Dilemmas in investing

This can be a challenging time to be an investor.

Like a many people in my age group, I saved a few dollars while working with the intention of using that money to make the reduced income of retirement pinch less.

Inflation

Inflation is theft against people who didn't relentlessly consume every penny they earned as soon as they earned it. Furthermore, it benefits those who consumed MORE than they earned.

Inflation steals from the savers and gives relief to the borrowers.

Nevertheless, it is better to have saved something than to have not saved at all. Look at my gross income, my pension (and I am blessed to have anything) pays 27% of what I received when I was bringing a paycheck home.

It is nice to have a few dollars set aside for luxuries like heating oil, gasoline and hotdogs.

From this juncture in time, there appear to be two kinds of inflation. There is the "everything costs more" and there is the "not available" kinds.

Many economists would argue that "not available" isn't inflation but from a practical standpoint the item is available IF YOU ARE WILLING TO HIRE SOMEBODY TO LOOK FOR IT AND ARE WILLING TO PAY ANY PRICE. From a practical standpoint the cost of an item that is not available approaches infinity.

Either that, or one must substitute more expensive or less suitable (and often less durable) items. Paying the same for an item that lasts half as long is 100% inflations.

Inflation makes "Bonds" and fixed income financial vehicles a loser's game.

Reserve currency status

Many nations are colluding to dethrone the US Dollar from its world reserve currency status.

If that happens, even in part, then many of the US dollars that were circulating through the world economy like so much financial hydraulic fluid will become surplus-to-need. The countries and foreign banks and corporations holding those dollars will use them to buy US assets. Since everybody will be doing it, asset prices will rise and the purchasing power of the dollar will plunge.

More inflation

Domestic equities

Under that scenario, domestic equities (stocks) are likely to provide a flimsy shield to preserve one's wealth.

The price of stocks are founded on two things: Future profits that are discounted to comprehend time-value-of-money and the collective emotional state of "the market"

Both pillars holding up stock valuations will be crushed by inflation. The discounting pillar will be battered as the discount rate rises. The collective emotion pillar will be crushed because nobody will have any expendable income to invest and "momentum".

Foreign equities

The efficient frontier concept is that allocating assets between different world markets can increase returns and reduce volatility.

I took a hard look at this option.

The largest economies in the world as a percent of the US economy are:

If the goal of divesting into foreign equities is to find a safe-haven in the event of the US economy tanking, then the save-haven must be VERY decoupled from the US economy.

That leaves Germany*, Russia, Brazil, Australia, Turkey and Poland.

The "*" next to Germany is to indicate that the other EU countries are equally decoupled but if you had to choose a robust local economy in the EU would you choose Germany or any of the countries on the Mediterranean?

Russia is in the enviable position of being able to sell energy to either the EU or China but its financial transparency is suspect and corruption is a risk.

Virtually no country has balanced demographics. We are either aging like Japan or blowing up like Brazil.

Whither to go?

Two paths present themselves.

One is to balance my portfolio heavily in bonds since a fast elevator ride down is preferred to an uncontrolled ride down. Keep that position until blood is running in the streets and then look for buying opportunities.

The second path is more fun. Looking around my property, there are many projects that are in various states of completion. I am very, very good at starting things. Not so great at finishing everything.

Viewed through the lens of "How much incremental function do I get for each incremental dollar I spend today?", punching several of those projects into the end-zone are clear winners. By a lot!

A fifty year-old milling machine is capable of easily lasting another fifty years if cared for. Additionally, the basic machine can accept digital and CNC upgrades.

Viewed through the lens of inflation, I will be trading depreciating dollars for hardware, that if cared for, will not halve in value every decade...or year.

The last hundred years have not been particularly inflationary in the United States yet a paper dollar minted in 1914 lost 96% of its purchasing power over that time. A milling machine that can last 100 years looks pretty attractive in comparison, especially if one already has a machine shop.

(NOTE: I do not have a machine shop but use the milling machine as an example. There are hosts of other durable items...including sheds to store and protect your other items, tool boxes to keep them organized and protected and so on...that merit consideration.)