Planning ahead for what’s going to happen

June 6th, 2010

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How to buy and invest in physical gold and silver bullion

In our previous article, one of our readers asked,

With either a recession on the way or increased government spending and its effects in the economy, what does everyone think are some ways/ideas for investors to plan ahead for both scenarios?

This is a very hard question to answer because every investor’s situation, outlook and opinions are different. There’s no one-size-fit-all answer. But we hope this article will set you thinking about planning ahead for yourself…

In today’s highly volatile and unpredictable economic climate, it is increasingly difficult to forecast what will happen in the future. So, in that sense, it is increasingly difficult to plan ahead. As we wrote in October 2008 at Real economy suffers while financial markets stuff around with prices,

Right now, deflationary forces are acting on the economy while at the same time, central bankers and governments are attempting to inflate. Consequently, the result is extreme volatility in prices. Volatile prices hinder business calculations, which in turn hinders long-term planning.

With long-term planning made much more difficult, how is it possible to engage in investments that allows the nation to continue to accumulate capital goods? Without the ongoing accumulation of capital goods and too much monetary capital wasted on either hoarding, bailing out bad investments and patching a dysfunctional financial system, there wouldn?t be a proper and efficient allocation of monetary capital. The economy will be engaging on capital consumption. If a nation starts to consume its capital, how can there be real economic growth. Without real economic growth, how can future generations enjoy a more plentiful and prosperous existence?

The governments’ inflationary policies are intervening heavily to fight against the free market’s deflationary forces. The results are volatile prices and unforeseen side-effects (i.e. Black Swans). Recently, Marc Faber made a very good point:

It is no longer sufficient to analyze macroeconomic and microeconomic trends and individual companies and sectors; we now increasingly need the help of a political analyst who can warn us of what governments? next regulatory ?Schnapsideen? (ideas developed while heavily intoxicated) are likely to be.

Professor Steve Keen is a very good example of someone who fell victim to the government’s ?Schnapsideen.’ His call for deflation in Australia was shredded by Rudd government’s First Home Buyers Grant (FHOG), which resulted in him having to walk a long trek for a lost bet. Unfortunately for him, his economic analysis (which is sounder than the mainstream, vested-interest-tainted neoclassical economics), is discredited because of that. This is to Australia’s great loss because by re-leveraging the Australian economy (i.e. ignoring debt dynamics), the economic margin of safety is arguably thinner today than before the GFC.

Another example is the Rudd Government’s infamous RSPT (see Why Rudd?s mining super-profit tax will encourage more commodity speculation), which threw a spanner into the works of many mining investment plans.

This kind of environment is not conducive for long-term planning of great enterprises. For investors, that means some of your investments today will be affected tomorrow by a bureaucrat’s decision. Instead, such environment favours those (in the short term) who are nimble and fast at shuffling money across asset classes and national borders. It encourages hoarding and speculations. As we wrote in Harmful effects of inflation,

With inflation, there is less incentive to be productive and more incentive to hoard, speculate and gamble. This in turn will reduce productivity and increase price inflation, which further increase the incentive to be less productive.

For investors who are more conservative, it means spreading your eggs into more baskets. For example, if you want to hedge yourself against a potential AUD currency crisis (see Serious vulnerability in the Australian banking system), it may mean diversifying your wealth from AUD into foreign currencies and physical gold (see How to buy and invest in physical gold and silver bullion). For those who are concerned that the world may perhaps end up in hell, they may want to prepare themselves by learning more self-sufficiency skills, accumulating equipment and for those who are well-off, buy a farm in the rural area.

Yet, as we wrote in If we are going to be doomed, why don?t we head for the cave and stop investing?, it does not mean we should stop investing right this minute. Even if you believe we will all be doomed, there will still be investment opportunities in the meantime. For those who are less conservative, it may mean investing in sound companies (with your eyes and ears open) or making some speculative bets.

The point of today’s article is not that we should all throw long-term planning out of the window and eat, drink, be merry and bugger all the consequences. Instead, our point is that investors today have to be alert and be prepared to act in a moment’s notice and not be locked into any particular set of investment/trading ideology. Creative thinking and flexible mental model is very important to survive in today’s economic/political climate.

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