Hello Grasshopper, and Happy Friday!
Thank you so much for reading and contributing to Kung Fu Finance. Today I’m going to do something a little different with our “QnA Friday”, because I really want to share with you some of the amazing and insightful comments I’ve received over the last two weeks because you took the time to write in, share your experience, and enrich our Kung Fu Finance community with your knowledge and insight.
I truly, truly appreciate it, and want to ensure that everyone gets a chance to benefit from your helpful comments, because many people do not visit the website after reading the email in order to read the comments. You all have so much insight and wisdom to share with each other and with me, and I truly appreciate your wonderful comments, questions, and feedback!
Let’s get started…
First, George had this terrific insight on bond rates, a book recommendation for understanding them from a historical perspective, and a great explanation on where we got some of our market terminology (thank you George!!!):
“I really enjoyed your start of an explanation of bond rates. One of the ways I was FINALLY able to understand this subject was to put it in its historical perspective.
The best stories I have heard came from the late John Pugsley of the Sovereign Society, but ONLY because I’d read Neal Stephenson’s Baroque Cycle (I think of Stephenson as the Oscar Wilde of our times).
It has to do with the prohibition on Interest and how Charles II, in his serial wars with the Sun King and needing financing, came up with workarounds for those problems. His solutions give us a lot of our market terminology. He needed gold to finance his ongoing wars with Louis XIV, so he had his thugs-um-tax workers go to the goldsmiths and “barrow” their gold.
Say, for instance, they got ninety ounces of gold. They would write out a receipt for one hundred ounces to be repaid at a certain date. This receipt was written on a split hazel branch in two parts, with the shorter, thicker part (the stock) being broken off and given to the goldsmith. This is also where the expression “getting the short end of the stick” comes from.
After several years of this, everybody involved realized they weren’t getting repaid. None of them had the power to call the king on his con, so some of the more enterprising goldsmiths came up with the idea of tying up little piles of these stocks and offering them as securities to gullible investors.
These, I believe, came to be called derivatives. This is also where modern commercial banking came from, and it was also the beginning of the Bank of England, the world’s first central bank.
This is when it was still “good to be King.”
You can’t make this stuff up—reality is much more interesting.
Thank you so much for starting this dangerous quest. I am so looking forward to the next exciting chapter!”
Thank you very much George!
Next, Kent had some great insight on Doug Casey’s view on the economy and timing, and how best to look toward the future and enjoy rather than worry about the challenges that lie ahead:
I agree with you completely on your assessment of Doug Casey’s brilliance and insightfulness on financial and economic matters. I have read all of his books, starting with Crisis Investing in 1979, and I have been subscribing to his newsletters for over 30 years.
But one area, by Casey’s own admission, where he has performed poorly is forecasting the timing of the economic events that he foresees. For example in his recent talks he has been pointing out that we have already entered the economic and political crisis that he refers to the Greater Depression.
Interestingly, he said essentially the same thing in his book Strategic Investing which was published in 1982. Here’s a quote from page 36: “The Greater Depression has begun.” During this same time period, when the DJIA was in three figures and housing prices were a fraction of what they are today, he was predicting a stock market crash and falling real estate prices.
My point is not to discount Doug Casey’s insightfulness, but instead to demonstrate how difficult it is to predict the timing of things, even when they are inevitable. Without the intervention of governments and central banks to artificially stimulate the economy, we might have seen a “greater depression” in 1982. But it would have been a lot less severe than the one we will eventually see when the stimulus-induced supports begin to fail.
The question now is, are we in the eye of the storm or can the economy be manipulated to give the appearance of stability for a few more years? I certainly don’t know how it will play out or when the next big event will occur. Therefore, I think it is important to have a strategy that will work for a variety of outcomes.
Because I don’t know what is going to happen when, I can’t live my life as if the world as we know it will end tomorrow. Nor, can I expect the relative stability of today to continue.
What I do know is that throughout history empires have had a life cycle – they are born, they grow, they mature, they decline and eventually die. This is neither good nor bad; it’s just the way it is. My coping strategy is based on the recognition that the empires of the West are mostly in decline.
The best strategy is exactly what you advocate at Kung Fu Finance: develop and maintain financial independence, be adaptable and be mobile. Most importantly keep your mind sharp and informed so that you can enjoy rather than worry about the challenges that lie ahead.
Steve Jobs expressed it well:
“Your time is limited, so don’t waste it living someone else’s life. Don’t be trapped by dogma – which is living with the results of other people’s thinking. Don’t let the noise of others’ opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.”
Thank you so much Kent!!!
Next, Steve discusses the U.S. debt situation and the possibility of losing our reserve currency status, but focuses on the positive, like Kent, and on how to protect and preserve your wealth (and enjoy the process rather than worrying excessively about it):
Hi Kung Fu Girl,
The future, save as much as possible, in whatever form you can to protect and preserve your wealth if you have any.
Funny you commented on the thought I had the other day, the Government plans to reduce the deficit by 1.2 trillion over 10 years, or 100 billion per year. That Is Laughable.
Now I am not a smart man (Kung Fu Girl note: I beg to differ…yes you are!) but running a trillion-dollar a year deficit is beyond me. Point of fact: the U.S. debt now is 16 Trillion, we are paying the interest, but we are not paying the debt but growing the debt.
That is like paying minimum payments on the credit card and then when maxed out get another credit card. It is the same thing, printed money, money created out of thin air. That’s a pretty simple analogy. But it is a true analogy.
At what point does the U.S. not have a lender after they have used up the faith of their global lenders, and then go back to the public and borrow all the savings from the public?
At that point the only option left is continuous printing of new money and continued quantitative easing.
Regardless of deflation or inflation the result is the same. If you cannot retire the debt, which we are not doing, you continue to grow the debt, which we are. The end result is the same.
The scary part is all the devastation, mental defeatism, anarchy, loss of liberty, loss of living standards, eventually loss of life and totalitarian government that will result until the U.S. loses it’s position as the reserve currency and bankrupts itself.
I don’t like to think this way; it may not happen in my lifetime, or it may be different than I see it. The U.S. will survive, but the road to change will probably be a very hard one.
Live Debt free, own your home outright, and fight the good battle. And above all build the family long-term wealth, and figure out how to protect it and pass it on to the future generations, but also enjoy it as you build it.
Thank you Steve!!!
Next, as I mentioned earlier this week, my friend Gary sent me a great and insightful email on interest rates, which ones matter, and interest rate manipulation that I want to share with you:
Good post KFG,
Explaining interest rate management in a blog post is not for the faint of heart. A few thoughts for you… I always point out that the Fed is quite capable of setting overnight rates, and by extension very short-term rates just by setting the rate that banks can borrow from the Fed. It requires no operation. They have no direct control over longer term rates, which is why they have to do POMO’s that affect rates at the point on the curve that they are buying or selling instruments.
In actuality, the most important rate for the economy is the 10 year Treasury yield, the Fed’s holy grail. It is the benchmark around which consumer loan rates revolve, and more influential to economic activity. The overnight Fed funds rate is virtually irrelevant. The Fed considered just setting the 10 year rate like it does the overnight rate (Greenspan’s fantasy), but that would be like Soviet Union 5-year planning or something. Any vestige of a free market would be gone at that point.
Also, if the Fed sets short-term loan rates and manipulates longer rates higher, i.e. a positive yield curve, banks can make money by borrowing short and lending long, encouraging an increasing money supply, and a near term boom, until it crashes. If the Fed wants to discourage lending, they will flatten the curve, a sign of a decreasing economy and decreasing money supply.
Of course, the truth is far more complex and nefarious, and what really sets interest rates at all points of the curve is the $30+ TRILLION dollars in interest rate derivatives that can leverage the market and manage interest rates in whatever direction powers that be want (with JPM, BofA, Citi, etc. as instruments of the FED to create interest rate swaps and derivatives in an unregulated market). Of course this is all unsustainable, and the house of cards will all come down at some point (within days or hours, not months).
If you look at the size of the derivative pools for oil, gold, etc. you get a sense of how those markets are manipulated as well, at least in part.
P.S. The notional value of interest rate derivative is waaaay higher than 30 Trillion. That’s the amount for one bank. Total is in the hundreds of trillions as I recall.
Thank you Gary!!!
Finally, Ivan adds his insight to Doug Casey’s perspective on the global economy and adds with a positive recommendation to hold cash and make your shopping list (which Kung Fu Girl completely agrees with!):
Thanks, KFG. I agree. If we step back and look objectively at what has happened over the past few years, nothing has been fixed. It “feels” like it at times because we’re floating. But nothing fundamentally has been fixed. And rather than letting the markets correctly reflect the situation, the government has interceded, which is usually not a good thing.
I’ll give them credit for being “smart” though (manipulative is probably more accurate); the government took money from taxpayers and gave it to the financial firms who turn around and essentially pump it into the stock market, which makes it look like everything is getting better. Combine that with zero interest rate environment, which makes some businesses look better than they are.
People might see the stock market rise, but I doubt people are feeling happier. Instead, people are probably feeling strained because they’re too burned/scared to get back in and they feel like the boat is leaving without them. For sure people are feeling poorer because they are earning next to nothing in the bank and CD’s (what a rip-off!).
On a more positive note for us savers and wealth-builders, it’s a good idea to have cash available when deflation hits harder. Make your shopping list of stocks and stuff to buy on the cheap.
Thank you so much Ivan!
And thank you everyone…I truly appreciate your insightful comments and questions and I know everyone will benefit from reading them.
I’ll be back next week with lots of questions…is a return to the gold standard feasible? Where and how do I buy physical silver? And more…
Thank you so much for reading and being a part of our awesome Kung Fu Finance community.
I wish you a wonderful, prosperous, and fun weekend!!!
See you next week!
To your financial success,
— Kung Fu Girl