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Be Your Own Central Bank

It will come as no surprise to students of financial history that the global monetary system is gradually spinning out of control. Yet most traditional asset classes - including stock and bond markets - remain unnaturally buoyant. This is especially confusing given that the COVID pandemic of 2020 has decimated the fragile, over-levered service economies of the developed world.

Stock markets have been so robust that it has been easy for investors to sleepwalk through the entire ordeal thus far. Provided you didn't sell into the teeth of the decline in March 2020, returns are looking quite robust this year with the S&P 500 up more than 14% YTD through the end of November 2020.

And yet all is not well.

The U.S. unemployment rate remains quite elevated at 6.9% - a figure that is no doubt understated as it excludes "discouraged" jobseekers. Meanwhile, GDP - although bouncing fiercely off its recent bottom - is still firmly lower than it was at the end of 2019. Combine these with the imminent bankruptcy and closure of thousands of small businesses and you have the beginnings of an economic apocalypse for the average person.

Most U.S. citizens are drowning in debt. They have mortgages, student loans, car loans and credit card debts to pay, not to mention monthly utility bills. These people need a constant stream of dollars to service these obligations.

The pandemic interrupted that vital flow of dollars. As a result, many families are on the ropes, financially speaking.

The U.S. Congress gave temporary respite in March 2020 by passing a stimulus bill back that granted enhanced, $600 weekly federal unemployment benefits and a $1,200 check to every adult citizen. Sadly, this forwarding-looking piece of legislation has not been followed up on as the Republicans and Democrats both angled for political advantage in the lead-up to the 2020 elections.

Now the chickens are coming home to roost.

The stimulus funds disbursed earlier in 2020 are nearly exhausted. And renewed COVID lockdowns mean that employment isn't returning to normal for the next several years at a minimum. As a coup de grâce, a national moratorium on evictions is scheduled to expire on January 1, 2021.

Barring a miracle, 2021 promises to be an economic disaster of almost unimaginable proportions.

All of this is slowly leading up to the monetary endgame for the dollar (and every other fiat currency out there too). While it has been a long time coming, it is obvious now that future economic policies in the developed world will be dominated by MMT - otherwise known as Modern Monetary Theory. MMT is the idea that a government that issues its own "sovereign" currency can print money without limit or negative consequences. Theoretically speaking, the sole possible undesirable outcome is if the economy should run into physical resource constraints, which would show up as inflation.

In other words, embracing MMT would give governments the philosophical green-light to engage in nearly unlimited fiscal stimulus. They could mail out one-time checks to every adult citizen (and for much higher amounts than the $1,200 stimulus checks the U.S. has already disbursed), send regular monthly checks as part of a UBI (Universal Basic Income) program or decree a (well-paying) jobs guarantee for anyone who wants one.

All of this means that the U.S. dollar's days as a store of value are numbered. No, the dollar won't become valueless overnight (or within the next few years, for that matter). And you will still need dollars (or whatever your national fiat currency happens to be) to pay your mortgage, utilities and taxes for the foreseeable future. But the dollar's (and other fiat currencies') ability to transmit value over time is clearly eroding.

What is an investor to do?

Should you chase the equity bubble and hope against hope that stock market indices don't drop by 50% or more in the next downturn? Should you invest in long-dated bonds that only pay 2% or 3% per annum, barely keeping up with inflation?

If the choices available in traditional asset classes seem unappealing, it is because they are unappealing. You can't expect a portfolio stuffed full of Tesla, Visa and random junk bonds to save you. However, I do believe there is one viable solution that stands above all the others.

You have to be your own central bank.

What do I mean by that? That's simple. You should replicate the typical central bank balance sheet in your own portfolio (with a few minor modifications).

So what sort of assets do central banks usually hold? Most of the time they own a mixture of sovereign government bonds (often U.S. Treasury bonds) and gold. Interestingly, many central banks have been aggressively increasing their gold holdings over the past decade.

I propose that you be our own central bank by copying this basic template with a few changes. First, instead of longer-dated sovereign debt I think you should stick to shorter-dated, cash-like instruments. Some examples from this category would be physical cash, CDs, savings bonds or a savings account.

The key would be to take on as little credit risk as possible with this part of your portfolio. So only investments in government-guaranteed debt, FDIC-insured deposit accounts or other short-term financial instruments of superlative credit quality would be acceptable here.

The reason the assets should be cash-like is to make sure you don't run out of liquidity. This might seem counterintuitive considering that I just told you the U.S. dollar is eventually destined for the trash bin of monetary history. But there is a method to my madness.

You see, a be your own central bank portfolio should also have a sizable allocation to tangible assets, with an emphasis on precious metals such as gold, silver and platinum. Holding cash and other safe dollar-denominated assets is just a way to protect these tangible assets against exigent circumstances.

Allow me to explain.

The absolute worst thing that can happen to you when you hold tangible assets is being forced to liquidate (sell) before you want to. You will be on the wrong side of the bid-ask spread during a forced sale and will be at the mercy of whatever market forces happen to be in play at the time. Given that many personal financial crises coincide with national/international financial panics (stock market crashes, currency crises, systematic bank failures, etc.), a forced liquidation of tangible assets is likely to occur at the worst time possible.

As mentioned above, we all still need dollars (or our respective national currencies) to pay our monthly bills. If financial disaster should strike - you should lose your job or face a major unexpected expense - you could easily run out of ready cash if you are not adequately prepared. We want to avoid this possibility at all costs.

If you want to be your own central bank, the tangible asset portion of your investment portfolio must be sacrosanct! And that means never being forced to sell against your will.

And now we get to the really interesting part of being your own central bank: the tangible assets themselves. I think it is vital to stick to investment grade hard assets like high quality gemstones, antiques, fine art and, of course, bullion. These desirable items can be hung on the wall or worn on the wrist. They are oftentimes compact enough to fit into a shoebox. But they are always in demand because of their rarity, beauty and historical significance.

I would like to note that I'm not alone in this analysis, either. While central banks all over the world hold gold reserves as insurance against financial disaster, one institution has taken this idea further. I'm referring to the Russian Gokhran, a sovereign government fund dedicated to investing solely in tangible assets.

In any case, the portfolio weightings you choose can be at your own discretion. A be your own central bank portfolio can be as simple or complex as you want it to be. If you want to just hold all gold bullion balanced with T-bills to ensure adequate liquidity, I think that works. But if you want to own an extensive collection of World War I trench watches or antique Japanese samurai sword fittings as the tangible anchor in your portfolio, I think that works too.

5 Gram Gold Bullion Bars for Sale on eBay

It is also vitally important that you take physical possession of whatever hard assets you decide to buy. Don't be fooled into allowing your gold or silver to be "stored" at a third-party vault where you can't see it or touch it. I don't care whether you opt for a local bank safety deposit box or a home safe. But you absolutely need to have your tangible assets somewhere you can get your hands on them.

As the old saying in the precious metal community goes "If don't hold it, you don't own it."

The point is that you need to exchange at least some of your dollars for something physical, something real. Our financial system has been swirling around the abyss for years at this point. It isn't hard to foresee a future where stocks crash and mass bankruptcies gut the corporate bond market. Or maybe our economy will experience an inflationary collapse from the effects of massive MMT-driven cash injections.

The point is that traditional asset classes will undoubtedly perform poorly in the future, although we can't know the exact circumstances under which our coming investment dystopia will unfold. Hard assets like antiques, precious metals, fine art and gemstones offer the average person a way to sidestep this coming disaster.

Despite their many fine qualities, investment grade tangible assets don't get a second look from most investors today. This is puzzling in light of the fact that the wheels are slowly coming off the global monetary system. But don't fret. The foolish investor's misfortune can be your boon, but only if you strive to be your own central bank.

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The Fed and Central Bank Digital Currencies

We've all heard about Bitcoin and other crypto-currencies, which are all the rage right now. But did you know that central banks around the world have been looking to create their own versions of crypto-currencies called central bank digital currencies?

This entire process kicked off in mid 2019 when social media giant Facebook announced ambitious plans to create a blockchain-based digital stable-coin called Libra. This new crypto-currency was going to be backed by vast pools of safe, short-term debt instruments denominated in U.S. dollars, euros, British pounds, Japanese yen and Singapore dollars - much like a money-market fund. The resulting digital currency would be relatively low-volatility - hence the name "stable-coin" - and could easily be traded across international borders via Facebook's digital Calibra wallet.

However as 2020 dawned, it quickly became apparent that Facebook's Libra digital currency would be stillborn. Politicians and central bankers across the political spectrum strenuously objected to the bold plan. Although the official skepticism towards Libra was ostensibly because of concerns over money laundering, in reality the idea was scuttled because it had the potential to permanently disempower existing national fiat currencies and their political beneficiaries.

But this idea did make it apparent to central bankers all over the world that digital currencies were here to stay and that if they wanted to remain relevant, they needed to adapt. Facebook's failed Libra initiative became the motivation behind the idea of replacing existing national fiat currencies with central bank digital currencies.

There are a lot of very rational reasons for the adoption of central bank digital currencies. Probably the biggest benefit is that it can simplify and expedite global payment systems.

Most people aren't aware of this fact, but the world's financial system is laboring under a disorganized patchwork of different payment systems that have haphazardly accumulated over the last several centuries.

We have cash, consisting of paper money and coins which originated in the 17th century or earlier. There are checks, which are a late 18th century invention. The first credit card was the Diners Club card, which was first issued in 1950. The ACH (Automated Clearing House) system was deployed in Great Britain in 1968 and the U.S. in 1972. Finally, we have the SWIFT (Society for Worldwide Interbank Financial Telecommunication) system which came into being in the mid 1970s.

Unfortunately, these payment systems are slow by modern standards and often don't communicate well with each other. Enter central bank digital currencies. Under this new system the dollar (or euro or pound or yen) would utilize blockchain technology to allow for near-instantaneous transfers of money from person to person, institution to institution, or any combination thereof. So for example, a digital U.S. dollar would be nearly identical to the existing dollar other than its purely digital nature and built-in payment system.

The coming advent of central bank digital currencies isn't just idle speculation either. The Swedish Riksbank began testing its digital e-Krona in February 2020. The United Kingdom's Bank of England is actively researching its own digital currency. And the Reserve Bank of Australia announced in November 2020 that it will explore the concept of a sovereign digital currency.

But the Bahamas has beaten them all by launching its very own (domestic use only) digital currency called the Sand Dollar in October 2020!

The United States Federal Reserve has signaled that it will not be left behind in the rush for central bank digital currencies by preparing its own FedNow Service. FedNow is slated for release in 2023 or 2024 and will include core functionality necessary to any successful digital currency including fast clearing and settlement capabilities and balance inquiry/reconciliation features. Although FedNow isn't a digital currency in its own right, it could very easily be used as the foundation for a future U.S. digital dollar once it has been perfected.

Now this is all well and good, but what I'm really interested in is the future implications of fully functional central bank digital currencies. And due to the U.S. dollar's importance in global trade and finance, I'm going to focus my analysis on the effects of a possible Federal Reserve digital dollar.

My thinking was really sharpened on this matter by a YouTube video I recently watched featuring Raoul Pal, the CEO and co-founder of Real Vision Finance. It is an incredibly thought-provoking video that I highly recommend you watch. I would even go so far as to say that Raoul Pal is almost prophetic in his musings. I've embedded the video below for you convenience.

Let's see if we can intelligently speculate about the future ramifications of a fully-digital, Federal Reserve dollar (which we will nickname "FedCoin").

First it is apparent that upon the launch of FedCoin every citizen will receive a free online account (or digital wallet) capable of storing, sending and receiving the Fed's new digital currency. This will almost certainly be coupled with enticements for individuals to use the new system. These could include higher interest rates on balances held in FedCoin (versus dollars held in the traditional banking system), faster receipt of government mandated stimulus payments, lower prices for goods and services (because there would be no credit card vendor fees for retailers to pay) and the possibility of bonus stimulus payments not sent out to people who don't use FedCoin.

The savvy observer will immediately note that a Federal Reserve digital currency would permanently disintermediate a large segment of the financial services sector almost immediately. The importance of this development cannot be overstated. If FedCoin is rolled out successfully, the demand for credit cards, bank deposit accounts or other transactional, retail-facing banking services (think PayPal or Venmo) would decline dramatically nearly overnight. FedCoin would simply do what these companies' services already do, except faster, cheaper and better.

However once successfully established, the financial authorities would have unprecedented control over the financial system. They could almost instantaneously credit or debit any FedCoin digital wallet for any amount with little oversight. It would be difficult - bordering on impossible - for any central bank to resist the raw power that this scenario would bestow on them.

And while it could be used relatively responsibly - for the fast payment of stimulus funds or UBI (Universal Basic Income) to citizens in need - it is more likely that our central bank overlords will ultimately abuse their newfound financial power.

I imagine this would be a gradual, creeping process.

For example, if the economy were to take another nosedive (a distinct possibility in a world of rolling lockdowns due to COVID) the Fed might feel compelled to step in to provide fiscal stimulus if the legislative branches of government were unable to come to a speedy agreement among themselves.

In fact, the Federal Reserve has already floated a trial balloon for this idea via what it calls "insurance recession bonds". These would be contingent, zero-coupon bonds that would only be "activated" when GDP declines below a certain threshold. Once activated, the Fed would automatically issue checks to every American household using the bonds as collateral. It is important to note that the bonds would simply be a book-balancing accounting exercise - in reality it would be naked money-printing.

Insurance recession bonds are important because they would allow the Fed to usurp congress' traditional role of allocating government spending. Suddenly, the Fed would be the real fiscal power behind the throne. I expect this outcome, if for no other reason than because the U.S. Republican and Democrat parties are unable to collaborate in any meaningful way anymore.

And if a Fed issued central bank digital currency already exists, then this entire process would become even more irresistible. After all, it would be convenient for both U.S. political parties if they were to grandstand for the cameras, each refusing to give an inch to the other side, while the central bank did the real heavy lifting of making sure tens of millions of people got the necessary funds to put food on the table or avoid eviction.

One dark side to this system is that there will be tremendous political pressure to make FedCoin the only game in town. Right now the Federal Reserve (along with most other central banks) is bumping up against the limits of monetary policy due to the zero-bound problem. When interest rates are at 0%, it is almost impossible to stimulate the economy via traditional monetary policy. It is also very difficult to institute negative interest rates because people can always flee to physical cash (which is exempt from such a policy).

But once FedCoin has been properly rolled out and scaled-up, there isn't any reason why the U.S. Treasury couldn't phase out the use of cash (and non-FedCoin bank accounts). The justifications for such a move could be numerous: cash is dirty and unsanitary in an age of pandemics; cash is antiquated and unnecessary; only criminals and tax-cheats use cash, etc.

The point is that once Fedcoin has been firmly established as a universal, convenient and low-cost alternative, the financial authorities might well move to ban cash. This could be done via a carrot and stick approach, with small bonuses for those who use the new FedCoin (extra one-time payments or higher interest rates) and punishments for those who fail to adopt the new digital currency (slower stimulus payments or additional financial scrutiny from the authorities). It is even possible that citizens may eventually be forced into using FedCoin or face the prospect of not receiving their stimulus or UBI payments at all!

Once the Fed has transitioned everybody to FedCoin and phased out cash, it will find a wonderland of new monetary policy tools at its fingertips.

For instance, the central bank could easily implement negative interest rates without having to worry about people hoarding cash. It could (electronically) print and instantly distribute massive sums of money to systematically-important financial institutions or favored industries. It could engage in targeted interest rates where some groups (like college students) would receive high interest rates on their FedCoin (to encourage them to save) while other groups (like retirees) might receive negative interest rates on their savings (to encourage them to spend).

It is even conceivable that the Fed could deposit stimulus funds into peoples' digital wallets, but then declare that if the money is not spent within a certain time frame it will disappear! And all of this could be done with little to no oversight from elected officials.

There are other downsides to central bank digital currencies for the average citizen besides delightfully cruel new monetary policies. Once FedCoin is the exclusive money of the realm, the government would be able to track every single purchase or financial transaction that you make. The central bank would even have the ability to block transactions that they feel are suspicious or that they don't like.

So when might we realistically see FedCoin come into existence? That isn't exactly clear. The Federal Reserve states that their FedNow Service won't be ready until 2023 at the earliest. This technology could serve as the backbone of a FedCoin rollout. But in my opinion, it would still take a minimum of 18 to 24 months after the introduction of the FedNow Service for an official U.S. dollar-based digital currency to be ready.

That would put the first realistic date for the release of FedCoin at 2025 or 2026 at the earliest. In all probability it would take substantially longer than this given the technical hurdles inherent in such an ambitious project. In other words, the late 2020s or early 2030s seem like a far more viable date for the release of FedCoin.

But let's not lose sight of what is important here.

Although central bank digital currencies may be the future of fiat money, they'll only serve as a trap for the average person. This is why I advocate buying portable tangible assets as a way to protect yourself from the possibility (maybe even inevitability) of FedCoin and other central bank digital currencies. This could be as simple as purchasing a $1,000 face value bag of U.S. 90% junk silver coins or as complex as assembling a fine collection of vintage Patek Philippe wristwatches. Bullion, fine art, gemstones and antiques are all feasible alternatives to a locked-down, FedCoin-dominated financial ecosystem.

Central bank digital currencies are coming, maybe not this year and maybe not next year, but they are coming. Invest accordingly.

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A Love Affair with Exotic Hardwoods

I am a sucker for exotic hardwoods. I know that might make me a bit strange, but I think it makes a lot of sense considering we live in a world dominated by particle board, plastic and cardboard. I don't know about you, but I've had quite enough of these subpar materials. I would much rather live a life surrounded by beautiful, natural and durable materials.

And few things rank higher on my list of luxury materials than exotic hardwoods.

So I couldn't help but write a post about my latest acquisition, a tropical hardwood box I recently purchased on Etsy. As the hero photo at the top of this article shows, the top and bottom of this box are made from thick slabs of Yellowheart while the sides are finely dovetailed Wenge. All of the woods used are solid, with no veneers present. In addition, the craftsman who created this piece didn't use any stains or dyes to artificially impart color. Eschewing dyes is a common practice when working with high-quality exotic hardwoods, which allows the beauty of the natural wood to shine through in the finished product.

The box isn't too large, measuring about 9 inches long by 5 inches wide by 3 inches deep. But in spite of its modest size, this work of art weighs in at a robust 1.42 kilos - over 3.1 pounds. It feels incredibly substantial in your hands due to the extremely high density of the woods used in its construction. I'll take more about this physical quirk later on in the article.

Exotic hardwood is a catch-all term for timber species harvested from tropical, savannah or desert regions located near the equator. Exotic hardwoods are a distinct category from the temperate hardwoods (also called domestic hardwoods) we tend to be more familiar with in the U.S. - species like White Oak, Sugar Maple and Black Cherry. In contrast, some of the more well known exotic hardwoods include Honduran Mahogany, Gaboon Ebony and Teak.

So what exactly is so special about exotic hardwoods?

Well, they have a lot going for them. On the whole, exotic hardwoods tend to be both harder and denser than temperate hardwoods. Even infamously tough domestic hardwoods like White Oak (with a density of 0.75 g/cm³ and a Janka hardness of 1350 lb_f) pale in comparison to many commercially available exotic hardwoods, which can attain densities of 0.8 to 1.2 g/cm³ and hardnesses of 1,800 to 3,000 lb_f (or more)!

Because of these exceptional physical properties, naturally lustrous exotic hardwoods usually take a remarkably high polish, sometimes approaching a mirror-like sheen. They are also frequently rot and insect resistant due to their high oil content. These attributes mean that items fashioned from exotic hardwoods have been known to survive for many hundreds of years with little to no damage. One example of this is African Blackwood furniture that was found intact with the burial goods of the Egyptian Pharaoh Tutankhamun - furniture that had been entombed over 3,000 years ago!

Exotic hardwoods are also celebrated for their amazing grain patterns, color palettes and contrasting textures. Skilled woodworkers love to use these desirable visual features to their artistic advantage when working with exotic cabinetwoods. Domestic hardwoods, while still very beautiful in their own right, can have trouble providing the same visual interest. Please note that I fully believe a few select temperate hardwoods, like Black Walnut and Redwood burl, can be exceptionally attractive in their own right and are capable of rivaling even the best exotic hardwoods.

Because the box I purchased is made from Wenge and Yellowheart, I wanted to talk a little bit more about these two specific woods.

Wenge (scientific name: Millettia laurentii) is a dense (0.87 g/cm³), hard (1,930 lb_f) wood that originates from tropical West Africa. Its coarse grain sports a luscious chocolate-brown hue alternating with almost pure black lines. This gives Wenge a unique, highly desirable visual contrast that has been exploited by luxury woodworkers to great effect for over 100 years. Due to its very dark color, it has sometimes even been used as a substitute for Ebony.

Wenge Grain (Photo Credit: The Wood Database)

Wenge first rose to international fame during the 1920s when it was extensively employed by French Art Deco designers such as Eugène Printz and Pierre Chareau. The wood then had a renaissance among interior decorators in the late 1990s when blond woods fell out of favor.

At that time (circa 1998), it was still possible to purchase Wenge for $7 to $8 per board foot. But due to steadily increasing demand and dwindling supply (a recurring theme in the world of exotic hardwoods), Wenge now costs around $20 a board foot (in 2020). This translates into an annualized price trend of 4.6% over the last 22 years for Wenge versus just 2.1% for general U.S. CPI inflation over the same period.

Although Wenge timber still has good availability in the international marketplace at the present time, the species is in the early stages of commercial endangerment due to aggressive over-harvesting.

Yellowheart (scientific name: Euxylophora paraensis) is a similarly dense (0.83 g/cm³) and hard (1,790 lb_f) wood found in Brazilian lowland rainforests near the mouth of the Amazon River. This fine grained tropical hardwood exhibits a lustrous, vibrant yellow tone that gives it a tremendous visual punch. In fact, Yellowheart is commonly known by its Portuguese name, Pau Amarello, which literally translates into English as "yellow wood".

Yellowheart Grain (Photo Credit: The Wood Database)

Another popular trade name for Yellowheart is Brazilian Satinwood. However, this is a technical misnomer. Although Yellowheart belongs to the same family (Rutaceae) as the true satinwoods, only West Indian Satinwood (Zanthoxylum flavum) and East Indian Satinwood (Chloroxylon swietenia) are commercially accepted as genuine satinwood species. Regardless, Yellowheart shares many of the same desirable characteristics as the true satinwoods - a yellow or golden hue, fine grain texture, high density and excellent luster. The only area where Yellowheart falls a bit short is its figure, which tends to be fairly straight versus the wavy, interlocking grain commonly found in the true satinwoods.

Yellowheart is moderately priced within the universe of exotic hardwoods - a surprising development considering how eye-catching it is. As you might have already guessed, tropical hardwoods are almost always more expensive than their temperate counterparts due to their greater rarity, difficulty in logging and distance from end-markets.

Even though its natural distribution is limited to eastern Brazil, Yellowheart lumber still has fair availability in the U.S. While not currently endangered, that designation could change if Yellowheart becomes more popular for high-end flooring or furniture-making.

Perhaps the most interesting characteristic of both Wenge and Yellowheart is the fact that they are relatively color-fast compared to many other exotic hardwoods. One of the dirty little secrets of the exotic wood trade is that the colors of some of the world's most beautiful tropical hardwoods fade over time with prolonged exposure to sunlight and air.

For instance, freshly-cut Purpleheart - a favorite of exotic woodworkers - starts off a muted violet-gray color that quickly deepens into a vibrant purple tone after a few weeks. However, after 5 to 10 years that wonderful purple hue will age into a dull, nondescript brown color. Many other tropical hardwoods, such as Bois de Rose and Pink Ivory, also trend towards undesirable shades of brown or black over time.

But Wenge and Yellowheart are exceptions to this unfortunate tendency. Wenge starts off a very rich dark brown/black and actually lightens a little bit with time. But its trademark contrast and chocolate brown color remain largely intact. Yellowheart deepens slightly from its initial canary yellow tone to more of a golden-yellow with age, which hardly seems like a con at all. For those who are interested, you can read more about color-change in exotic hardwoods in this great article on the topic.

Rarity is the last subject I'd like to touch on in regard to exotic hardwoods.

Items made from tropical hardwoods are predictably rare in American (and other developed country) households. When we do run into items crafted from Rosewood, Mahogany, Kingwood or Teak they are almost always antique or vintage pieces made back when these woods were more widely accessible. Much of the time these vintage pieces were veneered to reduce costs - solid pieces are rarer still.

I am of the opinion that no more than 1 in 25 U.S. households own a piece of furniture or decorative item made from exotic hardwoods.

This means that most people have never seen a piece of solid Honduran Mahogany (or any other tropical hardwood) in their lives, much less know what one looks like. I find it to be a sad commentary on the state of the world when the average person has never experienced the pure joy of admiring a solid slab of gorgeously-figured Hawaiian Koa or Bolivian Cocobolo.

Instead, most people sleep-walk through their lives with cheap furniture made from MDF, plywood or particleboard. IKEA self-assembled furniture is the epitome of this trend. And while flat-pack furniture might look good when you first get it home, it degenerates over a matter of months until it finally becomes a utilitarian lump in your house that you stack other banal household items on top of.

I believe we should strive for more.

Exotic hardwood furniture has one big negative; it will certainly cost more than whatever particleboard junk you can pick up at your local big-box store. However, I firmly believe that it is an investment well worth the price. A fine Mahogany table or Teak campaign chest will last longer than you or I will and will look great doing it. As an added bonus, fine antique furniture has the possibility to appreciate in value in the future - an outcome you couldn't even dream of for self-assembled flat-pack furniture.

And for those willing to take the time to look, bargains can still be found in the world of exotic hardwoods!

For instance, the Wenge and Yellowheart box (made from reclaimed wood) that I found on Etsy only cost me $60, plus shipping and sales tax. This is a remarkably low price for an heirloom quality exotic hardwood box. In fact, $60 probably isn't too far off the cost of the raw lumber used in the construction of the box! This means I may have only paid $15 or $20 for the considerable workmanship put into its creation.

Antique stores and thrift shops are a great place to start looking for fine hardwood furniture. However, keep in mind that most of what you find there will be made from domestic hardwoods. Online shopping venues like eBay and Etsy undoubtedly also have treasures to be unearthed, although you will most likely be limited in the size of what you can buy due to shipping costs.

In any case, life is too short to stay surrounded by plastic and plywood. Exotic hardwoods are an aesthetically pleasing solution to this lifestyle dilemma that also allow you to reconnect to nature in your daily (indoor) life.

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Money Printer Go Brrr – The Hyperinflation Myth That Won’t Die

The dominant narrative of the 2020 financial markets is that the U.S. Federal Reserve is printing the U.S. dollar into oblivion. After having expanded its balance sheet by roughly $3 trillion between March and May 2020 (during the worst of the pandemic lockdown), the Federal Reserve has actually shrunk its balance sheet by $220 billion since then. But this hasn't stopped financial pundits from breathlessly speculating about how close the U.S. dollar is to collapsing into hyperinflation.

A great example of this conventional wisdom can be found in an article I recently discovered on the financial blog Adventures in Capitalism. This blog is run by Harris Kupperman (aka Kuppy), founder of the hedge fund Praetorian Capital. This guy is a market pro with over two decades of investing experience.

Kuppy penned an article titled "Did The Market Actually Recover From COVID-19…???" It posits that even though the broad equity markets are either near (the Dow and S&P 500) or at (the NASDAQ) all time highs in nominal terms, in reality they are grinding along very low levels in valuation terms. This means that equities are a buy - a strong buy! Only an idiot wouldn't be long this market!

The way he achieves this valuation sleight of hand is by arguing that the U.S. financial authorities are engaged in what he calls "Project Zimbabwe" - in other words, hyperinflation. During hyperinflations, stock markets shoot to the moon in nominal terms, even as the economy disintegrates around them. This has happened in every country that has 1) experienced hyperinflation and 2) had a freely-trading stock market at the time of its hyperinflation.

The two latest examples of this unfortunate situation are Zimbabwe and Venezuela. The Zimbabwe Industrial Index is up 654% for the YTD period through July 2020 while the Venezuela Stock Exchange General Index is up 280% over the same time. So just invest in stocks and we'll all be rich, rich as Nazis!

Or maybe not.

Inflation in Zimbabwe is running somewhere close to 800% on an annual basis while Venezuelan inflation is maybe around 2,000% (hyperinflation rates are notoriously difficult to track, so all these figures are approximate). So equity investors in these countries might actually be losing money in real terms as inflation threatens to outpace any gains they make in the markets. Suddenly, those hockey stick equity market charts don't look nearly so appealing.

But Kuppy will not be deterred.

He produces a chart that shows the ratio between the S&P 500 ETF (SPY) and the Federal Reserve's balance sheet. The implication is that in a "true" bull market the S&P 500 will rise in relation to the Fed's balance sheet, while in a bear market it will fall. The chart then shows this in action, with the market ratio rising (the green line below) for most of the 2010s only to get unceremoniously knocked back down by the 2020 global pandemic.

SPY to Fed Balance Sheet Ratio

But I find Kuppy's accompanying commentary to be an intriguing window into the hyperinflation-obsessed thought process of professional money managers everywhere. I have excerpted a paragraph from his article below:

"What I find stunning is that after the COVID-19 crash, we’ve barely even bounced off the lows. In fact, we gave back a decade of retained earnings, financial engineering and everything else. We’re actually all the way back at 2010 levels. That’s stunning right? It’s literally been a wasted decade in the financial markets when indexed to the Fed’s balance sheet. That’s your COVID-19 crash and it’s as severe as you’d expect it to be."

So Kuppy thinks the downtrend in the S&P 500/Fed balance sheet ratio will stop and reverse higher as the Fed's money printing continues unabated.

Hyperinflation Ho! Zimbabwe here we come! Save us Dow! Save us S&P 500! Save us NASDAQ!

The hyperinflation narrative is perhaps best represented by the catchy slogan "money printer go brrr", which implies that Fed governors are busy manning the printing presses in the basement of the Eccles Building in a nefarious attempt to destroy our collective monetary future. Here is an absurdly entertaining YouTube meme that encapsulates everything the mainstream investment community currently believes about the Fed's money printing.

Kuppy, like many money managers in the world today, is suffering from Fed induced Hyperinflation Derangement Syndrome. Their thinking is that because gold is going up and stocks are going up and the Fed is printing, then it must mean that hyperinflation is right around the corner.

Except it's not true. The Fed printing is really just plugging a giant sinkhole in the economy…barely.

As soon as I read Kuppy's article I decided to prove it wrong. After about 45 minutes of work, I had my own chart showing the ratio of the Japanese Nikkei 225 Index to the Bank of Japan's balance sheet. Remember, this is the same Bank of Japan that has been printing with wild abandon for years…years! They've printed so much that their balance sheet has now swelled to 118% of Japanese GDP. To put that into perspective, if the Fed just matched the BOJ, they would have to print an additional $16 trillion - enough to double the value of every dollar deposit account in the entire country!

And despite all this BOJ printing, there is still no inflation in Japan. None. Zero. Nada. Zilch. The latest Japanese inflation reading in June 2020 was a microscopic 0.1% year-over-year.

Kuppy implicitly believes that the last 10 years of retained earnings and financial engineering in corporate America couldn't have been for nothing. But it was. Outside of a handful of exceptions, corporations actually retained very little in the way of earnings over the past 10 years. Instead they spent it all on share buybacks and dividends. Financial engineering has likewise proven to be a curse for long-term shareholders. It has hollowed out many companies' productive capacities, snuffing out their future viability.

Instead of arising like a phoenix to new highs, further Fed printing will only cause the S&P 500 to Fed balance sheet ratio to contract even more aggressively. One only has to look at the Nikkei to BOJ balance sheet chart below to realize that. Regardless of how many trillions of yen the BOJ has printed, the ratio has relentlessly sunk ever lower. In fact, you can still buy the Japanese Nikkei Index for the same (nominal) price it was back in 1987 - over 30 years ago!

Nikkei 225 Index to BOJ Balance Sheet Ratio

In the final analysis, there are two interpretations of what is happening in the market right now. The first is that we are in the nascent stages of hyperinflation - the money printer go brrr hypothesis. This is the glib, simplistic myth that just won't die.

The other possibility is that traumatized investors are fully cognizant we have entered a modern-day Greater Depression. Consequently, they are retreating to the safest, most liquid and money-like financial instruments possible - things like Treasury bonds, Agency debt and cash, along with gold and silver bullion. In conjunction with that, we are also experiencing the end stages of the largest equity bubble in the history of mankind - the twilight of the dreaded Everything Bubble.

I think the latter explanation is far more compelling than the former.

Of course I don't hate equities simply because they are equities. I hate them because they are so overpriced at the moment that their future returns will undoubtedly have a negative sign in front of them. If the valuations weren't so obscene, my investment outlook would be more constructive.

As a parting gift, I will give you a little investing tip. You'll often hear that you should invest in good, solid dividend paying stocks. And I would, if there were any domiciled in the United States. Alas, U.S. corporate management has mortgaged their shareholders' future through accounting tricks and excessive leverage.

Gold 1/10 Troy Ounce Bullion Coins For Sale

But I did stumble across a gem from overseas during my research. Coca-Cola Bottlers Japan Holdings Inc. is a company that controls 90% of the Japanese Coca-Cola beverage distribution market by sales volume. It administers the most important, most populous geographic areas in Japan, including Tokyo, Osaka and Kyoto. The company trades under the ticker "2579" on the Tokyo Stock Exchange or "CCOJY" as an over-the-counter ADR (American Depositary Receipt) in the U.S.

The firm has a market cap of around $3 billion, making CCOJY a mid-cap company. It also has an English language website, which makes gathering company information easier. The ADR (CCOJY) will probably be the most accessible security option for most U.S. investors.

I like CCOJY because it has a healthy dividend yield of between 2.5% and 3.0%, a low price-to-sales ratio of 0.35, and a reasonable debt to (tangible) equity ratio of only 55%. The company's debt sports a solid AA-/A+ credit rating, which means that their debt servicing costs are negligible. The chances of this firm going bankrupt are nil.

Coca-Cola Bottlers Japan Holdings Inc. is the kind of company you buy today and stuff away in your retirement account for the next 10 years. You'll earn a fair return on it (probably mid single digits annualized), which I understand isn't stellar. But neither will you wake up one random morning to news that the company disintegrated overnight as its executives fled to Mars in the wake of an accounting scandal.

CCOJY has declined by about 45% (in dollar terms) from earlier this year due to the impact of COVID-19. But it is a consumer staple company and sales volumes are unlikely to drop significantly. Positive near-term catalysts include the (now delayed to 2021) Tokyo Summer Olympics and the potential for further consolidation with the remaining smaller Japanese Coca-Cola bottlers. CCOJY's dollar price is currently near an all-time low, while its yen price is the same as it was back in 2013, 2009, 1995 and probably earlier as well (but that is as far back as I could get data).

In any case, please do yourself a favor by not falling for the hyperinflation myth. The U.S. dollar isn't going to fall apart anytime soon. But even so, I think allocating some of your portfolio to gold or silver (or the rare undervalued stock) is a good idea. Otherwise, holding cash while you wait for better investment opportunities to come along is just fine.

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