In recorded financial history, two of the most important tools are Gresham’s law and arbitration. Applying these tools can help reflect on the current decline in stock prices, which is likely to evolve from a cyclical downward movement market or a secular change into a structural change. (As with any prediction of the future, analysis of the present can be incomplete, leading to erroneous judgments. Recognizing these risks, I hope it is useful to analyze the present and speculate about the future.)
The following observations may be relevant to the analysis:
- Most governments want to stay in power and try to do so by increasing the money supply, providing food and other essential resources for most of the population to tolerate. As with any gift, there are costs disguised as taxes and restrictions. These “gifts” have now become very expensive, generating excessive inflation and a fall in the value of currencies, which has an impact on purchasing power.
- Many restaurants and other retail establishments no longer take the kingdom’s currency but only accept credit card payments.
- All over the world, the demand for cryptocurrency vehicles is increasing.
- Russia’s invasion of Ukraine has focused countries on critical shortages of energy, other select minerals, fertilizers and, most importantly, food.
- Wars are often fought between countries perceiving short-term differences in their supply of critical needs. We are approaching the possibility of another kind of world war. Instead of East versus West, it will likely be North versus South, with declining northern populations and growing southern populations. This sets up a transfer of resources and relative power.
- No country has absolute mastery of technology.
- Global mass communication involves the wide dissemination of correct and incorrect information.
- Relative investment performance no longer favors the generation of sales, profits, net cash, investment income, and similar measures over the attraction of future products and services. (Within their respective investment leagues, there are new leaders with little benefit from history or success.)
Please add your own comments and share them.
Gresham’s law arose from the observation that when governments use less valuable currency in place of older coins with higher mineral value, holders of the old currency hoard it. In terms of usage, the less valuable currency drives out the more valuable currency. Is this happening today? If this happens, how will economies restructure under this pressure?
A standard analytical technique is to examine an object, such as real estate or a work of art, and differentiate it from other measurements. We want to own the least expensive instrument, hoping that it will move up to the level of the most valuable instrument. Sometimes it works, but the real value is the perceived price differential, which becomes an article of faith.
Just as Latin American gold changed the entire European economy for ca. two hundred years, changes resulting from the imbalances observed above are likely to have substantial ramifications for all of us, especially our heirs.
What do you think?
There’s a lot going on that can be described as pointing up, despite an overall negative picture. There are five mutual fund peer groups averaging above 20% YTD: Natural Resources +31.55%, Global Natural Resources +22.86%, MLP Energy +22.26% , commodity funds +20.70% and Latin American funds +20.54%. Similarly, there are commodity pool peer groups holding futures or commodities: hogs +27.5%, wheat +25.2%, soybeans +23.4%, orange juice + 22.7% and sugar +22.5%. It seems that the invasion of Ukraine could have a greater impact on the world’s food supply from Europe and China than on energy. It is perhaps appropriate that this change appears now that we are closing a financial, economic and political era.
We should now start looking carefully, finding what will work for us as well as against us. We expect surprises and difficulties, as well as victories.
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.