Like sands through the hourglass, so are the assets of our lives. From bullion to Bitcoin, man’s search for safety and security in an uncertain world has stretched the definition of what it means to be an asset.
When Alex Turnbull was a teenager growing up in the small town of Hemmingway, North Carolina, he only knew one thing — hogs.
After all, Turnbull’s great grandfather, grandfather and his father before him had been hog farmers.
And when he was about to graduate, there was little doubt over where he would end up one day, just several miles away from his high school, farming hogs.
Yet if Turnbull was disappointed with his lot in life, it didn’t show.
While his friends from high school had big plans to go to Charleston or other big cities, Turnbull not only accepted, he embraced the lot he had drawn in life.
Until the last several decades or so, farming hogs was a highly manual, hands-on agricultural activity, that was mostly undertaken by small holders like the Turnbull family.
But with industrialization and factory farming, and a seemingly insatiable appetite for pork, some of the biggest names in industrial farming had bought over millions of acres of hog farms from smallholders and made them contract farmers, on terms highly favorable to the large corporations, but essentially made the farmers nothing more than indentured slaves to the corporations.
Turnbull noticed as small holdings around him one by one started to carry the flag of some of the biggest names in pork and pork products and was determined to go a different route.
Having read about a type of pig that was specific to the Iberico region in Spain, he had heard about how their meat was renowned the world over for its quality and taste.
Believing that he could do something similar on his own small holding, Turnbull literally bet the farm to raise specially-fed, high-grade pigs, that would be given a special diet of apples and acorns that would permeate and flavor their meat, and charge a premium for the product.
Turnbull’s father was initially hesitant, believing that the safest route for the farm was to go the way of the big corporations and cave to their demands, but Turnbull junior was insistent, because by his calculation, taking a risk was perhaps the safer bet at the end of the day.
And it paid off.
While neighboring farms fell to the sword of the large pork producers, Turnbull Farms produced high quality small-batch pork products, for which they could charge a huge premium.
Today, Turnbull Farm’s pork products can be found in gourmet supermarkets from Charleston to Chicago and are prized for their quality, flavor and ethical farming methods.
Because safety sometimes can be found in taking the biggest risks.
Two Decades of Dour Rates
And as the world confronts the seemingly relentless economic onslaught wrought by the coronavirus pandemic, investors have been left frantically searching for “safe haven” assets, only to find that there may be no such thing.
With geopolitical tensions between the world’s two largest economies rising, the investing world has entered into its most complex and difficult phase in over a decade.
The pandemic has brought about numerous business constraints and introduced vast economic uncertainty to businesses and households alike.
Against this backdrop, the past two decades have marked a secular decline in long-term real interest rates for most rich countries.
And although central banks have attempted to raise rates on multiple occasions since, none of those attempts stuck, as markets threatened to tank at the first hint of central bank hawkishness.
The coronavirus pandemic has simply put a two decades’ long trend in real interest rates, into sharp focus, as consumers faced with rising uncertainty reduce consumption and increase savings which helps to further depress rates.
And while historically, there have been an abundance of safe assets such as highly-rated government bonds, or real estate-backed securities, the financial crisis of 2008 has unwound those sanctuaries.
The European debt crisis of 2009 sent German bonds (some of the most highly-rated sovereign bonds the world over) into negative rates, while the U.S. housing crisis that led to the financial crisis of 2008, decimated the mortgage-backed security market.
The flaky sovereign debt debacle of Portugal, Italy, Greece and Spain (forming the unfortunate acronym P.I.G.S.) sullied the reputation of European sovereign bonds.
And the long-held belief that U.S. assets backed by land could never fall sharply, was proved wrong in 2008.
With sovereign debt from rich countries and asset-backed securities having lost their “safe haven” status, investors have been left feckless at a time when “safe haven” assets are more in demand than at any time in the past.
What’s Safety Anyway?
And that shortage of “safe haven” assets has seen a rush into gold — which although down somewhat from its record high, remains above multi-year averages — as well as cryptocurrencies such as Bitcoin.
Because there is a limit to how low interest rates can go (a form of zero lower bound or negative interest rate) to clear this excess demand for “safe haven” assets, low rates can create a persistent stagnation in the global economy and dramatically hamstring the efficacy of monetary policy, at a time when policymakers are increasingly running out of tools to boost the economy.
And increased tension between Washington and Beijing could potentially spillover into a currency war that would see a race to the bottom for both fiat currencies and play into the narrative that supports both Bitcoin and gold.
Adding to the sense of uncertainty, who will win the U.S. presidential elections in November is less of a concern as to whether there will be a smooth transition of power (if at all).
To be sure, America’s democratic institutions have come under serious pressure by almost four years of the Trump administration, and a failure for a smooth democratic handover, should Biden win the White House, may be the last straw on the camel’s back for American democracy.
And that political uncertainty could have a dramatic effect on the value of the greenback, the belief in U.S. Treasuries.
The global faith in the dollar and its democratic institutions if undermined, could play right into the playbook of gold and Bitcoin investors.
But investors betting on Bitcoin for safety should also note the new entrants into the digital asset markets, for whom “safety” is an unintentional byproduct, as opposed to an articulated goal.
Some of the biggest names in investment banking, including Goldman Sachs and JPMorgan Chase have already thrown dipped their toes in the water when it comes to the nascent digital asset class, but more are crowding by the poolside.
And European banks including Standard Chartered and UBS are also closely monitoring the space, where private banks have already taken the plunge.
Designated driver seemed a little too high on life. (Photo by Jacob Bentzinger on Unsplash)
But history has demonstrated that when investment banks get involved, they almost invariably fuel greater speculation and volatility.
As investment bankers feed off fee income and juice bets with leverage, especially given the highly unregulated state of the digital asset industry, can Bitcoin really serve the role that it’s being touted to serve in portfolios?
Investors Deserve Better
If and when the coronavirus pandemic comes to pass, the demand for a mix of “safe” and “risky” assets needs to be balanced — the options can’t simply be “risky” and “more risky.”
And existing investment paradigms will need to be shifted to redefine portfolio risk as well as what qualifies as a “safe” asset class.
Against this backdrop, the many snake oil salesmen (and women) touting Bitcoin as a cure-all for the pandemic’s economic ails, must be received with more than a pinch of salt.
And while there are plenty of macro factors which threaten our existing assumptions about fiat currency, not least among which has been the relentless money-printing, that doesn’t make it obvious that gold and Bitcoin are the necessary successors to the fiat currency system.
It may be that the global financial system will need to go through a painful period of re-discovery — to reassess what value and risk actually mean to the individual investor and more importantly, whether there’s such a thing as a “safe asset” to even begin with.
For now, the sooner investors learn to embrace that all assets are risky, the easier it will become to make sense of our present age — and that acceptance of risk, may end up becoming the safest asset of all.
We can’t all be hog farmers.