Not sure what the name of this post should be, but when you really think about it, money is being printed at all times (across the globe) which is removing capitalism. In a normal capitalistic country, failed companies would go bankrupt. These failed companies would then be purchased (the assets) and run by someone else. Instead, we’re printing money to keep zombie companies alive and giving them interest free loans so they can survive. We’re not here to debate if this is a good or bad idea (you can guess what we think from the prior sentences). Instead we have to focus on “what to do” as the future holds all of the value.
Money Printing: Hopefully we can agree on one thing, money printing won’t stop. If you have double digit unemployment and on top of that you have debt above revenue (Debt/GDP is around 3x) it means that you cannot turn off the printing press. If you do, all of the people with debt go under. This is a complete disaster for the current financial system so we should assume that every government wants to avoid mass default.
Now if we can agree that the government wants to “inflate away” the debt if they can, it means you need to get your money out of cash and into anything else that is scarce. When you take a 25,000 foot view of the world, we know that the supply of money is going to increase dramatically. If we open the economy tomorrow or in 2021 (who knows), it’s going to require a lot of money printing.
The second item here is that you have to ignore “near-term” potential in practically everything. Why? Near term changes don’t matter if the money printer is on. It means that all companies should be looked at in terms of 2023-2025. Interest rates are going to be 0 for the next 3 years (as already announced) so the real value of money will show up in three years (putting us into 2023 and beyond). Therefore instead of worrying about “cash flows” for the next couple of years, we have to worry about “who is actually going to be around” in 2023-2025? This is a big change in thinking and also explains why ultra-high technology firms are seeing significant increases in valuations/multiples (we recommend following Chamath Palihapitiya for a further explanation of this).
For those that want the “gist” you want to take all your cash and buy anything that is scarce/useful and anything extremely high tech that will be used in 3-5 years. The only cash you should have is enough for emergencies at this point since we’ve gone full crazy with the money printing.
Real Inflation Rates: Recently, Microstrategy (a technology company) bought a substantial amount of bitcoin with its balance sheet. The interview with the CEO Michael Saylor was quite informative. Funny enough, we think the most important concepts don’t even relate to bitcoin. Paraphrasing below:
“If you were a lawyer and made $500K a year and saved $50K in 10-years you’d have $500K in cash. While you’re still saving $50K a year, that would be an increase of just 10%. Meanwhile, the cost of education (for your kids) is going up 8% per year. So that $500K you have earns $0 in interest and now it buys 9 years of education instead of 10. In another couple of years it only buys 8 years of education instead of 10… and in another couple years… you get the point”
What he is saying here is that the cost of the things that are necessary to get ahead are growing way faster than the rate of printed inflation. So if you need a home? Well home prices in major cities (at the time) were increasing by much more than 1-2%. Education? Another item you want/need to get ahead is also increasing by more than 2% (closer to 6-9%).
We did some digging and came across an interesting website which makes intuitive sense to us. This is well known to most of you but in case you’ve never heard of it it’s called the Chapwood index (https://chapwoodindex.com/). While we would argue that the numbers are aggressive and should be discounted a bit, the real inflation rate is unlikely 1-2% and is much higher (probably closer to 6%).
How to Think About Money Now? It’s relatively simple now, if we know that money printing is going to continue (it has to) and we know that the government wants to create inflation… it means “money” is going to represent valuable assets in the future. If you have $50 in your pocket or one share of coca-cola stock, you’re better off being the guy with one share of coca-cola stock unless you absolutely need the physical cash for the purchase of basic needs (or you believe coca-cola is going out of business).
After reading quite a bit about global monetary policy the simple way to phrase it is you should look at your physical cash and say “This is worthless”. While it is an extreme view, the point is clear. Unless you’re using it to purchase productive assets there is no point in having money in your pocket or under a mattress or in a bank earning 0% (no different than parked under a mattress at 0%). Being responsible is no longer encouraged.
Here’s a new way to think about it. Assume you have $1,000 in your hand. Instead of saying you have $1,000, ask yourself how many shares of XYZ company you can buy. We have already outlined where we believe the future of tech is going (in our book Triangle Investing). Outside of that, make your own decisions and say “how any shares of this company can I buy”. Then go through all of your spending and start denominating everything in shares of companies.
Is your steak dinner with your girlfriend worth a full share of the S&P 500? Do you have 100 shares of S&P 500 in your checking account? 1,000 shares? 10,000 shares? Does this make sense if you know the amount of dollars printed is only going to go up? So on and so forth.
These are very big questions. Even if you want to be conservative, instead of saying “I need 2 years of cash in my hand” ask yourself “how many of my investments are already up 100%, 200% or even 300%?” Therefore, even if you needed to sell some of them for cash to pay for something, you’d unlikely lock in a loss. This will prevent you from being one of those strange people who have 5-10 years of cash earning 0% for long periods of time.
Flow of Money: With the knowledge that money printing will occur no matter what, your new flow of money should look like this: 1) absolute bare minimum to survive ~12 months without income and 2) every single cent after this needs to go straight into productive assets. Doesn’t matter what it is, anything that generates returns above 0% is good enough. Why? Well bonds are at nearly zero, interest on savings accounts are zero and more money is being printed! So this means if the money supply goes up by more than 1% or so, you’re losing money on that bond “investment” (Ie. your purchasing power went down).
Implications: For fun we’ll stick with the above being correct. All we need to agree on is that the government is going to be forced to print. If we can agree on that, it means that the next 4 years will see more inequality. The rich will get richer and the poor will get poorer either though inflation or through lack of asset ownership. Even if prices stay the same (for all goods) if the cost of assets (homes, education, etc.) all go up… the only winners are the rich.
With the main point out of the way, we can then move to secondary effects… which is that people will not be happy about it. The average person is not going to be okay with a massively increasing divide between the rich and poor. There are two ways to transfer that wealth through 1) taxation or 2) through a wealth transfer. Since wealth transfers are rarely seen as successful, an increase in taxes is more likely. Our best guess at this point would be an increase in property taxes since it is the most difficult to avoid.
Other ideas include: 1) a change in tax on dividend income, 2) a change in tax on stock issuance and 3) a change in tax on income. Generally speaking, the issue going forward *won’t* be an income issue. It will be an asset issue. This means that you have to find a way to tax people with a lot of wealth not people who are earning a lot of income.
By way of example the person who is worth $10M today and makes $100K a year as a junior college professor is the person you have to tax, not the person who is worth $250K and earns $300K a year. This is a much harder issue to solve so we’re sticking with various forms of “wealthy people” tax as the solution. PS if you’ve got an answer to a divide in rich and poor based on assets we’d love to hear it.
Conclusion: For now, it’s best to focus on the main items up front. Keeping your “value” out of cash and in items that will be used 3-4 years from now. Be it high tech stocks or various scarce assets. After a few years, we should see an increase in the proverbial divide “haves and have nots”. At that point it would be wise to find ways to hold valuable assets that are difficult to tax (a good example would be rare art).
