We are definitely in strange financial times. Some parts resemble the pre – war period in Europe, which came to a head with the dissolution of the Weimar Republic in a bout of hyperinflation unprecedented in the so-called “developed world”. The are some similarities to that time, but there are some enormous differences.

That epoch ended in a world war. Will we do better this time round?

Let’s first begin with the big picture, as shown from an American perspective. My European and Japanese and Chinese readers will know the situation is a close reflection of what they see in their own countries.

Besides, the US is still (not by much anymore) the biggest economic power in the world. When we catch a cold (or Covid) the whole world comes down with pneumonia…

So how has a US investor fared in the last 20 years? Here’s the big picture:

Macroeconomic big picture
Money supply vs inflation vs gold vs stocks vs real estate vs oil

The graph above shows a fairly decent picture, on the surface. The red line is inflation, which has increased by 49% since 2002. All investment classes shown here outperformed that. Stocks did best, up 522 percent, real estate (313%) , Gold (262%) and crude oil (212%) . Not shown here are long term bonds, a staple of most conservative portfolios. These were up 247% over the same time frame.

For right now, we’ll concentrate on the investor, and not the man in the street, who has arguably not seen an improvement in his lifestyle in the last 20 years, as money has concentrated into fewer and fewer hands.

Going forward, a traditional investor might think. If it worked in the past, it should work in the future. I’ll just use the old tried and true formula of subtracting my life expectance from my age and using that to determine how much of riskier investments (stocks, real estate) I should own vs more conservative ones (Gold, Bonds). With that formula in mind, most financial adivsors would counsel putting a 65 year old 20% into stocks and real estate and the balance in the other categories.

That in my opinion would be a very shortsighted strategy, with disastrous consequences for the real goal of investing: that of preserving and growing one’s spending wealth in after-inflatonary terms.

Why you ask? For that you need to focus a bit more on that pink line. That’s telling us from the Fed’s own statistics how much the money supply has increased. In old fashioned terms, that called debasing the currency.

Yes, you say, but there has not been any significant impact on inflation. Apparently, the Fed’s gotten so good at its job that its magically disabled the noxious effect of too much money chasing the same supply. It’s reversed the basic tenets of economics, it would seem.

Can’t this just continue? The short blunt answer is yes it can, but you may not like the consequences.

What has occurred in a nutshell, is that the Fed has printed money out of thin air. It has distributed this money in a fashion that has permitted the suppression of consumer price inflation, while favoring those sectors that could best get the government’s ear.

The effect, according to the government’s own statistics has been a worsening of inequality in the US. A detailed analysis can be viewed at The Balance. This gist is in the conclusion: “Between 1979 and 2007, household income increased 275% for the wealthiest 1% of households. It rose 65% for the top fifth. The bottom fifth only increased by 18.9%. That’s true even after “wealth redistribution” which entails subtracting all taxes and adding all income from Social Security, welfare, and other payments.”

Accompanying this, of course has been growth in the size and power of the government itself: Government Spending in the United States increased to 44 percent of the GDP in 2020 from 35.68 percent in 2019. source: U.S. Bureau of Economic Analysis

A new economic philosophy has gained more and more adherents within the current ruling party: Modern Monetary Theory. In short, this says the government can print as much money as it needs to without it impacting inflation as long as unemployment levels remain relatively high.

There is one element around the discussion of inflation that has escaped all but the most thoughtful of legislators, and has yet to seriously come into the consciousness, let alone the acceptance, of the average American voter. That is the inevitable and overwhelming impact of technological advancements on global economics and societies. The reader owes it to him/herself to to read its masterful treatise by Jeff Booth, The Price of Tomorrow

The technological forces described in this book are already and will continue to overwhelm all other factors affecting growth in the world, and the intricacies of finance. Bottom line, technology will cause an almost inconceivable abundance of goods and services in the world, and will occur at a pace that most people will find difficult to understand, let alone adjust to. This is not in the future. It is now. Software is quite literally eating the world and becoming more and more voracious very quickly. The technologies of artificial intelligence, materials science, biotechnology, gene editing, robotics, nanotechnology and cryptography are already growing at a blistering pace, affecting every industry, every country and every individual. This growth appears to be even faster than predicted by Moore’s Law. which forecast a doubling of technology every 18 months, and which has been uncannily accurate for the last 50 years.

Hard as it may be to believe, this will cause a massive loss of jobs and massive social disruptions. Truck driving, the largest employment sector in the US for middle class men, will be extinct within a decade. But its not just non-professional jobs that are threatened. Software programmers are becoming replaced by the very software they write. Two years ago, I was laughing at the bumbling version of Artifical Intelligence I encountered. This year, I saw the latest version write a 30 page web site in 5 minutes, replacing the cost of about 5000 programmer hours. (And they didn’t even demand ping pong tables and free twinkies!) Hospital lab technicians in the US used to have to worry about being unemployed by much cheaper yet equally qualified techs out of India and Pakistan, since images can now be instantly transferred through the internet? Now the Indian guys have to worry about AI doing the job better, in one one-hundredth of the time, and at one one-hundredth the cost. Studies have shown that close to 70% of jobs in the US performed today will be affected. Hey you, reading this. This probably means you!

Social optimists argue that this is a good thing, and that new jobs will spring up that we’ve never even heard of. I hope so. The resources unleashed will certainly allow us to address all of societies urgent needs, from planetary warming, to limited energy supplies, to environmental degradation. But I think the transition will be much more difficult than those optimists believe. It takes the average person two to three years to learn a new job skill. What happens when AI and robotics eclipse that need before the new skill is learned?

What we face, as societies, is the largest concentration of wealth and power that we’ve ever seen, in the shortest period of time. How will we address that? Can we do so without the typical historical solutions: revolutions and war?

As an investor, you might have thought that looming inflation due to money printing was the danger to confront. Short term, I think you’re right, but in the medium to long term, deflation will be the order of the day.

As Booth demonstrates with his paper-folding example, the human mind has difficulty grasping the power of a technology compounding every year or so. (Fold a paper 45 times and its height would reach from here to the moon – 62 times and you reach the sun. Yeah I know, impossible right? Check out the video). Apply this to the economic sector of your choice and the implications are staggering. Real estate? Hmmm, raw land, maybe. Houses? Less sure.

Conventional investing gets turned on its head: Normally, when the government goes crazy printing money, you want to buy hard assets, like real estate. But what kind of real estate? Just this year I saw a developer in New England printing $640,000 houses in a week with just a few workers and selling it for below market value. How many developers will not jump on that bandwagon right away? Today its 50 companies, next year 500 , then 5000, each bringing new improvements and cost savings to the process. If you’re buying real estate thinking the asset will faithfully appreciate at the pace of inflation, think again. You’ll be like the guy trying to resell a 10 year old mobile phone for its initial value. Good luck with that. Could a 4 bedroom home in the nicest part of town really sell for $100,000 in a couple of years? Hard to believe. But then again, I still can’t believe 45 foldings of a paper will get you the distance to the moon… What about the impact of all these technologies on commercial real estate. Will people continue to congregate in cities for their job attractiveness? Or will they be more willing to perform their jobs from less expensive rural locations?

Before I go into discussing what I think will be the best investment strategy for this period, it’s now time to delve a little into politics. I normally hate to do that in any discussion of finance, but the political ramifications of this technological surge will be huge, and far from certain. Depending on our political choices, our optimal investment strategies could be far different.

In the near term, in the US, the diagnosis is fairly easy. We’ve already chosen to address the pandemic with massive government intervention. As the years progress and more and more people lose their jobs to technology, I have no doubt we’ll print massive amount of new money in order to steer it into social programs and redistribute some of the ever concentrating wealth. Personally, I would take a different approach but it’s not one I think will be politically viable for at least 6 to 10 years. Before that, the effects of the technological shift to abundance and joblessness – shall we call it a “techpression”? – will first have to be clear and indisputable.

Could this shift with the next elections being won by the Republicans as people tire of ever more government interference in the their lives? Possibly, but I doubt it. I think it will take more than 2 years for that shift to occur, it if ever does. Moreover, the current solutions being advanced by the Republican opposition thus far – lowered government restrictions, tariffs, crony capitalism, immigration restrictions, tax breaks for the wealthy – are not solutions that will cure what ails us. And unfortunately, the forces of “unfettered capitalism” and “laissez faire” – intrinsically appealing to this author- will not be enough to offset the tremendous economic hardships that would follow. Social peace requires a controlled process of adjustments.

I only introduce politics into the discussion because the policies we adopt will affect tremendously which investments work – and which don’t. Until politics shift, I assume we’ll see the following policies put into practice.

The government will counter the deflationary effects of technological change by printing as much money as needed to keep the unemployed pacified – if not happy.

For the price of goods and services to remain constant, let alone increase, this would require money printing on the order of 30% to 50% per year!

The government has printed about 38% more money in the last 18 months. People think this is a one-time necessary aberration brought on by the Covid pandemic and the freezing of the global economy. They are wrong. If prices are to keep from dropping, it will be necessary to print about 30%-50% more currency EACH YEAR.

Of course this would bring with it an ever increasing control of the economy by the government. Within less than a decade the government would control over 90% of GDP.

Is is necessary for the government to maintain prices growing slowly, keeping inflation at the magical 2% that Keynesian economist hold sacred? Why can’t the government allow prices to fall where they will? Lower prices are good for consumers – especially for those unemployed. I would argue that this can be a good thing, but it will not be acceptable to mainstream Democratic politicians.

Even politicians truly concerned about the plight of the poor might accept deflation if minimum government policies were in place to prevent the worst of hardship. So couldn’t the Democrats shift stances and freeze the printing presses, allowing interest rates to rise and asset prices to fall?

The problem is, falling asset prices also means a huge drop in government revenues. Pension funds would be decimated, and middle class housing prices would collapse. These would not be popular effects among Democratic constituencies, even as a little Schadenfreude is fostered as fat cats stocks gains also plummet.

More alarmingly, the very bedrock policies undermining social peace in the US since the 1930’s, Medicaid and Social Security, would be threatened. Look at the 2 graphs below. The first, published by the Federal Reserve, shows that US debt at the end of 2020 was at $29.5 trillion dollars. At current interest rates of around 1%, this costs the government $300 billion a year in interest payments ,which is about 9% of the federal budget. According to the government’s published calculations, for every 1% interest rates are allowed to rise, this consumes an additional 9% of the government budget Source. So if interest If interest rates were allowed to return to the levels of the year 2000, of 4% on 10 year treasuries, this would consume 36% of the federal budget. At 1990 levels of 8% it would consume 72% of the federal budget.

interest vs gdp

Many economists believe a country that prints its own currency and funds itself only through its own national currency can never go bankrupt. On the Fed’s very own pages I was shocked to read : “When the interest comes due, it can be paid in legal tender—that is, by printing additional U.S. or Federal Reserve Notes. It follows that a technical default can only occur if the government permits it.”

Tell that to Venezuela. Oh right. We’re not Venezuela. I wonder how many Germans remembering the Weimar Republic would share that view.

But the very same article that makes the statement above also says there’s a simple math calculation. As long as GDP growth exceeds interest rates paid there’s no problem. That’s absolutely correct. What the article failed to mention is that the growth of debt has far exceeded the growth of GDP since 1983, as the 2nd graph shows.

Think about it. In order to grow ourselves out of this situation, we “only” need to fuel GDP growth at higher than the rate of interest. Forever. Check out our track record on that in the graph below. Not only has our 100 year average growth been 3.3%, but the trend is pretty consistently heading lower.

This means we CANNOT afford interest rates to rise higher than real growth. We cannot afford to allow our rates to go back to what they were just a decade ago. Or we can only do so if we have real growth much higher than it’s been historically. Food for thought.

So what an astute investor, with say a 10 year time horizon to do?

I would not do what the patriotic German in Weimarer times might have done. Buy government bonds. Invest in Germany. What would have served that German well back then? Buying Gold. Not stock. And certainly not overloading in German real estate. Nobody could tell of course, who would win the war, or even in 1939 whether another war would actually break out. But the astute investor back then would have been smart to hedge his bets. Some in Germany, some in the far off US, maybe a little in Japan (oops)

The point is, don’t put all your eggs in one basket.

The other lesson is: don’t assume that the next 10 years will be like the last. Money printing did wonders for our stock market in the last 10 years. The forces that caused that are not repeating themselves, in my view. The next 10 years are highly likely to see a global collapse of stocks and real estate prices.

I still like Gold. Heck it’s worked out ok at asset preservation for the last 3000 years or so, so maybe it’s safe enough for the next 10. But smart investors will also want to consider whether they think the digitization of goods and services will continue.

I have no doubt it will. In that case, you should load up on the digital form of Gold -> Bitcoin. If you haven’t been confronted with this asset class yet, it’s time you crawled out of that cave you’ve hibernated to.

I’m not going to spend 2 hours telling you all the reasons that 1) Bitcoin is scarcer than Gold and will be more so over time 2) Bitcoin – unlike every government currency in the world – is not subject to inflation 3) Bitcoin can and will resist all government attempts to prohibit its adoption (they can and are trying to do so).

Let’s add Bitcoin to a graph comparing it to the outrageous growth of the money supply. Remember that pink line in the first chart showing you money printing outpacing every return of investment? Well Bitcoin’s increase in value dwarfs that. In fact, it’s been the highest performing asset class since its inception in the doldrums of the 2008 market crash.

You could have put 1% of your money in Bitcoin and the other 99% buried in US dollar notes under your house, and you still would have significantly outperformed a classical stock/bond portfolio by a huge amount while suffering at most 0.6 % portfolio drawdown.

Isn’t Bitcoin volatile? For sure. And it will continue to be so until its adoption by a larger set of people. Bitcoin’s popularity has exploded and usage is up from 2% in 2018 to around 6% in 2021, according to a Gallup poll. I don’t expect its volatility to diminish until its been accepted by around 20 to 30% of the world population.

But if you think this price action has been something as 6% of Americans have discovered Bitcoin, what do you think will happen when another 30% to 40% realize there will never be more than 21 million bitcoin in existence, that 18 million units have already been minted, and about 1-2 million have been permanently lost by their owners.

Expectations for the next 10 years vary widely. I have little doubt that Bitcoin will exceed the valued of the global Gold supply by then.

So how much should you own? That depends on your understanding of the asset and consequently your ability to stomach its vaccillations and the government attempts to discourage its adoption through their dissemination of FUD (fear, uncertainty and doubt) among investors.

I can show you a portfolio that some might think is wonderful but that I’m not happy with due to my concerns with money debasement. If you’re happy with a 6 percent nominal return – even in the eventuality of a global economic collapse – then you’ll want to check out my previous article on steepener bonds written for the popular Seeking Alpha investor forum. But my minimum targetted return just to break even with currency debasement is 10%. So that 6% – while 8 to 10 times better than banks offer – still doesn’t quite cut it.

But how about combining those bonds with a 5 percent holding in Bitcoin? With 95% of your money in the safe bond strategy and 5% in Bitcoin, you’re looking at a downside risk of 5% in any one year, with an average worst case scenario of 5.5% return over 10 years. For that to happen, the circumstances would be pretty dire. Similar to a world war. Bitcoin is outlawed, martial law breaks out in the US and a heretofore legal instrument (see recent declarations of Treasure Secretary Genssler) Bitcoin is declared illegal. Oh and people decide they’ll do the honorable thing and voluntarily turn over their bitcoins for nothing instead of cryptographically storing them on the Ledger buried under their house.

Those returns would not be wonderful. But they certainly would have performed much better than most traditional mixes of stocks, bonds, real estate or commodities under the same circumstances.

Now to the upside. Bitcoin continues to be adopted as it has, and becomes, as I think it will an asset that supplants Gold as a safe store of value. In that case, I easily see its value in the next 10 years reaching levels between $400,000 a coin, and $2,000,000. That would be an increase of 10 to 50 times its present cost. That 5% of my portfolio could add a full 5% to 20% of overall compounded annual growth to my portfolio each year. That would boost overall returns to the 11% – 31% range, with again, max 1/2 percent risk to the downside. Not too shabby.

I actually recommend somewhat more sophisticated strategies, using a combination of my Milk The Cow strategy and long / short positions in what consider the winners and losers of technological transformation. But the above strategy, in its sheer simplicity, should serve you well.