For the first time ever, the Nasdaq hit the 8,000 mark on Monday, August 27, 2018.  Two days later, the revised GDP estimates for the second quarter came in at 4.2%.  With unemployment low and consumer price inflation seemingly in check, the good times are here.  Or, the good times are here at least according to the statistics.

We don’t know what’s next.  Maybe the Nasdaq will hit 9,000 before the year is over.  Maybe it will hit 10,000 next year.  Maybe the Dow will go to 30,000.  The S&P 500 is just a couple of good days away from the 3,000 mark.

In the tech bubble of the late 1990s and early 2000, the Nasdaq peaked at just over 5,000 in March 2000.  It plunged to about 1,200 by 2002.  Then it recovered a little bit up until to 2007 before falling again to below 1,400 in the spring of 2009.  The return has been staggering for the last 9 and a half years, as it has gone up almost 6 fold since that time.

If you had invested all of your money at the very bottom in February or March of 2009 in a Nasdaq index fund, then you would have done incredibly well.

On the GDP front, the revised second quarter GDP number is higher than it has been for almost four years.  Of course, it’s important to remember that GDP was above 5% for the first quarter of 2006, and we know how that turned out a couple of years later.

In other words, no matter how good things look right now, they can turn around quickly. Sometimes the numbers lie.

This is somewhat anecdotal, but several people I know or have had communication with are not doing that great.  Most everyone I know who wants to be employed is employed.  So they are making money.  The problem is that they don’t really have any money.

I have heard from several people who essentially live paycheck to paycheck.  Their savings consist of a 401k plan and, for some, equity in their place of residence.  In terms of money in the bank, there is almost none. There is just enough to pay the next round of bills.

Now, I know the common objections.  Yes, they all have smartphones.  Most of them will go out to eat, at least on occasion.  They don’t need all of the stuff that they have.  At the same time, I am not speaking of shopaholics.  If they really buckled down, they could probably save up $1,000 over the course of 6 months to a year.  But they just don’t want to give up their smartphones and eat rice and beans for dinner every night.

While we all have to take responsibility for our own actions, I find it rather ridiculous when conservatives and libertarians put an emphasis on all of the luxuries (such as smartphones) as the reason that many people are struggling.  I get especially irritated when I hear libertarians emphasize this.

Sure, someone could give up their smartphone, although maybe they do use it for some work purposes. If you don’t have any cell phone, then maybe you can save $80 per month, or whatever it is.  After a year, maybe you can get up to a $1,000 cushion in your checking account.  Is that really something to get excited about?  I think I would rather take my chances with my smartphone and at least enjoy life a little.

It shouldn’t be this way though.  We should be able to enjoy luxuries that didn’t exist decades ago without retracting our living standards in other places.  But this is not happening.  People are struggling, and many of them are far from frivolous in their spending habits.

This is because of big government.  At all levels (federal, state, and local), government is spending (misallocating) about 40% of our wealth.  If you add the burdensome regulations on top of this, probably over half of our money is taken away from us in some fashion.  I understand that some of it comes back to us in the form of various “benefits”, but most of the “benefits” are not what we would have spent our own money on.

Even though GDP is doing better and the stock market is roaring, the experience of the average middle class American is not one of great prosperity.  Their house value may be up if they own one. For those who don’t own, they are getting locked out of the market for now.

And maybe the 401k balances are going up, but we don’t know how long this will last.  Most are probably not well diversified in a setup such as the permanent portfolio.  And the 401k does little good if you can’t easily access the money to help pay your bills.

We have a government problem.  It is way too big. This is why we need a correction. We actually need some price deflation because our wages aren’t keeping up with prices.  Any correction is initially going to be painful for almost everyone.  But if it forces some kind of reduction in government, then it is ultimately what we need.

We need a drastic reduction in the size and scope of government at all levels.  This is how we can vastly improve our living standards.  We should be able to have our smartphones and still save money.  We should be able to get a $5 coffee if that is what makes us happy, without having to worry about paying the next electric bill.

For libertarians, we should not squander this opportunity.  When someone says they are struggling, you don’t need to lecture them on their owning a smartphone or their drinking of a $5 cup of coffee.  It is an opportunity to sell them a message of liberty and drastically smaller government.

People shouldn’t use big government as an excuse not to better themselves.  But at the same time, everyone needs to be made aware of the main reason that middle class America is struggling to get by. It isn’t the little luxuries. It is a problem of big government.

James Bullard is the president of the Federal Reserve Bank of St. Louis.  He is currently an alternate member of the Federal Open Market Committee (FOMC).  This makes him an influential economist. He is part of the establishment, but it is wise to listen to what he saying.

Bullard recently said in an interview that he would prefer for the Fed not to raise interest rates (the federal funds rate) any more this year.  He said he does not see the need for higher rates given that inflation is not running high.

He then commented about the flattening yield curve.  He said that it was a mistake for the Fed to have kept raising rates in 2006 when the yield curve inverted.  Then he said about an inverted yield curve, “This time, I want to take this signal seriously.”

He goes on, “There is no reason to challenge the yield curve at this time.  There’s no reason.  In other circumstances, if inflation was higher and heading higher, then I might say, well, we’re taking some recession risk but I’m willing to trade that off because it looks like inflation is getting out of control. We’re not in that situation today. Inflation is low.  It’s stable.”  He goes on, “We don’t need to challenge; we don’t need to be preemptive on the yield curve.”

Bullard made similar comments in another interview saying that we shouldn’t challenge the yield curve, meaning he doesn’t think the Fed should push short-term interest rates any higher at this time.

The yield curve has been a great predictor of recession.  When it inverts (long-term rates fall below short-term rates), it indicates a recession is coming, and it has historically been quite accurate.  So what if the Fed were to react to the yield curve?  It could stop tightening when the yield curve is flat.  It could even loosen if the yield curve is flat or inverted, anticipating a recession.  Would that in itself ruin the yield curve as a recession indicator?

I was a bit surprised that Bullard made these comments.  It’s not that he and other Fed members don’t think such things, but I am just surprised he said it out loud in a public interview.  While he is just one person, he is one of twelve people on the FOMC.

First, what are the chances that the FOMC voting members would actually follow the yield curve and let it influence their votes?  This is certainly possible, as Bullard has alluded to.  But I would be surprised if they were forthright about it.

Here is the thing. The Fed never predicts a recession or issues some kind of statement saying that a recession could be imminent.  It just doesn’t happen.  They will use technical jargon and say that the economy is softening or that growth may be slowing. But you never hear the Fed chair say that we should be worried about a coming recession.  You never read an FOMC statement saying that the Fed is loosening to prepare for a recession in the near future.

Even if they thought this, they would never say it.  Because if they were correct and a recession came, then the president, Congress, the financial media, and most of the American public would actually blame the Fed for causing the recession.  (They might be correct, but for the wrong reasons.)  They would say that the Fed caused the recession by making people worry about it and caused them to stop spending money. People would say that the Fed created a self-fulfilling prophecy.

Therefore, if the Fed is going to stop its tightening, let alone actually start loosening again, it would need a good excuse.  The Fed members are not going to say that they are loosening monetary policy because of an inverted yield curve that is making a recession look imminent. They would have to come up with another excuse, and it wouldn’t be easy to do in this economic environment with low unemployment, new stock market highs, and relatively low inflation (at least according to the government statistics).

And even if the Fed were to loosen in reaction to an inverted yield curve, would it actually prevent the recession from happening?

This depends. Most likely, it would not stop the recession from coming in the near future.  The malinvestments from the previous loose monetary policy have already begun to be exposed in this scenario.  If you remember the financial crisis of 2008, the housing prices started coming down about 1 to 2 years before that.  If the Fed had started printing (digitally speaking) money in early 2008, I don’t think that would have stopped the housing bust from happening, and it probably wouldn’t have prevented the meltdown in stocks.

Of course, it does depend on just how much the Fed were to react.  If the yield curve were to invert and the Fed were to announce QE4 where it increases its balance sheet by $200 billion per month, then sure, that may be enough to stave off the coming recession temporarily.  You can stop the patient from its drug withdrawal symptoms by overdosing the patient with the drug.

If the Fed were to react this dramatically, then there would obviously be other, and more severe, consequences.  We would probably get high consumer price inflation.  We would most certainly get more malinvestment on a greater scale. And when the inevitable recession finally did come, it would be that much more severe.

In conclusion, I don’t think the Fed is going to loosen policy based on a flat or inverted yield curve.  The Fed may stop hiking its target federal funds rate.  Maybe it would stop its balance sheet reduction.  But I highly doubt it would start another round of QE or lower its federal funds rate unless we are actually in a recession.

If the Fed were to take unprecedented and dramatic steps based on the yield curve alone, then we will be in uncharted waters.  But I still don’t think it would prevent the coming recession.

On Monday, August 20, 2018, Donald Trump stated in an interview his disappointment in his new Fed chair.  In reference to Jerome Powell, Trump said, “I’m not thrilled with his raising of interest rates.  No, I’m not thrilled.”

Trump also said, “We’re negotiating very powerfully and strongly with other nations.  We’re going to win.  But during this period of time, I should be given some help by the Fed.  The other countries are accommodated.”

In other words, Trump wants help from the Fed in pursuing a weaker dollar policy, or at least a less strong dollar policy.  Trump is a mercantilist.  This is why he promotes tariffs, which are nothing more than taxes imposed on imported goods.  He also promotes, if not always explicitly, a weaker dollar policy. These policies that he promotes make consumer prices higher for Americans than they otherwise would have been.

During his campaign, candidate Trump criticized the Fed for a loose monetary policy and said that the stock market may be in a bubble.  That was about two years ago.  If stocks were in a bubble then, then what are they now?

Now that Trump “owns” the economy, his position has of course changed.  He wants low interest rates from the Fed.  He does not want tight money.  He wants the boom (artificial or not) to continue on his watch.

The problem for Trump is if the boom goes bust, especially before his November 2020 re-election bid. It is hard for the president to disown the economy anyway, but it will be especially hard since Trump has not shied away from taking credit for the supposed good times.

If there is one thing you can say about Trump, it is that he has exposed a lot of dirt and corruption that goes on in Washington DC.  Sometimes it is intentional on his part, and sometimes it is unintentional. Much of it is due to his personality, and it also helps that we live in the Internet and social media age where communication is wide open.

In the case of the Fed, Trump’s comments just show that the Fed is not some independent agency. It is perhaps independent of Trump, and that is why he is criticizing it.  Trump nominated Powell for Fed chair, and he expected Powell to push for Trump’s policies.  But in a certain sense, the Fed is no different than the CIA, FBI, or NSA. It is part of the deep state, or establishment, if you will.  The Fed people will seek to protect themselves, and they will try not to rock the boat.

If the economy gets into trouble similar as in 2008, then you can rest assured that the Fed will engage in a loose monetary policy once again.  Of course, I say this facetiously in the sense that the Fed’s previous loose monetary policy has created the bubble that we are in now.

The Fed is not going to accommodate Trump, but it is part of the establishment that seeks to generally maintain the status quo.  Why would Fed members want anything different?  The status quo gives them their power and prestige.  It would take a really principled member to seek doing the right thing while destroying his own power.  Any such member would have to be very secretive about his true beliefs in order to get into such a powerful position in the first place.

On the same day as Trump’s comments, the 10-year yield dropped.  The financial media headlines said that yields were dropping on Trump’s comments about the Fed.  Of course, the financial media typically look for explanations for any major market moves.

However, even Trump’s comments did have an impact, why would the 10-year yield move so far?  The Fed controls short-term rates to a much greater degree, at least in the short run.  But if you look at the yields on August 20, the yield on the 3-month Treasury actually went up by 0.01 for the day.

In other words, on the same day that Trump made these comments and the financial media were saying that yields were falling because of these comments, the yield curve was actually flattening.  Short-term rates stayed about the same or even went up slightly, while long-term rates fell.

I have no idea if this yield curve flattening had anything to do with Trump’s comments, and neither does anybody else.  Maybe the yield curve would have flattened that day without Trump’s comments too.

The yield curve has not inverted yet.  It is still upward sloping, but it is considerably flatter than it was a year ago.  This means that the longest bull market ever in stocks may be coming to a close finally.  But with any bubble, it usually lasts a bit longer than you would think possible.

If Trump wants to avoid a recession on his watch in his first term, then he is right to push for lower interest rates from the Fed.  This would prolong the malinvestment (the bubble activities). It makes us poorer in the long run, but it covers up the misallocations for a while longer.  It would make the correction that much harsher in the future.

Fortunately, the Fed is not listening to Trump right now.  It has had a policy of tight money since the end of QE3 in late 2014. The problem is that the public knows that the Fed puts an implicit guarantee on the bond market.  The investing public knows that the Fed stands willing to inflate at a moments notice if and when the economy turns bad.

Elon Musk and Tesla have been in the news lately.  In a recent interview, Musk admitted that the last year has been very hard for him.  On that, I think we can trust what he is saying.

Libertarians have a wide array of opinions on Elon Musk.  It is understandable in that there are some things to admire about the guy and other things to despise.

As a businessman, there is no question that Musk has a streak of brilliance.  Part of this brilliance perhaps is making others think that he is more brilliant than he actually is.  I personally think Musk has been widely overrated, but I still acknowledge that he has certain qualities that are extraordinary that has put him into a position of heading up three companies: SpaceX, Neuralink, and Tesla.

Even if Tesla goes bankrupt, Musk is still a wealthy man in monetary terms, or at least we think so.  Things would have to go really bad for him to become penniless, as he is supposedly worth close to $20 billion.  He has admitted to taking the drug Ambien and perhaps having health issues (probably due to stress), so you don’t know how his life will end up.  But if he survives over the next decade, you have to think that Musk will bounce back in some way, even if Tesla does go under.

Just to recap some happenings from 2018, you will see what a rocky ride it has been.

Tesla has been questioned often in terms of meeting its production goals, as well as some reported investigations of accidents and fires due to, what some claim to be, faulty cars.

On April 1 (April Fool’s Day), Musk tweeted that Tesla was bankrupt.  It was his idea of a joke, I guess.  I think the fact that he sent that out is an indication that it was a joke not far from the truth.

In a press conference in May, Musk got rather nasty, When asked a question, he said, “Boring bonehead questions are not cool.  Next.”  He later apologized.

More recently, Musk, again with Twitter, stated that he may take Tesla private and that he already had funding lined up.  Now the SEC is investigating him, as the CEO of a company is not supposed to make claims meant to hurt those betting against the company.

In other words, Musk is in hot water.  And even if he gets out of the SEC investigation, he still has the actual money problem with Tesla.  The money problem is that the company doesn’t have any, other than borrowed money.  Its production goals have not met expectations and the company just doesn’t seem to be profitable.

Over the last few years, I have come to see Musk as a fraud.  He is a good talker and a good negotiator.  He is a good lobbyist too.

For libertarians, probably the most disgusting thing about Musk is that he lives on government subsidies for his electric cars.  Tesla has been barely able to compete as it is.  If the subsidies from government (taxpayers) dry up, then Tesla really won’t be able to compete.

Right now, the cars made by Tesla are toys for rich people will money to spend.  With the Tesla Model 3, it brings it closer to the middle class, but it is still an expensive car.

I believe the government subsidies will dry up too.  It is pure cronyism.  If we get a good hard recession and Congress is forced to tighten its belt even a little bit, then the subsidies to Tesla are a rather easy place to start.

When Trump was running for president, he was questioned on taking advantage of certain government regulations or tax breaks.  He said he was just playing the game that was set up for him.  For Musk, it is harder to argue the same thing because Musk seems to be actively lobbying for these subsidies.  It is different than if he were just accepting the subsidies without actively promoting them or promoting some other government scheme.

As far as the SEC investigation goes, it was absolutely stupid of Musk to send out the message that he did.  While I am not in favor of the existence of the SEC, he really should have known better.  And I do believe that his only purpose for sending out that message was to hurt short sellers of Tesla stock and to prop up the price of Tesla (which it temporarily did).

If there is one important political lesson to learn from all of this, it is the importance of having a free market without government favoritism.  That means we have to drastically reduce the size and scope of government, particularly at the federal level.

If the government were a small fraction of its current size, then Musk would be forced to compete solely on the basis of pleasing customers.  There would be no subsidies or special favors.

If Musk is a total fraud, then he would not survive in a free market environment.  He would either be unsuccessful, or he would be forced to change his ways or only exhibit his good capitalist qualities.  He would have to meet consumer demand by providing consumers with a product they want at a price they are willing to pay.

I don’t know where Musk will be in five years.  I don’t know if Tesla will be bankrupt or somehow recover.  The one thing I do know is that, as consumers, we would be better off without the government interference.

There is a very small but growing group in the financial independence (FI) movement.  Being financially independent does not mean you have to be retired.  It can simply mean you have enough money to vastly expand your choices in life.

Some people do pursue FI for the goal of early retirement (or maybe just retirement), but I personally don’t recommend early retirement.  If you have a job that you hate or just aren’t passionate about, it is fine to set goals to leave that job.  However, even for those who have a lot of money, I still recommend that people act in a productive way, as you will likely get more fulfillment out of life.  It doesn’t have to be your typical cube job though.  It can mean pursuing something you are passionate about.

There are typically three aspects involved in becoming financially independent:

1. how much you spend (or conversely, how much you save)
2. how much you make
3. how you invest

I find that any subject that comes up is some variation of these three when dealing with accumulating wealth.

It is obviously far easier to reach financial independence if you make a high income, and I find that some people don’t focus enough on the income side of the equation.

However, it is impossible to reach financial independence, or save any money for that matter, if you always spend every dollar coming in.  Therefore, the spending side (which is also the savings side) is an important part of the equation.

I actually think the investment side is typically the least important, but I do cringe when I hear people say they are investing all of their money in a stock market index fund.  Personally, I recommend a permanent portfolio for safety and stability.

On the spending topic, the two biggest expenses that you can control are typically cars and houses.  Taxes are probably your biggest expense whether you know it or not, but most of that is out of your control except to the degree of taxes you pay in accordance with how you make and spend your money.

When it comes to buying a car or a house, the debate is often whether to buy or rent.  In the case of a car, we would say buy or lease.  There is obviously the issue of price, and most people pursuing financial independence, and those with some degree of frugality, are going to agree not to go overboard.  You don’t buy as much house as what you qualify for in a mortgage.  You don’t buy a $40,000 car either just because you can afford it.

I think one important element that perhaps doesn’t get discussed enough is how long you keep the items you buy, especially when it comes to these two categories.  It certainly does get discussed in FI circles, but I think it is important to point out that it is really one of the main keys to financial independence.

If you are buying a house, it isn’t just a question of how much house to buy.  A big question is: How long are you going to live there?  In my opinion, if you aren’t planning to live in the same house for at least 5 years, then I don’t think you should buy.  You should just rent.  There are major transaction costs in buying and selling a house aside from the actual process of moving.  When you add in all of the closing costs and agent fees, you may be talking $20,000 or more for the average house.

You may get lucky and see the value of your house go up in the time period that you live there, but that is leaving it to chance.  If there is approximately no change in price from when you buy and sell, then you will lose money if you live there for 5 years or less, and maybe far more.  You aren’t going to be paying down the principal balance on your mortgage enough to cover the closing costs.

The one exception to my rule is if you are planning to buy another house in a similar area in 5 years and then rent out the house you had been living in.  But in this case, you are not planning to sell in 5 years.  You are just planning to move.

In the case of a car, most FI people will say to buy instead of lease.  I think this is usually correct, but even here there are exceptions.

Then you get into a debate about whether to buy new or buy used.  I have found that used car prices are so high that it is often just better to buy new in some cases, especially as compared to buying something just a few years old.

I have seen used cars that are 3 years old that are selling for around $4,000 less than a brand new car would cost.  Personally, I think it makes more sense just to buy the new car with the full warranty, the new tires, the new battery, and new everything else in this situation.

The key here though is that you keep the car for a long time.  It is people who have a high turnover rate with their cars who are typically making poor financial choices.  If you buy a new car and drive it for 15 years, then you have done well.  Even if you took out a five-year car loan, you were able to drive the car for 10 more years without a payment.

If you are frequently buying a new (meaning different) car, then you are going to lose financially.  You are paying the transaction costs on both ends.  I find that most people who operate this way just accept the fact that they always have some kind of a car payment.

In conclusion, if you are looking to become financially independent, or to retire one day, or even to just save some money for a rainy day, then you should buy things you need and hold on to them for a long time.  This is a way to be able to save more and spend less.  It makes for a more likely path to financial independence.

The latest Consumer Price Index (CPI) numbers were released showing the CPI up 0.2% in July from the previous month.  Year-over-year, the CPI is up 2.9%.

The more stable median CPI also was up 0.2% from the previous month, and the year-over-year median CPI is holding steady at 2.8%.

While these are not the exact metrics used by the Fed, there has to be a little concern over the uptick in consumer price inflation.  It would be nice if the Fed would at least acknowledge that the CPI numbers are running over its 2% target, and have been for some time now.

If you get a 3% raise at your job, then you really are getting no raise at all.  Actually, it is probably worse than that because you owe additional taxes on that 3%, so your after-tax raise is lower than the inflation rate.  Actually, it is even worse than that because your health insurance premiums are probably going up by 20% per year, which you could say tends to be underweighted in the CPI calculations.

With the release of the CPI numbers, stocks fell hard on Friday.  But the reason – at least according to the financial news media – wasn’t because of the CPI numbers.  Stocks fell because Turkey’s currency (the lira) dropped significantly.  I am still trying to figure out how a country with a GDP of well under $1 trillion annually can rattle US markets so much.  Maybe sellers were just looking for an excuse to sell.

But perhaps the most significant, and possibly overlooked, news of the day in the world of finance came in Treasury yields.  The 10-year yield closed at 2.87% when it was sitting at 3% at the beginning of the month.  Meanwhile the 3-month yield closed at 2.05%, whereas it started at 2.03% at the beginning of August.

In a week and a half, the 3-month yield rose 0.02%, while the 10-year yield fell by 0.13%.  While these aren’t massive changes, it still points to a continually flattening yield curve.  The flattening is slow, but it is still happening.  And if you have been reading my posts, then you know I see this as the number one warning indicator of a coming recession.

To wrap up the latest financial news, gold has still been struggling along.  It is currently trading for around $1,220 per ounce.  Gold investors have certainly seen better days.  But then again, consider that the US dollar has been relatively strong recently.  European investors in gold who trade in euros have fared a little bit better.

There just isn’t much enthusiasm for gold right now except for a few central banks.  Even gold bugs have been relatively quiet.

But we have to remind ourselves that gold is there as a hedge against risk and currency depreciation.  It is something of an insurance policy.  And when things start to get rocky out there again, then gold will have its day in the spotlight again.

We have to be patient as investors, and we also can’t get greedy by running into the bubbles.  Things usually take longer to play out than expected.  I certainly never expected the economy to hold up for nearly 10 years after the financial crisis in 2008.  You have to wonder if we are just being set up for that much of a harder fall in the future.

I recently had a discussion with a strong proponent of Bitcoin.  It was a friendly discussion, but we certainly didn’t shy away from challenging each other.  I stated some of my objections to Bitcoin and asked him to respond.

I said that buying Bitcoin is not like buying stock shares in Apple (or pick any company).  When you buy stock in Apple, you are buying a small piece of that company.  You are buying a small piece of all of its assets, and you are buying the potential of future profits if you hold onto your shares.  With Bitcoin, you aren’t buying any assets or future profits.

The interesting thing is that my friend seemed to use the same arguments in favor of Bitcoin.  He believes that Bitcoin is the next big thing (or the biggest thing now) because you don’t actually own anything.  He argues that it is fully decentralized because there are no hard assets to control.

I stated that I had read an article that we shouldn’t conflate Bitcoin (or other cryptocurrencies) with the blockchain.  He basically agrees with this except for entirely different reasons.  He sees Bitcoin as the real winner and the blockchain just serving as a function for using Bitcoin.  But he doesn’t see any future for the blockchain.  I was rather taken aback by that part.

I pointed out the possibilities.  There is already a company developing blockchain technology for ticket sales to concerts, sporting events, etc.  It would be an easy way for people to buy tickets and ensure they are not being defrauded.  I didn’t like in the company’s description that it would help prevent “scalpers” because scalping tickets just means buying and selling in the open marketplace.  But the point is that a company is using this technology for real world uses, and there are likely to be many more that follow.

My friend doesn’t agree with this.  He is liberty oriented, so he is not advocating that the government not allow this.  He just doesn’t think it will work out too well in most cases because it relies on a central authority (as opposed to Bitcoin, in his view).  In other words, in the example of blockchain use for tickets, some central authority has to issue the tickets.

While he has a valid point that it initially relies on a central authority, this doesn’t make it useless.  Everything relies on a central authority initially, as it is some person or group of people implementing the idea.  Even Bitcoin originally had a creator.  Every company on earth is a central authority to some degree.  Somebody, or some group of people, has to place the orders for the computers, tablets, and smartphones that Apple will sell.

In the case of tickets, they could initially be offered by the venue hosting the event or by the event planners.  Or they could be offered through a third party such as Ticketmaster.  You could buy the ticket using blockchain technology.  You would own that ticket just as you would own a bitcoin.  And you would hopefully be free to sell that ticket to anyone, even anonymously.

On the subject of money, I said that I envision some kind of gold-backed currency that uses blockchain technology.  There are already companies doing this sort of thing.  It would be like owning bitcoins, except that the bitcoins would be backed by actual gold.

Again, my friend’s objection is that it won’t work because it relies on a central authority.  Someone would have to store the gold, and it could easily be corrupted.  I certainly accept his objection up to a point.  There is an issue of trust.

With that said, I think he is missing the wonders of competition in a free market.  While the storing of gold for a gold-backed currency would require a central figure to store the gold, it doesn’t have to be one central figure.  There is competition.  You can go to most stores and use Visa, Mastercard, American Express, and sometimes Discover.  There is competition.

The same would likely occur with gold-backed cryptocurrencies.  The companies would compete.  They would also compete for your trust.  They would make it a point to be audited and stamped with approval by a third party.  You might see the Underwriters Laboratories (UL) sign stamped on your digital currency when you pull it up on your smartphone.

The key to all of this though is that I don’t have to know how any of it will work.  I just know that liberty works.  I know that there is competition in a free market.  I know that the costs of the technology will come down.  I know that innovative people will find ways to use blockchain technology to make our lives better and our living standards higher.

I am the opposite of my friend on this subject.  He believes strongly in Bitcoin, but does not see a future for blockchain outside of cryptocurrencies.  I do not think Bitcoin will last, and it is highly unlikely to ever serve as a common form of money.  However, I do believe there is unlimited potential in the blockchain technology and that it will be incorporated into many industries and ultimately into our daily lives.  We are just getting started.

I like to frequently point out that the advice given by Warren Buffett is the opposite of what actually made Buffett extremely rich.  This doesn’t automatically make the advice wrong, but it is important to recognize it.

Buffett is a strong advocate (for others) to buy and hold U.S. stock market index funds.  He says if you believe in the American economy, then it is a relatively safe bet to just buy a low-cost index fund of the S&P 500 and hold on to it for the long run.

However, Buffett became extraordinary wealthy by picking individual companies to buy or invest in.  He found companies that he saw as good long-term value plays.  For the most part, he has been quite successful in the strategy that he has personally implemented. He isn’t exactly a rags-to-riches story, but you could say he is a story of going from upper middle class to one of the wealthiest people on the planet.

Warren Buffett’s father – Howard Buffett – was a Republican congressman.  Philosophically, Howard Buffett was mostly libertarian.  He advocated a non-interventionist foreign policy, and he pushed for a return to the gold standard.  Unfortunately, Warren Buffett did not follow in his father’s footsteps, at least politically speaking.

There have been some recent stories discussing Warren Buffett’s favorite metric in telling us of stock valuations.  Buffett has, in the past, cited this indicator as “the best single measure of where valuations stand at any given moment”.

The indicator is the total market capitalization of all U.S. stocks divided by the latest GDP.

Of course, like any indicator, it doesn’t have to be right, and Buffett himself would tell you this.  We don’t hear Buffett currently out on the circuit warning of a major stock market downturn.  Even if he thought such a thing was coming, he probably wouldn’t boldly announce it.

The Buffett indicator is currently near 150%.  It is at about the same level as the peak in 2000 at the height of the tech bubble.  The current number is well above the percentage in 2008 before stocks (and the rest of the economy) imploded.

In other words, if the Buffett indicator is to be trusted, then we should be seeing a massive selloff in U.S. stocks in the near term.  Also, in other words, you shouldn’t be following Buffett’s advice to buy and hold an index fund.

Even if you do want to bet on the long-term health of the U.S. economy, why would you hold on to a heavy stock position when you know that there is a high likelihood of a severe correction?  If you trust Buffett’s advice to buy and hold stocks, then why do you not trust his advice with his favorite indicator of stock valuations?

It’s possible that GDP could spike higher and bring down the currently high percentage of the indicator.  But really, how likely is that?  If the indicator means anything and is likely to fall back below a more reasonable level of, say, 100%, then this is far more likely to come about with a major correction in stock prices.

I think the Buffett indicator is an interesting one and certainly has some merit.  Still, I believe that it is not the best indicator overall.  The best indicator is the yield curve.  An inverted yield curve is about as certain as it comes when predicting a recession.  And with the major explosion in stocks over the last several years, it is almost certain that a major correction in stocks would go along with a recession.

Currently, the yield curve has not yet inverted.  It has flattened quite a bit in the last year.  As I write this, there is less than a one percentage point difference between the 10-year yield and the 3-month yield.

The yield curve is my indicator.  But either way, I am not an advocate of buying and holding index funds in U.S. stocks.  I advocate a permanent portfolio.  And if you think there is strong likelihood of stocks severely correcting, why would you hold them anyway?  You can always buy them back after the correction.

The FOMC released its latest monetary policy statement on August 1, 2018.  As was expected, it did not change its target for the federal funds rate.  It is still in the range of 1.75% to 2%.

The FOMC statement did change a little from last time, stating that “the labor market has continued to strengthen and that economic activity has been rising at a strong rate.”  In the June statement, it read that “economic activity has been rising at a solid rate.”

I guess “strong” is better than “solid”, or so say the analysts.

While the Fed is currently seen as essentially doing nothing, it is doing something.  In fact, it is doing something that it has not done often in its history.  It is deflating the monetary supply.

In the implementation notes of the latest statement, it says that the Fed will continue to roll over the maturing debt for Treasury securities that exceeds $24 billion and mortgage-backed securities that exceeds $16 billion.  In other words, it is equivalent to selling off $24 billion in Treasury securities and $16 billion in mortgage-backed securities.  The Fed is draining its balance sheet by $40 billion per month.  Over the course of several months, this starts to add up to real money, even in terms of the federal government and the Federal Reserve.

You probably won’t read that in a lot of places.  But, yes, the Fed is currently deflating.  This after its unprecedented monetary inflation from 2008 to 2014 where the adjusted monetary base grew by nearly five times.

In the FOMC statement, it says that inflation remains near 2 percent.  Therefore, nearly everyone thinks things are going rather smoothly.  However, we shouldn’t let that fool us.

In the late 1920s in the lead up to the Great Depression, consumer price inflation was low and relatively stable.  This gave the false impression that there were no giant bubbles.  This told the central planners that there was no overheating, as they like to term it.

Yet, the stock market plunged anyway.

Now, there are many reasons why the Great Depression was so severe and lasted so long.  This was due to the continuous interventions of Hoover and Roosevelt.  But the initial bursting of the stock market bubble was largely because of the loose monetary policy that came before it, which misallocated resources.

I am not predicting the next Great Depression.  But I do think there is a major bubble in stocks.  This isn’t to say that the bubble can’t go on for a while longer.  It’s just that we shouldn’t be fooled by the relative calm, including the stable consumer price inflation numbers, that everything is fine.

There have to be misallocations from the previous monetary inflation and the continued low interest rates (backed by the Fed).  It is just a matter of when these misallocations correct and how severe it will be.