Grant Williams: The Rules Of Investing Have Just Changed

For decades now, interest rates have plummeted, bringing the cost of borrowing to all-time lows.

Over the same period, the digital revolution has brought down operating costs faster than at any time in human history.

This secular deflation in the financing and operation of businesses has been one of the largest defining economic trends of the past half century.

But it has come to an end, predicts Grant Williams, publisher of the Things That Make You Go Hmmm… newsletter and co-founder of Real Vision.

The events of 2020 have dramatically accelerated a reversal from the past decades of deflation into a new future of secular inflation. And that means the rules of investing have just changed, as the playbooks for those two environments are extremely different.

Not only will many of today’s investors be caught flat-footed by this reversal, but so will our financial “experts” warns Grant. It has been so long since we’ve experienced sustained inflation that very few fund managers, traders and stock brokers are left who have the expertise to know how to handle it.

Which is why now, more than ever, is the time to partner with a financial advisor who understands the risks in play, can craft an appropriate portfolio strategy for you given your needs, and apply sound risk management protection where appropriate:

Anyone interested in scheduling a free consultation and portfolio review with Mike Preston and John Llodra and their team at New Harbor Financial can do so by clicking here.

And if you’re one of the many readers brand new to Peak Prosperity over the past few months, we strongly urge you get your financial situation in order in parallel with your ongoing physical coronavirus preparations.

We recommend you do so in partnership with a professional financial advisor who understands the macro risks to the market that we discuss on this website. If you’ve already got one, great.

But if not, consider talking to the team at New Harbor. We’ve set up this ‘free consultation’ relationship with them to help folks exactly like you.


This is a companion discussion topic for the original entry at

First, great interview. Grant is one those very few commentators who usually drags me kicking and screaming inexorably towards his thesis.
I’m not so sure here. For example, at 15:50, Grant brings up the elephant in the room that haunts everyone thinking about inflation: the late 1970s-early 1980s US double-digit inflation. However, IMO, he gets this wrong like most commentators today.
The 1980s inflation narrative is that government spending drove us off the gold standard and created the massive inflation, so the Fed hero Paul Volcker road to the rescue with high interest rates. Unfortunately, this narrative is simply not true as Blinder explained in 1982, showing that Volckler misread the cause of inflation which was actually on the demand side due to massive baby boom consumption that the Fed did not provide enough liquidity to grow families, driving production overseas:
1. At any given moment, there is a normal, or “baseline,” inflation rate toward which the actual inflation rate tends to gravitate. (This rate is also referred to as the “underlying,” or “core,” rate of inflation.) This baseline rate is determined by fundamental economic forces, basically as the difference between the growth rates of aggregate demand and aggregate supply.
2. On the demand side, the weight of the historical evidence is that the growth rate of money is the dominant factor in the long run. It is in this very limited sense that Milton Friedman’s famous dictum “Inflation is always and everywhere a monetary phenomenon” has some validity.However, other factors like fiscal policy also influence the growth rate of aggregate demand. On the supply side, the fundamental long-run force is the trend rate of change of productivity, though occasional abrupt restrictions in aggregate supply (so-called supply shocks) can dominate the supply picture over short periods.
3. For empirical purposes, the baseline rate of inflation can be measured either by the rate of change of wages minus the trend rate of change of productivity or by the rate of change of prices exclusive of food prices, energy prices, and mortgage interest rates. The latter measure of baseline inflation is relied upon here.
4. The observed rate of inflation can deviate markedly from the base-line rate over short periods. The major reasons for such deviations are obvious from the empirical definition of the baseline rate. Rapid increases in food or energy prices, or run-ups in mortgage interest rates,can push inflation above the baseline rate for a while. Conversely, unusual moderation or declines in food or energy prices, or a serious recession, can pull inflation below the baseline rate. There are other special one-shot factors as well. For example, the Nixon price controls played a major role in the 1973-75 episode. Despite the cacophony of complaints about “ruinous” budget deficits and “excessive” monetary growth, the headline-grabbing double-digit inflations of 1974 and 1979-80 were mainly of the special-factor variety. Only a minor fraction of each inflationary acceleration can be attributed to changes in the baseline rate; the rest came from supply shocks from the food and energy sectors, from mortgage interest rates, and from the end of price controls—a whole host of special one-shot factors.
Bottom line: I’m not so sure inflation has much room to move until the Fed really starts dropping cash. Yes, I do think this will happen eventually via MMT, but not anytime soon with a divided government. Currently we face a depressed economy and a lot of old people and very few kids (birth rates are lowest ever due to student loan debt) and thus very low pressure for inflation. Rather, I think we will just wallow around for four more years offering pittance payments to the proles while rich men get richer. I sure hope I’m wrong.

Grant mentioned confidence as being a key to where we go from here. How do you measure confidence? If you use the stock market as a measuring tool, as the Elliott Wavers do, then confidence would be near an all time high. If you look at what is happening across the political and social spectrum, you cannot ignore the very high level of polarization between political parties, between people, between countries and between states within countries. I think the mood we see at the street level gives us a better idea of where we are going. The stock market has become so distorted by the actions of central bankers who are acting out of desperation so you could argue that the market is driven upwards by fear rather than the traditional animal spirits.
I think Grant is offering very sensible advice in that it is better not to be too fixed on any particular outcome but to have a plan B. However, I don’t think that his shift towards an inflationary outlook is in any way an unusual stance. As he points out, inflation has been heading south since the early 1980s to recent historical lows. Throughout history there have been economic cycles so it is hardly an earth shattering idea to expect that downward slope to turn round and for inflation to head north for a decade or two. If the bond play is over it implies that bonds will be sold off and the greatest motivator for that is the fear of inflation. What I don’t think is being taken into account is that asset prices (including precious metals) are already at humungous price levels. If bond prices fall then rates rise and that will surely have a devastating effect on stock markets. That is not true of commodities like base metals, fibre and food.
If you measure inflation by money supply, then we are already in a highly inflated environment. We only have to look at asset prices to see that. We also know what happens when you get a downward blip in money supply - look back to the global financial crisis to see what a small blip can do.
Grant made another important point - the politicians will never admit their contribution to these huge financial problems but the pitchforks are appearing on the streets. They will have no choice but to go after the rich. In a sense they are already doing it with the move on the tech titans. As time goes on and the pressure of the enormous deficits presses down on governments and central bankers, the current blasé attitude of confidence that creating trillions out of thin air will work out in the end will almost certainly be replaced by a failure of confidence. I think the politicians will force the rich, one way or another, to put their wealth back into circulation again. The usual method is to tax them. It would surely make more sense than trying to force ordinary people and retirees (who usually depend on fixed interest) to put their modest savings at risk in these stratospheric share markets.
I agree with Mike Preston that there will be better buying than there is right now.

I agree with Mike Preston that there will be better buying than there is right now.
The problem with this line of reasoning? There simply hasn't been "good buying" in a decade. Of course there will be better buying in a future bear market. The problem: when? After a guy is retired and has missed all the bull market? It has now been ten years of straight-up bull. Everything is overvalued. Basically, it's a hidden inflation driving up all prices. So I don't see how one can sit around waiting it out. In what? Cash? Gold? That's about the only other option I can see, and sadly, gold has no yield, and cash loses money daily. And if Mike Green's "passive" investing theory is correct, this 10 year bull market could march on for another 10 or 20 years, punctuated by possible wild swings that are hard to time or get in on before they spike higher. Prechter's market timing just won't work in a passive investing scenario as people are just mindlessly putting their money into index funds and don't really know what they are doing. Thus they are not responsive to market forces while holding a "stocks for the long run" lobotomy.

I’m pretty sure this “” bull market “” will not go on for another 20 years. Not without Venezuela type inflation anyways.
Im happy with staying in PMs & mining, productive farmland, and cash.
Jeff Gundlach talked about a simple allocation strategy on Real Vision - the permanent portfolio (starts at 47’30”):
25% stocks
25% high quality bonds
25% gold
25% cash
Gundlach muses that with low yields on bonds, you might as well go 50% cash.

This is a fair solution…but 50% cash & bonds in a ZIRP is quite heavy for these times methinks…

Another alternative is Chris Cole’s Dragon portfolio.
“If you could build a portfolio that would last a century, how would you do it?
In “The Allegory of the Hawk and Serpent,” hedge fund manager Chris Cole set out to answer this question by taking a look at the history of the economic cycles the stock market goes through.
So far, we’ve seen four: Secular Decline, Secular Rebirth, Secular Stagnation and Secular Boom.
The financial historian wanted to construct a Dragon portfolio that would be capable of surviving any type of economic cycle and it would have the ability to protect your money.But in order for you to successfully make a portfolio that thrives in times of growth (rising asset prices of stocks, bonds and real estate) and times of decline (gold, long volatility and trend following), you have to understand the history of the Hawk and the Serpent.”
George Gammon discussed how to build your own version of it here:
The idea is this portfolio mix generates positive returns in all four categories of markets, and is the optimal allocation over the past 100+ years.
Investing this way is almost buy-and-forget, letting the market do its thing and not having to worry about returns. But if we are at a transition point, where stocks are ahead far lower in the near future and commodities and gold much higher, then you could take on a bit more risk by investing more heavily in those areas.
The really big picture is the traditional 60/40 is not optimal except for certain market conditions, which it looks like we are exiting.

A problem with Dragon is its 1/5 portfolio in “volatility” which is not a real investment instrument you and I invest in (the VIX long-term loses money, it’s a vol trade meant for buy/sell activity, and NOT a “invest and forget” strategy).
You can see this in the way Cox builds this theoretical dragon portfolio is merely to go back in time to right “after” the great depression, then invest in things that retail investors couldn’t buy during those times (such as gold and volatility) and then say, hey, if this was possible back then, they could have made a fortune! Not applicable to today for a retail investor; apples and oranges.