I've been accumulating gold

The United States has experienced high rates of inflation in the past and appears to be running the same type of fiscal policies that engendered hyperinflations in 20 countries over the past century. - Laurence Kotlikoff

I’ve been concerned about a hyperinflationary environment for close to a decade. My thought process is rather simple.

• There is a significant amount of debt in the system that continues to increase every year.

• Politicians use a short-term view point when it comes to spending. If you want to get reelected you need to spend, spend, spend. No one will get reelected if they tighten up the budget during their time in office.

• The United States monetary system operates under a fiat currency. The only “thing” giving the U.S. Dollar value is the full faith of the citizens who use it. If this faith in the monetary system collapses, the dollar will become utterly useless.

• No fiat currency in the history of monetary history has stood the test of time. Every fiat currency ends up collapsing under the weight of inflation.

• Money printer go brrr.

I’ve tried to position my portfolio and personal assets to withstand a potential inflationary environment. I mainly own companies with real assets (real estate, land, buildings, equipment). The majority of my portfolio is in asset rich, unlevered companies. And I have started to accumulate physical gold.

The level of Federal debt concerns me. I am under the belief that this debt will eventually need to be paid. The payment of the Federal Debt will either be done through:

1. Spending cuts

2. Higher taxes

3. Inflation

I’m under the impression that spending cuts will likely not happen. Government officials, especially Presidents with four year terms, have incentives to keep spending rapidly in order to boost their own presidential rating and ensure they are reelected when their first term is up. Nobody ever votes for a President who cuts spending.

Higher taxes is definitely a possibility. Biden is already making plans to leverage the debt burden by raising taxes. But there is only so much a government institution can raise taxes to before it upsets the populace. If a government institution raises taxes too much it could result in riots, angst and potentially a Coup d'état.

Since a massive spending cut and higher taxes is likely not to happen the only way to pay off the Federal debt the United States has accumulated is through inflation — the invisible tax. And this has already begun.

Did you know that 22% of all U.S. Dollars were created in 2020 alone? Read that again. 1/5th of all U.S. Dollars were created in 2020.

M2 Money Supply

On December 2020 there were $15.4 trillion dollars in the world. At today’s date, there are $19.7 trillion dollars. In layman’s terms this is described as printing money. But in practice the Fed creates digital dollars to buy government bonds in the secondary market, known as quantitative easing. The buying of government bonds keeps bond prices high and yields low.

Fed Funds Rate

The federal funds rate is currently at historical lows (pretty much at zero) from the massive injection of cash into the bond market. Basically, the majority of the new money pumped into the system went directly into the bond market.

But how can you blame them? Federal debt levels have skyrocketed — now over $27 trillion — up from $23 trillion at the beginning of 2020.

Federal Debt Levels

Assuming the interest payment on the $27 trillion of Federal debt is 0.07% this implies the yearly interest payment is $18.9 billion. But what if we assumed the interest rate started to move? We mapped the potential annual interest obligations out below:

• 1% - $270 billion

• 2% - $540 billion

• 3% - $810 billion

• 4% - $1.08 trillion

• 5% - $1.35 trillion

• 6% - $1.62 trillion

• 7% - $1.89 trillion

• 8% - $2.16 trillion

• 9% - $2.43 trillion

• 10% - $2.70 trillion

• 15% - $4.05 trillion

• 20% - 5.40 trillion

The United States is in big trouble if interest rates move. A move to a measly 3% interest rate implies the yearly interest payable would be around $810 billion — a 4,185% increase from the current rate.

But what if inflation gets out of control, bonds are sold off and interest rates move back to the levels we saw in the 80s? Annual interest payable on $27 trillion in debt would be in the trillion dollar range.

But, but, but Federal Reserve economists say inflation will be “transitory”.

Transitory…

A word usage that tells investors that the Fed has gotten so deep into Project Zimbabwe the only word they have to describe the impending inflation is transitory.

Even the “Bond King” himself thinks the Fed has lost all control.

“I’m not sure why they think they know that it’s transitory,“ Gundlach of DoubleLine Capital LP said in an interview with BNN Bloomberg Tuesday. “How do they know that when there’s plenty of money printing that’s been going on and we’ve seen commodity prices going up really massively.”

“There’s plenty of indicators that suggest that inflation is going to go higher, and not just on a transitory basis, for a couple of months. So we’ll see how the Fed is trying to paint the picture, but they’re guessing.”

“Who’s going to buy all these many trillions of dollars of bonds? Foreigners have been selling for years and they’ve accelerated their selling in the last several quarters, domestic buyers are not exactly selling, but they’re not adding to their holdings. So what’s left to absorb all of the spawn supply is the Federal Reserve.”

Does transitory mean seeing the price of corn limit up everyday to now trade above $7.00?

Alpha Investors @redditinvestors

Corn is going above $7.00 soon.

Or how about the price of wheat which is now trading at an eight year high?

Alpha Investors @redditinvestors

The price of wheat is at its highest level in eight years.

Or what about literally every commodity screaming to new all time highs? Is this purely transitory?

Alpha Investors @redditinvestors

Inflation is coming Steel +145% Lumber +126% Oil +80% Soybeans +71% Corn _69% Copper +50% Silver +38% Cotton +35% Coffee +34% Wheat +25% FAO Food Index +25% Cattle +21% Bitcoin +470% Stock Market +23% Home Values + 8% Hourly Wages +5% Money Supply Up +24% Reported Inflation +1%

The point I’m trying to make is the Federal Reserve has experimented with this cheap money for far too long and eventually there is a point of no return. The entire global economy is awash in debt and inflation is starting to happen.

If inflation happens in a major way, the real interest rate on bonds will collapse into negative territory (I’d argue they are already there) and bonds get sold off. When bonds get sold off interest rates explode higher. The only thing holding interest rates down is the Fed’s massive quantitative easing practices. I can’t imagine any astute institutional investor is buying bonds at less than a 1% rate.

Some think interest rates will be at this level forever because the Fed can’t afford to let rates move higher. I’d argue that eventually free market forces will force the Fed to show its hands resulting in a global currency crises the world has never seen before.

For this reason alone I have been accumulating physical gold. I only have 3.5% of my portfolio in physical gold but targeting at 6-8% rate in the near-term. And I’m not thinking of this gold accumulation as an investment, but more of an insurance policy. An insurance policy against the reckless monetary decisions world government have adopted. My gold position is a short against the entire system.

It’s not really an investment per se—It’s an escape from government imprudence. You don’t own gold because you expect it to do remarkable things—you own it because you are scared of your government doing remarkable things. Think of gold like the credit rating of world governments. It’s the CDS you buy if you don’t trust the politicians and their stewardship of the currency. - Kuppy, Adventures In Capitalism

Short list of countries that have underwent hyperinflation (this list is not comprehensive):

• France 1795-1796

• Austria 1921-1922

• Soviet Union 1921-1922

• Germany Weimer Republic 1922-1923

• Poland 1923, 1989-1990

• Greece 1941-1944

• Philippines 1944

• Malaya 1942-1945

• Hungary 1945-1946

• China 1943-1949

• Bolivia 1970-1987

• Chile 1971-1981

• Argentina 1975-1992

• Brazil 1985-1994

• Peru 1988-1991

• Yugoslavia 1989-1994

• Angola 1991 – 1999

• Yugoslavia 1992-1995

• Belarus 1994-2002

• Zimbabwe 2000-2009

• North Korea 2009-2011

• Venezuela 2016

One of my favorite books is Gone With The Wind. It is an incredible story of riches to rags and back to riches. A part in Gone With The Wind that really stands out to me is when the rich southern farmers lose all of their money because they held their wealth in Confederate currency that underwent a hyperinflationary state during the war.

After the war the ones who owned gold became extremely wealthy and in some cases were hunted down by the government so they could confiscate their wealth.

"I've made enough money, and it's in English banks and in gold. None of this worthless paper for me." - Rhett Butler, Gone With The Wind

The end game is simple to me. The U.S. fiat currency will eventually collapse and you will want to be holding a real asset than can’t be diluted into oblivion. I choose gold as my short against the entire system.

Disclaimer: The publisher does not guarantee the accuracy or completeness of the information provided in this page.  All statements and expressions herein are the sole opinion of the author or paid advertiser.

Alpha Letter is a publisher of financial information, not an investment advisor.  We do not provide personalized or individualized investment advice or information that is tailored to the needs of any particular recipient.  

THE INFORMATION CONTAINED ON THIS WEBSITE IS NOT AND SHOULD NOT BE CONSTRUED AS INVESTMENT ADVICE, AND DOES NOT PURPORT TO BE AND DOES NOT EXPRESS ANY OPINION AS TO THE PRICE AT WHICH THE SECURITIES OF ANY COMPANY MAY TRADE AT ANY TIME.  THE INFORMATION AND OPINIONS PROVIDED HEREIN SHOULD NOT BE TAKEN AS SPECIFIC ADVICE ON THE MERITS OF ANY INVESTMENT DECISION.  INVESTORS SHOULD MAKE THEIR OWN INVESTIGATION AND DECISIONS REGARDING THE PROSPECTS OF ANY COMPANY DISCUSSED HEREIN BASED ON SUCH INVESTORS’ OWN REVIEW OF PUBLICLY AVAILABLE INFORMATION AND SHOULD NOT RELY ON THE INFORMATION CONTAINED HEREIN.

No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.  

Any projections, market outlooks or estimates herein are forward looking statements and are inherently unreliable.  They are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur.  Other events that were not taken into account may occur and may significantly affect the returns or performance of the securities discussed herein.  The information provided herein is based on matters as they exist as of the date of preparation and not as of any future date, and the publisher undertakes no obligation to correct, update or revise the information in this document or to otherwise provide any additional material.

The publisher, its affiliates, and clients of the a publisher or its affiliates may currently have long or short positions in the securities of the companies mentioned herein, or may have such a position in the future (and therefore may profit from fluctuations in the trading price of the securities).  To the extent such persons do have such positions, there is no guarantee that such persons will maintain such positions.

Neither the publisher nor any of its affiliates accepts any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of the information contained herein.

By using the Site or any affiliated social media account, you are indicating your consent and agreement to this disclaimer and our terms of use. Unauthorized reproduction of this newsletter or its contents by photocopy, facsimile or any other means is illegal and punishable by law.

For Full Terms of Use Click HERE. For the Privacy Policy Click HERE.

alphaletter.co (“Alpha”) is a website owned and operated by Substack. Alpha is paid fees by the companies that make investment offerings on this website. Be aware that payment of these fees may put Alpha in a conflict of interest with the investor. By accessing this website or any page thereof, you agree to be bound by the Terms of Use and Privacy Policy, in effect at the time you access this website or any page thereof. The Terms of Use and Privacy Policy may be amended from time to time. Nothing on this website shall constitute an offer to sell, or a solicitation of an offer to buy or subscribe for, any securities to any person in any jurisdiction where such an offer or solicitation is against the law or to anyone to whom it is unlawful to make such offer or solicitation. Alpha is not an underwriter, broker-dealer, Title III crowdfunding portal or a valuation service and does not engage in any activities requiring any such registration. Alpha does not provide advice on investments or structure transactions. Offerings made under Regulation A under the U.S. Securities Act of 1933, as amended (the "Securities Act") are available to U.S. investors who are “accredited investors” as defined by Rule 501 of Regulation D under the Securities Act well as non-accredited investors, who are subject to certain investment limitations as set forth in Regulation A under the Securities Act. In order to invest in Regulation A offerings, investors may be asked to fill out a certification and provide necessary documentation as proof of your income and/or net worth to verify that you are qualified to invest in offerings posted on this website. All securities listed on this site are being offered by, and all information included on this site is the responsibility of, the applicable issuer of such securities. Alpha does not verify the adequacy, accuracy or completeness of any information. Neither Alpha nor any of its officers, directors, agents and employees makes any warranty, express or implied, of any kind whatsoever related to the adequacy, accuracy, valuations of securities or completeness of any information on this site or the use of information on this site. Neither Alpha nor any of its directors, officers, employees, representatives, affiliates or agents shall have any liability whatsoever arising from any error or incompleteness of fact, or lack of care in the preparation of, any of the materials posted on this website. Investing in securities, especially those issued by start-up companies, involves substantial risk. investors should be able to bear the loss of their entire investment and should make their own determination of whether or not to make any investment based on their own independent evaluation and analysis