The Paper Armageddon Portfolio

188
Thu, Aug 1, 2013 - 11:42am

An interactive exercise in tangible asset investing

In introducing “The World Turned Upside Down” blog here at TFMR, I mentioned that one of my goals was to explore various means of preparing for The End of the Great Keynsian Experiment. If you are new to TFMetalsReport.com, we use the acronym TEOTGKE as shorthand for this phrase, and by it we are referring to a particular set of assumptions about economics and the world around us. Though everyone here likely has a different specific vision of what the future holds (and honest disagreement abounds on this topic), TEOTGKE essentially refers to the fact that 1. Forty plus years of easy money policy has resulted in massive mal-investment on a civilizational scale, 2. These Keynsian policies have facilitated the creation of enormous debts at the personal, corporate, state, and sovereign levels, and 3. The resulting economic imbalances (and the pace of money creation needed to support these imbalances, commonly referred to as ‘keeping the Ponzi going’) are ultimately unsustainable. Western Central Banks, in short, will have no choice but to continually increase the supply of money (to maintain the present system) at an increasing rate until at some point that paper money will be either significantly devalued or potentially worthless. Most people at TFMR, at the core of it, are trying to protect themselves from the harsh consequences of such a scenario. If you disagree wholeheartedly with the broad outline above, then this exercise is probably not going to be your cup of tea. But if you think that even a portion of the above holds some validity, then play along for a minute- you may find this interesting!

For the purposes of this exercise, let’s say that paper money continues to lose value at an increasing rate as time goes on BUT the entire civilization doesn’t completely degenerate into a Mad Max scenario. Presumably, everyone reading this would like to preserve as much of their current wealth as possible through the uncertainties of such a scenario- and many invest in physical gold and silver for precisely this reason. However, you would be hard-pressed to find a single big-name advocate of PM investing who advises that every single cent you own should be invested in physical PM’s. Rather, what we hear is that they recommend gold and silver as a part of a ‘diversified investment strategy’. While opinions differ as to how much of your wealth should be in physical gold and silver, opinion is virtually unanimous that going all-in is unwise. So my question here is, simply, what else should we invest in and how can we do it?

This essay is an attempt to generate an interactive discussion on this topic- specifically, to explore the question if you believe that paper money is going to be harshly devalued BUT that civilization will remain roughly intact, what are your best investing options? How do you position yourself to achieve a realistic diversification of your assets, given this particular vision of a likely future? I am going to outline some suggestions and attempt to develop what I jokingly refer to as The Paper Armageddon Portfolio, and then see what all of you make of it and what your suggestions/additions would be. Please note that I am not a financial advisor, nor should this be mistaken for investing advice- it is merely a starting point for discussion to generate investing ideas amongst a group of like-minded individuals. After a day or two, I will take some of the more popular ideas from the comments and post a revised Paper Armageddon Portfolio in the comments section of this essay, taking into account the new information, stocks, ETFs, and ideas that you generate- an interactive investing discussion! So let’s get started.

Premises:

I am not including PM’s or miners in this portfolio, figuring that people here already understand these areas and have them covered. At the core of the Paper Armageddon Portfolio is the notion that you will have a better chance of preserving your wealth through a fiat-devaluation scenario if a portion of your wealth is invested in companies that 1. hold tangible assets, 2. produce actual products that are necessary even in times of hardship, or 3. are companies positioned to profit or gain market share during a period of fiat devaluation. After all, given the scenario we are looking at, traditional fixed income investments like corporate bonds, Treasuries, or CDs would be disastrous. Investing in companies whose value is essentially “paper-only” like banks, trading houses, or financial services groups, would likewise be potentially problematic. Companies providing non-essential goods or services like entertainment companies or high-end clothing chains would also seem to be a poor bet. So given these constraints, what is out there for us to diversify into?

I would suggest first and foremost, we look at what other serious, big-time players are doing… and these days, it seems nobody is more serious or big-time than the Chinese. That China has imported thousands of tons of gold over the last few years is well-known within the PM community, but look at what else they are doing: Fellow Turdite John Galt posted the following fascinating observation in the comments of my post last week- check out what our friend John had to say:

My wife and I live on some rural property north of Toronto. We are surrounded by farmland, and on the surface it looks like most of these farms are multigenerational farms that have been in the same families since before WW1.

Most locals have no interest in farming, because it is hard work for low pay. These folks prefer better paying white collar or government jobs, and will commute to the city for the better pay if they have to. This unwillingness to get one's hands dirty probably explains why there are large numbers of seasonal workers from Jamaica and Mexico coming up every year to work these farms, because no one else around here will do it.

But the most interesting development is the one which is not as readily seen, namely the buying spree going on by serious money coming out of China. Huge tracts of farmland around here are being bought by the Chinese. In many cases older farmers don't have kids interested in taking over the farm, so there is little choice but to sell when it comes time to retire. China is clearly making strategic investments for the long term. Yes there is evidence they are seriously stacking physical gold and shifting away from paper. But around here I am seeing evidence that China is also seriously stacking farmland as well. Not just the odd farm here and there, but huge blocks of land of what were once multiple farms. https://www.tfmetalsreport.com/comment/215886#comment-215886

To this, I would add that China is known to be buying mines across the world, developing its already formidable (largest in the world) domestic heavy industry producing steel, aluminum, concrete, etc… Add this to the massive gold imports, farmland investments, and the picture is clear: China is stacking tangible and productive assets across multiple asset classes. They have come up with their own Paper Armageddon Portfolio, and are situating their entire economy for the End of the Great (Western) Keynsian Experiment. Maybe we should, too! Let’s explore what that might look like:

Asset Class 1: Productive Farmland

This is a suggestion heard quite often in PM investing circles, and seems to be a very good idea. It presents the average investor with a problem, however: how many of us can run out and buy a 1.5 million dollar producing farm in the name of “asset diversification”? How many of us could profitably run such an enterprise even if we could afford it? Probably not many. Interestingly, when I researched this I really didn’t find many good, pure “Agricultural Staple Farmland ETFs” or ways that the average investor could get good exposure to this through a commonly used investment vehicle… there may be an opportunity here for enterprising individuals to fill a needed market niche by creating a targeted ETF or Trust, in other words. Nonetheless, the following made my list of ways we could get exposure in this area (please add any more you find in the comments):

Cresud Sociedad (Ticker: CRESY) – A simple way to invest in global farmland is to buy shares of Cresud Sociedad. CRESY is based in Buenos Aires, Argentina and owns and operates 26 large farms covering over 1.25 million acres scattered across Latin America.

AgCapita: Jim Rogers is an advisor to this fund, which is a private equity fund owning farmland in Canada. The investor prospectus can be found here: https://www.farmlandinvestmentpartnership.com/investor-centre

Sprott Resource Corp (Ticker: SCPZF,PK) is not a pure farmland play, but is a fund which is diversified between PMs, Energy, and Agriculture. They own more than a million acres of prime Canadian farmland, however, which is why they made this list. Their website says “Sprott Resource Corp was founded in 2007 to take advantage of a future in which management believes trust in paper currencies will diminish. The idea is to invest in natural resources, including precious metals, energy and agriculture, which represent tangible value from which investors will benefit as necessities become more precious.” Sounds good to me!

Gladstone Farmland Corporation (ticker: LAND): Pure Farmland ETF but not agricultural staple farms, this fund owns mainly fruit and nut farms in California and Florida. The good news is that it sports a whopping 8.9% dividend. Holy schnikees!

Asset Class 2: Timber and Grazing Land

The idea with these plays would be twofold: First, to own companies where a big percentage of their book value is in a tangible asset that won’t go away- acres of land. Second, the goal would be to own companies who, if times are good and the economy is strong, will perform well and pay a decent dividend.

Plum Creek Timber Co. (ticker symbol PCL): Plum Creek is the largest private landowner in the U.S. as it maintains its status as one of the biggest and best in the industry. A REIT, PCL’s products include a wide variety of lumber assets like plywood and wood chips. Plum Creek is financed by a heavy debt load (which might not be a bad thing in a currency devaluation scenario). It currently pays a 3.8% dividend yield

Potlatch Corporation (ticker symbol PCH ) is a real estate investment trust, or REIT, with approximately 1.6 million acres of timberlands in Arkansas, Idaho, Minnesota and Wisconsin. Pays a 2.7% dividend.

The Texas Pacific Land Trust (Ticker symbol TPL). This is an interesting combo-play that includes land ownership and rental for grazing, land for oil and gas leasing, plus it’s located in a pro-growth political environment. Created in 1888 after the bankruptcy of the Texas and Pacific Railway Company, the Trust is one of the largest landowners in Texas with just under 1 million acres located in twenty different counties. TPL generates revenue from land sales, grazing leases, easements, as well as a perpetual oil and gas royalty interest in some 387,000 acres. The market cap divided by the total acres owned works out to 285$ per acre… interesting. I think 285$ is a pretty sweet price to own an acre of Texas.

Asset Class 3: Commodities / Energy

It would seem that the end of the petrodollar would be advantageous for companies producing energy and/or owning the rights to energy producing lands domestically in the US. Additionally, the two trusts I have selected here both pay an extremely high dividend, which is a nice hedge today (given current economic conditions) for much of the rest of the portfolio, which is set up to take advantage of future, hypothesized conditions. If these do not materialize, the dividends here are a major bonus today. Finally, a Commodity Index Fund is one way to take advantage of the broad trend of currency debasement, an environment within which tangible products will presumably keep pace with or potentially even exceed the rate of inflation.

DB Commodity Index (Ticker: DBC). PM investor Jim Rodgers owns this ETF. The fund tracks an entire basket of agricultural commodities including corn, soybeans, wheat, cotton, sugar, coffee, cattle and pigs.

Whiting USA Trust II (Ticker: WHZ ) Spin-off of Whiting Petroleum, owns interest in 1,300 gross producing oil and natural gas wells in the Rocky Mountain, Permian Basin, Gulf Coast and Mid-Continent regions. Also chosen because it pays a monster dividend yield of 19.1%

SandRidge Mississippian Trust II ( Ticker: SDR ) Owns oil and natural gas wells throughout Oklahoma, Kansas, and Mississippi and includes overriding royalty interest in 13 wells currently awaiting completion and 206 horizontal development wells to be drilled in the Mississippian formation (an area that spans across approximately 81,200 gross acres). Another monster dividend of 18.6%

Asset Class 4: Railroads

Railroads are probably not the first companies that come to mind in this exercise, and a strong argument could be made that since these are dependent on the health of the overall economy for traffic, they would be a poor play in this type of scenario. However, remember that one of our goals for the Paper Armageddon Portfolio is to invest in companies or industries that are positioned to gain long-term market share in a currency devaluation scenario. So think this through with me: a process of currency devaluation means the end of the petrodollar. This will make oil many times more expensive, and most of the US transportation system is reliant on our trucking fleet, which in turn is reliant on cheap gas. If we see extremely expensive oil, then transport efficiency instantly becomes leveraged profitability. Trucks use 4-6 times more fuel to haul the same weight of freight than trains do, or put another way, in an environment of extremely high gas prices, shipping by train would incur just 1/4th to 1/6th the fuel costs per ton per mile compared to trucks. So the idea here is that 1. Things will still need to be shipped, and 2. Railroads are positioned to capture a great deal of market share from trucking if the petrodollar collapses.

Canadian Pacific (Ticker symbol CP): A top-flight railroad, well run. Also gives some Canadian exposure. A significant part of its car-load comes from agricultural products from Canada’s fertile interior farmland, so one would expect this traffic would continue even during hard times. Dividend is 1.1%

Genesee & Wyoming (ticker symbol GWR): A sentimental favorite of mine since I’ve always like short-lines, this is a very well-run company. In some ways, its ownership of short lines in rural/agricultural areas would position it to take even more local / truck traffic than the big boys if gas becomes expensive. https://gwrr.com/about_us

Norfolk Southern (Ticker symbol NSC) End of the petrodollar might means an increase in the use of other forms of energy, and Norfolk Southern hauls a whole bunch of coal from Appalachia to the east coast… another interesting positioning play. Dividend 2.8%

So there we have it: a cross-section of investments in farmland, timberland, grazing acreage, railroads, commodities, and energy producers. Average dividend yield of all these combined is 4.7% at present (not too shabby), and hopefully positioned to protect wealth in a fiat devaluation scenario while diversifying an overall portfolio of investments. Caveats obviously apply, however. Any major stock market turmoil would take these down with the crowd, so a long-term investing mindset is key (and if you think a major correction in stocks is likely, then that would be known as a “buying opportunity”, wouldn’t it?) Additionally, any black swan event that affected data storage, the grid, or the internet would be problematic, as these are paper claims on real businesses. One might wish to have actual stock certificates in your possession for long-term investing in these. Finally, government perfidy and nationalization is always a possibility during difficult times, so that needs to be taken into account as well. However, as a portion of an overall investment strategy this portfolio, or the ideas behind it, may be worth doing your own research on.

Now for the interesting part- what would YOU like to see on this list? Are there entire asset classes that would do well in the scenario we have outlined here? If so, please add them in the comments section and make a case for them. Any particular stocks or ETF’s within the classes I have listed that you like? Please add them in the comments and note why you favor them.

I will collect the suggestions and in a day or two, publish a revised Paper Armageddon Portfolio in the comments section of this thread. Stay frosty out there, and happy hunting my friends!

Farmland: CRESY, AgCapita, SCPZF, LAND

Timber and Grazing: TPL, PCH, PCL

Commodities/Energy: DBC, WHZ, SDR

Railroads: CP, GWR, NSC

About the Author

  188 Comments

Jakarta Expat
Aug 1, 2013 - 11:48am

Pining

Good article but do you believe it, unfortunately I have lost faith in the US as it is being run by a totally corrupt system overseen by corrupt politicians who only care about personal greed.

agNau
Aug 1, 2013 - 11:49am
Willy
Aug 1, 2013 - 11:56am

Mad House

Does anyone find after following the metals market over the past couple of years (especially in 2013) you're feeling like you are beginning to loose your mind? It's like some sick joke and we are trapped in the Truman Show. I think if gold and silver get bombed tomorrow after the BLSBS number I will officially have to check into the loonie bin???

Nana
Aug 1, 2013 - 11:57am

Support Your Local Farmers

Or grow your own food. Starve the beast before it starves you.......

achmachat Willy
Aug 1, 2013 - 11:58am

check into the loonie bin...

...to protect yourself from the rest of the world that has gone completely bonkers?

rtabit
Aug 1, 2013 - 11:59am

Asset Allocation Strategies

Saw this yesterday, I thought was interesting.

https://www.mebanefaber.com/2013/07/31/asset-allocation-strategies-2/

Below are three charts. The first is returns vs. volatility, the second is returns vs. maximum drawdown, and the third is returns vs. Sharpe Ratio. As you can see, they all performed pretty similarly. People spend countless hours refining their beta allocation, but for buy and hold, these allocations were all within 200 basis points of each other! A rule of thumb we talked about in our book is that over the long term, Sharpe Ratios cluster around 0.2 for asset classes, and 0.4 – 0.6 for asset allocations. You need to be tactical or active to get above that.
lakedweller2
Aug 1, 2013 - 12:03pm

Fertilizer, Energy

Despite the craziness going on with the "potash cartel", there is going to be more people and less food in the future. All that farmland the Chinese are buying is going to need some fertilizer unless the US wipes out various populations with indiscriminate unsanctioned drone hits and triggers nuclear annihilation.

Maybe some oil or pipelines or natural gas or wind or solar or "rocks and flint".

One clothing store for Central Bankers.

Owtovit
Aug 1, 2013 - 12:04pm

Rare earth metals and fertiliser

How about rare earth metals ETF ticker REMX and any fertiliser potash companies to feed the farmland

Eric Original
Aug 1, 2013 - 12:10pm

Check out GUNR

I first stumbled onto this one a few weeks ago. It immediately struck me as either a "Peak Commodity Doomer Fund" or a "Dollar Debacle Fund". Whichever strikes your fancy. It's on my watch list.

It has upstream assets in Energy, Agriculture, Mining, Water, and Timber.

FlexShares® Morningstar Global Upstream Natural Resources Index ETF

¤
Aug 1, 2013 - 12:10pm

Thanks Pining

I appreciate the effort, insight and food for thought you've laid out :-)

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