Orthodox Investor – what to invest in


I originally started writing on the theme of the “Orthodox Investor” six years ago in an e-mail I sent to a former co-worker. In that e-mail the main concrete investing idea I had was to buy US treasuries because the yield curve was destined to flatten towards zero over time, making the countertrend rallies the only significant risk in the trade.

I recently wrote another piece in which I made several references to what seemed to me like a sacrosanct work ethic that would make it impossible for people to stop working for peanuts. So when they first started with the COVID-19 lockdowns, it was preposterous. It had become too much trouble to clean up after tenants moved out that I had begun leaving houses empty and just waiting for their value to appreciate. Shelter-in-place was my cue to go out and get my two empty houses listed ASAP. I still have a hard time wrapping my head around what the implications are when we’re willing to paralyze the economy for fear of catching the sniffles.

Now that interest rates in all developed economies are at zero, what is left to invest in? What’s the orthodox investment now?

All things considered, I believe precious metals are a horrible investment, but the best there is, making it the ultimate TINA trade (There Is No Alternative).

In a world where the vast majority of economic activity is senseless and unnecessary, earnings and valuations are primarily, and in most cases entirely, a reflection of scams and frauds. You trick people into buying stupid things or better yet, something abstract, like services, to generate a profit. Encouraging average people participate in the scams via their 401k plans, gives them a financial interest in keeping it going year after year.

This is the reason why it doesn’t matter whether the government increases its deficit spending each year (regardless of whether debt growth outpaces economic growth), or whether corporations don’t generate enough cash flow to cover their interest payments. How can there be such a thing as a poor choice in allocation of capital when nearly all economic activity is foolish to begin with? There are these popular memes going around saying something to the effect that the economic Ponzi games we play today, whether it’s deficit spending, MMT, or underfunding our pensions somehow steals something from future generations. Even Jerome Powell recently said something along those lines, suggesting that the ballooning national debt beyond the growth rate of the economy will burden our children with interest payments. In reality, the only thing we’re saddling our children with is overcapacity. We’re producing so much more stuff than we should (whether it’s cars or appliances), it shouldn’t be a big deal to retool the factories to makes simpler and more reliable things, if that’s what they prefer. The children and grandchildren are not the ones with millions of imaginary wealth in their trading accounts, and the loss of theoretical wealth will most likely take the form in disappointment when the inheritance turns out to be a small fraction of what they thought their parents were worth.

Intuitively, it seems so prudent to think that the money-losing actors in the economy should bear the consequences and that spendthrift governments be punished by the bond vigilantes. But there is a possibility that we’ll be able to print 100 times the money we have in the past, that inflation will remain low, and that the percentage of zombie corporations just keeps increasing while the president keeps congratulating himself on new all-time highs in the stock market year after year. With each 10% increase in the money supply, the average worker is probably only getting a 3% pay raise, so if the average person was mathematically astute, he’d simply boycott the situation by saying he doesn’t care what the CPI number says, he wants his fair share of every form of wealth, whether it’s a certain percentage ownership in the stock market, a certain percentage of the real estate market, or a percentage of the precious metals market.

The problem is that the worker that demands that his wage be indexed to either some measure of money supply or some measure of asset prices is nonexistent today. If some small percentage (say 2%) were demanding this today, you might think that the seeds have been sown and in another 5 or 10 years something might actually change. Instead, what we’re faced with today is a world whose future can be predicted fairly easily. The belief in working today is unshakable. It’s considered good and virtuous and any alternative to that view is unthinkable. This tells us that we are still very far away from reaching the limits of money printing and papering over any hiccups that might disrupt our financial system. It’s this willingness to work for less and less wealth that will keep inflation under control in the years ahead.

We’re all here to play a myriad of financial Ponzi games, and the key to winning is to buy early and cheap before the suckers and bagholders are drawn in. A simplified view of the investment universe regards every asset class as a money substitute, a competing form of currency. Stocks are just another currency, and we’re probably in the early innnings of central bank intervention with only the Swiss and Japanese making equities a part of their balance sheets. As a currency, stocks (individually or in the form of ETFs) have major advantages. Platforms for buying and selling stocks are extremely widespread, trusted, and even automatic for many workers via 401k or various pension plans. With size and acceptance comes safety. Central banks have an excellent track record in levitating stocks. Even the 2000 and 2008 crashes were followed by rapid reflations (just a few years of waiting and losses are recovered).

At the highest level of generality, the big mistake investors are making today is likely to be the exact same mistake that workers are making today: thinking of one’s wealth in terms of CPI-adjusted dollar terms instead of percentage terms. For example, if my stock portfolio doubles in 2 years, but the market capitalization of stocks in general doubles during those 2 years, I have made no progress in percentage terms. US stocks today have quite a large market capitalization at over $30 trillion making stock ETFs such as the SPY or QQQ some of the most questionable investments from a risk-reward perspective.

Over the last 40 years, one of the easiest ways to make money has been to go long bonds. Unlike a junk bond, a 30 year treasury bond has a zero chance of default. If it pays an interest, this practically guarantees a gradual grind toward zero. Thinking a step ahead, we can view the corporate bond market as a fairly “safe” form of currency because the Fed will only allow a small percentage of firms to go bankrupt. So the only interesting question we need to ask ourselves is “What will be the next popular currency?”

While it’s a safe bet that the world’s fiat currencies are out of control and a sure way to lose wealth over time, it is not clear what the best alternative currencies are. Many forms of currencies have limited supply. Apple stock, for example, ensures a limited supply through buyback programs. You can buy an infinite number of alternative cryptocurrencies or a finite number of alternative elements in the periodic tables, such as iridium and osmium. Real estate is just another currency, too. It has low liquidity, but high stability, and a yield in the form of rental income, which is a euphemism for a tax placed on an innocent person’s wages.

A person who buys a meal at McDonald’s pays a substantial tax to the managerial class of MCD and KO (ticker symbols) as well as the equity holders. It really isn’t a good deal for the consumer to pay dollars for pennies worth of potatoes and sugar, and it’s a bad deal for the workers who are working too hard for their share of the revenue. But as long as there is no strong distaste for this economic model, real estate and stocks will likely remain an excellent way to steal the fruits of the labor of the majority of the population, who are sometimes referred to as the sheeple.

There is nothing unsustainable about record debt-to-GDP ratios and record wealth inequality. No amount of money printing will trigger hyperinflation, so long as slaves continue to want to be slaves. If we start measuring our wealth in terms of what share of the total we own, and we refuse to go to work unless we get our fair share, then stocks, real estate, and the world’s national currencies will implode.

It is exceedingly unlikely that money managers will ever admit that investing in equities and real estate means promoting inequality and serfdom because humans like to put a positive spin on what they do. Even an investment in gold means promoting those who currently hold power. You’re validating all those rich people who currently hold gold as well as the world’s central banks that hoard gold. The fact that gold is a monetary metal rather than an industrial metal is simply evidence of its overvaluation. It means that industrial applications exist only at a much lower price point. Furthermore, if you are not already extremely rich, the share of the world’s gold you can buy is small, while it is much larger for the other three precious metals that are actively traded on the futures exchanges as well as by bullion dealers, namely, silver, platinum, and palladium.

The investment thesis for silver and platinum (we exclude palladium because you should have bought it at $200 not at $2000) is that they are one of the few options that will make a difference in the best case scenario. You can buy a basket of equities, but the worst outcome is that you lose a lot and the best outcome is that you gain nothing in terms of the share of the world’s wealth that you own. There are very compelling and logical reasons for investing in silver and platinum, but they don’t matter because the actual reasons why a specific investment takes off will most likely be highly irrational.

The only likely way I see the value of silver and platinum going substantially higher is because rich people try to hide their wealth from confiscation by the poor who finally demand to get their fair share. You own almost every asset in the world because some electronic record says you do, and in that case, your wealth is always at risk of being traced and taxed. The only way rich people can effectively evade this is if they own something that they can physically hold. This means gold. But as a shortage of gold develops, the next best alternatives will immediately catch a bid (even today bullion dealers are mostly sold out of silver and platinum). Currently investment demand for silver is 20% of total demand and the number is around 10% for platinum. These percentages have room to grow, which will be the driver for their outperformance over gold. Therefore, an investment in platinum and silver is a way of front-running the world’s wealthy who try to evade a populist revolt.

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