Don't stifle or wait for the worst; adapt!
Instead of waiting for the end of the financial system, adjust your investment portfolio now.
Hi,
It has taken me a bit longer to come up with my next post, but here it is. Apologies! The Fund is doing very well, and I can tell with high conviction that its philosophy of investing in scarce assets to counter the abundance of bonds and debt resonates very well. It is no surprise; this post fits that philosophy perfectly.
1972!
I recently came across this cover of Time from 1972, which seamlessly illustrates how I view the ever-increasing mountain of debt and its impact on my investments. You can (endlessly) predict the end of the financial system, but that hardly pays off. Yet, the footprint debt leaves on the outlook for different asset classes is profound.
Always Concerned
In 1972, the U.S. national debt was about 35% of GDP, 3.5 times less than the current debt level, now exceeding 120% of GDP. Before I go on, one must also focus on total debt to derive meaningful conclusions regarding debt. However, that distinction is less relevant regarding this post.
The cover of TIME reveals that investors, economists, etc., were already worried about the amount of debt in the system 50 years ago. In 1972, a brief period of population growth ended, and not much later, the structural decline of the working-age population began, a critical variable determining a country's potential growth. Even then, it was clear that without a magical growth enhancer (read: debt), you would have to sacrifice the pace of growth.
We're Still Here!
The main conclusion 50 years later is that we are still here. And we have all taken on much more debt, because we must grow. Yet, one might question whether growth should be the ultimate goal, as it is today. The same applies to inflation. Why central banks agree that it should be (exactly) 2% remains a puzzle to me.
Back to the Mountain of Debt. In 1972, the U.S. 10-year Treasury yield was well above 6%. After peaking in the '80s, when inflation spiraled out of control and interest rates rose to 15%, rates went on a long journey downward. This allowed the debt-driven growth model to continue for at least 50 years and likely a bit longer.
Where There's a Will
Governments, flanked by their central banks, have always found a way to manage escalating debts. This required a financial crisis from time to time, during which a significant amount of debt was purged from the system. However, ultimately, the system survived, including the dire moments near the end of 2008. As we know now, the Great Financial Crisis proved to be the accelerator of the debt-driven growth model, leaving a profound impact on financial markets.
Although interest rates are currently higher than we've seen in the last two decades, they will likely remain low in the long run unless we 'accept' another major crisis. And while this means attractive returns for bonds on the way down, the risk on bonds has also increased. Add to that an expectation that inflation will likely be closer to 3% than 2% in the future, fewer diversification benefits, and the risk-reward ratio of the second-biggest asset class on the planet will become significantly less attractive than it has been in the past 50 years.
Take Action
An ever-rising mountain of debt is not a reason to panic or to sell all your assets, but to adapt. Each time the debt increases and pressure on interest rates rises, other investments become more attractive. If you are a fan of stocks, that means higher valuations. If you focus solely on cash flows, like rents, then a category like real estate will become more attractive. And if you are concerned about the impact of the abundance of debt on the system, you invest a portion outside it through gold or Bitcoin.
There is, of course, a chance that the music does eventually 'stop.' Proponents of Stein's Law, which states that 'If something cannot go on forever, it will stop,' are likely to take more drastic steps than investors who are intrigued by look at the cover of TIME. In any case, any adjustment will be better than sitting quietly in a corner and hoping it all turns out well.
My solution? Invest in a smart combination (meaning with a strong focus on risk management) of scarce assets, Quality Stocks, and Physical Gold & Bitcoin outside the current system. And forget about bonds out altogether.
More information on the Blokland Smart Multi-Asset Fund can be found here: