Investing In The Post-Corona World
Incrementum Advisory Board Discussion of April 8, 2020, with Special Guest Rick Rule
The Incrementum Fund’s Advisory Board held its quarterly meeting on April 8. This time renowned resource stock investor Rick Rule, the President and CEO of Sprott US Holdings Inc., joined the discussion as a special guest. As always, there is a download link to a transcript of the conference call in PDF format at the end of this post.
Rick Rule, CEO of Sprott US Holdings Inc., and renowned investor in the commodities sector.
Obviously, the discussion focused on the suddenly rather dramatically altered investment landscape in the wake of the COVID-19 pandemic. After shutting down large parts of the economy, fiscal and monetary authorities in developed nations have embarked on fiscal and monetary interventions on an unprecedented scale.
Just how extraordinary these interventions are can be gleaned from a chart of total assets held by the Federal Reserve system. What started out as a “happy little money tree” late last year, when the Fed first began to support repo markets after an apparently unexpected dislocation and then followed this up with “not-QE” in the form of $60 billion of t-bill monetization per month, has morphed into the monetary equivalent of the world’s tallest skyscraper:
The Fed’s balance sheet: lurching from one crisis to the next.
To be sure, all of this was expected to happen well before the pandemic struck – it just wasn’t expected to happen so soon or so fast. It is not knowable yet how precisely this will play out in the long term, or where the threshold lies at which the currencies issued by central banks are finally called into question.
Dr. Powell’s standard prescription.
What is certain is 1. such a threshold does exist and 2. both the economy and the investment landscape have been altered quite significantly and (at least partly) irrevocably.
The actual extent of the damage will only become clear after some time has passed, but it will undoubtedly be substantial. Despite this, investors are still acting as if things can be expected to just continue where they left off before the recent crash rudely interrupted the serene cruise to ever more absurd asset valuations.
Alas, that seems unlikely; it is rather more likely that investing will become a great deal more challenging in coming months and years.
Modern investment strategies …
Complacent Bureaucrats
Jim Rickards, who is an avid observer of the monetary bureaucracy, made a remark in the course of the meeting that struck us as particularly interesting in this context. He noted that central bankers have become quite nonchalant when talking about “non-conventional” policies these days. For instance, negative interest rates – which were once regarded as an impossibility – are these days calmly discussed as “just another tool in the toolkit”.
It seems to us that quite a bit of complacency has set in about the potential harm policies like QE or negative rates could inflict in the long term. Caution has been thrown to the wind, mainly because some of the initially feared effects of these policies failed to materialize in recent years (chiefly among them an acceleration in consumer price inflation – instead only asset prices ballooned. Obviously, soaring prices for stocks and bonds don’t tend to elicit much criticism).
Central bankers appear to be quite convinced that they will be able to keep a lid on any untoward developments. This conviction is apt to invite mistakes that may otherwise have been avoided. As long-time readers of this blog know, we have long argued that they will probably take things one step too far one day and Jim’s remark highlights why that could easily happen.
We hasten to add that it obviously hasn’t happened yet. However, the pandemic has brought us a big step closer to the day when the standard response of revving up the printing presses to counter economic crises will no longer be the complication-free decision it appears to be today (and the same holds for its corollary of nigh limit-less deficit spending on the fiscal side).
Year-on-year growth of the broad US true money supply (TMS-2). After decelerating to a 10-year low of 1.84% in August 2019 as a result of the Fed’s timid attempt to take back a portion of its previous QE programs, it has accelerated to almost 11% as of March 2020. The data for April are likely to show further acceleration in money supply growth (we will post an update once the data become available). Since January of 2008, TMS-2 has increased by almost 183%. This creates structural problems for the economy that go well beyond the possibility of a revival of consumer price inflation.
Given the unusual situation, the Advisory Board discussion was quite wide-ranging. Despite the uncertainty and the difficulty of forecasting how the situation will evolve from here, a consensus emerged on which investment decisions probably make the most sense in the here and now – details are in the transcript.
In closing, we want to mention something Rick Rule said (we are paraphrasing): if you happen to have prepared for the current upheaval, be as generous as you can afford to be to those who didn’t or couldn’t prepare. In particular, let us not forget that the pandemic poses a truly dire threat to people living in the third world given the lack of well-developed health care systems (and many other things) which are taken for granted in industrialized nations.
Download link:
Charts by St. Louis Fed, acting-man.com
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