Focus on what is real not what is safe

Monty Pelerin offers some investment advice and then asks his readers what they would suggest. I responded with the following comment:

Gold mining companies may be good in the sense that their assets (NAV–Net Asset Value) are largely trapped under ground and brought to the surface at a slow rate and sold for profit; thus they will still be recovering value from the ground when money has collapsed and gold is needed as a currency. I think the same is true of Canadian oil companies, which have large stores of oil and gas in the ground (i.e., NPV–Net Potential Value)–the Cardium and Swan Hills are largely, e.g., are known quantities exploited by vertical drilling and are now offer new yield through new technologies, i.e., horizontal drilling and multi-fracking. Billions of barrels remain in the ground, and EOR (Enhanced Oil Recovery) methods, such as the injection of natural gas, that companies like Petrobakken (see this post) and Crescent Point are beginning to employ promises to produce as much as 25% more recoverable oil from the fields–this means that these companies could increase their NAV by as much as 5 times, since their current NAV is based on 5% recoverable oil. The US has a lot of oil too, but the Canadian regulatory environment remains for now a far more favourable than in the US. Yet this remains high risk, and my portfolio which consists most of these oil companies and few miners is suffering YTD.

After your last post by Ann Barnhardt, and the news coming from Gerald Celente about how his cash was stolen from his brokerage account, one wonders if any brokerage account is safe any more.

Thus, the operative word in all this is risk. Nothing is safe. Perhaps the best thing is to focus on what is “real” as opposed to what is “safe”. Fiat money is not real, for our estimation of all that is denominated in nominal currency is actually a reification–the assigning of concrete value to an abstraction. What is real? Physical gold & silver, wine kits (see Wine as Currency), spam, beans, unused toilet paper, used aluminium beverage cans. What is reified? Bonds, derivatives, currencies, the value of gold in terms of fiat currency, etc. I have a canned spam collection, Monty Python not withstanding–mind you, I like spam. It has a long shelf life and is good food during times of crisis–that’s why my Korean family from Hawaii used to eat a lot of it–it could survive the sea journey from the mainland and was a staple during WWII.

Wine as currency

During difficult economic times, it is often the case that hoarding becomes illegal.  It is punishable by severe fines. In Weimar Germany a law was even passed against gluttony.  Today, the USA faces a serious threat of hyperinflation.  During hyperinflation, paper money becomes worthless and unhelpful in exchange.  Therefore, people resort to bartering goods and services.  Bartering is a form of commerce that is frowned upon by government because it can’t be taxed.  If I fix your plumbing and you fix my roof in exchange, each of us spending three hours to do it, we’ve exchange services but there is no money,  no paper trail, and no receipt.  Two normally taxable events are reduced to zero tax.  So a doctor treats a lawyer’s son and the lawyer draws up the doctor’s will.  Neither reports the activity to the government and no money passes hands. It is just a friendly transaction in an underground economy.

I believe that hyperinflation is an inevitability in the US, and unfortunately here in Canada, there is going to be high inflation.  In such times, it is useful to build up a store of silver or gold.  But personally, I’ve decided to store up something that I could potentially barter.  I have been making wine from concentrated juice, grape juice and from grapes since 2004.  My wines are pretty good; I’d say the equivalent of at least a $10 CDN per bottle at our local provincially control liquor stores (called the LCBO-the Liquor Control Board of Ontario).  Wine is a controlled substance, and so I am not allowed to sell my product without a license.  But when times are desperate, and money is worth nothing, I figure that I should be able to barter bottles of wine for food or other goods and services that I might need.

So I’ve decided to stock up on wine kits.  These kits are $70 for two at Costco, or $45 for one at my local supplier. Each kit contains concentrated juice that will make 30 bottles. I know that the juice remains usable for at least two years maybe more. Once made into wine, the wine can be aged another two years.  It is not certain how long the wine will last after that.  So my minimum cost base will be $1.17 per bottle plus my labor (which isn’t worth anything). If I buy 10 kits at Costco at a price of $300, I’ll be able to hoard 300 bottles of wine in reserve.  This would give me $3000 worth worth of goods with which to barter, and the product itself has an indefinite shelf life.  I estimate that it would be about the same as buying two one-ounce coins of gold, at a cost of $300 CDN.

The great thing about alcoholic beverages is that they do not lose their “currency” in times of depression.  Indeed, people feel the need to celebrate or to drown their sorrows even more during economic hardship than during the good times.  If the economic crisis never comes to Canada, well I can consume my product or give it away as gifts.   Or if the crisis comes and I am unable to barter the product, my wife and I could consume the wine for the calories and it will stave off starvation for a moment.