Tale of Possibilities
I recently finished the book by Ray Dalio, The Changing World Order. He paints a grim picture of where we are as a country, using history to guide the reader through why he is concerned. Very thought provoking from the founder of one of the world’s largest investment firms, to say the least. To avoid the worst-case scenario, we need to come together politically and get strong leadership to set in place multi-year plans to keep us as the world’s leading economy. Unfortunately, the Republicans and Democrats bicker and blame each other over everything.
The worst-case scenario for Ray is United States civil war and/or a revolution. He handicaps this happening at 30% in 10 years, and the book was written before the FBI visited President Trump’s home, and even before Putin invaded the Ukraine. China, he suggests, likely becomes the world’s largest economy while the US dollar loses status as the world’s reserve currency. He points out that many qualified leaders do not want to go into public service as that process has become quite burdensome in many ways. China and Russia apparently have been collaborating on a new world reserve currency over the past few months. This has attracted surprisingly little attention. Best I can tell, it is apparently true.
Another interesting book I read was ‘The Price of Tomorrow’. Jeff Booth explains that the world we grew up in was built without much technology and that makes those companies/industries vulnerable to disruption from startups not burdened by the old ways. We have already seen plenty of that over the years: my favorite example some of you know is Eastman Kodak. I remember the CEO commenting on a conference call that ‘digital will never replace film’. Dumb to be the CEO that should know the threat of disruption and yet not have a clue. I look at companies and wonder if some smart students from MIT, Stanford or Ga Tech are going to figure out how to do what they do better and cheaper. And if they can, will they be able to raise enough money to survive that battle? If Jeff Booth is right, these innovations are deflationary and that provides a glimmer of hope to the current worry of long-term escalating inflationary prices. Don’t order Champagne just yet. Last year, stagflation was a worry and now is becoming a reality. But how this plays out is anyone’s guess. There are possibilities. The question is, will the markets be significantly different with the various outcomes? Let’s review that.
If unrest climbs due to a serious food shortage in our country for example, no amount of stimulus will solve that in the short run. This is quite bearish. Politicians on both sides will be escalating the rhetoric and previous disagreements will pale in comparison. Many of us have noticed shortages in the grocery stores already. How close are we to a real supply chain problem? I suspect closer than anyone will admit. This would not be helpful to many businesses with hungry employees priced out of the ability to afford food, gas and rent. This will not bode well for stocks and Putin likely has that as part of his strategy. Food is in crisis all around the world, and I found some information on the Bayer.com website. Click here to see the full report. An excerpt: The most effective way to help mitigate the disruptions caused by the war in Ukraine is to end the war and ensure food is not being used as a political tool. The clock is ticking. Every day the war continues, the global food crisis worsens.
However, if we are smart enough to recognize dangerous looming problems and work on bipartisan solutions to combat an invisible enemy, there is a chance for only minor disruptions to our supply chain. I have little confidence this can happen as apparently ‘we the people’ have demanded our elected officials fight each other on every detail. Maybe corporate America will step up and lead us out of that possible calamity and keep the potential dislocations of supply chain manageable. This would be bullish as investors will continue to own investments and deploy new capital on the dips if we avoid these threats. There is a long list of possibilities. Aside from that, the market is very forward looking, and this would be bullish for the markets.
Let’s talk football! Picture the Army-Navy Game, with 89,510 spectators. They are fierce rivals and take every play seriously. But that is just a game, and in the end, these enlisted soldiers all go back to their job of keeping our country safe. They have a common goal. Politics should be that way too, but the environment of ‘I am right, and you are wrong’ has escalated beyond anything reasonable or sustainable. I’m not going to be political, but I am curious just how far this division will go. If it goes to an extreme like Ray Dalio worries about, we will be at war with each other. The have and have nots will be looking at a new playbook. To put that in perspective, Credit-Suisse estimates that a total of 89,510 people in the USA have assets of at least $50 Million. This number equals 50.9% of the ultra-high net worth individuals in the world. Visualize all these wealthy people in the Army-Navy stadium. An announcer comes on the PA system and makes an announcement that ‘the shit is hitting the fan, get out of stocks!’ I can see how a fear based sell off can become severe quickly. High net worth families and their advisors read and worry about the same stuff, so the herd is easy to corral in the digital age. Additionally, some of these wealthy spectators run other people’s money in hedge funds. Uncertainty is the nemesis of investing, and much potential uncertainty has permeated today’s narrative. Billions of people in the world are also easy to communicate with and the truth is not necessarily important when you are cold and hungry.
Our divisions, hopefully, are not serious enough at the end of the day for turmoil to escalate and problems with the "supply chain/food shortages or whatever" will be short lived. If this is correct, I suspect stocks will be a spectacular investment over the next 5+ years. The other possibility is to plan for turmoil in DC, food shortages, unrest, maybe riots and who knows what. I believe most people in the stadium are already defensive judging from the rhetoric of late. But you can never have enough cash if you’re scared, and we must prepare mentally for a severe correction in stocks.
Last year I mentioned that Crypto might be worth a look on a substantial correction and boy have we gotten one started. One flaw I see in Crypto is that you must have a password to retrieve your loot. If you lose that, you lose it all. This is unacceptable to me, and a major hindrance to the long-term viability of these digital assets. They should be listed and publicly traded in some fashion similar to stocks. If something happens to you, your estate should be able to distribute your assets as you wish. But if you die with your passwords, that is not good. In this case, I guess you can take your money with you when you die! Oh, you think this is easy, just leave your passwords with someone. They can log in and transfer the coins out easily, not discussing it with you or your advisors. It just disappears with little traceability. Be careful!
As I have mentioned before, the old saying is that "the market climbs a wall of worry"; we all know there is plenty of worry.
