Betting on failure

The Thinker by Rodin

I regularly look to see what’s trending on my blog. Given the relatively little traffic that it gets discerning trends is kind of hard. My Craigslist posts frequently get hit, which is why I decided to encourage the trend with a monthly review of local Craigslist casual encounter posts. Also, no one else seemed to be doing as a form of entertainment. Over the last few months I’ve watched my Porter Stansberry tag trending upward. This probably means something too.

I wrote just one blog post in 2011 where I mentioned Mr. Stansberry and his dubious “research” firm. I mentioned him mostly in passing. His ads were following me all over the Internet so one day I gave in and spent forty-five minutes or so listening to his pitch. Of course he was trying to sell me something: a pricey subscription to his financial newsletter. He was looking for a certain kind of investor that I’m not, mainly the ultra paranoid “I’m ready for the zombie apocalypse” type.

Four years ago Mr. Stansberry was predicting the imminent collapse of the dollar but really all major currencies. He saw another Great Depression on the horizon and it was coming at us like a freight train. He had a plan to deal with an impending financial apocalypse that would let you survive it and ultimately prosper. When it hit you would presumably be sipping margaritas on your private island in Bermuda while the rest of the world went to hell. It was all pretty vague but his financial forecast was available in small segments via his pricey newsletters. They had to be pricey because not just everyone was good enough to afford his unique insights. Just the chosen, like you.

Four years later there has been no financial apocalypse. The stock market is higher than ever, even though incomes are not. Most of the income continues to go toward the top of the income scale, which explains why incomes still lag, our recovery feels somewhat tentative and why people are getting financially nervous again. China recently devalued its currency to make its products cheaper, basically to hold off a recession. Its stock market has lost roughly a third of its value the last time I looked, and might have lost more if China’s government hadn’t propped it up. Commodity prices are also falling as evidenced by the price of gasoline. Stocks while generally high are a bit off their peaks. So a lot of smart people are reading the financial tealeaves and trying to figure out if stocks are overvalued and whether they should be cashing those investments in for something safer. The bad news is that if you are chasing your financial fears you are probably going to take a financial haircut.

I won’t pretend to be an economist. However, I do feel my advice is at least as good as Porter Stansberry’s and most likely better. After all, I was not fined $1.5 million by a U.S. District court in 2007. Most of the fine was used to refund his investors who were urged to buy stock in a company based on fabricated insider information. Stansberry said it was sure to increase 100 percent. To find out the name of the company, you had to send him $1000. In any event, after the company’s announcement the company’s share prices fell after being artificially bid up by his investors. This led to the demise of his previous firm Pirate Investor and the creation of Stansberry Research and lots of videos hawking his presumably newly improved financial insight.

So even if you are a paranoid investor type, you should not trust Stansberry Research. Moreover, all the gold bullion in the world won’t save you in the event of a total financial collapse. The truth is that while there will certainly be future financial shocks and maybe even major widespread currency collapses, our financial system is too complex to go back to monetary sources based on perceived permanent value, like gold. Instead if there is uncertainty in the market, money will shift toward perceived safer forms of currency.

That’s happening right now with the collapse of the Yuan and slow slide of other currencies like the Euro. The dollar is perceived to be a safer currency, so its value is rising in comparison to most other currencies. This of course makes it harder for the United States to sell products and services priced in dollars. It’s the penalty for having a financial system less screwed up than everyone else’s. This has the ultimate effect of proving that we are all tied together. Investors running toward the dollar reduces economic growth in the United States, which makes it cheaper to buy commodities outside the United States, which hastens their recoveries at the expense of less economic activity in the United States. This cycle repeats endlessly but generally the United States is seen as having the most stable economic system, so generally cash is poured into dollars and U.S. treasury bills when economic uncertainty rises.

So when the value of the dollar rises significantly compared to an aggregate of all other currencies, this can be a warning sign that a financial correction is due. You don’t need Stansberry Research to tell you that. You can simply track currency valuations online and compare it with what happened in previous financial crises. What seems to be happening now is that the market understands that the recovery in the United States is much weaker than investors would like it to be, and that’s likely due to income inequality in the United States. When wage growth hardly moves upward that doesn’t give the majority of consumers a whole lot of money to buy more stuff. It stifles growth because as I pointed out before the top one percent will only choose to buy so much stuff. Hardly any economic growth ever trickles down from the top one percent’s personal spending.

Curiously, the best way to get economic growth on track again would be for voters to vote for a little socialism next year. Changing the rules so more income would go down toward the rest of us instead of the top would put more money in our pockets and start a virtuous cycle. Changing the rules to raise taxes on upper income people would have the same effect, since the government generally spends all it takes in and that feeds economic growth in the United States. Arguably the United States was never better than in the 1950s when top marginal tax rates were about ninety percent. That’s because taxes were put to use providing assets like our interstate highway system. Putting more money into the middle and lower classes gave people the means to spend it to increase their standard of living and keep the economy on a generally good footing. This is why there is more growth under Democratic administrations than Republican administrations.

It remains to be seen if voters will choose optimism or pessimism next year. The financial rumblings happening now and how we choose to react to them will probably influence voters in 2016. A downturn in 2015 would probably ensure a sustained downturn after the next U.S. president is sworn in, since the next president will have an austerity agenda.

None of this matters to Porter Stansberry because the fear of failure is the basis of his business model. It sells more of his pricey newsletters. As for me I will continue to play my financial cards the way I always have: keep a diversified portfolio and move toward more cash and bonds as I age. I’ll never win the game of timing the market, but no one actually does. Instead, investors sell themselves on the delusion that with the right financial guru they can outsmart it. The best thing we can do for our economy is simply talk to our neighbors and friends. We need to convince them to be cautious but rational, and to vote rationally in 2016.

President Obama famously campaigned on hope, which was derided by many Republicans. However, we’ve had seven years of economic growth and falling unemployment. Much of the growth went to investors and not to the rest of us, but it was growth nonetheless. We should hope for continued better times, but hedge our bets by electing politicians who will vote for some pragmatic democratic socialism again.

Paging Bernie Sanders.

A question of monetary confidence

The Thinker by Rodin

In my last post, I was feeling a bit dazzled because on paper my wife and I became millionaires, although just barely. I found our new wealth somewhat suspect, in part because stock prices seemed surreally high and the dollar was steadily sinking in value. The dollar simply isn’t worth what it once was and the trends suggest it may never recover its wealth in relation to other currencies. In addition, prices for commodities are soaring. No wonder I felt deflated reaching the milestone. It’s not how much money you have that matters; it’s what it will buy. It won’t buy a mansion in Beverly Hills with a cement pool in the backyard, that’s for sure.

When communism fell in Eastern Europe, Yugoslavia experienced incredible hyperinflation. It currency essentially became worthless. In October 1993, the government tried to solve the problem by printing new money. One new dinar became one million old dinars. Not coincidentally, the country fell apart, but not before we observers got an abject lesson in the meaning of money, two lessons of which I opined on some years ago. My take was that a currency is only as valuable as people’s confidence in it. Attempts to prop up the dinar failed miserably and triggered a horrendous inflation and a depression. Once balkanized (literally) into separate countries, former Yugoslavians found their new country’s currency and leadership were more trusted than the old dinar and communists, and things began to recover. What didn’t recover was the country of Yugoslavia, which dissolved. It was always a country on paper more than in fact, and existed mostly due to Soviet support and because of the heavy hand of its military and secret police.

The steady decline in the value of the dollar against other currencies thus should be worrisome. For some, America is undergoing a slow loss of confidence. With enough rumored whispers, some official institutions will take notice. Standard & Poor took notice recently and issued a warning that in two years the U.S. would lose its AAA bond rating if it did not get its deficits under control. Right now, federal deficits are causing concerns about the solvency of our currency.

If investors are wary of the U.S. dollar, so far they don’t seem to be slacking off purchasing dollars via U.S. Treasury bills. If you have surplus you have to save it somewhere, and you also want some of it to be a stash of money, so you can spend it quickly if needed. The currency needs to be in something reasonably stable. The major choices are the dollar, the Euro, the Yen and the Chinese Yuan. It’s unclear if the Euro will be around in a decade. The Japanese Yen looks suspect, particularly since their devastating nuclear accident. The Yuan is as stable as the Chinese government, but in part because they own so many dollars, inflation is becoming a serious problem that could discount their currency and maybe take down the government. The dollar is not a perfectly safe bet anymore, but it is still safer than other currencies. So many want to buy dollars as a monetary hedge, and that it is keeping interest rates artificially low, likely exacerbating the dollar’s fall.

Most commodities are priced internationally in dollars. Oil is the most prominent example, and oil recently topped $110 a barrel. A good part of its price rise is uncertainty in the oil market, but it is also due to oil being traded in dollars. If oil is in demand and the dollar is cheap, oil will cost more dollars. The same can be said for most traded commodities, particularly food. Rioting in Egypt, Yemen and elsewhere may be due in part to the high cost of foodstuffs priced in dollars and the inability of people to afford the inflated prices. The same is true here in the United States. One reason obesity is epidemic in this country is that unhealthy food is much cheaper to buy, in part due to subsidies.

Loss of confidence in the dollar is also probably pushing up stock prices, and helps explain my millionaire status. Why would this happen? What do you do if you are concerned that the dollar you have today may be worth ninety cents next month, but you have enough cash for an emergency? You try to invest that dollar today in something tangible and profitable instead. That is my suspicion. While a recovery is underway, it is a weak recovery and there are no real signs that it is going to turn into a roaring recovery. How to explain exorbitant stock prices? I explain it as we are bidding up the price of businesses because we have more confidence in their retaining long-term value in than than in the U.S. government.

This works fine unless instead of a currency decline there is a currency collapse. Is there a way to anticipate a currency collapse? Porter Stansberry sure thinks so, and he says he is spending his own money to try to warn others. Others think he is just running another scam. I spent about an hour listening to his pitch over the weekend. Unfortunately, there is no fast forward button and he likes to reiterate his points endlessly. I ran out of time and interest, but if you are patient enough and paranoid enough, he has suggestions on how to protect yourself from what he feels will be a major collapse of the dollar and the economy over the next few years. The “good stuff” apparently requires purchasing his report. So I doubt he is acting out of the goodness of his heart.

I agree with Stansberry on one point: if the dollar really did collapse, it would take down not just the U.S. economy but also most of the world economy, at least for quite a while, probably for years. Having a ready supply of Yen, Yuan and Euros to pay for life’s expenses instead of using dollars probably won’t help that much. We’re all tied together now; there are no safe harbors. If the U.S. dollar goes on life support, my suspicion is most other currencies will as well, because so much commerce is traded in dollars which are traded for local currencies. The good news is I have a third of an acre for my lawn. I could become my own farmer until the depression caused by a dollar collapse is all over, providing of course I can rent a tiller and enclose my backyard in twelve feet high fencing with barbed wire to keep out hordes of desperate and hungry people. Or I can do what everyone else will do and procure things with possibly hyper inflated dollars.

Can a dollar currency collapse really happen here in the USA? Perhaps. No one really knows if such a scenario will happen, but it can be triggered if enough people think it will happen. The dollar is as solid as our faith in it and our institutions, which at the moment is low. Arguably people, like Porter Stansberry are rooting for it as a way to acquire wealth by spreading fear. A dollar collapse is possible, of course, but so many have so much currency valued in dollars that no one really has incentive to root for its collapse, except, possibly al Qaeda. Which is probably why Standard & Poor issued its warning. It is trying to make politicians do their jobs.

My suspicion is that the root of investors’ concerns is not the deficit itself, but the underlying problem the deficit exposes. Until now, when parties could not compromise, the difference was charged to the future in the form of deficits, because there was always agreement to extend the debt ceiling. That seems to be changing. What would normally happen in dire circumstances like this would be we would find our better nature, and move toward compromise and shared sacrifice. So far, there is not much evidence that this will happen. My suspicion is that if we can affect a meaningful compromise where all parties have real skin in the game, it will remove most of the financial jitters underpinning the drop in the dollar.

Unfortunately, what’s much more likely to happen is a high stakes game of poker that ends badly. It is already well underway. I am no more prescient than anyone else how it will play out with a vote to raise the debt ceiling. I suspect it will get raised, with much wailing and gnashing of teeth, and in small, tortuous increments and play out like a bad horror movie. I can say that if we reach a point where the United States cannot come together politically to raise the debt ceiling and find real middle ground on raising taxes and reducing expenses (and yes it will take both), I will need my own vegetable garden with its twelve foot fence and maybe even a gun or two and a bulletproof vest. If that happens, unfortunately, it will be too late for all of us.