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Schrödinger’s cat is the famous quantum thought experiment which sought to explain the weirdness of quantum physics but actually further confuses the quantum physically uninitiated by the tales of a cat that is both alive and dead at the same time.
Anyone who can look at the trillion-dollar giants of the US stock market and then at the more-than-decimated economy of the world can be forgiven for being equally confused at seeing both an alive and dead economy at the same time.
The Deflation/Inflation Theses
What comes next – inflation and deflation – is also in a quantum-like state of superposition. Unlike thought experiments, though, we can’t easily have contradicting states going at the same time.
The market sees inflation coming: precious metals are up, cryptocurrencies are up, precious metal mining stocks are up and many big name investors are convinced and positioning themselves accordingly. Meanwhile, many economists see deflation as the upcoming threat from the economic aftermath of the COVID-19 pandemic response.
Inflationists simply say the government is in deep fiscal trouble, and it is printing money like crazy and handing it out all over the place, thus there will be inflation, as has always followed profligacy. Deflationists say that the new money is getting sumped in the banking system that will never let the money out to the masses, which makes it – in effect – dead money. If you print cash and give it to a bank that then warehouses it, there will be no inflation: QE 1, 2, 3, 4 quod erat demonstrandum.
It is hard to argue against either of these theses. There is a lot of new money out there, and government budgets are off the dial. Then again, banks are sequestering the newly printed money and basically cashing out of their risk and leaving the Federal Reserve (that is US and You) as the bag holder.
While Buffett, who is buying Barrick Gold (GOLD) and shifting his focus towards Japan and its reliably un-inflationary economy, is clearly worried about inflation, economists are pointing at the ever-deaccelerating velocity of money to explain that inflation is not on the cards because the cash is stuck in the plumbing of banks.
Now, it is easy to hop down the rabbit holes of why this and that will happen, what will make it go one way or the other – personally, I’m convinced inflation is the medium-term outcome – but rather than go on about why I’m going to be right, I prefer to look at ways to eat my investment cake and still have it.
Cash, Equities, Gold
Clearly, if you believe in high inflation, you want all your liquid in precious metals. If you believe in deflation, you want all your money in cash. So, if you didn’t believe in either, you would most likely want the bulk of your money in equities.
This is the key to how to trade the coming few years. Cash-Equities-Gold is an investment arc you can dial your diversification across depending on your inflation/deflation sentiment. Rather than take a stand and tie your wealth to a long-term prediction, you can instead rebalance yourself between these poles, quickly and cheaply, depending on whether the economists are right or, instead, the wizened old investment gurus have nailed it.
This is a straightforward idea, but there is nothing to stop you from elaborating on it. I, for example, have a chunk of my cash in Swiss francs and should probably follow Buffett’s Japan lead by moving some of the rest into yen. Because I have an inflationary ache that needs soothing, my equities are skewed towards gold, silver and platinum stocks; my gold is crypto, which is gold (squared) as far as I’m concerned.
While I’m convinced by the inflation argument, it is easy for me to shift towards a deflationary bias simply by moving some bitcoin into equities and swapping some gold shares for something defensive and by moving some euros into yen.
Meanwhile, I can pop a percent or two into DeFi (Decentralized Finance) or Ethereum knowing I’m playing fast and loose in an inflation-proof, high-risk playground, while still protecting myself from the Fed’s zombie trillions if they suddenly escape their Umbrella Corp compounds and start infecting prices.
Disclosure: I am/we are long GOLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I have positions in all assets mentioned.