Doc's Daily Commentary
Mind Of Mav
The Fed’s Inflation News: How It Affects You Over The Next 10-20 Years
Bitcoin (BTC) climbed by over $2,000 on Dec. 15 as markets quickly reacted to news that the United States Federal Reserve would raise interest rates and curtail its bond-buying program starting in 2022. While this might be great for the short term bulls, what does this mean long term? How does inflation hurt or help the case for Bitcoin and other cryptocurrencies?
Recently, people have been asking me a lot about what the next 10–20 years will look like, and how inflation will impact the economy and what this means for them personally.
This newsletter describes the general outlook I have for the next one to two decades. I will explain how — in my opinion — inflation and potential deflationary crashes will shape the future and how I as an investor will prepare for this.
Buckle up, it’s gone be a wild ride.
Disclaimer: Please note that the following is a summary of what I believe has a high chance of happening. However, I DO NOT claim that things will exactly play out like this. And as always, this article is intended to educate people. It should not be taken as financial advice.
Going From A Non-Inflationary To An Inflationary World
We are facing difficult times.
After decades of living in a non-inflationary environment (not for all goods and assets, but in general) supported by lots of cheap high-density energy and a globalized economy, we are now facing strong price increases in all areas.
Here is a very short summary: We are running out of cheap high-density energy (fossil fuels) to run everything and grow our economies. Governments try to substitute missing energy by pumping money into the system. But this does not bring back growth and is also contributing to rising prices.
Hooked On Cheap Money
I think inflation will continue to shape the coming decades.
To stop the current inflationary process, central banks would have to take governments and corporations off the cheap money supply by raising interest rates. But I doubt that this will happen soon. The system relies on more liquidity to prevent a crash. Raising interest rates would cause a lot of inefficient and indebted governments and corporations to go bankrupt. They would also drag down a lot of healthy businesses with them.
This would most likely break the global financial system and cause a serious global recession.
The consequence: People (voters) around the world would face severe hardships. This is something most governments can’t survive. So they will likely keep pouring more money into the system.
However, a crash still could happen. In fact, I see a high chance that it will at some point because the whole system is so inefficient, over-complex, and over-leveraged that it will break eventually. We have countless examples of this happening in human history. And governments will not be able to control it.
But even when a deflationary crash happens, the underlying reasons for inflation will not go away.
Because the lack of high-density energy will not be easily solved (if at all). Without enough high-density energy available, the economy can’t grow its way out of the current crisis. And even if we would be able to solve our energy problems by massively building up our capacities for renewable energy, it would take us decades to make the transition.
So what will happen from here on?
I see energy prices continuing to climb for the coming years and decades.
This sets in motion a vicious circle.
As energy prices climb and the pandemic lingers on, the production and distribution of things become increasingly difficult. This makes everything from goods to services more expensive.
Seeing how inflation is eating away their buying power, workers will ask for higher wages.
Because inflation devalues fiat currencies, people will try to convert their increasingly worthless money into something that holds value, driving prices of these assets up further.
Meanwhile, taxes and fees will climb higher and higher.
All of this will erode regular people’s wealth who have no other choice but to buy less non-essential things.
This will force companies and service providers to de-complexify and shrink their production. They will have to lay off more people. To compensate for this they will raise prices further.
And so on.
What’s interesting to note here is that as inflation increases, so will pressure on governments to do something about it. As described above, raising interest rates is the only thing left they can do and this would in all likeliness trigger a deflationary crash.
What we are looking at now is an environment where prices increase while the economy shrinks and regular people become poorer.
This is also called stagflation.
Let’s take a closer look at what this means for the average person and business.
The Life Of Average Joe and Joeanne In 2030
I’ll be honest. I am not a friend of the mainstream media and economists coming from the establishment.
That’s because these people keep on telling us that the overall economic situation is fine, while only admitting minor problems.
But in my opinion, this is not the truth.
In fact, the economy is deteriorating. The average person’s prosperity in western economies has been falling since the early 2000s. First slowly and now increasingly faster.
If you kept your eyes open you know that the average person in the US, the UK, and Germany of today is not better off than 20 years ago. The same of course also applies to other places. Their situation got worse because almost all of the wealth that has been generated ended up in the hands of a few very wealthy people on the top.
And it will get even worse.
If today’s trends continue, I expect a sharp drop in the average person’s prosperity by the middle of the 2020s. By the early 2030s, prosperity levels in most western countries will have fallen so much that many people will have to seriously cut down on discretionary expenses.
What are these?
Simply said, discretionary expenses cover everything you do not need for your survival. The nice-to-haves that make life more comfortable and entertaining. Non-discretionary expenses are things such as high nutrition food, housing, healthcare, and transport. Things you cannot do without.
Sooner or later, the most obvious choice for the average person will be to cut down on spending money on things they don’t need.
2030–2040: An Economy That Is Smaller and Simpler
This will have a profound impact on whole business sectors.
The travel industry has already been hit hard by the pandemic. But in a world of increasing prices, I believe this is one of the first sectors to feel changing spending habits. People will travel less and if they do, I expect a lot of mass tourism services that rely on scale, to vanish.
I see similar things coming for many consumer goods. To give an example, smartphones won’t disappear. But I do believe that when people have less money to spend on them and as economies of scale go into reverse, producers will have to react. One way would be to make their supply chains shorter and more robust which will result in simpler products. So instead of having 3 cameras, many phones in 2030 might only have one.
I also assume that some producers will change their business model. They won’t offer mass products for a large market anymore, but upscale solutions for people who still have money to spend. I also believe that a lot of companies offering digital products and services will face difficulties. Businesses offering monthly subscriptions similar to Netflix and Spotify might lose a lot of customers in the coming decade as more people will switch to free alternatives.
To summarize, I see an economy that becomes smaller and simpler. This has a lot of implications for the world of tomorrow. Whole business models are based on the expectation of perpetual growth. But if growth does not return, then a lot of the things we are taking for granted today, won’t exist in 10 or 20 years.
Takeaways For Investors
I am aware that a lot of what I just wrote sounds dire and from today’s perspective probably extreme.
This is understandable.
But to repeat myself, I see an increasing probability that the future will go in this direction. I am not saying that all people will be affected by this and that everyone will be affected the same. There will be differences, depending on where you live and other factors. Including how well you prepare. But the number of people hit hard by what is coming will definitely increase over the coming years.
And as I described above, there is also the constant danger lurking in the background that we might see one or several market crashes that could wipe out much of the economy.
Doesn’t really make me look forward a lot to the coming years.
But it is also a good reason to be prepared. So how do I, as an investor, plan to prepare for the next 10 to 20 years that will see a lot of inflation and potential market crashes?
1) In case central banks such as the FED or the ECB increase interest rates, I will convert parts of my Crypto holdings into fiat/stable coins, as I believe this will trigger a crash/recession that will drag down all markets.
I also keep my eyes open for signs that an “involuntary“correction is happening that governments can’t contain by throwing more money at it. When I see this happening, I will also take out some of my Crypto holdings, though it may be hard to do so in time. That is why I plan to cash out some Cryptos during the current bull market.
In both cases, I want to have some cash/stable coins available to pick up the pieces after the dust settles.
2) If there are no policy changes and if the market can be held together by the powers that be, I will continue to hold a lot of my wealth in Cryptos and other appreciating assets. This is a long-term play. Of course, there will be the usual cycles playing out in Crypto, including major corrections that I will need to take into account. But in general, the trend is going upwards.
3) I will refrain from investing in companies that are in sectors that are strongly dependent on cheap energy and which will suffer in an inflationary environment (as described above). This also includes the Teslas, Apples, and Walmarts of this world which are either overvalued and/or rely on cheap access to resources they can ship in from around the globe.
4) Instead, I will focus on small, agile businesses that can source most of the things they need (energy supply, raw materials, workforce) locally. I will also keep my eyes open for businesses that have pricing power due to very strong client relationships, intellectual properties, and/or strong connections to governments.
Again, this is a plan, not a recommendation nor even an idication of what I might actually do. It’s merely trying to look ahead at uncertain waters and chart multiple potential courses.
I hope this gives you some perspective as to how dangerous a game the Fed is playing, and how we need to do everything in our power to stop being beholden to it.
Sources / Reading:
Ben Hunt: Things Fall Apart III
Tim Morgan: The Surplus Economy
Tim Morgan: The Case for Contingency Planning
Tim Watkins: What If Growth Cannot Return https://consciousnessofsheep.co.uk/2021/03/03/what-if-growth-cannot-return/
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