by Simon Black
It all started innocently enough.
It was July 2, 1997, and the Prime Minister of Thailand had just announced that its currency, the Thai baht, would no longer be pegged to the US dollar.
Big deal, right? It doesn’t seem like a dull press conference about an emerging market currency in Southeast Asia was even noticed by too many people, let alone ruffled any feathers.
However, this announcement triggered one of the largest global financial crises in modern history.
Today we call it the Asian financial crisis. But its effects quickly spread around the world, wreaking havoc as far away as Brazil, Russia and the United States.
The basic plot was that foreign investors had been pouring money into the “Tiger Economies” of Asia for several years; Stock markets in places like Thailand and South Korea had soared. And investors were confident their money was safe, in part because of the Thai currency’s peg to the US dollar.
But beneath the high-flying financial markets, these Asian economies had serious cracks…including rapidly growing mountains of debt.
When Thailand abandoned its currency peg, the fantasy of magical stock market returns quickly faded and investors pulled their money out of the region.
Asia’s economies crashed almost immediately and a severe recession ensued. Thailand’s currency went into freefall, dropping an incredible 55% over the next few months. This led to nasty inflation in Thailand that quickly exceeded 10%.
In short, it was stagflation: a deep economic contraction, along with high inflation.
But it was actually much worse than that.
Because in addition to economic contraction and retail price inflation, Thailand also experienced asset price deflation.
In other words, while food, fuel, rent, etc. became more expensive, assets such as stocks and real estate were rapidly losing value.
Thailand’s stock market fell 75% during the crisis. Bond prices fell. Real estate prices fell. There was no shelter from financial problems anywhere in the country, almost the worst economic conditions imaginable.
Although far less severe, these are similar conditions to those facing the West today.
On the one hand, we have a recession. And yes, federal government “experts” all the way up to the President of the United States have so far refused to use the word “recession.”
They don’t care if you we think we are in a recession. You are not entitled to an opinion. Only “experts” can make that decision. But for the sake of argument, let’s pretend a recession is coming.
Then we have this inflationary nightmare, which has been caused by the incompetence of experts to deal with a public health crisis, combined with the incompetence of other experts to worsen a geopolitical crisis, further combined with the incompetence of others experts in engineering an energy crisis. .
Another win for the experts!
Both together, inflation plus recession, are stagflation.
But like Thailand in 1997, it’s worse than that, because we’re also seeing asset prices deflation
The S&P 500 is down 17% from last year’s peak. And frankly stocks probably still have a long way to go from here.
Current economic conditions, for example, are obviously much weaker than they were in early 2020, just before Covid. But stock prices today are still 15% higher than they were back then, when the economy was still strong.
So, it can easily be argued that stocks can easily go lower from here.
Bond prices are also falling as interest rates rise (bond prices move inversely to interest rates, so as they rise, bond prices fall).
Real estate prices are down; data from Redfin and Zillow show U.S. home prices peaked in May at about $430,000; now they are down 5%. And with mortgage rates rising, there’s a good chance home prices will continue to fall.
Many goods have gone down. Alternatives like crypto, gold and silver are falling (for now). And even having savings in a bank account almost guarantees you’ll lose more than 8% a year to inflation.
This is quite unusual. Usually, even in an economic downturn, there is at least one asset class that is a safe haven, ie stocks go down but bonds go up. Or bonds go down but commodities go up.
Most major asset classes now appear to be falling in tandem. It’s exasperating. But here are some ideas to consider.
First, one of the main effects we are seeing right now is a rapid loss of confidence in central banks. And this is a very, very big trend.
Investors have long believed in the infallibility of central bankers: that these unelected bureaucrats, these “experts,” can perfectly manage their economies and financial markets to perfection.
This fantasy quickly dissipates. And the sheer incompetence, negligence and ignorance of central banks has been exposed for all to see.
After all, if central banks were really good at their jobs, inflation wouldn’t be 8% right now. And they would have predicted it a long time ago.
People are beginning to realize that there are major problems in the world. Energy problems Food problems And they recognize that central banks are powerless to do much about it.
Central banks cannot print more food or create more energy through quantitative easing.
But people can. Companies can. And it makes sense to consider investments in these kinds of real assets, especially important resources that the world really needs, including food, energy and productive technology.
Second, there are still many large companies and large investments. But what worked in the past is not necessarily the right approach today.
In recent years, investors could throw money into some random index fund and expect a decent return. This was because, at the time, pretty much everything was rising in tandem (which was also unusual).
But index investing is a strange concept when you think about it. An index fund invests your money in everything, regardless of price or quality. When you invest in an index fund, you’re essentially buying shares of the WORST performing companies alongside the best.
Maybe not such a wise approach today. In this environment, it may be wiser to consider weeding out the worst performers…and focusing only on the best quality, undervalued investments.
Third, the benefit of so much fear and paranoia right now is that there are many undervalued assets, whether it’s a commodity like uranium or carbon, or stocks in well-run companies. There are many energy and agricultural companies whose stock prices are down right now. Fertilizer companies are very cheap, if you’ll pardon the pun.
Finally, there are cash alternatives.
Your bank probably pays no interest or a ceremonial fee of 0.2%.
But right now you can buy a 2-month Transit note with a yield greater than 3% per annum. The six-month note pays almost 4%.
And the The Treasury Department’s “I-Bond” series currently pays 9.62%.
I bonds (technically “Series I Savings Bonds”), like most US Treasury securities, can be purchased through the government website TreasuryDirect.gov.
I bonds are capped at $10,000 per person per year, so that’s chump change. And you have to keep them for at least a year before you can redeem them.
But it’s definitely worth learning more about as a more attractive way to save money.