The New York Hard Asset Show
Each year I attend the New York Hard Asset show in early May. As the name suggests, it is a gathering of people that think investments in paper currency are less preferable than investments in hard assets.
The gathering is a mix of Letter Writers trying to illustrate their value, companies involved in the commodity sector trying to show the value of their shares, and some very knowledgeable people giving their calculated opinion on the economy.
Overall Themes
While the opinions ranged, there were some consistent themes.
Commodities
Commodities remain the place to be. As the speakers illustrated by historical comparisons, there hasn’t been a commodity cycle lasting less than 16 years and most such cycles go on for far longer. The current cycle is about 10 years old, so far, and it currently should be no more than half way through.
This is very logical, but then we have never before had a world where enormous sums of money and communication travel the globe at the speed of electrons, or where the DAILY value of the commodity derivatives traded far exceeds the ANNUAL production of those commodities.
We have never had a world where every country on the face of the earth (with the exception of some oil producers) is mired in enormous debt.
Still, when considering the alternatives, commodities seem to be the choice.
Real Estate
The consensus was that given the amount of debt everywhere, interest rates had to be held down by all governments, but it was like trying to keep a genie locked in the bottle. Given the slightest possibility, the genie could escape. So it is with interest rates. Sooner or later, the genie will escape and interest rates will rise.
Nominal interest rates cannot fall below zero. Today, when one subtracts the annual inflation rate from the nominal interest rate, one gets the true rate of interest – which stands at approximately -2%. That’s right. We actually have negative interest rates. You actually lose purchasing power by earning interest, as odd as that sounds.
When the interest rate genie escapes from the bottle, the price of real estate should take a big hit.
Even in today’s environment, some real estate prices are not stable. USA and European real estate prices are projected to fall this year. So much for the tried and true axiom that you should always hold real estate.
Here is a bigger fear. There is a distinct possibility that prices in China will fall, and think about that negative effect. More on that another time.
Debt
Numerous speakers had different charts and graphs showing the debt of countries worldwide. The USA’s national debt is not worse than European and Chinese debts. Many countries had far worse debts, including Japan, Greece, Portugal, Ireland, and so on.
China is an interesting case. What was illustrated is that China’s debt almost equals their massive USA currency reserves.
So if every country is in debt, how does the debt ever get repaid? I have answered this question previously, but see my next blog. It would make this blog too lengthy.
Japan
A comment was made that Japan has debt equal to 200% of its GDP (I think it is greater) and currently uses 20% of its annual revenues to pay the interest on this debt. Because most of Japan’s debt is owed to Japanese nationals, Japan’s interest rate is currently only about 1 ½%. Just imagine the effect if interest rates in Japan rise to USA interest rates.
Everyone thinks that rates in the US are almost zero, but they are actually double the Japanese interest rate.
Let’s say that interest rates in Japan rise to match USA rates – the interest on their debt would rise to 40% of their actual annual revenue collections. Where would they get money to pay pensions, social benefits, the army and so on?
How about if interest rates rise to 5% or 6%, which in historical terms rates are still quite low. Imagine essentially all tax and other money collected by the government going to pay interest on debt. What happens then?
USA Debt, & Euro Debt
The joke is that with debt roughly equal to annual GDP, should interest rates rise, it is impossible to pay the interest cost.
China
Prior to attending this conference, I was preparing to write blogs describing the dangers emanating from China. It turns out that I was not the only one musing about this possibility. One presenter made a very convincing argument that China is the greatest danger. What was illustrated is that China’s debt is enormous currently. More on that later.
If Every Country Has Massive Debt, What is to be Done?
Speakers each gave opinions that ranged from the inevitability of massive inflation, to debt failure, to immense rises in the price of commodities as currencies lose their value, to massive currency devaluations.
None mentioned that just stabilizing the debt could solve the problem in the long term if there were no further shocks. But then we come across the issues created by aging populations and one child policies and so on.
Where to Invest
If the consensus of the speakers at the conference is to be believed, commodities have to rise dramatically in price.
Yet, I have doubts. I know that if severe inflation arrives, the economy goes into a tailspin and everyone suffers. If inflation soars, money loses its value, and demand for everything collapses. If there is no demand for commodities, the price of commodities will collapse, with everything else.
An uncontrolled rise in interest rates will have a similar effect.
Follow Today’s Trend and be Nimble
The scenarios painted are inevitable in the eyes of the speakers. We however know that nothing is inevitable and the only thing that we will always know, is that we will never be able to predict the future with certainty.
So what you should do currently is avoid investments in low paying interest instruments as after inflation and income taxes, you are actually losing money.
Invest in some way in commodities, whether you follow our opinions or not, consider some form of precious metals, or commodities, or shares. But be nimble. The world is in a fragile state and investment policies may have to be radically altered without great notice. The age of buy and hold is gone, long gone.
