Silver And Gold

In a previous memo, “How To Allocate Funds…”, I pointed out that gold is often seen as a hedge against inflation. This type of investment should be considered A) a hedge against bigger and riskier returns and/or B) a short/term type of investment. The main point of putting money into an investment that protects against inflation is that doing so provides protection in case something happened to the stock market and/or big economic events occur that may not necessarily affect the stock market but do provide some level of safety in concerning times. A meaningful amount of one’s investment portfolio should not be allocated to gold (or any investment like gold), as investing in gold alone does not make one rich; gold alone does not produce income. Assuming that the main reason to buy gold is as a hedge, there are other types of commodities that should behave like gold. These commodities are known as “precious metals”, and while they should act similarly regarding inflation, this memo will delve into why those precious metals may currently be priced differently.

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Deflation

In my last memo “Negative Interest Rates”, I mentioned … negative interest rates, and that it was a difficult thing to wrap my brain around the idea. Even earlier, I was thinking about another occurrence, deflation. While it is a much more common occurrence than negative interest rates, I just could not see how it was anything that we would experience in the longer term. Although I have been thinking about it, that does not mean that I think deflation will be a long-term trend for our economic future, like in the Great Depression. Still, deflation is a phenomenon that wracked my brain for a bit longer than it should have.

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Negative Interest Rates

A few ideas have been kicking around in my head lately, and they’ve been a challenge to wrap my head around. There are likely a few that I will write about, and this is among the first. It takes even trained economists some mental gymnastics to understand negative interest rates, and in particular, a world in which negative interest rates may be the smart play. It’s a bizarro world.

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Why Is The Stock Market So High?

Something has been bugging me. As I sit in an empty co-working space (because we are all supposed to work from home) with my wife at home every day with the kids (because schools are closed) and we can’t go anywhere (because restaurants, shops, and gyms are closed)…it just seems like a miserable time.

Yet the stock market has been going crazy. After we hit our lows in late March, the value of companies has been going up. Meanwhile, those same companies are going bankrupt and laying people off. Even on days like today (May 14) where you think the stock market will come to its senses, the Dow went from losing 500 points in the morning to gaining 400 points at close…in one day…when 3MM job losses were announced. It’s like Wall Street has no concept that Main Street is drowning.

So, what is the disconnect? Why is the stock market so high?

I think I have identified at least one reason.  

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Seasons Of Change

In starting this memo, I was thinking often about the market cycles. Specifically, my thoughts centered around how to prepare for what may be coming…before it hits…or what has already happened. I tend to think about market cycles in terms of the seasons, and in turn, how to financially behave before and during them.

Additionally, we are in a bit of a storm currently. Naturally, that leads to comparisons of other economic storms, however, those comparisons have evolved over the last few weeks.

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Personal Impact Of Unemployment: Short-Term And Long-Term

In thinking about the current environment and the next steps that we face, there was a swirl of thoughts going on in my head. I could honestly write about notes from a handful of different issues. However, people losing their jobs seemed to dominate most of my personal thoughts and emotions. The ideas jotted down evolved throughout the week and are probably timelier than if someone picked this up in a few weeks or months. Still, this is where my head is at.

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How to Allocate Funds If You Are Worried About Inflation

When writing the last memo “…Effects On Inflation”, about my inclination that there will be upward pressure on inflation (as a result of the government’s current and future likely actions), I thought to myself that the opinion was fine, but what do you do about it? This memo attempts to compare outcomes in various asset classes and the effect that inflation will have on them.

Inflation has a meaningful effect on your money, but it is hidden in the background and makes its impact slowly. Still, with a long-term view, you can see it better. The analysis goes into a short-term comparison but then looks at the mid-term impact and how you may want to look at the issue differently. There is no specific recommendations here, just some high-level information.

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The COVID-19 Response And Its Effects On Inflation

This is my first memo on the state of monetary policy and investing. I am doing this because (a) it’s confusing for most people to figure out what is happening right now and (b) it’s helpful for me to write down and dissect my thoughts as I learn what I think.

The exercise is self-indulgent but maybe you can benefit. For those of you that don’t care and think I am just shouting into the wind, please disregard the memo and go about your day. I still love you.

The COVID-19 pandemic is causing a ton of volatility in the capital markets and in the government’s response. My belief is that the result of this will be inflationary pressure over the next few years. I will attempt to break down why and quantify it. With that said, we will only know it’s long-term effects many years later and it is perfectly possible that, despite my ranting, nothing will happen outside of the realm of normal capital market fluctuations.

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