What To Do; What To Do?

 

I have been expecting the value of money to change substantially in the medium term, and my expectation has been for price inflation. A lot of it. Anyone trying to construct a building has seen it happen. But we see it in food too, and fuel. It isn’t just a matter of there being so much more available spending money, but supply chains have been disrupted as was easily predictable. When blue collar people are staying home from work, of course production of goods will suffer. In Canada, we are reporting an inflation rate of 3.4%, but if you are shopping for pretty much anything, you probably don’t believe it. It’s hard to see how price inflation can do anything but get worse. Not only is the government running huge deficits, but people have very high savings from which to fund their spending.

We have an M2 in Canada of about 2.2 trillion dollars. When the government infuses several hundred billion new dollars into the works, the action greatly raises people’s ability to bid up the prices of goods and services. So, we expect prices to continue rising. But read on.

Prices are a function of what people are willing to pay. Their willingness to pay depends on how rich they feel. Cash is only part of the feeling. What they perceive as the value of their other assets has a lot to do with the spend-versus-save decision. Other assets include stocks, bonds, real estate, and derivatives, among other assets. The real estate market is twice the M2 money supply --- in excess of 4 trillion dollars. The stock market value is over 3 trillion. It’s hard finding data to establish the size of the Canadian bond market, but my guess is 25 trillion. My estimate on the derivatives market in this country is about 100 trillion. Further, many Canadians are exposed to the markets of other countries. My point is that even though the expanding money supply combined with shortages of goods makes a good argument for aggressive price inflation, even a small contraction in other markets could make people suddenly feel quite poor. And such contractions have a way of snowballing, especially in an economy that contains so many investment bubbles. Deflation is a very real risk. Cash may be trash now, but we may see cash becoming king again, so it is important to hold cash and assets that are liquid --- easily convertible into cash. It’s a difficult road to navigate. Cash is losing value at the rate of at least 5% per year (I think it is probably more like 15%), and it doesn’t take long for half the value to be gone, and yet cash may be what is needed at some soon time of trouble.

My advice: take charge of your investing. Study. Read widely. If you are a believer, pray for wisdom. Be nimble and ready to turn on a dime, but don’t be fickle.