James Saft, Reuters Columnist
“These assets effectively act as a money supply index tracker,” said Roseman, who for 16 years was a money manager and economist at Moore Capital, run by the legendary Louis Bacon. “If the authorities are going to bail themselves out, money supply will expand. Every single time governments have been here, this is exactly what they have done.”
Roseman, who now manages his own money, has published a book titled Silver, Wine, Art and Gold: Alternative Assets for the Coming Decade.
His argument, in short, is that a combination of excessive debt, aging populations, resource scarcity and financial repression will bring on extremely poor performance in equities and bonds.
Equities will suffer, and bonds, the traditional safe haven, will hugely underperform as policymakers engineer inflation and seek to trap assets as sources of government funding.
Rather than death and taxes, then, investors will come to fear money printing and financial repression, which will be used in combination to help inflate away excessive debts and corral funds for hard-hit governments.
Under this scenario, what is sure to go up is the money supply, as central banks print and print, either to fund their governments or to ease the real impact of high debt by stoking inflation.
Roseman’s argument is that SWAG assets can act almost like alternative currencies, and, unlike fiat currencies, cannot have their supply increased at the press of a button.
You can’t magic up more gold or 10 new Picassos. They also, by definition, carry no debt, making their risk profile hugely different from most other assets, implying a lack of correlation and added protection. In addition, SWAG are not denominated in any particular currency, meaning you are not hostage to a particular monetary or fiscal policy, or even to natural disasters or wars.
It’s worth noting that the range of SWAG-like assets extends beyond the big four, to include in varying degrees things like palladium and stamps.
THE SWAG FOUR
SILVER - A hard currency instrument like gold, but with more other industrial uses. Up almost 500 percent over a decade. Useful as a diversifier from gold. Roseman is optimistic about industrial demand. That said, this makes it a less pure play on the theme of a rising money supply and inflation.
WINE – The most investible fine wines have done well over the past decade and studies indicate they have low correlation with traditional assets. Finite supply of the great investment wines, portability and relatively low storage costs are an advantage. There also has been huge growth of demand from prestige-oriented drinkers in China and other emerging markets.
However, this is a double edged sword: while Chateau Lafitte, the wine to serve to impress your regional party boss in China, has surged in price, so has fraud. By some estimates the amount of “Lafitte” drunk in China last year exceeded total yearly production by almost 10 times. Wine investing requires storage charges, and wine funds are often quite expensive. Due diligence and caution are key in selecting advisers and storage places, as instances of fraud and overcharging are far from unknown.
ART – The oddest of the group, and the one of which Roseman seems most fond. What is art? Hard to say, but whatever it is it seems to go up satisfyingly in price, with sections of the market sky-rocketing even during the tough times in recent years. While I have concerns that this is a market highly dependent on the 1 percent, and thus vulnerable to falls if their share of income falls, Roseman believes that the growth of the very wealthy in emerging markets will drive future price growth.
There are collective investment vehicles specializing in art, but once again charges will tend to be high and due diligence is incredibly important. Needless to say, fraud is a real risk.
GOLD – the classic hedge against having one’s pocket picked by money printing and inflation. Supply is limited and new sources take time to come on line. Gold has performed fantastically the past decade – up more than 400 percent - and has become far more mainstream, attracting institutional investors. Carrying costs can be low, and, thankfully, no need to pay an investment manager.
THEORY AND PRACTICE
Roseman argues that for high net worth investors, people with perhaps $5 million to $10 million in investible assets, a weighting of 20 percent in SWAG would be appropriate. He urges caution and due diligence.
I have a lot of sympathy with the underlying concerns driving a SWAG allocation, but I do worry about costs, fraud and the potential that the same events that are driving money printing and financial repression could have an impact on wine and art values. Roseman, argues, convincingly, that actually, compared with many financial assets, SWAG tends to be simple and robust.
In some ways the decision boils down to the classic dilemma facing investors considering paying high fees – the promise of truly uncorrelated and defensive assets against the sure thing of higher costs to get a shot at the good outcome. If Roseman is right, my concerns about costs will look small-minded. We agree about due diligence: if huge amounts of cash flow into art and wine, you can bet there will be a rising wave of fraud.
A bit of prudence can go a long way, both in terms of protecting investors through due diligence and in the genuine hedge value of SWAG assets during an all-too-believable scenario of financial repression and rampant money printing.