It’s hard to know where things are headed.  We have a continuation of fear sweeping the planet over the coronavirus. In the United States, most things deemed “non-essential” were shut down by state and local governments. There has been a partial reopening with numerous regulations for businesses to follow (as if they didn’t have enough to follow already).

The federal government (in this case, the Trump administration) has largely taken a federalist position with regard to the lockdowns.  Trump mostly left it up to governors and mayors to impose lockdowns or not impose them.  But, of course, the federal government has done massive damage.  It has helped with the propaganda, and the FDA and CDC have had great impacts on disseminating information (or disinformation) on the virus and in dictating how it should be treated.

Beyond this, the response by the federal government and the central bank (the Federal Reserve) has been monumental in terms of the economy.  The U.S. government was already running an annual deficit in the neighborhood of one trillion dollars.  It has now piled on trillions of more in the matter of a few months.

Meanwhile, the Federal Reserve (the Fed) is monetizing most of this new debt.  Its balance sheet has swelled by about $3 trillion in a few months.  This is unprecedented.

Inflation or Deflation?

There are counteracting forces taking place.  On the one hand, people are generally fearful and trying to save money instead of spending it on unnecessary consumer goods and services.  Money is exchanging hands at a slower pace. This is price deflationary.

On the other hand, you have the government handing out checks with the Fed creating new money like crazy.  This is price inflationary.

The question is, which one will win out.  I don’t have an easy answer because it depends on the actions of millions of people.  Actually, it largely depends on the actions of a handful of people with the Federal Reserve.

We are likely to get a combination of both.  For example, the price of a nice vacation may go down in the next few years to come.  The price of certain luxury goods might come down.  The price for a new car will likely fall in the near term.  Even the price of oil may stay down.  The price of food will likely go up. It is a necessity.

Who knows where real estate will go.  It will probably be mixed.  Commercial real estate is likely to take a major hit and go down.  I would imagine the price for an apartment in Manhattan will go lower.  Housing in the suburbs of major cities could go up.

Even though price changes will vary dramatically for different goods and services, we should expect something (inflation or deflation) to dominate.  Overall prices will go up or down.  I tend to lean in the direction of eventually seeing higher price inflation, but I really don’t know.  Maybe the Fed can continue to inflate to some degree while being stuck in a recession without rising prices.  Japan has had massive deficits and monetary inflation over the last several years without seeing an explosion in price inflation.

I don’t want to bet against the Fed.  At this point, it looks like the Fed will do whatever it takes to create some positive inflation, which it sees as a good thing.  But I can’t completely discount a massive depression where people are fearful of spending anything beyond necessities even in the face of massive monetary inflation.

For this reason, I am hedging my bets.  It is difficult to prepare for both scenarios.  The best you can do is to diversify.

Diversification

I recommend a permanent portfolio, which I partially follow myself.  But I have gone beyond this, as I don’t want to have a lot in stocks these days.  Even with bonds, I don’t see a lot of upside because rates are so low.  They could go negative, but I actually don’t think that would last for a long time if they do.

I like two things that are seemingly contradictory: gold investments and getting rid of debt. On the latter, I like the idea of having liquid money, but if you have debt, then it may be better to get rid of debt that costs interest instead of holding cash that pays virtually no interest.

I had someone ask me why someone should pay down debt if the dollar is going to depreciate. After all, you can pay back the debt later with currency that has lost some of its value.

My first response is that we don’t know for sure if we will see massive price inflation.  We don’t know that the U.S. dollar is going to rapidly depreciate.  It is not a sure thing.

But even if you did know that you would be losing, say, 5 to 10 percent per year in the value of your dollars, it still might make sense to pay off debt.  This would be especially true if your interest rate is high enough.

Even if you have a mortgage or car loan at 4%, why not pay it off?  It is always a good idea to have some money in the bank.  It isn’t a good idea to be living on the edge or have everything tied up in investments.

So if you are going to have money sitting in the bank earning almost zero interest, why not take some of this money and pay down or pay off a loan?  You don’t want to drain all of your money so that you can’t cover an unexpected emergency, but if you can gain cash flow by paying off a loan, this is especially beneficial.

Just to be clear, I am somewhat following my own advice here.  I recently paid a little extra towards my home mortgage, which has a rate just below 4%.  I am thinking about refinancing in the near future, so I can always pull this money back out anyway.  But I do caution putting money into a mortgage and leaving yourself short on liquid funds.  You can’t pull that money back out of the mortgage unless you sell your house or refinance.

On the other hand, I am considering some additional investments to protect against inflation. I think gold mining stocks are going to explode upwards at some point, but I admit this is very speculative. If I buy any more stocks at this point outside of a permanent portfolio, they will be in specific sectors.

Again, I tend to think price inflation will win out over price deflation, but I don’t think you will go wrong by paying off some debt if you have any.  If there is anything you can actually pay off (and not just pay down), then you should especially consider it.  Even if your dollars depreciate by 10% over the next year, it is better to save 4% interest than have it sit in the bank.

If this is unclear, then think about this: You will only get wealthy by collecting interest, not paying interest.  This is one of my favorite lines.  It is so simple, yet so easily forgotten or ignored.

Sure, people have gotten wealthy by taking out massive loans to buy real estate or start a business. But even here, they get wealthy because they collect more in interest, or rent, or dividends, or profits than they pay on the loans.

At this time, I am a strong advocate of saving cash, paying down debt, and hedging against inflation, particularly with gold investments.  If you have savings and are not sure what to do with it, take half of your money and buy gold and take the other half and save it or pay down debt.  I don’t think you will regret this strategy down the line.