Saturday , November 16 2019
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Three Things I Think I Think – What if it All Comes Crashing Down?

Summary:
Here are some things I think I am thinking about: 1. Do you need gold if it all comes crashing down? The Dutch Central Bank stated that we would need gold to recapitalize the system in the case that it all comes crashing down. I’ve never understood this view to be honest. If the whole system comes crashing down you’re not gonna care about gold and recapitalizing the system. If this zombie apocalypse scenario unfolds my guess is you’ll be fighting (perhaps hand to hand) for resources. The only metal you’re going to be worried about is lead. For bullets. You’re not going to be lugging around gold bars so you can purchase stuff at the store. So, sure, gold could be used to recapitalize the system, but if the system ever needs to be recapitalized with gold I wouldn’t go out buying gold bars

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Here are some things I think I am thinking about:

1. Do you need gold if it all comes crashing down? The Dutch Central Bank stated that we would need gold to recapitalize the system in the case that it all comes crashing down. I’ve never understood this view to be honest. If the whole system comes crashing down you’re not gonna care about gold and recapitalizing the system. If this zombie apocalypse scenario unfolds my guess is you’ll be fighting (perhaps hand to hand) for resources. The only metal you’re going to be worried about is lead. For bullets. You’re not going to be lugging around gold bars so you can purchase stuff at the store. So, sure, gold could be used to recapitalize the system, but if the system ever needs to be recapitalized with gold I wouldn’t go out buying gold bars assuming that you’ll somehow be safer because of them. After all, the guy with all that lead isn’t going to be graciously accepting payment in gold bars because he’s going to be too busy taking your gold from you at gunpoint.

2. The case for stocks over bonds? Here’s a chart from CNBC claiming that stocks are now more attractive than bonds.

Three Things I Think I Think – What if it All Comes Crashing Down?

I guess this could be true. But who cares? Asset allocation shouldn’t be thought of as an all-or-nothing game. We know, for a fact, that stocks will earn a premium over bonds in the long-run. So there’s always a case for stocks over bonds. But the reason we own bonds is because stocks, while superior in the long-term, will inevitably be worse in the short-term at times. And bonds are where we get our short-term certainty. So, unless you’ve got some sort of mythical 100+ year time horizon for your liabilities, then you should probably own some cash and bonds despite the fact that they’ll generate worse returns than stocks in the long-run.

Here’s 46 pages on the topic if you need some night time reading.

3. Future expected guesstimates of returns. I thought this chart from Robeco showing future expected returns was useful.

Three Things I Think I Think – What if it All Comes Crashing Down?

I think they’re fairly close in general. I’d probably be a little higher on stocks, a little lower on commodities and pretty close on everything else. They’re guesses of course, but we need to make guesses when we think about our asset allocations because we need to be able to match our expected future liabilities with our future expected assets. That’s just good financial planning. So, contrary to the irrational rage of the anti-forecasting crowd, these sorts of things are perfectly useful in the scope of sound financial planning and asset management.

4. Negative rates are a sign of fiscal policy failure? Here’s Stephanie Kelton, leader of the MMT cult movement, declaring that negative rates are a sign that fiscal policy has failed:

Three Things I Think I Think – What if it All Comes Crashing Down?

The MMT people have some truly bizarre views on rates. I mean, imagine running trillion dollar deficits with low inflation and thinking that that necessarily means fiscal policy has failed!?! It’s like running a corporation and thinking that you’re not spending enough just because the interest rates on your bonds are low. Sure, governments are different than corporations, but governments fund their spending at the rate of inflation. So, when inflation is low interest rates will also be low. If you can run massive deficits AND have low inflation then this is a good thing. Not a bad thing!  The true sign of fiscal policy’s failure is when you’re running huge deficits and inflation rises which leads to the need to raise interest rates.

5. We need to re-elect Trump or it will all come crashing down! Here’s Donald Trump claiming that it will all come crashing down if he doesn’t win.

Three Things I Think I Think – What if it All Comes Crashing Down?

This is so irrational I don’t even know where to start. First, the US economy is much bigger than any single person. This idea that the President dictates the markets and the economy makes no sense. At the most basic first principles level it should be obvious that none of us gets up and goes to work because someone is President. Well, maybe some of you do, but most of us don’t give a hoot. I get up and go to work because I care about my family and being able to take care for myself and others.¹ I’m not gonna stop doing that because Donald Trump is President. Sure, politicians can impact the economy on the margins, but they’re not the engine in the car. Politicians are, at best, the signs on the road regulating how we drive, but they’re not the drivers and certainly not the engines. So no, even if you believe the Democrats are all awful, the economy isn’t going to crash if they win. So let’s stop doing this thing where we assume that the economy does this or that because of the men and women behind the curtain.

6. Men to the left. Speaking of men and women – here’s a bonus image from Black’s BBQ in Austin Texas. I never knew this was how it works.

Three Things I Think I Think – What if it All Comes Crashing Down?

¹ – Also, I need to buy 10 pounds of Reese’s Pieces for Halloween because the kids will only take ~0.5 pounds and then I get to eat the remaining 9.5 pounds. That’s how this works, right?  

NB – That was more than three things. I apologize.

Cullen Roche
Former mail delivery boy turned multi-asset investment manager, author, Ironman & chicken farmer. Probably should have stayed with mail delivery....

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