Nothing is cheap in today’s investment world. Because of the trillions of currency units that governments all over the world have created – and are continuing to create – financial assets are grossly overpriced. Stocks, bonds, property, commodities and cash are no bargains. Meanwhile, real wages are slipping rapidly among those who are working, and a large portion of the population is unemployed or underemployed.
The next chapter in this sad drama will include a rapid rise in consumer prices. At the beginning of this year, we saw the grains – wheat, corn, soybeans and oats – go up an average of 36% within one month. In the same time frame, hogs were up 30.7%. Copper was up 29.1%. Oil was up 14%. Cotton was up 118%. Raw commodities are the first things to move in an inflationary boom, largely because they’re essential to everything. Retail prices are generally the last to move, partly because the labor market will remain soft and keep that component down, and partly because retailers cut their margins to retain customers and market share.
We are in a financial no-man’s land. What you should do about it presents some tough alternatives. “Saving” is compromised because of depreciating currency and artificially low interest rates. “Investing” is problematical because of a deteriorating economy, unpredictable and increasing regulation, rising interest rates and wildly fluctuating prices. “Speculation” is the best answer. But it may not suit everyone as a methodology.
There are, however, several other alternatives to dealing with the question “What should I do with my money now?” – active business, entrepreneurialism, innovation, “hoarding” and agriculture. There’s obviously some degree of overlap with these things, but they are essentially different in nature.
Few large fortunes have been made by investing. Most are made by creating, building and running a business. But the same things that make investing hard today are going to make active business even harder. Sure, there will be plenty of people out there to hire – but in today’s litigious and regulated environment, an employee is a large potential liability as much as a current asset.
Business itself is seen as a convenient milk cow by bankrupt governments – and it’s much easier to tap small business than taxpayers at large. Big business (which I’ll arbitrarily define as companies with at least several thousand employees) actually encourages regulation and taxes, because their main competition is from small business – you – and they’re much more able to absorb the cost of new regulation and can hire lobbyists to influence its direction. Only a business that’s “too big to fail” can count on government help.
It’s clearly a double-edged sword, but running an active business is increasingly problematical. Unless it’s a special situation, I’d be inclined to sell a business, take the money, and run. It’s Atlas Shrugged time.
An entrepreneur is “one who takes between,” to go back to the French roots of the word. Buy here for a dollar, sell there for two dollars – a good business if you can do it with a million widgets, hopefully all at once and on credit. An entrepreneur ideally needs few employees and little fixed overhead. Just as a speculator capitalizes on distortions in the financial markets, an entrepreneur does so in the business world. The more distortions there are in the market, the more bankruptcies and distress sales, the more variation in prosperity and attitudes between countries, the more opportunities there are for the entrepreneur. The years to come are going to be tough on investors and businessmen, but full of opportunity for speculators and entrepreneurs. Keep your passports current, your powder dry, and your eyes open. I suggest you reform your thinking along those lines.
The two mainsprings of human progress are saving (producing more than you consume and setting aside the difference) and new technology (improved ways of doing things). Innovation takes a certain kind of mind and a certain skill set. Not everyone can be an Edison, a Watt, a Wright or a Ford. But with more scientists and engineers alive today than have lived in all previous history put together, you can plan on lots more in the way of innovation. What you want to do is put yourself in front of innovation; even if you aren’t the innovator, you can be a facilitator – something like Steve Ballmer is to Bill Gates. It will give you an excuse to hang out with the younger generation and play amateur venture capitalist.
This argues for two things. One, reading very broadly (but especially in science), so that you can more easily make the correct decision as to which innovations will be profitable. Two, building enough capital to liberate your time to try something new and perhaps put money into start-ups.
In the days when gold and silver were money, “saving” was actually identical with “hoarding.” The only difference was the connotation of the words. Today you can’t even hoard nickel and copper coins anymore because (unbeknownst to Boobus americanus) there’s very little of those metals left in either nickels or pennies – both of which will soon disappear from circulation anyway.
We’ve previously dismissed the foolish and anachronistic idea of saving with dollars in a bank – so what can you save with, other than metals? The answer is “useful things,” mainly household commodities. I’m not sure exactly how bad the Greater Depression will be or how long it will last, but it makes all the sense in the world to stockpile usable things, in lieu of monetary savings.
The things I’m talking about could be generally described as “consumer perishables.” Instead of putting $10,000 extra in the bank, go out and buy things like motor oil, ammunition, light bulbs, toilet paper, cigarettes, liquor, soap, sugar and dried beans. There are many advantages to this.
Taxes – As these things go up in price and you consume them, you won’t have any resulting taxes, as you would for a successful investment. And you’ll beat the VAT, which we’ll surely see.
Volume Savings – When you buy a whole bunch at once, especially when Wal-Mart or Costco has them on sale, you’ll greatly reduce your cost.
Convenience – You’ll have them all now and won’t have to waste time getting them later. Especially if they’re no longer readily available.
There are hundreds of items to put on the list and much more to be said about the whole approach. This is something absolutely everybody can and should do.
During the last generation, mothers wanted their kids to grow up and be investment bankers. That thought will be totally banished soon, and for a long time. I suspect farmers and ranchers will become the next paradigm of success, after being viewed as backward hayseeds for generations.
Agriculture isn’t an easy business, and it has plenty of risks. But there’s always going to be a demand for its products, and I suspect the margins are going to stay high for a long time to come. Why? There’s still plenty of potential farmland around the world that’s wild or fallow, but politics is likely to keep it that way. Population won’t be growing that much (and will be falling in the developed world), but people will be wealthier and want to eat better. So you want the kind of food that people with some money eat.
I’m not crazy about commodity-type foods, like wheat, soy and corn; these are high-volume, industrial-style foods, subject to political interference. And they’re not important as foods for wealthy people, which is the profitable part of the market. Besides, grains are where everybody’s attention is directed.
But there are other reasons I’m not wild about owning any amber waves of grain. Anything you want to plant will practically require the use of a genetically modified (GM) seed from Monsanto. I’m not sure I really care if it’s GM; all foods have been genetically modified over the millennia just by virtue of cultivation. And $1 paid to Monsanto typically not only yields the farmer $5 of extra return, but produces lots of extra food – which helps everybody. But I wouldn’t be surprised if someday the giant monocultures of plants, all with totally identical purchased seeds, don’t result in some kind of catastrophic crop failure. This is a subject for another time, but it’s a thought to keep in mind.
In any event, agricultural land is no longer cheap. But I don’t suggest you look at thousands of acres to plant grain. Niche markets with niche products are the way to fly.
I suggest up-market specialty products – exotic fruits and vegetables, fish, dairy and beef. The problem is that in “advanced” countries – prominently including the US – national, state and local governments make the small commercial producers’ lives absolutely miserable. Maybe you can grow stuff, but it’s extremely costly in terms of paperwork and legal fees to sell, especially if the product is animal based – meat, milk, cheese and such. Niche foods are, however, potentially a very good business. Eternal optimist that I am, I see one of the many benefits of the impending bankruptcy of most governments as again making it feasible to grow and sell food locally.
Above all, though, this isn’t the time for business as usual. You’ll notice that “Working in a conventional job” didn’t occur on the list above. And I pity the poor fools working for some corporation, hoping things get better.
for The Daily Reckoning
I’m a commodity trader…but that doesn’t mean I always expect commodity prices to go UP. In fact, a lot of times you’ve got to bet AGAINST commodities if you want to make a buck. But that’s not the situation today. Most commodities are in a bull market…and it’s not to late to profit from it. […]
Doug Casey of Casey Research is the author of the best sellers Strategic Investing, Crisis Investing, Crisis Investing for the Rest of the 90's, and most recently, Totally Incorrect. He has lived in seven countries and visited over 100 more. He has appeared on scores of major radio and TV shows and remains an active speculator in the stock, bond, commodity, and real estate markets around the world. In his spare time, Doug engages in competitive shooting and plays polo.
Outstanding article! Truly this is “News You Can Use” in a very practical sense.
I would add one ounce silver to the essential collection – inedible to be sure but something that should be a transitional trade good when the US$ fails. Garden tools, solar panels, water purifier system, and perhaps a simple high mileage vehicle? IMO, the next inflationary surge will hit utilities.
You’ll notice that “Working in a conventional job” didn’t occur on the list above.
No matter what sort of society you got, most people find themselves in the “conventional worker” category.
What Casey is concluding here is that if things will be difficult for those with some capital and some choices, things will be irredeemably bad for those less capital and fewer choices.
Therefore, I would argue that if you’re a worker and lack capital, then don’t waste your time worrying about business or investments.
Instead, devote yourself to extremist politics (whether left or right doesn’t really matter) and scare the hell out of the owners. It’s like the poor man’s version of going Galt.
You probably won’t end up ahead, but you might live to see a few delicious moments!
Besides, Utility is overrated.
I don’t mean to bust your chops, but I am willing to bet money you won’t be planting anything in the near future. And has anyone, anywhere ever shown GM food to be a problem?
I come from a farming community and it is a miserable business in my opinion. To be sure there are people making money now, but it took a huge surge in commodity prices to make that happen. The only people I know that go into farming are people that inherit land worth at least $500,000. What kind of business requires you to be a millionaire just to make a middle class living? People are excited to see wheat over 7 dollars. It was over 7 in the 70s.
I do agree with some of the items here though. I think an excellent hedge would be to go pick up a new toyota corolla. High mileage, low maintenance, and good longevity. How much more will it cost after the VAT? I really would like to hedge against medical costs. The only thing I have done so far is get Lasik surgery.
The only “Boobus americanus” is the one you see in the mirror. What a crock of do-do and psycho-babble when you say that “Big business actually encourages regulation and taxes, because their main competition is from small business – you – and they’re much more able to absorb the cost of new regulation and can hire lobbyists to influence its direction. Only a business that’s “too big to fail” can count on government help.” It’s because of greed we have the largest gap between the rich and the poor in decades. We now have insufficient regulation and overbearing lobbyist working the weak-willed, unscrupulous politicians that got us into the financial mess we’re in. Well you can see who’s feathering your nest and it’s not us “Americanus” but rather you the “Boobus”.
Are you guys still here?
Well, I guess that means you missed the Rapture.
Now, you can wait for the end of the World. Lucky you!
“Well we can all pack our bags, a religious group with a web site called http://www.wecanknow.com, claims doomsday is approaching and the day of the Rapture is May 21, 2011 and God will destroy the earth on Oct 21, 2011.
They are so sure of these dates that they have begun putting up billboards in cities like St. Louis, Omaha and Nashville. “
DRUNK AND DISORDERLY made a good point, some gold and silver coins may be essential for trade if things get real bad. I would imagine other tangible stores of wealth like gemstones could make sense though less liquid.
I agree with your thoughts I would like to share the first two paragraphs of my newest essay:
We will go kicking and screaming down the path to the new Middle Ages as fossil fuels desert us. With the decline of available energy, those of most of us who have sat at the top of the energy pyramid will become the new peasants. With the popular view of the Middle Ages as a brutal and dirty time filled with famine and disease and at the mercy of armed overlords. We cringe at the thought.
With great sadness, we must recognize the direct connection between present day population levels and the use of fossil fuels in food production, medical procedures, medicines and hygiene. With the fall in fossil fuel availability there will be a reduction in population. Population soared with the industrial revolution and the development of industrial, fossil fuel based agriculture. It cannot be sustained.
From: The New Middle Ages
They haven’t changed the metal in nickels…not yet.
what if this is all a set up to introduce a cashless society? to keep us under the big thumb
Scottie can’t read his own calendar.
Are these suggestions right out of “The Alpha Strategy” by John Pugsley? circa 1980
my name-arindam,my net capital&pogition, my trade count please.
Doug – A Farm would be the best investment in a hyper inflationary world, especially if you purchase it with a bank loan / mortgage, this was proved during the Weirmar republic days when morgages could be repayed just months later by simply selling the current years harvest.
“if this is all to set up a cashless society”
Sadly, I believe that more than I would like to. In a purely credit card and ACH payment environment, banks stand to take a 2.9% to 3.4+% cut on every single purchase transaction. That’s enough incentive to make any banker have wet dreams nightly.
Barter, not buy…….
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