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Stop worrying about yield and start worrying about principal safety with your investments

Posted by John T. Reed on

Here is a haunting passage from general practitioner lawyer Benjamin Roth’s Depression Diary. He wrote it on February 7, 1933.
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“In numerous talks with businessmen I find a higher valuation than ever placed on ‘financial security’ and ‘freedom from want.’ During the boom of 1928 businessmen scorned to leave their money in safe investments yielding only 4% or 5%.”
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Four years later he wrote,
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“A major risk should not be taken for a minor profit.”
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The two great financial investment risks are inflation and deflation. Tremendous financial catastrophes occurred in the Great Depression (deflation) from 1929 until WW II and in the hyperinflation in Germany, Austria, and Hungary in from 1921 to 1924.
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Both were caused by the existence of government fiat money. So we should abolish fiat money? No. Money was needed to create the incredible prosperity that separates our current financial situation from pre-money primitive existence in the BC era.
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The alternative to money is barter. Money is infinitely more efficient. The problem is that the supply of money must match the growing need for it. Inflation is too much money supply; deflation is too little.
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At present, laymen think stocks make money but not always and bonds make relatively little but generally hold their value. Accordingly, they chase basis points (.01%) of yield in the stock and bond markets, occasionally retreating like scared ground squirrels from stocks to bonds.
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But stocks fell 90% in the Great Depression and did not come back to 1929 levels until around 1956 (S&P 500). So did other non-currency assets.
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In the 1920s in Germany-Austro-Hungary, the purchasing power of the national currencies fell to zero. They never came back. They were replaced by new currencies.
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What was constant regarding assets in the 20th century was VALUE IN USE. If you lived on a subsistence farm in the US, like my father in 1915 to 1933, or in Austria from 1921 to 1924 like a farmer relative of Anna Eisenmenger’s, your life was NOT AFFECTED BY EITHER deflation or inflation.
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The value of your farm in CURRENCY was dramatically affected. But unless you are buying or selling the farm, who cares?
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Where do stocks and bonds fit? They have NO value in use. They are pure speculations on the money supply and the likelihood of default on bonds and the value perceptions of other humans and the currency income production of each asset. You cannot eat stocks or bonds. You cannot live in stocks or bonds. You cannot travel in stocks or bonds.
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Chasing basis points of yield in stocks or safety in bonds suggests you are operating in a guaranteed stable money-supply realm with a non-fickle human population.
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True, there is a segment of the human population that is acutely aware of the money supply deviating from the Goldilocks just right rate of expansion. They do not retreat to bonds for safety. Far from it. They retreat to a hard asset that like stocks and bonds cannot be eaten: gold.
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The haunting moans of the businessmen in the Depression stemmed from the fact that they put a lot of their life savings into assets that had no value in use and were overly focused on pursuing tiny increases in currency-denominated wealth which could give them prestige and self-esteem, and under concerned about value in use like a free-and-clear home and means to produce food and other needs or barter items to obtain food and other necessities.
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Having experienced a totally unexpected and never before in their lifetimes experienced monetary crisis (non-Goldilocks money supply), they realized they had made assumptions—the mother of all screw-ups— about monetary stability that were catastrophically wrong.
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There is another dimension: Liquidity. It is true that you can live in a home and you cannot live in a stock or a bond. But it is also true that you cannot eat a house. You can buy a lot of long-shelf-life food, but there is such a thing as menu fatigue. And you may need five years from now something like medicine that you simply cannot buy now and store for five years. So you need to store a certain amount of relatively liquid hard (non-currency) assets that you can use to buy or barter for immediate needs like food, fuel, and medicine. Things like junk silver, specie (pennies and nickels), forever stamps, products you can make like books, repairs, clothing, tools, and so on.
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But there are another much better source of liquidity in a hyperinflated nation: the uninflated currency of another nation.
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I learned a lot from studying inflation history, but I am not sure how modern debit cards fit. During hyperinflation, can I simply stick my BMO debit card in the card reader at Safeway? Say I want a dozen eggs. Before hyperinflation in the US, they cost $6. Now, in a hyperinflated America, they cost $600. But if Canada is not hyperinflated, a debit of my Canadian savings account of $600 US would only lower my Canadian bank account by $8.50 CAD.
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One problem is my fellow citizens of Alamo, CA failed to put money in Canada or elsewhere and Safeway cannot afford to operate a grocery store just for the Reed family. Because debit cards are new, I cannot tell if 21st century capital controls would permit me to use one like that. Seems like the government should want real money, like uninflated CAD, brought into the US.
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Stop worrying about regretting missing the next Apple and start worrying more about how you and your family will get the necessities of life in all monetary and human fickleness scenarios. Stop assuming there is safety in an asset known as a bond because of the credit rating of its issuer and in spite of past history of AAA bonds defaulting overnight like Penn Central and in spite of past hyperinflations.

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