by Simon Black
It all started innocently enough.
It was July 2, 1997, and the Prime Minister of Thailand had just announced that their currency– the Thai baht– would no longer be pegged to the US dollar.
Big deal, right? It doesn’t seem like a boring press conference about an emerging market currency in Southeast Asia would even be noticed by too many people, let alone ruffle any feathers.
And yet this announcement kicked off one of the biggest global financial crises in modern history.
Today we call it the Asian Financial Crisis. But its effects quickly rippled across the world, wrecking havoc as far away as Brazil, Russia, and the United States.
The basic plot was that foreign investors had been shoveling money into Asia’s “Tiger Economies” for several years; stock markets in places like Thailand and South Korea had soared. And investors were confident that their money was safe, in part because of the Thai currency’s peg to the US dollar.
But underneath 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 vanished, and investors yanked their money out of the region.
Economies across Asia crashed almost immediately, and a severe recession took hold. Thailand’s currency went into freefall, dropping an unbelievable 55% over the next several months. This triggered nasty inflation in Thailand that quickly surpassed 10%.
In short, it was stagflation: a deep economic contraction, coupled with steep 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. were becoming more expensive, assets like stocks and real estate were quickly losing value.
Thailand’s stock market dropped a whopping 75% during the crisis. Bond prices fell. Property prices fell. There was no shelter from the financial woes anywhere in the country– pretty much the worst economic conditions imaginable.
Although much less severe, these are similar conditions to what the West is facing today.
On one hand, we have a recession. And yes, the ‘experts’ in the federal government, all the way up to the President of the United States, have thus far refused to use the word “recession”.
They don’t care if you think we’re in a recession. You’re not entitled to an opinion. Only the “experts” get to make that decision. But let’s just pretend for argument’s sake that a recession is coming.
Then we have this inflation nightmare– which has been brought on by the experts’ incompetence in dealing with a public health crisis, combined with other experts’ incompetence in worsening a geopolitical crisis, further combined with yet other experts’ incompetence in engineering an energy crisis.
Another win for the experts!
The two of these together– inflation plus recession– is stagflation.
But like Thailand in 1997, it’s worse than that, because we’re also seeing asset price deflation.
The S&P 500 stock index is down 17% from its peak last year. And frankly stocks probably still have a long way down from here.
Economic conditions today, for example, are obviously much weaker than they were in early 2020, just prior to Covid. But today’s stock prices are still about 15% higher than they were back then, when the economy was still strong.
So there’s an easy argument to be made that stocks can easily go down from here.
Bond prices are also falling as interest rates rise (bond prices move inversely to interest rates, so as rates rise, bond prices fall).
Real estate prices are in decline; data from Redfin and Zillow show that US home prices peaked in May at about $430,000; they’re now down about 5%. And with mortgage rates rising, there’s a good chance that home prices will keep falling.
A lot of commodities are down. Alternatives like crypto, gold, and silver are down (for now). And even holding savings in a bank account pretty much guarantees that you will lose more than 8% per year to inflation.
This is quite unusual. Typically, even in an economic decline, there’s at least one asset class that’s a safe haven, i.e. stocks go down but bonds go up. Or bonds go down but commodities go up.
Now it seems that most major asset classes are falling in tandem. It’s exasperating. But here are a few ideas to consider.
First, one of the major effects we’re seeing right now is a rapid loss of confidence in central banks. And this is a really, really big trend.
Investors have long believed in the infallibility of central bankers– that these unelected bureaucrats, these ‘experts’, can flawlessly manage their economies and financial markets to perfection.
This fantasy is quickly unraveling. And the sheer incompetence, neglect, and ignorance of central banks has been exposed for all to see.
After all, if central banks were actually good at their jobs, inflation wouldn’t be 8% right now. And they would have predicted it long ago.
People are starting to realize there are major problems in the world. Energy problems. Food problems. And they recognize that central bankers are powerless to do much about it.
Central banks cannot print more food, or create more energy through quantitative easing.
But people can. Businesses can. And it makes sense to consider investments in these types of real assets, especially important resources that the world really needs, including food, energy, and productive technology.
Second, there are still plenty of great businesses and great investments out there. But what worked in the past is not necessarily the right approach today.
For the past several years, investors could throw money into some random index fund and expect a decent return. That was because, at the time, pretty much everything was rising in tandem (which was also unusual).
But index investing is a bizarre 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 businesses, right alongside the best ones.
That might not be as wise an approach today. In this environment, it may be more sensible to consider shedding the worst performers… and only focusing on the best, highest quality, and most undervalued investments.
Third, the benefit of so much fear and paranoia right now is that there are plenty of undervalued assets, whether it’s a commodity like uranium or carbon, or shares of well-managed businesses. There are plenty of energy and agricultural firms whose share prices are down right now. Fertilizer businesses are dirt cheap, if you’ll pardon the pun.
Last, there are alternatives for cash.
Your bank probably pays no interest, or some ceremonial 0.2% rate.
But you can buy a 2-month T-bill right now that yields more than 3% on an annualized basis. The six-month T-bill pays nearly 4%.
And 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’s website TreasuryDirect.gov.
I-bonds have a limit of $10,000 per person per year, so it’s small change. And you have to hold them for at least one year before you can redeem.
But they’re definitely worth learning more about as a more attractive way to save money.