- It is through this emergency money and repressively low interest rates that the world’s central banks create conditions that compel investors to seek out value in real assets and move outward along the risk spectrum.
- Investors should focus on assets that are likely to benefit from central bank policies designed to reflate deflated economies: commodities, land, equipment and software, for example.
- In equities, this means favoring entities in the developing world over those of the developed world – in particular those reliably expected to pay a dividend.
“What the hell has Hoover got to do with it? Besides, I had a better year than he did.”
-- New York Yankees baseball player Babe Ruth in 1930 on getting a raise to a salary higher than U.S. President Herbert Hoover’s.
-- New York Yankees baseball player Babe Ruth in 1930 on getting a raise to a salary higher than U.S. President Herbert Hoover’s.
Babe Ruth made just under a million dollars in total earnings
during his illustrious baseball career, which spanned from 1914 to 1935,
most of which was with the New York Yankees. His peak salary for any
season was $80,000 in 1930, which was $5,000 more than U.S. President
Herbert Hoover earned the same year.
Little did Ruth know that someday the jersey off his back would
fetch more money than he earned in his entire career. That’s what
happened this past month when Ruth’s 1920 road jersey was auctioned for
$4.42 million, the highest price ever paid for a piece of sports
memorabilia. Other items used by The Babe also fetched big money, with a
baseball cap selling for $537,000, and a baseball bat selling for
$591,000. That’s quite a lot of money for strands of cotton yarn and a
piece of wood, but at least the buyer can see and touch the items and
perhaps smell sweat the Sultan of Swat shed onto his jersey and cap
while circling the sandlots after yet another home run. And who knows,
maybe someday the buyer will sell the items to someone just as eager to
get a piece of The Babe and someday make a profit himself. The simple
laws of supply and demand make it likely he will – there’s only so much
of The Babe to go around.
It’s not just the limited supply of The Babe’s stuff that is
selling well, so is other “stuff” that you can touch and feel, and I’m
not talking about Greek government bond certificates – you’ll get less
than face value for those. I’m talking about art work, which has sold
spectacularly well of late, led by the sale in early May of Edvard
Munch’s famous painting “The Scream,” which sold for nearly $120
million, the highest price ever paid for an auctioned painting and over
50% higher than the expected selling price. It’s a bounty to scream
for! Even comic books are fetching big bucks, with the first Superman
comic book selling for $2.2 million. Not bad for an item that sold for
10 cents in 1938.
Central banks are harming investor purchasing power and increasing the attractiveness of real assets
The attractiveness of real assets as opposed to financial ones
increases in particular when a central bank turns up its printing press,
as is now occurring in the United States and in much of the developed
world. The good news is that outside Japan deflation has been avoided.
The risk going forward is that the value of paper money will diminish.
While highly unlikely today, at extremes excessive coinage historically
has wiped out the value of paper money, as was the case in Germany in
the early 1920s under the Weimar Republic, in Argentina in the 1980s,
and more recently in Zimbabwe (I have 200 trillion Zimbabwe dollars
sitting on my desk – I bought them on eBay for $10).
The hyperinflation experienced under the Weimar Republic was so
extreme (Figure 1) that Germans stopped using central bank money – the
German mark – and began using other forms of currency as a medium of
exchange. People began to take money printing into their own hands,
designing all sorts of colorful money called “notgeld” (Figure 2), which
in German literally means “emergency money.” These were monies created
outside the purview of the German central bank and they held their value
better than the central bank money did. Notgeld were broadly accepted
as a means of payment and they came in more than just paper form,
including in the form of aluminum, coal, silk and stamps, for example.
Real assets, in other words, held their value better than paper assets
did.
Today’s purveyors of notgeld
The purveyors of notgeld today are the central banks of the
developed world, which are fostering value in real assets by expanding
their balance sheets and thus printing “emergency money” on a massive
scale in an attempt to reflate asset prices and combat the wretched
effects of the debt deleveraging process. It is through this emergency
money and repressively low interest rates that the world’s central banks
create conditions that compel investors to seek out value in real
assets and move outward along the risk spectrum. Central bankers will
have to maintain these conditions for a very long time, because the
debts of the developed world will not be extinguished any time soon.
This means that the Federal Reserve and central banks in other parts of
the developed world will have to keep their benchmark rates low and keep
their printing presses running at full speed for quite some time.
Investment implications
Today, notgeld are taking the form of Babe Ruth’s jersey, artwork,
comic books and a plethora of other assets that investors believe will
hold their value because of both their relatively limited supply and the
abundance of central bank liquidity stemming from policies geared
toward propping up asset prices and growing nations out of debt. In some
cases these assets are being bought by investors in developing
countries who are eager to show off their newfound wealth. Investors
therefore should focus on assets that will vanquish attempts by central
bankers to repress them and invest in assets that are likely to benefit
from central bank policies designed to reflate deflated economies. These
include real assets such as commodities, land, equipment and software,
and human capital, all of which have the potential to provide a better
rate of return than can potentially be earned investing in financial
assets in the developed world.
In the fixed income market, investors should consider low-duration,
inflation-protected assets and aim to fortify their portfolios against
the risk of permanent losses by investing in bonds that are high in the
capital structure, favoring entities that are high quality, have hard
assets to sell, have high amounts of assets relative to their debts,
exposure to the fastest-growing economies and industries in the world,
and low degrees of sensitivity to the ups and downs of the business
cycle. Chop volatility off at the knees, in other words, because in
choppy markets an investor can get chopped up. In equities this means
favoring entities in the developing world over those of the developed
world, in particular those reliably expected to pay a dividend.
Uncovering value is challenging in today’s uncertain, volatile
world, but there remains one simple truth to guide investors: actions by
central banks that result in excess coinage will have both deleterious
and propitious effects. In many assets in the developed world you will
find the former. By carefully selecting assets in the developed world
and scouring for opportunities in the developing world you will likely
find the latter. You may also find some in your attic.
