap, will be a powerful signal to markets that the government will not spend itself into ruin.

But tax increases reduce consumption in an economy and contribute to deflationary impulses.  Rising taxes on corporate profits would be especially devastating because so many investors have come to expect the companies they invest in to pay little to no tax.  However, I think the generational low for such taxes came with the passage of the 2017 Trump tax cut, when U.S. corporate taxes were dropped to a flat 21%.  Higher corporate taxes are almost a given in the current political environment, which will contribute substantially to future disinflation.

I would like to note, however, that disinflation does not mean that prices drop.  On the contrary, I think it highly likely that nominal prices will be higher 5 years, 10 years or 20 years from now.

And I'm no inflation denier, either.

2021 has seen a major upward adjustment in prices due to the lingering supply-chain disruptions caused by the COVID pandemic.  These price increases are very real and very sticky too.  We won't be giving them back, short of falling into a severe deflationary spiral.

Disinflation merely means that going forward we are likely to see slow, modest price increases, rather than dramatic, galloping ones.

The important take away from all this inflation/disinflation/hyperinflation talk is that the best way to protect yourself is to have a healthy cash cushion and to invest in reasonably priced assets.  The cash part is easy enough, even if relatively boring.  Finding reasonably priced assets in our massively overvalued markets is much harder.

This is where antiques, bullion, art and gemstones can play a vital role in your portfolio.  These are the asset classes that time forgot.  While financial pundits are hysterically shrieking about hyperinflation, many tangible assets have been curiously ignored by bubble-obsessed investors.

But their loss is your gain.

Because they are so cheap, a prudent investment in fine antiques or bullion will do well in almost any conceivable monetary future.  And it doesn't matter whether we ultimately face disinflation, deflation or hyperinflation, tangibles will navigate them all with equal aplomb.

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