IN THIS ISSUE: Conventional thinking tells us that a “glass half full kind of guy” is an optimist. But what if he is simply contented and complacent? In terms of investing, what if the person who views the glass as half empty is actually looking for more ways to fill their cup? This month, John Nicola reviews four books (each with a different take on our world’s future and the direction of the global economy) to see what obstacles lie in the road ahead and assess just how full the glass might be. Or was that empty…
Just because you might remember these lyrics does not make you ancient (it’s just possible you watch old movies as I do). This song seems decidedly upbeat, but in fact its original version starts with the lines: “Walked with noone and talked with no-one/ And I had nothing but shadows.”
The song was written for Lew Leslie’s International Review that had the good timing to open one year after the 1929 Wall Street crash. Nevertheless, it did survive for 95 performances.
But this begs the question – is the songwriter happy or sad? Is her glass half full or half empty?
In this newsletter, we want to look at several investment and economic tomes written by different authors, but with somewhat similar themes. When we are finished, we need to ask the question: is our investment glass half full or half empty?
Normally, we would associate the “glass is half empty” approach to investing with those nattering nabobs of negativism, whilst the cynics amongst us would say that only a plethora of positive Pollyanna’s would assume the glass is always half full.
But what if the opposite is true? What if those who believe that the glass is half full are, in fact, simply satisfied before getting a complete result? Conversely, what if those in the half empty lot are actually looking for creative ways to fill the entire glass?
Now, it may seem pointless to read books by people who disagree with your view of the world (and are thus not well-informed individuals). However, when it comes to investment strategies, objective thinking is critical and one must consider and evaluate alternative positions.
The four books which we will review today have very strong opinions on a number of subjects that can essentially be boiled down to the following themes:
It’s pretty hard to find ways to fill up the rest of your glass if you’re dealing with these themes. Understanding complexity and having all view points is important, and I have my own observations for each of the above which I will reserve for later. For now, let’s give these books a look and see if we can find the “sunny side of the street”.
These authors believe that, at best, we will see a tough economic environment as we adjust to new costs of energy and as we deal with record high debt levels created by cheap money. Overall, I admit I see much to agree with in some of the points they raise, but I also see them being committed to a position and focusing on data that supports that position.
- Here is our take on the books collectively:
1. Since going off the gold standard in 1971 (when Richard Nixon ended the ability for individuals and countries to exchange paper dollars for gold), it has appreciated from $35 to about $625. This is a perfect example of how the US has devalued its own currency. However, they fail to consider the following: For $35 to grow to $625 in 35 years is an annualized rate of return of about 8.2%. This is also the same rate of return an investor would have made buying long-term US treasury bonds. Consequently, owning dollars and getting paid interest was just as good an investment as gold and far less volatile. Furthermore, the 1971 value for gold of $35 was artificially suppressed – in fact the black market price was closer in 1971 to $100. Using this number, gold has averaged about a 5% rate of return – roughly equal to inflation. This is what one might expect. We see nothing wrong with owning gold, but it is hardly the only worthwhile asset to invest in.
2. At the time they wrote this book (summer 2005), the value of the US dollar had dropped from a peak of 0.8285 (dollars per Euro) on October 26, 2000 to 1.3129 on July 31, 2005 (about 5 years) – another example they cite of a US government devaluing their own currency to pay off their obligations with cheaper dollars. However, they forget to mention that the Euro started on January 1, 1999 at 1.1674 and, as of the writing of this newsletter, is at 1.2859. That means that over about 7.5 years, the dollar has devalued relative to the Euro by 1.4% per year. That devaluation is more than made up for by the higher interest rates available in the US for most of that period of time. We are not here to defend the US dollar, but we like to look at all of the relevant facts.
- Peak Oil is likely a concern, but the impact of new technologies in oil recovery and the drive to create alternative energies should not be dismissed too easily. I would think that we might even see some excess supply of oil in the near term if we combine a recession with some potential easing of political tensions globally. However, I also feel that low-cost energy has been one of the main factors in improving global standards of living, and if that is in jeopardy then we would face some bleak times. Energy should be part of everyone’s investment portfolio. We are also currently doing research into alternative energies to see what the long-term opportunities are. (And it will take a long time for many of them to pay off, but sometimes being early is worthwhile.)
- Cheap money has created an asset bubble in housing and related real estate. Perhaps the good news is that rates are likely to remain relatively low for some time (because we also expect inflation to remain benign). Therefore, with a little luck, any changes in house prices could be gradual. However, in places where prices have risen the fastest (think 2010 and Stampedes), then, to paraphrase Bette Davis, “…we may be in for a bumpy ride.”
- If something is not logically sustainable, then eventually it will change. The US trade deficits will eventually end or reduce substantially. Hopefully, that end will be as a result of an orderly decline in the dollar combined with an increasing consumer society in Asia and more savings in the US. If it ends apocalyptically, as Kunstler and company suggest, with America’s trading partners looking to cash-in their $2 trillion US of Treasury Bonds and Bills for “real stuff ”, then the following would likely occur: the US dollar would fall very quickly, interest rates would rise dramatically (including our own), and eventually all of this would lead to a severe global recession (in case you didn’t notice, Kunstler and friends are in the depression camp). What one hopes for (and expects) is the more orderly retreat, since all players are highly interdependent. However, it is for scenarios just like this that we own gold and precious metals funds and that we lock-in our financing rates on real estate for ten-year terms.
- In keeping with the theme that unsustainable situations eventually change, we can also surmise that demographics and our ageing populations will mean that we will eventually increase the official retirement age, reduce the number of people who receive government funded pensions, and limit health care to those who are in need of financial assistance and/or basic services. Bonner and Wiggins can gleefully point to the previous US Treasury Secretary, Paul Simon, as the man who said that the present value of unfunded liabilities of Social Security and Medicare is $44 trillion dollars (just a little larger than the last lotto). Since that number is more than 5 times the official US debt, America is already technically bankrupt. (In case you were wondering whether Canadians are more parsimonious about our future unfunded liabilities, the answer is “no”.)
The problem with all of this analysis is that it assumes we do not change our systems. We will increase funding, reduce benefits, increase qualifications, and do whatever is required to make these plans work. It will change our assumptions about what we are responsible for and what government is or should be. While this is probably for the best, not all citizens will be overjoyed, so be prepared for the NDP to explain how all of this can be paid for (print money, soak the rich, or preferably both).
We see some rough times full of change. So what is really new? We do need to keep aware of our current issues, but not let our worries and concerns impede us from positive action and a proactive approach to investing. Whether we see the glass as being half full (potentially complacent) or half empty (concerned, but looking forward to the challenges ahead), the fact is we can add to what is in the glass.
And in looking to fill our glass to the brim, we should take the advice of James Thurber, who was probably on the sunny side of the street when he wrote the following: “Let us not look back in anger or forward in fear, but around in awareness.”