Here you go Nancy - thank you: For those who have asked me to re-post my piece on MDEF-style portfolios - here you go: Financial Literacy (Part One) What four investments (sectors of the economy) has humankind always required to survive? This is a simple enough question, but think it through. What four classes of “stuff” have we risked our lives to own - and that have carried us forward from the beginning? Even assuming we were once simple hunter-gathers, humankind has passed through the various “Ages” by our mastery and use of technology: Stone-age, Bronze-age, Iron-age right through The Enlightenment, the Industrial Revolution and into the Information Age. But what have been the four constants for survival? What has humankind always strove to own at the risk of all else? The four absolute essentials are: Metals, Defense, Energy and Food (MDEF) Let’s briefly examine each of these sectors and apply what we learn to our current world-conditions and economy. It might be helpful to acknowledge how little has changed over the millennium. Metals Yes, there have been instances in human history when people used sticks, shells, stones or even “ability” to trade goods and services. However, precious metals, iron, copper and even tin have been used as a means of exchange with great success. The mining of these ores for practical use is the defining characteristic of the different “Ages” of humankind. Metallurgy provided the technological means enabling the evolution of, and wider availability to the other three sectors. Defense (War) Throughout history the ability for self defense has been paramount. From the iron spear through the atomic age and drones, our ability to defend ourselves (wage war) has relied on our ability to manipulate metals in one fashion or another. Religions, ideologies and customs have collapsed, taking empires and languages with them, but the success of the longer-lived ones relied on strategy and tactics which themselves have all evolved around the ability to defend or seize territory (wage war). It’s not a stretch to say that most wars revolve around the perceived need by some to control the resources of others. War has also been the best business around for centuries – especially if one controls vast sums of monies (metals). Lending to both sides of a conflict and collecting from both the winner and the loser have been hallmarks of finance and led to our current world-wide monopolies. Wars have begun for other reasons as well: to deflect a population’s attention from failed leadership or to settle excessive debt between countries. Presently, it is these two reasons that should concern us most as investors. Energy Energy means different things to different people. Over the millennium, it has meant wood or coal fires, steam, solar or nuclear. Since the industrial revolution, cheap and abundant oil has been the impetus for all achievement. Wars have been fought for it and have been lost for lack of it. Nothing in our current world system is grown, manufactured, transported, or “works” without energy from oil – period. The foreign policies of nations continue to revolve around this key resource while science either attempts to create new forms of it or minimize our use of it. Regardless, the world runs on the piston engine and will for the balance of our lifetimes. Food It goes without saying that until well into the Industrial revolution, humankind had spent most of its time growing, harvesting and storing food. We cannot live long or produce much else without a steady and healthy intake of food. As the world population has exploded over the last century. Food has become much more abundant but food is also scarce at times. Scarcity has taken the form our own “dust bowl” and droughts, but it has also been used as a weapon. Manufactured famines have killed millions of people in both Europe and the Far East in just the past century. We take for granted the over-abundance at our local super-markets, but we know the better part of the world survives on a fraction of the quality and quantity of the average American diet. Last year’s world-wide drought was considered the second costliest natural disaster in US history. Prices in the US went up, portions went down (in pre-packed foods) and profit margins were squeezed. Think of the “just-in-time” delivery system now employed by every industry in America. Now think of it as it relates to your local grocer – which carries only a two-day supply of most foodstuffs. If there were an interruption of the supply-chain due to fuel costs or natural disaster, for example, how much and how fast would prices rise? The Financial Lesson I point out these facts because they all directly relate to our societal safety and well-being. As investors we look for return on principal but there are also times when preservation “of principal” becomes paramount. As the DOW corrected in 2008-2009, many investors watched half – or more – of their principal evaporate. That is an extremely difficult hole from which to re-establish either: a) a comfort level with the reliability of our monetary system; or b) a projection of asset growth for retirement. My current view is that “the race to the bottom” in the present “currency wars” (devaluation across the globe) will, at first, be positive for the US dollar and hold in check some of the inflation that must come. But eventually, our own currency will falter, and when it does, we will not be talking about a “targeted inflation rate” of 2 or 3% but rather in the high double digits (no one wants to say the word “Weimar”). Also, we have to ask ourselves when and how a “currency war” becomes a true armed conflict? The call for a new ‘world currency’ will re-emerge. Finance Ministers from around the globe will look for the least painful way to extract their country from mountains of debt. The new currency will be based on a country’s precious metals, natural resources and advanced labor. If this sounds strange, or is a new concept to you, please read any of the data available from the United Nations on how the U.N. has been preparing for just such an event. What Stock Sectors Will Rise the Most Dramatically? The title of this piece is “Financial Literacy (Part One).” Libraries of books have been written detailing the demise of fiat currencies and the root causes of that demise. It’s a fascinating and worrisome topic that can be summed up in one line: No financial system in history that used fiat currency as an exchange (money) has survived. It’s mid-2013 and I’m asked constantly what to expect next – war? dollar crash? hyper-inflation? Let me be frank: My view of this market is short-term bullish and long-term catastrophic. My goal is to have client monies primarily in MDEF stocks as the currency-of-survival has never changed: We all must have an alternative to fiat money (metals); be able to stand against force for ourselves and loved ones (defense); have electricity and transportation (energy); and be able to feed ourselves (food). It’s that simple. I also believe that as we approach the next pivot point, returns on other asset classes and sectors will continue to diminish as demand contracts further and money managers, and individual investors alike, rotate into an MDEF-style portfolio. Remember that the markets are driven by human psychology and our old friends, fear & greed, are two sides of the same coin. If you’re interested in talking directly about what is expected next and how you might benefit – don’t hesitate to contact me. Jeffrey C. Borneman
Posted on: Thu, 18 Jul 2013 05:33:23 +0000
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