"Gold and silver is money. Everything else is credit." -JP Morgan
A few words from the real world
I have just secured the mortgage on my new home. In the end, I opted for a loan which tracks 3-month EURIBOR but with the caveat that, for the next five years, the rate of interest cannot exceed 1%. I tell you this little tale, as it is a reflection of my expectations. If I were seriously concerned that the current bout of inflation could bring back the interest regime of the late 1970s, where I paid 19% on my first mortgage, I would have aimed for a 30-year fixed rate mortgage. That was indeed one of the options I had – at the annual cost of about 4% in interest – but I chose the other option, as I don’t think the 3-month EURIBOR rate will be meaningfully higher than 1% five years from now.
I may obviously come to regret this for the rest of my life, but I am quite convinced that the inflation bout anno 2022 is quite different from the one we experienced some 40 years ago. The risk is that my analysis is proven wrong, and that we go from bad to worse as far as inflation is concerned. Therefore, in last month’s Absolute Return Letter, I asked the rhetorical question: are public deficits out of control? I even went one step further and asked: is gold the answer? However, I never provided a proper answer, as I ran out of space, so here we go again.
It is a fact that millions of investors all over the world have a significant share of their wealth, either directly or through their pension savings, tied up in government bonds. Many pension funds are forced by the regulator to invest in high grade bonds, even if the outlook is somewhat suspect, as it is at present.