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Of Generals and Central Bankers

Most of you have by now heard General Milley, the chairman of the Joint Chiefs of Staff, insisting that “there was nothing, that I or anybody else saw that indicated a collapse of the [Afghan] army and government in eleven days.”

Really? When the general says ‘I or anybody else’, I imagine he thinks of the people inside the U.S. Defense and State Departments, because anyone outside of those self- absorbed and myopic structures has long ago come to realize that America’s track record on the regime building front has been dismal for decades. Unlike the general’s resources, the people we talk to predicted what has happened with great accuracy—the complete collapse of the Afghan army, the effortless takeover by the Taliban of billions of dollars of military equipment, and of course the flight of the flamboyant American proxy, President Ghani to a U.S.-friendly nation, reportedly with a booty of US$169 million in gold and cash.

Sadly, the delusional state of U.S. policy thinkers is not confined to those contemplating military strategy. Similarly harmful mind-games seem to have invaded the brains of the those running monetary policy. And here is something that’s even worse than America’s military and monetary stratagems: the absurd willingness of other Western nations to go along with them. It’s hard for me to imagine that players like Germany, France or Canada will be left with any enthusiasm for a Washington-led NATO—not after the many embarrassments of recent years. But on that score, I’ve been wrong for some time. I’ve been equally off course when it comes to the folly of central banks who’ve followed the U.S. Federal Reserve’s manipulative ways step by step, ever since Chairman Greenspan initiated them and his successors Bernanke, Yellen and Powell exponentially expanded them (see chart on page 2, tracing U.S. money supply).

But such is the sway of the post-war international order, in which the U.S. retains effective control of a great many supra-national organizations and policy platforms. For many participating nations, the status quo is by now utterly unappetizing, but the lack of acceptable alternatives is equally frustrating. Escape is not only logistically difficult, but it can also prove very costly. Which is why a transition to a more enlightened approach may be years in the future and will probably not occur until the current, destructive path will take us to comprehensive social and economic failure. Let’s consider that, for a decade or more, growth has been possible only with ongoing massive stimulus, while wealth and income disparities have exploded. These are clear indications that we’re headed towards catastrophe.

A Lack of Safe Havens

So, as we careen toward the inevitable, where are the safe haven investments? Does a cash reserve any longer qualify? If so, only as a very temporary, albeit convenient parking spot. Some of the younger market participants point toward crypto-currencies, but anything that routinely fluctuates to the tune of 10% a week is too speculative to qualify for shelter status. Meanwhile, the bond market, with real yields

deeply in the negative and issuers more indebted than ever, remains the most blatant example of overvaluation.

Equities, as well, are in seriously overvalued territory, while margin debt is at alarming levels. However, prudent stock selection can considerably mitigate risks, which is why we continue to focus on companies with solid cash flow that, ideally, have an attractive and sustainable dividend policy. In other words, avoid index proxies and focus on the merits of individual businesses, not the broad market.

When looking at all asset classes, we also believe that investments that represent actual ownership, and not just someone else’s liability, will increasingly be favoured. The lesson here: don’t be a creditor—instead, be an owner.

In terms of portfolio mix, we continue to be ultra-cautious. Our largest current bet is 50% in equities. Given that we are approaching a period of historical weakness, we have started trimming back that allocation, whenever the market pushes it above 50%. We’re also holding 15% in gold-related assets, of which the vast majority is in physical bullion. Finally, we remain committed to our whopping cash reserve, which amounts to 35%.

The risk to our defensive posture is that we will underperform if financial markets continue to rise. Is that a possibility? Right now, anything is possible. The Covid dynamic is utterly unpredictable, as is the policy of the world’s key central banks, which have managed to box themselves into a seemingly inextricable position.

Given these circumstances, we think it’s best to err on the side of caution.

Best wishes!