Guest Post: Keeping Capital in a Depression

Tyler Durden's picture

Submitted by Doug Casey of The Casey Report

Keeping Capital in a Depression

Nothing is cheap in today’s investment world. Because of the
trillions of currency units that governments all over the world have
created – and are continuing to create – financial assets are grossly
overpriced. Stocks, bonds, property, commodities and cash are no
bargains. Meanwhile, real wages are slipping rapidly among those who are
working, and a large portion of the population is unemployed or
underemployed.

The next chapter in this sad drama will include a
rapid rise in consumer prices. At the beginning of this year, we saw the
grains – wheat, corn, soybeans and oats – go up an average of 36%
within one month. In the same time frame, hogs were up 30.7%. Copper was
up 29.1%. Oil was up 14%. Cotton was up 118%. Raw commodities are the
first things to move in an inflationary boom, largely because they’re
essential to everything. Retail prices are generally the last to move,
partly because the labor market will remain soft and keep that component
down, and partly because retailers cut their margins to retain
customers and market share.

We are in a financial no-man’s land.
What you should do about it presents some tough alternatives. “Saving”
is compromised because of depreciating currency and artificially low
interest rates. “Investing” is problematical because of a deteriorating
economy, unpredictable and increasing regulation, rising interest rates
and wildly fluctuating prices. “Speculation” is the best answer. But it
may not suit everyone as a methodology.

There are, however,
several other alternatives to dealing with the question “What should I
do with my money now?” – active business, entrepreneurialism,
innovation, “hoarding” and agriculture. There’s obviously some degree of
overlap with these things, but they are essentially different in
nature.

Active Business

Few large fortunes
have been made by investing. Most are made by creating, building and
running a business. But the same things that make investing hard today
are going to make active business even harder. Sure, there will be
plenty of people out there to hire – but in today’s litigious and
regulated environment, an employee is a large potential liability as
much as a current asset.

Business itself is seen as a convenient
milk cow by bankrupt governments – and it’s much easier to tap small
business than taxpayers at large. Big business (which I’ll arbitrarily
define as companies with at least several thousand employees) actually
encourages regulation and taxes, because their main competition is from
small business – you – and they’re much more able to absorb the cost of
new regulation and can hire lobbyists to influence its direction. Only a
business that’s “too big to fail” can count on government help.

It’s
clearly a double-edged sword, but running an active business is
increasingly problematical. Unless it’s a special situation, I’d be
inclined to sell a business, take the money, and run. It’s Atlas Shrugged time.

Entrepreneurialism

An
entrepreneur is “one who takes between,” to go back to the French roots
of the word. Buy here for a dollar, sell there for two dollars – a good
business if you can do it with a million widgets, hopefully all at once
and on credit. An entrepreneur ideally needs few employees and little
fixed overhead. Just as a speculator capitalizes on distortions in the
financial markets, an entrepreneur does so in the business world. The
more distortions there are in the market, the more bankruptcies and
distress sales, the more variation in prosperity and attitudes between
countries, the more opportunities there are for the entrepreneur. The
years to come are going to be tough on investors and businessmen, but
full of opportunity for speculators and entrepreneurs. Keep your
passports current, your powder dry, and your eyes open. I suggest you
reform your thinking along those lines.

Innovation

The
two mainsprings of human progress are saving (producing more than you
consume and setting aside the difference) and new technology (improved
ways of doing things). Innovation takes a certain kind of mind and a
certain skill set. Not everyone can be an Edison, a Watt, a Wright or a
Ford. But with more scientists and engineers alive today than have lived
in all previous history put together, you can plan on lots more in the
way of innovation. What you want to do is put yourself in front of
innovation; even if you aren’t the innovator, you can be a facilitator –
something like Steve Ballmer is to Bill Gates. It will give you an
excuse to hang out with the younger generation and play amateur venture
capitalist.

This argues for two things. One, reading very broadly
(but especially in science), so that you can more easily make the
correct decision as to which innovations will be profitable. Two,
building enough capital to liberate your time to try something new and
perhaps put money into start-ups. This thinking partly lay in back of
our starting our Casey’s Extraordinary Technology service.

Hoarding

In
the days when gold and silver were money, “saving” was actually
identical with “hoarding.” The only difference was the connotation of
the words. Today you can’t even hoard nickel and copper coins anymore
because (unbeknownst to Boobus americanus) there’s
very little of those metals left in either nickels or pennies – both of
which will soon disappear from circulation anyway.

We’ve
previously dismissed the foolish and anachronistic idea of saving with
dollars in a bank – so what can you save with, other than metals? The
answer is “useful things,” mainly household commodities. I’m not sure
exactly how bad the Greater Depression will be or how long it will last,
but it makes all the sense in the world to stockpile usable things, in
lieu of monetary savings.

The things I’m talking about could be
generally described as “consumer perishables.” Instead of putting
$10,000 extra in the bank, go out and buy things like motor oil,
ammunition, light bulbs, toilet paper, cigarettes, liquor, soap, sugar
and dried beans. There are many advantages to this.

Taxes
As these things go up in price and you consume them, you won’t have any
resulting taxes, as you would for a successful investment. And you’ll
beat the VAT, which we’ll surely see.

Volume Savings –When you buy a whole bunch at once, especially when Walmart or Costco has them on sale, you’ll greatly reduce your cost.

Convenience –You’ll have them all now and won’t have to waste time getting them later. Especially if they’re no longer readily available.

There
are hundreds of items to put on the list and much more to be said about
the whole approach. The idea is basically that of my old friend John
Pugsley, which he explained fully in his book The Alpha Strategy. Take this point very seriously. It’s something absolutely everybody can and should do.

Agriculture

During
the last generation, mothers wanted their kids to grow up and be
investment bankers. That thought will be totally banished soon, and for a
long time. I suspect farmers and ranchers will become the next paradigm
of success, after being viewed as backward hayseeds for generations.

Agriculture
isn’t an easy business, and it has plenty of risks. But there’s always
going to be a demand for its products, and I suspect the margins are
going to stay high for a long time to come. Why? There’s still plenty of
potential farmland around the world that’s wild or fallow, but politics
is likely to keep it that way. Population won’t be growing that much
(and will be falling in the developed world), but people will be
wealthier and want to eat better. So you want the kind of food that
people with some money eat.

I’m not crazy about commodity-type
foods, like wheat, soy and corn; these are high-volume, industrial-style
foods, subject to political interference. And they’re not important as
foods for wealthy people, which is the profitable part of the market.
Besides, grains are where everybody’s attention is directed.

But
there are other reasons I’m not wild about owning any amber waves of
grain. Anything you want to plant will practically require the use of a
genetically modified (GM) seed from Monsanto. I’m not sure I really care
if it’s GM; all foods have been genetically modified over the millennia
just by virtue of cultivation. And $1 paid to Monsanto typically not
only yields the farmer $5 of extra return, but produces lots of extra
food – which helps everybody. But I wouldn’t be surprised if someday the
giant monocultures of plants, all with totally identical purchased
seeds, don’t result in some kind of catastrophic crop failure. This is a
subject for another time, but it’s a thought to keep in mind.

In
any event, agricultural land is no longer cheap. But I don’t suggest you
look at thousands of acres to plant grain. Niche markets with niche
products are the way to fly.

I suggest up-market specialty
products – exotic fruits and vegetables, fish, dairy and beef. The
problem is that in “advanced” countries – prominently including the U.S.
– national, state and local governments make the small commercial
producers’ lives absolutely miserable. Maybe you can grow stuff, but
it’s extremely costly in terms of paperwork and legal fees to sell,
especially if the product is animal based – meat, milk, cheese and such.
Niche foods are, however, potentially a very good business. Eternal
optimist that I am, I see one of the many benefits of the impending
bankruptcy of most governments as again making it feasible to grow and
sell food locally.

Above all, though, this isn’t the time for
business as usual. You’ll notice that “Working in a conventional job”
didn’t occur on the list above. And I pity the poor fools working for
some corporation, hoping things get better.