Back To The Future Part 2

Inflation, Investing Strategies, Markets

Last week Chuck Butler and I accepted a challenge from subscriber Charles F.

“Describe life in the US 5 years into the loss of our currency reserve status. Winner, Losers, what does gov’t look like on different levels, our position in the world, let your imagination run wild. When I do this my thinking quickly turns to mush.”

Much like the movie Back to Future 2, we tried to look at life down the road when the US loses much of its status as the world reserve currency. We focused on what things would look like.

Now it’s time to sort out what separated winners from losers. The discussion continues:

DENNIS: Before moving ahead, let’s summarize. Who are normally the winners and losers when a country loses reserved currency status?

CHUCK: Good question again!

I would suspect that the Winners are those of us that:

  • Diversified their investment portfolios to include precious metals, and other currencies.
  • Got out of debt.
  • Had a good base of cash before all this came raining down on us.
  • Moved that cash, grabbing hard asset bargains that will become available, while avoiding huge inflation losses.

The Losers will be those who:

  • Didn’t diversify their investment portfolios
  • Don’t understand that inflation could ruin their lives, as well as their investment portfolios.
  • Held debt that got called with worthless money or defaulted.
  • Probably started out with a bad understanding of what it takes to “make it”.

There are also some who feel they can time the market perfectly and, when things turn on a dime, think they are smart enough to beat everyone out the door. They will get clobbered!

DENNIS: I want to address one inflation concern. Historically inflation hurt creditors and helped debtors as they are paying back their obligations in much-depreciated dollars. I’ve had readers ask about borrowing money to invest.

Chuck, that concerns me. Many of our readers are baby boomers or retired. The theory might make sense as long as you have a good job and can continue to earn money to pay the bills. If you lose that income, then loans could be foreclosed.

I know many retirees who have a government pension and think nothing about financing purchases.

Are you in the camp of believing that people should get out of debt and stay that way? Would you tell pensioners they are OK, and those trying to make do with Social Security and a 401k would get different advice?

CHUCK: Well, just because I say this, doesn’t mean it’s right for everyone, but for the most part it should be right.

I have always been someone that doesn’t like to owe anyone anything… Therefore, I WOULD be in the camp of believing that people should get out of debt.

Being out of debt allows you freedom to address things as they arise, without worry of having monthly payments hanging over your head. I’m a strong believer that people my age shouldn’t be going into debt, unless they are very sure that they will remain employed for the next 5 years. 5 years is a long time, relatively, and you really need to be sure that any new debt is covered.

As we said in part 1, all political promises cannot be kept. In times of crisis, social security and government pensions will likely be adjusted.

And finally, the more true, hard assets you own, the better off you are. Live below your means and invest your savings. When the inflation dust settles, assets can be sold and your buying power would have been preserved because the hard assets kept up with inflation. You don’t want to be forced to sell at the wrong time.

DENNIS: OK, let’s turn to the positive side. There were plenty of winners in the Great Depression, UK, and Brazil, etc. We want all of our readers to be part of that group.

I’d like to add a third category. The winners will move ahead on the net worth scale, while the losers will move down. The third group is those who manage to hold their own. Baby boomers and retirees want to protect their true buying power so they can survive, enjoy a reasonable lifestyle and perhaps pass something on to the next generation.

Assuming the dust eventually clears, like it did in the UK, how is society rearranged? Even today’s billionaires may take a hit and be deluged with taxes, but they would likely still be wealthy if they diversified.

No government I know of has ever taxed its way back to prosperity. Something has to give.

What about the middle class? How about retirees? What about the welfare class who are already being told they are entitled to free stuff because they are being treated unfairly?

CHUCK: Well, all those that believe the Gov’t checks will continue to come, will be right for a short period, but once the reserve currency status is removed from the dollar, those that live for Government checks, including social security will suffer.

The working class will hang in there, I believe, for they will continue to go to work each day, put food on the table, no matter the cost, and survive. Retirees have been dealt one financial blow after another since 2007. As long as they have properly diversified their investment portfolios, and stayed out of debt, they should be OK.

DENNIS: You recently mentioned how many more people were working from home and moving out from the high tax cities and states. Do you feel a mass migration to rural America would continue?

CHUCK: Yes, this is the new normal for workers… In 2020, people became so scared of being around other people, that they have taken the improved internet, and moved to the country. I worry that these people don’t have the slightest idea what it takes to live in rural America, but that’s their problem and not mine!

On the positive side, many will love rural America and likely a lower cost of living.

DENNIS: Let’s get as specific as we can under the circumstances. I suspect you would advise readers to stay gainfully employed as long as possible.

We talk diversification; I want to add some of my experience. We have a comfortable allocation to precious metals. When it comes to the market, we are no longer investing for stock appreciation. The market scares us and could topple at any time.

Most of our market investments are in two groups. One is income producing, dividend stocks, with the bulk in solid preferred stocks. The second is in stocks, like mining companies that pay small dividends but are a good inflation hedge. During the high inflation Carter years, mining stocks outperformed gold.

Some of our investments are offshore, also diversified.

Holding a lot of cash scares me. While we want cash to be able to jump on bargains, too much could be subject to high inflation woes. What few CDs we own are laddered, all within three months.

While the 2025-2030 Investor’s Almanac is very blurry, what are ways investors can hold their own and improve their lot?

CHUCK: I’ve notbeen gainfully employed for 5 years now, and my situation is stable… I wish I had been physically able to work for a few more years, but that was not possible. I advise everyone to continue to work as long as they can, that is the number one way to hold your own.

I like what you wrote about how you have diversified; proper diversification is key to holding your own, or improving. We have two homes, in desirable locations. Real estate in the right location makes sense to me. People who have mortgaged land may be forced to liquidate and there will be some real bargains.

DENNIS: Neither of us want to sound like Chicken Little, constantly warning about impending doom. We are calling what we see, feel and believe. History shows us that people, cultures and societies can positively survive in spite of stupid governments.

Despite all the challenges, I’m positive. Had the reset taken place in 2008, instead of government intervention, our country, and world would be better off today. The bigger the bubble, the more the collateral damage; however, smart, industrious people always seem to do well.

How do you feel about the future?

CHUCK: I regularly comment on the Consumer Confidence Index; the people that write the report didn’t “ask me!” Don’t be fooled by this Confidence Index, it’s really a pulse on how the stock market is doing.

The survey takers don’t ask about debt levels, rising inflation fears, what China and Russia are doing, and things that could easily bring down the Consumer Confidence. Maybe it’s better that I’m not asked, as I would point out a number of things that just scare the bejeebers out of me!

I feel, much like the UK, things will get tough because a big bubble will burst. Many senior members of congress will not run for reelection, giving the people a great opportunity. Like the UK, we will land on our feet. I just hope the young people are able to vote in true reformers and not get caught up with political hype.

DENNIS: Well, we gave Charles F. our best shot! Chuck, thanks again for your time.

CHUCK: My pleasure.

Dennis here. The 1929 crash caught many by surprise. Roosevelt unilaterally raised the price of gold, devaluing the dollar. Learn from history, stay well diversified including gold and hang on.

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