Investing Pioneer – 1/30/2023 – 1:28 PM EST
As we enter the approaching economic storm, discussing the
following concept I think is timely.
The concept is wealth destruction. Take FTX. It went from
the market valuing the assets at billions of dollars to a dissolution much
faster than it was created. When value is destroyed, there may be a relative
wealth transfer. This is mostly of concern to the economy when artificial
assets and wealth are used to purchase other assets and goods. If that suddenly
disappears, it can have a deflationary effect on the system, meaning those who
have other assets, and did not hold the artificially inflated one, are
technically wealthier, because wealth is relative.
This idea may be significant going forward, in the context
of a debt crisis, inflicting something worse than the 2008 financial
crisis.
To further elucidate this concept of relative wealth, let’s
travel back to the great depression. In Ron Chernow’s book, the House of
Morgan, he states, “Astute investors who bought their bonds became the future
owners of Wall Street”. Certainly, in such a deflationary collapse, those who
bought bonds fared very well. In an inflationary collapse, it is usually gold
and silver that allows the investor to take advantage of the concept of wealth
being relative. How to take advantage? Purchasing undervalued assets with your
“bonds” or “gold”, which allowed bond holders to become the “future owners of Wall
Street”.
It is said that the Union League club, following the crash
of 1929 and the continued deterioration in the market until its deepest trough
in 1932, had a room wallpapered with stock certificates (Chernow, House of
Morgan). Those who managed to retain their assets from beforehand were
inherently much wealthier. Indeed, the price of many of those stock
certificates plastered to the walls eventually rose again, leading eager hands
to pry off the certificates from the walls, a message to future investors that
if you manage to escape a crash mostly unscathed, use the opportunity to buy before
the economy and financial system normalizes.
