Markets, Mayhem, and Metals

Where are we in relation to equity values, bond values, home values, dollar values, overall inflation, and the price for precious metals?  If history is any guide, the answers may find some inadequately prepared for what comes next.  Thankfully though, there is still time for all of us to prepare, without needing to blaze a new trail through the uncertain and unfamiliar financial territory of today.  The trails have already been blazed for us, though they are somewhat overgrown and in need of clearing.  Today we will evaluate where we are in relation to history, and follow a proven route that leads to the future we all desire.  Whether we can convince politicians or anyone else to come along with us remains to be seen.  Someday soon many will be looking for the old financial paths that led to our individual and national success, and we should be prepared to lead the way.

It is no secret that stock prices are down this year.  As of 730 this morning (Sep 29), they appear to be moving lower again.  What everyone wants to know, is how long will the pain last, and how low can things go?  While it is impossible to know precisely, history can provide some clues when we consider other periods of significant equity drawdown.  If history is any guide, it appears that we likely have further to go, in terms of both time and distance.  That is, it will likely take longer, and will likely fall further before a bottom is reached.  As the attached graph indicates, the drawdown of 1987 happened quicker, but it also fell further and faster than the current malaise.  The other 6 times saw further declines over a longer period than we have experienced currently.

An old standby in traditional financial planning circles is the typical 60/40 portfolio, in which an investor allocates 60% of their investment capital to stocks/equity securities, and 40% to bonds/debt securities.  The thought is that the stability and income from bonds helps counterbalance the volatility associated with stocks, to smooth out a portfolio during difficult times.  Sometimes in the past this has worked.  So far this time, not so much.  As the attached data set shows, the traditional 60/40 portfolio is having the largest drawdown (20.4%) in 91 years.  We have to go all the way back to the Great Depression, in 1931, to find worse conditions - and the year is not over yet.

How does $ 57,800,000,000,000.00 sound?  $57.8 trillion in losses so far here in the United States, between stocks and bonds (see graph below).  A trillion here, a trillion there; pretty soon we’re talking about a lot of money.  What does this number mean?  This is simply an illustration of how much value has been lost so far, in the equity and debt markets.  These might be individual stocks and bonds held in the investment accounts of average Americans, or other investment products inside the pension or retirement funds throughout the country.  Anyway you slice it, that’s a lotta dough.  In terms of dollars, that’s more than 5x greater losses than experienced during the Great Financial Crisis of 2008.  With energy shortages,  inflation crises and war brewing across Europe, it is possible we haven’t seen the bottom yet.

That is the million-dollar question; “when will it end?”.  While the best answer would be “yesterday”, history suggests it might be awhile.  While the official inflation rate is “down” here in the United States to under 9%, it is moving up in other areas of the world.  Germany has reached 10% inflation for the first time since WWII.  Fuel prices have been rising again here in the United States, with Californians seeing $6 gas again.  Recent history (since 1980) suggests that when inflation exceeds 5% in an advanced economy, it can take 10 years before 2% inflation is seen again.  In the current environment, even 5% inflation would be a vast improvement from where we are.  2% inflation feels like a distant memory, that used to be the upper limit of planned inflation only 2 short years ago.

John Exter (1910-2006) was an American economist and Vice President of the Federal Reserve Bank of New York, among other things.  He was also the founder and influencer of other central banks worldwide, and led precious metals operations for the Federal Reserve.  He was familiar with the way the financial world worked, and understood that the value of paper and other intangible assets were transitory and somewhat illusionary.  He believed that the basis of true or real wealth rested on a foundation of precious metals in general, and gold in particular.  A modern version of the Exeter Pyramid is displayed below.  While some have sought to discredit his notions of the importance of precious metals as the economic foundation of the world, the current state of things suggests he was at least partially correct.  

Whether we agree or disagree with Mr Exter’s thesis about gold being an important foundational asset to global finance, there are times throughout history when the assets listed above gold begin to come under pressure.  With losses of over $57 trillion here in the United States, now seems to be one of those times.  Central banks continue to add physical gold to their portfolios for stability, often by exchanging paper assets such as bonds or dollars.  While there are discussions from time to time about acknowledging gold and silver again as official financial assets here in the United States, it might take awhile before such plans materialize.  Thankfully for us, we don’t have to wait for Congress to act in order to protect our purchasing power from the ravages of inflation and devaluation.

Who would have thought that ensuring our future financial success could be as simple as purchasing precious metals?  Word is out, and awareness is growing.  Increasingly, clients in my community are reaching out to discuss transferring a portion of their financial portfolio to precious metals.  Obviously this is happening nationwide (and worldwide), as it becomes more challenging to find coins minted from certain mints; the shortages seem to migrate from mint to mint.  But don’t let that stop you.  Any silver is better than no silver, gold is gold, and platinum is platinum.  Build a diversified portfolio of bullion (bars and coins), investment grade, and historically significant coins, that will help sustain you through the extended seasons of upheaval and loss such as we see today.