I watched my 15-year-old son take off recently into a blue Auckland sky in a small Piper plane.
We’d just had the briefing with his instructor at North Shore airfield.
‘At your early stage, you can take full control — but there’s absolutely no flying into clouds,’ the instructor advised. ‘We’ll head out over the sea and avoid too many bumps.’
The Piper rose and climbed into the haze of blue until it was a small white dot in the sky.
I popped back into the viewing deck and caught up on some of my reading. He’d be back in 30 minutes for a debriefing.
I was reading about gold and the loss of it as a standard for global money issuance since the early 1970s.
In 1913, the US Federal Reserve Bank was created.
If you’d held a million paper dollars from 1913 until today, that USD $1 million would only be worth around $20,000. Most of that decline probably occurred after 1970.
Instead, if you’d invested that $1 million into gold in 1913, you’d have around $62 million worth now.
There’s a remarkable steadiness in gold’s ability to hold its value. And a remarkable tendency for cash to lose its value.
The value of gold is based on its supply. Which is based on the costs of labour and mining.
Despite population growth and technological developments, the stock of gold has averaged 2.5% annual growth for centuries.
Source: Mbuji Refinery
A new gold standard?
From March 2020 through to the end of 2021, the Federal Reserve drove a 42% increase in the money supply in just 22 months.
This was far more than the economy could absorb by growth.
Surprise, surprise. We now have runaway inflation.
Here in New Zealand, I’d posit by size of economy, there has been a similar, if not greater increase.
These economies have no actual gold standard upon which money is based.
Our ‘gold standard’ today is housing. We measure money — and were encouraged to invest our money — into housing. House prices are one of the most prevalent items in the local financial news.
Except housing is not restricted to a trickling average growth rate of 2.5% per year like gold. It moves according to signals in the economy. But with considerable lag.
Right now, it’s bending against a complete change in the demand vs supply dynamics.
The population is shrinking. Homebuilding consents are at record highs. And, harmfully, interest rates are rising more steeply than ever before due to inflation.
What will happen next?
Unlike gold or financial instruments like stocks and shares, home prices are illiquid.
They respond slowly to market forces. Sellers and landlords gradually realise they cannot get the prices or rents they hoped for. And without a change to the market dynamic, the prices continue a slow and steady freeze.
Until this hazardous store of value, like an iceberg, begins to crumble away.
Navigating opportunities for investors
One thing we do know is that equity markets flex much more quickly in response to market crises and monetary obesity.
In March 2020, as stocks fell 35%, I began to deploy around the world. In my portfolios and those I manage for our Wholesale and Eligible clients.
The lockdowns did shock me. How could governments around the world have such power to lock down entire neighbourhoods and businesses? Why were local butchers and bakeries locked down while supermarkets could open?
Surely all this was unnecessary? Only those truly vulnerable to the virus needed to be locked down.
The scam I thought to be unfolding then has proven now to be heavy-handed. And potentially more damaging to health and economies than the virus itself — which, with the help of vaccines, we have managed.
But as an investor, it is not my place to wail over the tyranny of governments. My job is to simply navigate the opportunities they may create. To fly to a targeted destination. And avoid clouds.
I grew one portfolio from around $900,000 in March 2020 to over $1.7 million by March 2022.
Fear of the lockdowns crashed many stocks. This presented huge value. Governments then flooded economies with money via quantitative easing, wage subsidies, and stimulus payments.
Many stocks had jumped by mid-2021.
I sure wished I’d been braver and invested more!
Then, as now, it was a case of navigating the crisis.
Inflation’s next crisis?
There’s a new crisis now presenting opportunity. It’s grinding away the market and is more pernicious due to its longer time horizon.
As far as I can see on our trading desk, the bulk of investors are not concerned about war in Ukraine, or threats presented by China.
They are responding to and are worried about a new incentive: fast-increasing interest rates. These draw money away from risk markets at a rapid rate of knots.
Yet, as a roller coaster enters its downward descent, it builds power for its upward climb.
This is why my colleague John Ling has said he believes there may be a 50% chance of a bull market in 8 months. And an 80% chance of a bull market in 18 months.
We’re preparing for these opportunities now.
And we’d like to share with you our thoughts on this in our next Investor Café via Zoom:
Investor Café — Zoom Session
👉 Limited Spots Available — Book Your Place Now!
⚡Thursday, November 17, 2022
⚡7.30pm – 8.30pm NZST
- Inflation, war, and a more unstable world. We look at why now is a unique time to find opportunity like no other.
- We’ll discuss the opportunities we see and what areas we’re investing in — and why.
- We’ll cover the lessons from inflation before. And discuss how long it may take for this cycle to turn.
- We’ll talk about the effects of this bear market, and how savvy investors are positioning themselves for the next bull market.
- This will be your golden chance to share your concerns, views, and raise any questions you may have.
As numbers are limited for this Zoom event, please register now to confirm your place and receive your link.
This is a tough market, no question. But we have no doubt there may be opportunity for some to fly high when it turns. And that’s what we want to talk about.
Editor, Wealth Morning
(This article is general in nature and should not be construed as any financial or investment advice. Wealth Morning events provide news, commentary, and general information only on financial and economic trends. They represent the speakers’ personal opinion only. They should not be construed as any financial or investment advice. To obtain financial advice for your specific situation, please consult an authorised Financial Advice Provider.)
Simon is the Chief Executive Officer and Publisher at Wealth Morning. He has been investing in the markets since he was 17. He recently spent a couple of years working in the hedge-fund industry in Europe. Before this, he owned an award-winning professional-services business and online-learning company in Auckland for 20 years. He has completed the Certificate in Discretionary Investment Management from the Personal Finance Society (UK), has written a bestselling book, and manages global share portfolios.