Desperately seeking safety
The story of Hansel and Gretel has been told countless times. It’s a children’s fairy tale, right?
Dude, Hansel and Gretel is downright terrifying.
The siblings overhear their parents talk about taking them out to the forest and abandoning them, due to the famine that has left them unable to feed their children. Knowing this would be the outcome of tomorrow’s “walk in the woods” with their mother, Gretel leaves a trail of breadcrumbs to find her way back home. Alas, the crumbs are eaten by birds, and the abandoned children spend three days lost in the terrifying, dark woods.
Investors saving for their retirement might be feeling the same sense of abandonment these days. Huge and irresponsible government debt levels have forced policymakers and central banks to do everything in their power to keep interest rates low — benefiting borrowers, but punishing savers. Uncertainty and fear rule.
The next chapter sees Hansel and Gretel discover a house that can only be described as too good to be true, made out of cake and candy, with windows made of sugar. A kind woman lives therein, and invites them inside for some food and a warm bed.
Similarly, investors are taking refuge in assets they believe are “safe.” Every week a new announcement seemingly rockets another AI-adjacent tech stock up by at least 25% in a day. Gold and silver are setting new highs daily based on a perceived flight to the safety of precious metals, due to government profligacy. Just as bad, long-term government bonds are also seen as a refuge whenever stocks show the slightest signs of correcting. (If you think it’s an intelligent decision to lend any government money for over 20 years at a fixed 4% interest rate, you don’t know your history.)
Indeed, the stuff that’s performing best lately is reminiscent of Hansel and Gretel’s candy house. Pity the prudent retiree with a portfolio full of utilities, consumer staples, and telecom stocks.
And so, it’s useful to recall the plot twist on which the Grimm fairy tale pivots.
The kindly old lady in the candy house is actually a cannibal witch. Oops - spoiler alert! It takes some clever misdirection for the children to turn the tables and escape with their lives.
Might this story offer clues for investors looking for safety in cryptocurrency, precious metals, or government bonds? Of course! You’ll recall that Hansel fooled the witch into thinking he wasn’t fattened up enough to eat, and Gretel used some trickery to push the old lady into the fire. Fairy tales often punish the greedy and reward the clever. So it is in investing.
An important thing to remember about investing is that price matters, and the more people there are buying up an asset because they perceive it as “safe,” the less safe it becomes. Paradoxically, the safest assets are often the ones that other investors perceive as most risky! The house made of candy looks like a tempting refuge, but it’s important to ask what the hell a candy house is doing in the middle of the woods.
The candy house was a trap. So too, the perceived safety of government bonds. And while the case for using gold and bitcoin as a refuge against currency debasement makes sense, only time will tell if the current rush to own those assets has turned them into the proverbial candy house.