Where Is The Safe Haven?

Inflation? ATH in Markets? Bonds?

Over the past few days, I have had a few conversations with people about where to put your money. Politically, they have been very liberal to very conservative. It seems everyone around my age is pondering this question.

I don’t have a great definitive answer yet. I am blogging to cogitate about it and get a conversation started.

The reason we are is we remember the 60s and 70s.

Tumultuous social change in the 1960s along with the breakdown of Bretton Woods led to massive inflation in the 1970s. Johnson’s Great Society printed lots of cash. Nixon didn’t really turn the spigot off and instead magnified the problems with price and wage controls. Watergate happened and we got Jimmy Carter.

Jimmy Carter was a total disaster for America.

We all remember the inflation and stagflation of the 1970s. Whip Inflation Now turned into rampant inflation with super high-interest rates. One of the strongest selling points to me when I was being recruited for basketball my senior year was if I attended USNA or USAFA I was guaranteed a job upon graduation. People who went to other schools didn’t have that sort of security.

Those of us that started working in the late 1970s and early 1980s are looking at retirement now. For most of our working careers, we have seen interest rates drop and we have seen the stock market go up. There have been some market blips along the way, but you could reliably expect an 8% return on index funds in the stock market come hell or high water. Thank goodness for Ronald Reagan.

Today though, we all are wondering. The market is at all-time highs. Can we expect a return of at least 8% year over year? Over the last 30 years, the return has been close to 22%. We know that the stock market was a dreadful place to have your money back in the 1970s. Over one twenty-month period it lost 50%.

Another thing we learned back then, easy-money policies from the Federal Reserve combined with a lot of government spending led to high inflation. Hmmm. The US has had that since the financial crisis of 2008. Not one Congress or President has been fiscally responsible. Prior to that spare me the talking point about Bill Clinton. If the government today can say a $3.5 Trillion spending bill costs zero, you ought to have an inkling that government accounting isn’t exactly like your checkbook or business. Trust me when I tell you the US has been perpetually in debt, with ever-increasing amounts of debt ever since I was born.

Today we have:

• Easy money

• Massive government spending

• Massive debt

We also have inflation as we have never seen since the 1970s. I think that much of it is caused by disruptions in the supply chain which accentuates the bullwhip effect. That bullwhip effect leads to much higher prices.

What happens when you tame the bullwhip? Prices will drop, supply chain problems ease. But, prices won’t drop to where they were. That is unless you have a big recession or depression which no one wants. Inflation sucks but deflation is worse.

That leaves us with the question, where do you put your money?

Putting the dough in bonds will suck. Suppose you buy a bond with a 5% return. Not unheard of today if you dip down into lower-quality bonds. Inflation last month was running at hotter than 5%, so you are actually losing money and since we are assuming a corporate bond, you are even paying taxes on it. The one nice thing about bonds is the payments are totally predictable. If you can run your life on that predictability, fine. But, your dollars won’t go as far as expected. For most of us, screw fixed income unless you want to absorb the loss.

The stock market might be a place except if we have 1970s redux, it will be a disaster. You could keep your money in and wait for the upturn but you will have to weather a pretty big storm and your money won’t be worth nearly as much as it was prior to the assumed downturn.

What about real estate? You could do that but real estate across the country has been on a tremendous tear higher. Plus, what do you do with it when you get it. Some property you might buy could be income-producing but you actually have to manage them and do some work along with accepting the problems that come with owning properties.

There are always commodities. Inflation fanatics tout gold and silver on television all the time but truth be told, those are terrible investments. They don’t hold their value either.

There are cryptocurrencies. Bitcoin fanboys will call it “digital gold” and it just set all-time highs again too. As bullish as I might be on crypto, it’s not a low-risk place to put your money although having some exposure with a little bit of money you can afford to totally lose seems like a winning proposition. I am invested in a crypto hedge fund. It beats the market. But past performance doesn’t guarantee future performance.

As the Vauban post I linked to said, money is filtering into private markets. I think you can beat inflation by investing in private companies. If you have the time, the inclination, and the risk appetite you can find companies to invest in.

Otherwise you are stuck with being in a fund and giving up at least 20% of the gains with no control.

It goes without saying the private market is frothy too. Companies are raising at higher valuations because there is too much money chasing too few good deals. Besides that, often private investing resembles a herd mentality. I never neat the market going with the herd.

The other thing you can do is build your own business. Building something of value that you can sell later on is appealing. However that’s not a cinch either.

Americans looking to build or preserve wealth have been put between a rock and a hard place by the utter mismanagement of government finance at federal, state, and municipal levels.

What are your thoughts?