The tale of a Russian man attempting to buy bread for his family is age old and quite famous. After the fall of the iron curtain, Russia was deep in debt and the value of the ruble fell sharply as inflation ran rampant and unchecked. A single loaf of bread would cost millions of ruples. It was on this day we find our Russia friend taking a wheelbarrow overflowing with near worthless money to the bakery to buy food for his hungry family. He parks his wheel barrel of cash in front of the store, so that he may shop. When he walks outside to collect his money to pay his bill he finds his ruble's in large pile on the dirt, someone had stolen his wheel barrel. This story illustrates that goods, not money hold intrinsic value.
Given the recent shifts in fiscal and monetary policy, there is growing concern that ultimately the US dollar will weaken considerably in the next 20 or so years, mainly due Fed policy. During the Great Ression of 2008 the government employed a policy to stimulate the economy by creating synthetic liquidity while drastically softening the dollar relative to the rest of the world. “QE” or quantitative easing was introduced to provide cheap capital in our economy and simulate growth. The inverse correlation to this action is the printing of money, increasing the US Governments Debt to GDP ratio and diluting the power of the dollar. Most economist believe that inflation as determined by CPI will eventually spike and the dollar will weaken against the broad currencies. This is especially true when you look at emerging markets that have very low debt to GDP ratios compared to developed markets. The actions taken by the Federal Reserve have brought interest rates to all time historic lows. In other words, we as investors are disincentivized to keep money in cash and fixed income vehicles. We are being forced to buy “risk-on” assets like stocks in an effort to preserve our capital.
This sets up a perfect environment for all hard assets to perform well relative to the stock market and especially well against the bond market. During times of ‘hyper-inflation” hard assets have historically been the single best preforming asset class you can own. But which asset classes? Energy, real estate and other commodities have a history of strong performance during these times. in all likelihood they will continue down that road. Given that the gap between wealthy and poor continues to increase, it would stand to reason that hard assets that are considered "rare" or “luxury” should out perform them all. That trend has actually already started; we currently have historically low interest rates, there are now punitive yields in cash. The US Stock market has had a 7 year bull run and is statistically unlikely to continue for another 7 years. Instead there is an upswing in non traditional assets classes. Vintage car auctions are well attended and setting new highs and are no longer limited to gold standards like Ferrari or Bugatti, but are expanding to include Porsche and BMW. Art auctions are making headlines worldwide, with the price tags paid for these works are achieving record breaking highs. Read Jeff Koons “Ballons”, I guarantee it will shock you. His pieces are the highest prices paid for a living artist, his “Ballons” piece fetched $58.4M at auction. The data gets better, vintage whiskey and scotch sales have a 10 year ROE (return on equity) of 500%, that hardly outperformed the broad stock market. Wine auctions are also blowing the doors off with the results nearly matching that of whiskey. Watches have also started to move and the auction results are impressive. The Patek Philippe Super Complication recently selling for a staggering $11M at auction recently.
This sets the stage for rare and vintage cigars to be considered as part of a robust portfolio. As we aficionados already know, cigars pair nicely with everything! With the current back drop in the economy, as well as the demands of hard asset luxury (aka HAL). There is one more angle to this story that we here at PuroTrader believe is going to drive prices to the moon. The lifting of the 60 year ban on Cuban goods into the United States and the enviable discontinuing of the Cuban Trade Embargo will create a surge in demand for Cuban cigars that Havana is ill equipped to handle. Cuba's infrastructure is unfortunately subpar by developed nations standards and with a surge in demand from the USA for cigars, the quality will fall and prices will soar, making Cuban cigars rolled prior to that period will sky rocket in value based on perceived quality. To take that thought process one step further, limited production, rare, and popular brands like Cohiba and Montecristo will do even better.
In summary, we believe that cigars in general, but more specifically Cuban cigars, will be an outstanding component to a prudent investment portfolio. And hey, if we are wrong about that, at least you get to enjoy smoking it, try that with a mutual fund!