The Return of John Pugsley

Many years ago John Pugsley published The Alpha Strategy, a book warning of the reckless and dangerous government policies of the day and advocating that people protect themselves from inflation by stocking up with long term (indeed multi-year if shelf life allowed)  supplies of food, tools, household goods, clothing items not subject to changing fashion, wine, and other storable items and by investing in commodities in preference to stocks or bonds. Pugsley’s thesis made good sense as a response to the events of the inflationary depression of the 1970’s. The book was well received and sold well enough to  make a best sellers’ list.  

However, his timing was awful. The book came out in 1980 and was widely distributed in 1981 just as Paul Volker’s fed was reversing the inflationary policies of the last decade and Ronald Reagan was giving the nation a different set of government policies, policies that would help lead to a quarter century of peace, unparalleled prosperity, declining inflation, and high real investment returns on both stocks and bonds. A person following Pugsley’s advice in 1981 would have missed out on some of the greatest investment opportunities of all time and would have lost money on a number of investments in commodities, including  precious metals.  Pugsley continued writing for many years before his death in 2011, but it is fair to say that he was never again as well known as he had been for a while in 1981.

Now, though, we have an inflationist federal reserve printing  money at truly shocking rates, a stagnant economy, high unemployment coupled with high monetary inflation, a lost decade and a third in the stock market, a pair of long and pointless wars in Asia, a pervasive sense of malaise with large numbers of people believing their children will have less opportunity and poorer lives than their own, an increasingly intrusive government imposing anti-growth regulations and restraints on the economy, and in George W. Bush and Obama a pair of presidents quite reminiscent of Richard Nixon and Jimmy Carter. It’s not exactly a repetition of the 1970’s, but there are some  similarities.

There are of course significant differences as well. The biggest is that this time there is no international threat comparable to the Cold War, which in the 1970’s the United States was losing. Also while we have had very serious monetary inflation, so far we have had only moderate price inflation this time unlike the 1970’s which had both.  Interest rates of all durations are at multi-decade  lows instead of the multi-decade highs of the 1970’s, and bonds have not yet  fallen into a bear market. 

 Still it may be time to take another look at John Pugsley and his alpha strategy of over thirty years ago.  Unless this is one of those rare times when it is valid to make the dreaded claim  that it’s  different this time, our present monetary inflation probably will lead to higher rates of  price inflation. It takes a great deal of faith in Ben Bernanke to assume the fed can act in just the right way at just the right time to prevent all that new money from producing higher prices above and beyond the stated inflation target limits.  Bonds have been in a secular bull market since about the time Pugsley published his book. With the P/E of a ten year treasury at over fifty to one and the P/E on a five year treasury at over one hundred and twenty five to one, and with both delivering a before tax nominal yield less than the present rate of inflation, it is hard not  to think that that bull market probably is in a bubble phase. Stocks are more attractive. They have done poorly for over a decade and will eventually do well, but it is not prudent  to be invested one hundred percent in stocks or anything else. Gold and silver have already had a multi-year run and may be near or even past long  term tops.  Cash has no immediate risk, but faces the near certainty that the longer it is held the less it will buy.

So it may not be a bad idea to follow some of Pugsley’s advice and do some stocking up on durable items to lock in lower prices than we will see in  the future. His book has useful advice on what things to buy and what things to avoid and tips on storage, insurance, and other practical considerations. The opportunity cost of doing  some of this versus investing more in bonds is quite low right now, and the risk is far less.  Doing a little investing in commodities may not be a bad idea either. Of course I would follow his alpha strategy only in  moderation and not whole hog. Remember 1981.