[7 min read] Since returning to work in 2021, Vern and I have been sparring over the usefulness of cash in an investor’s portfolio. He thinks it’s undervalued, I think it’s getting devalued and therefore shouldn’t be a major part of your portfolio. As you know from reading Vern’s work, he thinks stock markets are hugely overvalued and that a decline of 50% in value is a possibility. Yes, it is a possibility. That I acknowledge. But I would say there is a much larger possibility that cash will lose 50% of its purchasing power over the next five to 10 years against a well selected portfolio of assets. That’s the thing about financial markets. There are no certainties. You simply don’t know how the future is going to play out. So you have to diversify. Gold, cash and bonds for the slowdown and defensive positioning. Shares for growth. Rather than sit in cash and wait, in my view you should only use it for tactical purposes. Build up your cash balance to 10%...or even 20% when markets are extremely frothy and deploy it during the corrections. The hard part is knowing where we are in terms of the frothiness. I’m seeing A LOT of froth in the smaller end of the market. Anything speculative, with little to no revenues and earnings, allows investors to go to town with their imaginations when it comes to valuations. For example, each day, I scan the ASX for companies making two-month highs. This morning, 184 securities popped up on my list. Very few of those were in the ASX 200. The vast majority are in the small to microcap space. Most probably don’t have earnings yet. So if you’re playing at this end of the market, you’d want to be taking some money off the table and building up a bit of cash. The speculative end of the market has had a VERY good run since last year. We know these moves run out of energy at some point. It’s just a question of when. The bigger stocks, on the other hand, aren’t moving in unison. The big banks and resources are dragging the ASX 200 higher, but underneath those large caps, there is a bit of weakness around. In other words, there isn’t a lot of froth at this end of the market. You can see the relative difference in the chart below. It shows the ASX 200 relative to the Small Ordinaries Index. As you can see, the ASX 200 is the cheapest it’s been in some time against the small-caps. How long will it be before capital shifts away from the smaller players and into the bigger stocks? But getting back to cash… I advocate holding it for tactical purposes only. It provides optionality in that you can take advantage of mispricings but it doesn’t provide safety. Rather, it only gives the illusion of being safe. The lack of volatility that cash brings to the portfolio hides the fact that policy makers are destroying its purchasing power. In the next few years, QE will seem like conventional monetary policy. Governments around the world will be employing Modern Monetary Theory (MMT), and central banks will be rolling out central bank digital currencies. This is all designed to have greater control over how you receive and spend your money. MMT is basically where the Treasury does away with primary dealer banks marketing their bonds and raising cash via financial markets. Under MMT, the Treasury just goes straight to the central bank. It’s direct financing of government spending. The theorists who came up with the idea reckon unelected bureaucrats will be smart enough to use taxes and tax rates to prevent inflation and direct the spending where it ‘needs’ to go. Right… Do you think cash is going to hold its value in such a scenario? Let me put it another way. A 50% fall in the market means a 50% increase in the purchasing power of cash against real assets like stocks. As I said, such a fall is not impossible. But what do you think these clowns will do when that happens? And will you be smart enough and brave enough to deploy all your cash after such a massive fall. People will be too busy patting you on the back for being so smart and staying in cash all these years, that you won’t have the mental flexibility to adjust your views. I can almost guarantee it! The decision to be in cash or stocks is not a binary one. You can invest sensibly and minimise risk as much as possible. Hold tactical cash. Own gold and gold stocks. Focus on quality companies with decent returns on equity that aren’t overly expensive. Look at sectors where the hot money isn’t in, you can often find bargains there. In short, you can be an investor, not a punter. Invest in businesses, and over time you should do well. One final point of Vern’s that I agree on: The idea of intangible assets is a dangerous one. These businesses are highly profitable, but the lack of tangible assets allows investors (who turn into punters) to let their imaginations run wild. That’s how stocks become crazy overvalued. More on that tomorrow… Regards, Greg Canavan, Editor, The Rum Rebellion ..............................Advertisement..............................GREEN HYDROGEN: The ‘missing part of the puzzle to a fully decarbonized economy…’ Green hydrogen has governments and investors all aflutter going into 2021. But what’s the angle here for you? Should you join the investors rushing to build hydrogen portfolios like they did with lithium 18 months ago? The basic answer is yes. And here are two potential plays to start with. | ..........................................................................
Monkey Business By Bill Bonner Today, the new president takes over. You’d think he would find it an easy job. He only has two major responsibilities to remember: Protect citizens’ freedomProtect their wealthEverything else is detail…distraction…and (usually) delusion. Blame game But the distractions are many…and the delusions are more common than houseflies. There’s still no wall keeping Mexicans out. But at least there’s a wall — chain link and razor wire — protecting the insiders in Washington from the outsiders in the rest of the country. Some of our dear readers blame the Republicans for the US’ sad state. Others blame the Democrats. But here at the Diary, we blame them both…and no one at all. Birds gotta fly. Fish gotta swim. And a degenerate empire has to find its way down from the peak, one stumble at a time. Each president has to take the fall assigned to him. Bush with his War on Terror. Obama with his Wall Street bailout. Trump with his spending increases, tax cuts, trade wars, COVID-19 cheques, and other abominations. Who’s to blame? Is the wolf to blame for eating sheep? Does he even know he’s a carnivore? And now, et tu, Biden? The new president is just a human. He is probably unaware that he’s supposed to destroy the empire. He just does what comes naturally. He listens to those around him — the other members of the Deep State elite. And they all agree. They have a list of priorities. Protecting citizens and their property is not even on it. Falsified economy Their first priority is to keep the fake economy going. Stansberry Research’s Morning Market commentary reports: ‘Treasury Secretary nominee Janet Yellen warned lawmakers any delays or insufficient support in implementing Biden’s stimulus plans could lead to lasting economic damage.’ A healthy economy hardly needs regular inputs of fake money. But we will cue you in…the US economy is an imposter. Interest rates are fraudulent. Prices are phony. Output is depressed and perverted. Tesla is not really worth $800 billion. Wall Street honchos don’t really earn their executive millions. The federal government can’t really afford to send $2,000 cheques to people who don’t deserve the money. The whole system is contrived…jacked up…and falsified. It is now like a married man with a second family…hidden away on the side. He’s gotta stick to his lies. And Yellen et al. have got to stick with their fake money. The transformation happened over many years. Hardly noticed…rarely understood, it nevertheless turned the US economy into something ghastly…grotesque and unnatural. Over the centuries, mankind learned that central planning, paper money, and prices set by bureaucrats always end in disaster. But somehow, the US’ economic elite forgot. It was as if they had forgotten how to walk upright without dragging their knuckles on the ground and grunting. And now, the simians are in control. Like those in the zoo, they swing from the bars and occasionally throw sh*t at the public. Obvious loss But let’s look a little more closely at the fake economy…and where it is headed. We have seen how the fake dollar system, set up from 1968 to 1971, when the US dollar was unpegged from gold, caused a pandemic of amnesia. People forgot how fake money worked. But the counterfeit money helped the elite shift the nation’s wealth from the 90% of the population on Main Street to the 10% on Wall Street. And the little guys had no idea what was going on. They thought the rich people were just lucky…or that their wealth would trickle down to everybody else. Every president since Richard Nixon aided and abetted this bamboozle. Most people lost wealth. The loss in relative wealth is obvious: the Federal Reserve gives money to the rich, not to the middle classes. Less obvious is the loss of wealth in the whole fake economy. Growing output When you can ‘print’ money and manipulate interest rates…you foul the whole shebang. Savers don’t save. Businesses don’t invest in new factories and better-skilled labour. Investors turn to speculation. The whole economy becomes ‘financialised’, driven into a frenzy of ‘get it while you can’ rather than real wealth production. These things drive down real output — the supply of goods and services that constitute real wealth. While GDP growth — the growth in the value of all the goods made and services provided — clocked in at 4–5% before the fake money did its damage…now, growth rates are barely half that. And if consumer price inflation were measured in the same way it was back in the good old days (prior to the 1990s revisions), today’s real rate of wealth increase (as measured by GDP) would be close to zero. Then, the authorities claimed that more printing press (ie: fake) money would ‘stimulate’ the economy to boost GDP growth. And by the 21st century, the presses were running hot. By the end of 2020, the Fed had added nearly $7 trillion in new money to the system — multiplying its balance sheet 10 times. No growth Alas, real output did not increase. Instead, all of this ‘stimmy’ spending (the War on Terror…Wall Street bailouts…Obamacare… Quantitative Easing…COVID-19 relief…the Paycheck Protection Program…Supplemental unemployment…) had the effect of making Americans poorer. JPMorgan Chase CEO Jamie Dimon said that if previous growth rates had been maintained, US GDP would have increased by $20 trillion in the last decade, not just $10 trillion. If his estimate is right, American families each lost an average of about $100,000 in the last 10 years alone. Our presidents — Bush, Obama, and Trump — all failed to stop the loss. All of them failed to do the job they were elected to do. Bad start But what about the other major responsibility of the president of the US? What about making sure Americans can go about their business without anyone bothering them? In this regard too, the 21st century got off to a bad start…with George W Bush’s ‘Patriot Act’. We’ll look at what this might mean tomorrow… Regards, Bill Bonner, For The Rum Rebellion ..............................Sponsored..............................‘I believe Australia is about to become the epicentre of perhaps the biggest gold bull market in history’ What makes our gold expert Shae Russell say that? One very simple fact: According to a report by Resources Monitor, Australia is about to overtake China and become the number one gold producer in the world. That’s HUGE. It would put Australia — and Australian gold mining stocks specifically — right at the heart of a rapidly rising gold market, potentially for years to come. Shae believes that could make some people here a lot of money in 2021. 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