On a Fast Boat to Nowhere
A committed landlubber until ten years ago, I took a few sailing lessons on a dare and unexpectedly discovered the joys of sailing. When a friend later asked if I would stand in for a crew member on his 18' catboat during a Saturday race, I eagerly agreed, although his sturdy but slow boat didn't look much like a racer. It turned out that being slow was not a problem in "one design" racing, just as it isn't in today's investment business. When one competes within the same class, it is through relative, rather than absolute, performance that one wins a trophy. It also turned out that much like investing, sailboat racing is as exciting as it is challenging. I got hooked and started racing my own sturdy and slow catboat, while learning as much about life, teamwork and investing as sailing.
This past Saturday, for example, we all drifted around the course hoping for a breeze. Indeed, the wind soon filled the sails, lifted spirits, and the boats started to move nicely... or so it seemed. After sailing briskly for about 15 minutes, we looked at the shore and realized we had been moving backwards! It happened because the prevailing tide was setting us back, even as our senses, the boat's wake and its speedometer were all indicating forward movement. This episode was nature's reminder that apparent progress should never be confused with making headway. This is why for 5,000 years, a mariner needed a clear view of the skies to gauge his true position. Without the stars as fixed reference markers, there was no way to know one's location. Similarly, for the past 5,000 years, market-set interest rates (the cost of scarce capital) and money anchored to tangible value have been financial stars that have guided capital allocation and served as a basis for setting asset values.
Today, reliance on the self-referencing economic models, epic debts, digital money printing and negligible to negative rates, have combined to blanket investors in the impenetrable fog from which no reference markers are visible. Having long forgotten how to navigate without models, investors and regulators are mesmerized by the virtual reality of computer-driven markets, where asset prices (including gold's) are based on manipulated rates and measured on a USD speedometer that conflates apparent, i.e. nominal, gains with the accretion of lasting purchasing power.
Recently, the U.S. Navy showed that it had a lot better sense than the U.S. financial regulators. Instead of waiting for a GPS cyberattack or malfunction to imperil its fleets, the Navy, after a 20-year hiatus, has reinstated mandatory celestial navigation training for all officer candidates. As Lt. Cmdr. R. Rogers of the U.S. Naval Academy explained: "We went away from celestial navigation because computers are great. The problem is, there's no back up."
As accurate as GPS is, economic and financial models keep proving to be anything but. Despite the Fed's perennial forecasts of imminent recovery and higher rates, neither have materialized. Yields continue to decline and the debts continue to increase. Global debts are up 40% since 2007 to stand at $200T; there are still ~$660T in derivatives; and the utterly inane $13T (and growing) in negatively-yielding debts defy history and common sense. To top it all off, unable to lift rates without crashing the markets, all major central banks keep taking turns at the digital printing presses.
Despite the present and clear dangers, the markets and the global financial system continue to navigate by the rigged markers and operate without any backups. As stocks and bonds and the USD keep hitting all time or near all-time highs, complacency rules. Neither the regulators nor the investors want to question whether the profits are real or merely apparent. My own answer was unexpectedly reinforced last Saturday afternoon - apparent returns won't fund your retirement any more than sailing against a faster current will get you where you want to go.
Until the monetary fog lifts and un-rigged navigational markers re-emerge, physical gold remains the only hard reference point capable of providing an essential back up plan for one's nest egg. After all, just as the Navy took protective measures after realizing that no one can hack a sextant, investors should realize that no matter how many fiat dollars get printed, no one can print gold bars. The time to take protective measures is before they are needed. Now is that time.