The Collapse of Paper Assets

The first time I saw it, I just had to have it.

"It," in this case, is an original movie poster - Wall Street, to be exact.

To be even more exact, "it" is the Polish version of the Wall Street movie poster - a hand-drawn abstraction of the movie's money-is-the-root-of-evil theme that looks nothing like the U.S. poster, a photo that depicts Charlie Sheen, Daryl Hannah and Michael Douglas set against the Manhattan skyline.

But I share this not because I think this poster is cool - and it is. I share it because I have an investment motive to tell you about today...

I came across the poster while in London back in September, visiting my friend Geoff Anandappa at Stanley Gibbons, one of the oldest coin and stamp dealers in the world. He had invited over one of his new contacts, Bruce Marchant, who makes a business connecting collectors of movie memorabilia with rare and collectible movie posters.

You'd be surprised how much these things go for. At the top end, they fetch hundreds of thousands of dollars. My Polish Wall Street and the Czech version of Terminator (one of the coolest movie posters I've ever seen!) set me back a bit more than $1,000 combined.

But this story isn't about movie posters, per se. It's about hard assets - the theme of 2017 - which are uncorrelated to paper assets.

It's those paper assets that have me writing this piece today.

Too Many Bubbles

We are in a paper bubble. A massive paper bubble.

Stock prices are not just at historic highs - they're at valuations that have been seen only a few times in history, and each time served as preamble to a monumental meltdown.

Bond prices are in the mother of all bubbles because of überlow interest rates that have persisted for nearly a decade now.

The U.S. dollar - a paper asset in that it's backed by nothing more substantial than the petty whims of politicians - is in a bubble that has seen it rise to a 14-year high. Relative to other major currencies that are worse off than the buck, that makes some sense. But relative to the underlying fundamentals of a nation strangled by more than $19 trillion in debt and a political class riven by diametrically opposed views on substantive matters that will define our financial future, the dollar is used toilet paper masquerading as art.

Each of these three bubbles will burst, possibly violently, possibly less so.

They might burst separately. They might burst in a unified implosion.

Whatever the means by which these bubbles go away, they will all go away at some point.

And at the same time we have these obese bubbles waiting on a pinprick, we find ourselves in an economy that lurches toward stagflation.

As I've written about a few times now, the economic policies that are likely to flow from a Trump White House are both inflationary and recessionary - the combination of which is, by definition, stagflation.

Catch the Countertrend

The last time stagflation visited, in the 1970s, stocks, bonds and cash suffered. All were marginally or substantially negative. Commodities rocked!

Gold rallied from a low of $100 an ounce in August 1976 to a peak of $873 an ounce in January 1980 - 773% gain.

Silver jumped from $1.28 an ounce to $41.50 an ounce from 1971 to 1980 - a 3,100% gain.

Even coffee soared from $45.20 in 1975 to $337.50 in 1977.

But of course they would. They're hard assets. They're real in that they always have some intrinsic value to someone who needs them.

No one needs a share of stock. But everyone needs energy or food or materials to build a shelter.

No one needs pieces of paper currency to buy something, but everyone needs a way to transact commerce, and if the paper in people's wallets is losing value to inflation, they can opt to use real money in the form of metals (or they will opt to trade paper money for metals, knowing that the metal will rise in value relative to the paper money and, thus, generate a larger pile of paper money that can then be used for commerce).

Just as those hard assets rise in value, so, too, do prices for real assets such as land and various collectibles such as wine, art, sports trading cards and such that might not at first seem like assets.

See, when traditional assets are under pressure, people pull out their money to keep it safe. But they don't necessarily leave it in cash, since cash is losing value to the inflation component of stagflation. Instead, they buy tangible assets that they believe will hold value and become more valuable as inflation pushes up those prices.

For that reason, hard assets are the play today.

Yes, Wall Street is hitting record highs. Yes, the buck is ripsnorting its way higher. And, yes, it seems counterintuitive to recommend that you reduce your exposure to stocks and the dollar by snapping up hard assets.

But playing the countertrends is where the greatest profits hide, and with the least amount of risk.

As a lifelong world traveler, Jeff Opdyke has been investing directly in the international markets since 1995, making him one of the true pioneers of foreign trading. He is Investment Director for The Sovereign Society and a weekly contributor to The Sovereign Investor Daily.