Here at Nestmann, we receive quite a few requests from our clients asking, “What should I do…right now?”
And there’s no simple answer to that question because part of it involves trying to foretell the future. And while we’re short of crystal balls, we believe that 2023 could be the year in which several trends converge to begin what most Americans will view as an economic catastrophe.
The full impact of that catastrophe won’t be felt in 2023 but will unfold in future years. And its centerpiece will be a total collapse of the debt-based global economy.
The collapse could begin in many ways and quickly spread across international borders. It might be a repeat on a larger scale of the 2021 implosion of the Archegos family office that we wrote about in this article. Archegos, which operated as essentially an unregulated hedge fund collapsed after it failed to meet margin calls on trades in highly leveraged financial derivatives; what Warren Buffett once called “financial weapons of mass destruction.”
Archegos’ lenders wrote off losses exceeding $10 billion … but the brazen market manipulation overseen by Archegos founder Bill Hwang was largely contained to the lenders themselves. We might not be as fortunate the next time one of the thousands of family offices operating globally blows up. Collectively, they control assets worth $6 trillion, and potentially much more.
As well, in a global economic system awash with nearly $300 trillion in debt – 343% of global GDP – the higher interest rates we’ve seen this year have been wildly destabilizing. We’re keeping our eyes on Europe, which thanks to Russia’s invasion of Ukraine, is experiencing its biggest crisis since World War II ended in 1945.
At some point – perhaps as early as this winter – we could reach a tipping point with the euro, as we discussed here. Multiple eurozone countries could throw in the towel and relaunch their own national currencies. That could lead to an international banking crisis as financial institutions which hold euro-denominated debt in the countries that leave the eurozone are forced to write down the value of that debt to its new market value.
Southern members of the eurozone, especially Greece and Italy, are especially vulnerable. Both countries have been hit hard by the European Central Bank’s (ECB) decision to end its longstanding negative short-term interest rate policy. Higher interest rates mean their indebted governments will be increasingly hard-pressed to service their exploding debt. What’s more, the ECB is also engaged in quantitative tightening – draining money from the financial system. That policy hits weak eurozone borrowers like the Italian government, which has long relied on the ECB to buy its bonds, thus helping to keep long-term interest rates low.
Meanwhile, inflation continues to rage throughout the world. Here in the United States, the official rate of inflation over the past 12 months slowed to 7.1%. But the real rate is closer to 15%, if inflation were measured today the same way it was in 1980. And despite the Federal Reserve increasing short-term interest rates to the highest level since 2008, we believe inflationary pressures will continue to build in 2023.
Yet as we observed last June:
The American economy has become addicted to near-zero interest rates. Both public and private debt as a percentage of GDP have climbed to record levels. Entire business models are dependent on ultra-low rates, including more than 600 zombie corporations that remain in existence only because they can borrow enormous amounts of money for next to nothing.
That leaves the Fed and other central banks in an impossible dilemma. If they continue increasing interest rates, we foresee a tidal wave of corporate bankruptcies, bank failures, and unemployment. But if they stop raising rates, or even lower them, inflation could skyrocket.
Nothing would make us happier than if our forecast of financial calamity is wrong. But in case we’re correct, it only makes sense to prepare for what we believe could be the worst economic collapse in history – a cataclysmic event that makes the Great Depression of the 1930s look like a Sunday School picnic.
It’s also clear that conventional investment strategies aren’t likely to protect you. For decades, financial advisors have recommended the “60/40” strategy; to create a portfolio balanced 60%/40% between stocks and bonds. A portfolio divided 60% between the S&P 500 and 40% in long-term Treasury bonds would have thus delivered a return of an investment performance of -22.5% for the year through December 23. Bonds, which supposedly lend stability to the 60/40 strategy, have had their worst year since 1793.
Even our favorite investment strategy – the Permanent Portfolio – didn’t protect investors this year. Composed of an equal mix – 25% each – of stocks, bonds, gold, and cash, a Permanent Portfolio consisting of four domestic ETFs that follow these markets would have declined 11.7% for the year.
The only way to cope with the toxic stew of inflation and economic instability is to own productive assets. These assets hold their purchasing power as inflation slashes the value of wages. Real estate you rent out to produce passive income is an example. So is farmland.
If you don’t already own productive assets, the best solution is to live below your means so you can save money and buy them. We also recommend accumulating real goods – food, fuel, ammunition, medicines, etc. – you know you’ll use, or that will be useful in a crisis. That strategy is also a powerful inflation hedge at a time when the real inflation rate exceeds 15%.
