In my book, INVESTMENT DILEMMA, I write “Everything starts and ends with philosophy. There is philosophy and the power it creates. Investment is all about philosophy. Philosophy creates investment and everything we do is investment.”
Democracy is the greatest way to achieve investment success for both the individual and for society. The problem is that democracy is not a natural state. It is not static. It is a very volatile and vulnerable philosophy as history shows. It is ultimately a moral negotiation between the citizens and their current government. It is always moving either increasing or decreasing in practice. Keep in mind that a trend can be imperceptible at first and then manifest quickly.
Investing in democracy is paramount. Artificial intelligence, interest rates, valuation measures, alpha, etc. are all important. However, all together are not as important as democracy. Investing is created by democracy, not the other way around. Investing grows or declines following the direction of democracy.
GROWING DEMOCRACY CHARACTERISTICS:
Increase in accurate disclosure and transparency by government and business.
Increase in political and economic participation of all citizens, particularly the middle class.
Increase in free speech, freedom of the press and open media.
Strong stable currency, especially if backed by gold.
Consensus on taxation.
Judicial process focused on justice and civil rights.
Increase in social stability, less surprise events, particularly less negative ones.
Decrease in the information gap between society words and reality.
INVESTMENT IMPLICATIONS:
A growing democracy is a very positive financial ecosystem.
Increase in disclosure and transparency presents more knowledge thereby making risk more easily understood and managed.
Numerous investment opportunities in various asset classes become widely available.
Long term planning becomes clearer.
Strong stable currency offers more opportunities for both domestic and foreign.
Social stability reduces strife allowing more collaboration and partnerships.
Consensus with taxation leads to an increased efficiency of government.
FADING DEMOCRACY CHARACTERISTICS:
Decrease in disclosure and transparency, less accuracy.
Decrease in free speech and freedom of the press, attacks on both.
Increase in the proliferation of propaganda as an information source.
Decrease in the political and economic participation of citizens.
Prominent use of fiat currency.
Dissension on taxation.
Judicial process focused on government and business.
Rising information gap between society words and reality.
Increase in surprise events, mostly negative.
INVESTMENT IMPLICATIONS;
A fading democracy is a dangerous financial ecosystem.
Information becomes more obscure and manipulated. As disclosure and transparency decline, the assessment of risk is much more difficult.
Need for careful selection of asset classes as many will lose value. Bonds become more risky. Equities become more volatile within a declining trend in prices. Funds and annuities become riskier. Due to the political nature of real estate it will become more vulnerable as a productive investment class.
Currency will be used for fiscal manipulation and lose value.
Taxation is contested making planning difficult.
Long term planning is ineffective, even dangerous if based on past history.
Increase in social strife affects the nature of the philosophy of society, more negative surprise events.
There can be a rotation between deflation and inflation with inflation more likely longer term.
Trends will be fleeting and hope disappointing.
Need to prioritize investing with flexibility and liquidity taking advantage of short term opportunities within a longer term objective that recognizes the changes in society.
Some investors may eventually find success in moving assets to another society. For several decades there has been a steady flow of this activity along with Americans giving up their citizenship. If this is a consideration, you need to be aware of what is called the “exit tax”.
America is in a state of flux and it may be hard to determine the long term trend for democracy. We are a resilient society but there are presently ominous signs. These signs are very important and need to be monitored constantly. Once a democracy is in decline it can be very hard to revitalize. There will be forces against it. Remaining investment opportunities will be moved away from the middle class and taken by an oligarchy. Capital controls take the place of democracy. So to protect your family you will need to correctly ascertain the extent and speed of any movement of democracy and adjust your investments accordingly.
Be aware that the investment markets currently appear to be at high risk and could be subject to dramatic volatility. Whether that is part of a decline in democracy is hard to tell. I will try to help you in any case.
For disclosure purposes, my portfolios for the past two years have been heavily invested in cash and gold related stocks, no long term bonds and a select collection of equities.