FWIW # 41 Stresses and Misconceptions

Sometimes it appears there are no good answers or positive outcomes. One reason is the country, and the world, have allowed proponents of the negative aspects of society to come to the forefront, pushing the positive features of society off a cliff. Why is this?

A second important reason is a constant drumbeat of negative thoughts stresses people out and brings them to the point where they want change just to stop the stress. The US political parties, along with their respective shills in the media, are the prime culprits for this pounding on the drums, gleefully gaining support as they drill holes in the fabulous melting pot that has always been America. Both major parties are guilty of this debilitating psychological manipulation toward tribalism and identity politics.

A third reason for the stressed condition of the population is the current vogue of extrapolating from the present or immediate past into the future. Two examples are artificial intelligence (AI) and generative artificial intelligence (GAI). It seems the world today wants to use these tools to look into the future and purport that what they see there is gospel and will lead to the end of society as we know it unless the elites decide on guardrails, i.e., censorship. The classic example of this reading of the future is the narrative about climate change, whatever the current definition of the phrase is. The Cassandras of doom are fortunate. There is little time before their dire projections will either be fulfilled or come to nothing. They are already starting to hedge their predictions. It’s unlikely the global temperature reversal they demand will meet their target. So, we’ll be able to dismiss their negative prognostications in a few short years unless the world does come to an end, and then it won’t matter. Another example is the federal government budget deficits, for which their predictions are supposedly rock solid and certain to come about. That’s not true.

No one knows what the next ten years will bring. Let’s look at some negative issues recently in the news and see if there is another perspective besides that espoused by the experts. And, more importantly, let’s consider what steps you should take in your portfolio to protect and prosper whether or not the predictions come true.

World War in Five Years

British Defense Secretary Grant Shapps gave a speech three weeks ago in which he said the world was in a prewar phase and world war would break out in five years. I have no doubt, looking at his CV, that he is experienced enough to read the signs and see that the risks of all-out war are elevated. A CEO of a cutting-edge US company applying AI and GAI to governmental issues indicated that some departments in government are preparing for war.

But extrapolating the current situation into a world war is problematic. The variables for going from where the world is today to where it would be in a world war are too many and too complex, and they embody too many unknowns and fateful decisions that won’t be made until the future. Certainly, the chances of Shapps being right are at least 50% since there are so many current conflicts raging.

What if he is right? What should your portfolio look like? The obvious choices are technology and defense stocks, both sectors with large valuation premiums now. What else? Liquidity you can put your hands on will be important. How much liquidity? Probably enough to get you through two years if the investment markets were shut down, which is possible. In a declared war—not the undeclared waste of resources and precious lives led by incompetent senior government war losers in the past—but a crisis in which the country mobilizes its full resources to bear on an enemy there will be a scarcity of basic goods, particularly when the government imposes price controls as it has done in the past. So companies that supply basic goods, such as paper, chemicals for manufacturing and production, infrastructure development companies, food, clothing, and pharmaceuticals, would be important. Interest rates would be suppressed, and companies’ dividends may be restricted as the government seeks to marshal all the resources available to fight the war. If Minister Shapps is correct, inflation will balloon for many years during and after the war. Check your portfolio and make sure you have broad representation in companies that are the engines keeping the economy moving. Even though stock prices may be suppressed by years of wartime-controlled markets, the economic power of companies will grow.

What if Minister Shapps is wrong? Perhaps some event, likely a change in political leadership or proponents’ realization that they would ultimately lose the conflict, will bring the world back to sanity. In this case, the need for liquidity changes and the fixed-income portion of a portfolio can accept duration (longer maturities) depending on your personal circumstances. The stocks in the portfolio could include companies that are overlooked by most institutions and speculators. For instance, there is a major company supplying necessary products around the world that has a market capitalization of approximately $200 billion. Some technology-oriented companies have market capitalizations of $2.5 trillion to $3 trillion. This 12-to-15-times valuation does not make sense. Proponents say these tech companies will make unlimited profits in the continuing AI and GAI revolution. That is questionable, but even if it’s true, the other companies that have more favorable valuations will implement AI and GAI, boosting their profits as well.

If the future is bright and we avoid a world war, either the overpriced technology companies will lose some of their optimistic valuation or the more mundane companies that are the backbone of the US and global economies will gain in value to reflect the continued devaluation of the currency. I’m not making a judgment that Minister Shapps is right or wrong. I’m making sure my portfolio will survive and thrive either way.

Bitcoin and Gold

The only gold I have is in jewelry. Many people believe the metal’s 4,000 years as a store of value make it an important part of a portfolio. Usually, these proponents suggest anywhere from 2% to 5% of a portfolio should be in gold. Now, the proponents of Bitcoin and other cryptocurrencies call Bitcoin digital gold and say it should also be in a portfolio. That’s a stretch. Proponents of the concept point to six shared characteristics of gold and Bitcoin:

1.limited in supply

2.globally accepted

3.decentralized in nature

4.transferrable

5.divisible

6.fungible

Gold and Bitcoin do compare in those characteristics. And there is a seventh characteristic they share: Criminals use both regularly for money laundering and illicit payments to people in power.

There are five more characteristics gold possesses that Bitcoin does not, and these five clearly override the seven listed above:

1.able to be touched, possessed, and hidden if necessary

2.not dependent on the internet or an exchange

3.real instead of a digital mix of 0s and 1s that can be seized by governments and/or bad actors

4.hoarded by civilized and uncivilized governments in huge quantities

5.used in transactions that are not necessarily public, unlike every transaction in Bitcoin, which is on a distributable, transparent ledger

You only need to know and understand that the US government has ways to track crypto transactions and has seized many Bitcoins, currently holding billions of dollars in Bitcoin. I’m always troubled by the deception—and, to me, fraud—concerning the visual aspect of Bitcoin. On television and other media, a gold-colored actual coin with a B is displayed. This is a deliberate attempt to make Bitcoin appear tangible. If Bitcoin was real, there wouldn’t be this deception about what it really is.

Finally, the SEC approved ETFs for holding Bitcoins. Gary Gensler, the SEC chair, made it clear on CNBC that his agency approved the ETF package, not what is in the package, namely Bitcoin. As a matter of fact, he was negative in his comments about Bitcoin. In a world that has become addicted to gambling and speculation, Bitcoin is just another way to place a bet. It is proof positive that everyone is not cut out to stay wealthy. The only tragedy is most of the money will eventually be lost by individuals who can’t afford to lose it.

Inflation

Inflation is coming down! The Fed and Washington are geniuses! Because the media doesn’t understand inflation and the proponents of fiat money want to fool the people, misinformation and downright lies abound. Inflation is different from the inflation rate. In a fiat currency economy, inflation does not disappear. The inflation rate increases and decreases as the degree of currency devaluation accelerates or recedes. For example, if an item costs $1 before the monetary authorities deliberately issue too much money, it may begin to sell for $1.05 when the inflation rate rises to 5%. Several months later, if the inflation rate declines to 3%, the item still increases in price but at a slower rate, now costing $1.08.

With an election coming, the monetary authorities may slow the growth of the money supply or even shrink the money supply by a small amount, triggering an even lower inflation rate, perhaps 2%. Several months later, the $1.08 item costs $1.10. Monetary authorities and politicians swarm the media and say that inflation has been beaten. Happy days are here again. The next month, the item sells for $1.12. In other words, the inflation rate has declined, not inflation.

To get the item back to $1 would require a severe, prolonged economic deleveraging and contraction that no one, even the proponents of sound money, would want. Why? Because it would lead to a change in the government structure in this country. So, the next time you hear one of the talking heads in the media say inflation is receding, understand they are ignorant. Monday’s CPI inflation rate indicated inflation is deeper embedded in the economy more than expected.

The Stock Market

Stock ownership is a bright spot in our lives, to say the least. As I’ve always preached, investors should own companies that will be important to the economy over time. It is wrong to sell good companies because of concerns they are overvalued. If you bought the company right, you didn’t overpay for the shares, and the reason for owning the company remains in place.

Can the market go down? Of course. If a company is growing at 7% a year and the stock price is up 25%, it’s obvious the stock valuation is highly emotional and can move both ways. The analysts will give you good reasons to buy stocks at these elevated levels; however, being disciplined and buying the companies that are priced fairly based on their operating earnings and are dividend payers makes sense and can be done, even in an overvalued market. Stay invested in companies that you believe in and that pay you to be an owner. Look for economic sectors under represented in your portfolio and wait patiently for the market to make them good values.

Everyone has an opinion as to why the stock market is at all time highs. Probably a sliver of each reason is in the mix; however, if you look at the continued over expanded Fed balance sheet and the hugely expanded money supply, the stock market is reflecting the monetary authorities willingness to allow inflation to be unacceptably high for longer.