Back on March 23, 2019, I wrote a post titled, “Special Alert: Recession Indicator Triggered”.  The yield on the 10-year bond fell below the yield for the 3-month note.  This held for about a week and then went back to “normal”.

The two key benchmarks briefly inverted again last week during intra-day trading, but the 3-month yield was lower again when trading closed for the day.  Now the yields have inverted again at close, which just adds confirmation of trouble ahead.

The official closing on May 13, 2019, according to the Treasury’s website, put the 10-year yield at 2.40% and the 3-month yield at 2.41%.  They are rounded off to the nearest one-hundredth of a percent. They are essentially the same, but still another official inversion.

This happened after Trump’s trade war with China blew up.  Trump stupidly hiked tariffs on Chinese products, so the Chinese government retaliated with their own stupid hike in tariffs.  It’s like if I shoot myself in the foot, and you retaliate by shooting yourself in the foot.

That analogy is not exactly correct though because the people hiking the tariffs aren’t the ones feeling it the most.  It is the consumers who live under the politicians’ rule.

Then again, although American consumers are suffering for Trump’s stupid tariffs, Trump is hurting himself too.  As I just wrote in a post last week, Trump is triggering a fall in the stock market, which might just coincide with a coming recession. I don’t think tariffs, while harmful, will actually cause a recession, but it doesn’t mean that others won’t see them as causing a recession.

So just as the Democratic presidential race is getting underway, Trump is hiking tariffs while we face a high likelihood of recession.  That doesn’t make it promising for Trump in 2020, and it is his own stupid fault.  He’ll be lucky enough if Pompeo and Bolton don’t start a war overseas, but he is still in trouble even if he can somehow contain them.  Trump doesn’t understand economics, and it may be his downfall.

Trump thinks of himself as this great negotiator.  And maybe he was when it came to real estate deals.  But working in government is a different ballgame. Negotiation in politics usually means pointing a gun at someone, and it doesn’t typically work out the way it is planned.

Trump thinks he can just bully the Chinese government to do what he wants.  He wants his “trade deal”.  If he really wanted a good trade deal, he would have just eliminated all tariffs on Chinese imports.  It would have been a great boost for the American consumer.  Instead, he makes it more of a struggle for middle class America.

The Next Recession

The latest yield curve inversion is confirmation for me.  I can’t guarantee a recession before November 2020 (the presidential election), but I give it a much greater than 50% chance of happening now. Even if Trump does get some kind of trade deal with China, I don’t think it’s going to matter.

The damage was already done before he took office.  He was foolish to brag about the great booming economy on his watch.  Now he will have to share in the blame.

I don’t think the establishment wants a recession, but you can sure bet they will be quick to blame Trump the minute it becomes evident.

Some people think the 2008 financial crisis was some kind of conspiracy amongst the powers-that-be. I have never thought this to be the case.  It is giving too much credit to the establishment.  They can orchestrate particular events such as coups.  They can make up stories about Trump conspiring with Russia, although they didn’t even do that very well.  But they can’t control an entire economy of 300 million people.

The Fed can change the money supply and manipulate interest rates, but there are limits.  The Austrian Business Cycle Theory is real. We can argue over little nuances with it, but the general theory is correct.  An artificial boom can’t last forever.  It doesn’t matter what the establishment conspires to do. They can’t change the laws of economics.

The media will not heavily criticize the economy until a recession is obvious.  Most of them know nothing of the yield curve. You may hear it on CNBC, but they are mostly cheerleaders for the economy.  You can bet that once the recession is evident that the media will be piling on to Trump hard.  They will pretend to be promoters of free trade and blame Trump’s tariffs if they have to.

If someone like Bernie Sanders gets elected, I’m not exactly sure what to expect.  He isn’t going to be some kind of radical socialist.  He is going to conform to the establishment for the most part.  Most of the spending from Congress is already spoken for, and the deficits are already huge.  But I think we will be most vulnerable at the beginning of a Sanders presidency, especially if we are in recession.  He may be able to push more of his welfare state agenda at that time.  It would be the same for someone like Biden, but probably to a lesser extent.

One thing I am certain about is that the Fed will start digitally printing money again. The only question is how much. There are going to be some bargains when things are down across the board, except for U.S. government bonds. It might finally be the time for a boom in commodities, including in the precious metals.

This is why it is good to have some cash on the sidelines.  You don’t want to be in stocks right now anyway, or at least not heavily.

All I know is that bond investors right now are accepting a lower interest rate to lock their money in for 10 years as they will take for 3 months or less.  This is a sign of fear.  The bond investors know better than the stock investors if history is any guide.

On August 15, 1971, Richard Nixon announced to the nation an end to the Bretton Woods agreement that was instituted around the end of World War 2.  This put an end to the last remnant of the gold standard for the U.S. dollar.

Gold, in most forms, had been illegal to be held by Americans since the authoritarian Franklin Roosevelt dictated so right upon taking office in 1933.  But despite this, and despite the creation of the Federal Reserve in 1913, gold could still be redeemed by foreign governments for their U.S. dollars.

Charles de Gaulle of France took advantage of this in the 1960s.  With the government’s “guns and butter” under Lyndon Johnson, the dollar was being inflated.  This is what happens when you are supporting a welfare state or a warfare state, and especially so when you are supporting both.

It presented a problem for the U.S. government that France was redeeming gold for dollars because the U.S. government would eventually run out of gold.  This is what happens when you print money.  You can’t maintain a gold standard unless you continually reduce the amount of gold that can be redeemed per dollar, but that wouldn’t be much of a gold standard.

Many people blame Nixon for completely abandoning the gold standard, which is fine.  Nixon really was a big government guy. When he announced the end of gold redeemability, he also announced wage and price controls.  He was not a free market guy.

Still, I don’t think things would have turned out much different if someone else had been president during this time.  Something had to change.  The government was going to run out of gold.  If it didn’t break the promise of exchanging gold for dollars, then it would have had to get the Fed to stop printing money, or perhaps even deflating the money supply.  This was not going to happen.

Monetary deflation only happened later in 1979 when there was double-digit price inflation and double-digit interest rates.  It is almost inconceivable in today’s world when the 10-year yield sits at about 2.5% and you can get a fixed mortgage rate around 4%.

Paul Volcker became chairman of the Federal Reserve in August 1979.  He almost immediately slammed on the monetary brakes.  He allowed interest rates to rise in accordance to market levels.  It led to back-to-back recessions in the early 1980s.  Some would say it was just one big recession.  It helped defeat Jimmy Carter, but Carter may have lost to Reagan anyway.

We are accustomed to the establishment cheering on money printing (or its electronic equivalent). But in 1979, I think Volcker’s deflation was quietly supported by the establishment.  It helped to save the dollar.  If the Fed had just kept its monetary inflation going, the dollar may have slipped into something close to hyperinflation.

Consumer Prices

If you go to the BLS website and calculate consumer price inflation, it tells us that prices have risen extraordinarily since 1971.  If you plug in a value of $100 in August 1971, that is equivalent to $626.34 today (April 2019).  For a period of less than 50 years, that is a lot of depreciation, especially considering that the U.S. dollar is the world’s reserve currency.  We aren’t Argentina or Venezuela.

Everything seems relatively calm right now in the financial markets.  Stocks have been a little volatile, but mostly up for the last decade.  The reported unemployment is low.  The federal deficits are incredibly high, especially for a period that is supposed to represent prosperity.  Yet, consumer price inflation, at least as reported by the government, is relatively low.

Warren Buffett does not think this is sustainable.  I don’t agree with Buffett on a lot of economic points, but on this one I do. His 95-year old business partner, Charlie Munger, is warning about using money printing to solve all of our problems.  He is pointing out that we can’t just print money like crazy without consequences.

I do not believe we are going to hit a point of hyperinflation, as some alarmists do. I don’t think it’s impossible, but I don’t think it’s likely.  The powers-that-be are not going to shoot themselves in their collective feet.  Hyperinflation would risk their own well-being.

With that said, I don’t think consumer price inflation, as measured by the government, is going to stay forever under 3%.  The median CPI has already been running at 2.8% annually.  I also don’t think the government statistics fully account for the increased cost of living for the average middle class American.  The decreasing price of electronics does not offset the massive increase in health insurance costs.

A good portion of the increased costs in healthcare is due to government regulation and interference, but monetary policy does have an impact too.  Regardless, no matter the cause, this is a real and substantial increase that most Americans have faced.

When the next recession hits, it is likely that the Fed will go back to a policy of monetary inflation.  I don’t know if it will be to the same degree as we saw beginning in the fall of 2008.

It is also questionable on what will happen in the economy.  Will we see a Japan-like scenario where consumer prices stay relatively tame and there is just an overall drag on the economy?  Or will it be more like 1970s America again where there is high price inflation, high interest rates, and periods of recession?  I tend to lean more to the latter, but we can’t be certain.

I think Japan will actually be something of a canary in the coalmine.  Japan has most of the same issues as the U.S., except they seem to be magnified.  The debt is higher, the spending is higher, and the monetary inflation is higher.  It’s just that the Japanese tend to be very obedient to their government.  They are so patriotic that some of them continue to buy the government’s debt, even at near zero or negative interest rates.

Most Americans are not going to buy U.S. government debt that pays a zero percent interest rate. They are more likely to buy gold or real estate.

It’s hard to say where this goes next, but Buffett and Munger are correct that the current situation is not sustainable.  Something has to give.

I am over Donald Trump.  I am still anti anti Trump, meaning that I view his worst enemies as some of the most despicable people on the planet.  This includes many of the people in his cabinet and his advisors, who pretend that they are on his side.  Believe me, people like Pompeo, Bolton, and even Pence, are not on Trump’s side unless he completely capitulates to all of their demands.

I didn’t vote for Trump, and I saw a lot of problems with his policy proposals.  I have long thought he is completely ignorant at best when it comes to economics.  He also has an authoritarian streak as part of his ego.

With that said, I do appreciate his disruption of the establishment.  He hasn’t drained the swamp, but he has certainly helped to expose the swamp for anyone who cares to look.  This includes the establishment media.

I held out a little hope that there would be more peace under Trump.  The best I can say for him so far is that he hasn’t yet started any new major wars.  He has continued the old wars, and he is on the verge of getting into a hot war with Venezuela and/or Iran.  The U.S. government has already enacted war against these countries to a certain extent in the form of sanctions.  There just hasn’t been any official shooting and bombing yet.

Although I don’t think Trump would have pushed for these conflicts on his own, he is still to blame for surrounding himself with many war hawks from the establishment.

If he can somehow avoid a major new war, he does have a decent chance for re-election.  Of course, there are a lot of variables.

Trump is loved by his base, and he is hated by his opponents.  It is a vitriolic hatred like never before.  Hatred is nothing new in politics, but there really does seem to be something special about Trump.  There is such a thing as Trump Derangement Syndrome (TDS).

I do not have TDS. You can oppose his policies without having TDS.  The people with TDS obsess over his petty tweets on Twitter.  They go along with made up stories about Russia. They really want to believe that Trump is a racist and that he hates women.  They really want to see Trump’s tax returns.  The list of pettiness goes on.

They mostly do not oppose Trump for his foreign interventions, or that is a secondary concern if they do.  They don’t oppose Trump for his massive spending and big government policies. If anything, they believe he is somehow doing the opposite, despite the facts in front of them.

It’s Still the Economy, Stupid

There is going to be a small number – maybe a few million – who will decide the 2020 presidential election.  They are the people who don’t necessarily love or hate Trump.  They are people who may or may not vote.  Sometimes it just comes down to which side is more enthusiastic.

As with every election, many people vote their pocketbook.  The economy matters to them because that is what impacts them most.  Even though the president doesn’t have near as much impact on the economy as given credit (or blame) for, this is typically the number one issue.

Trump has been taking credit for the supposed booming economy.  I don’t think it is booming.  The stock market is booming and unemployment is low for those looking for work, but it doesn’t reflect how people are doing.  Life is expensive.  Real wages do not seem to be keeping up with the cost of living, starting with health insurance premiums.  Trump and the Republicans did not repeal Obamacare.

Life is expensive because of government.  It is all of the regulations, the taxation, and the monetary inflation. Trump has made it worse with his tariffs, and now he is threatening to raise tariffs on Chinese products even more.  Because of this, we pay more for cars, appliances, and other consumer products than we otherwise would have.

But most people do not see it.  They do not realize that prices went up because of the tariffs.  They’ll blame greedy corporations, but they somehow miss the elephant in the room, which is the government.

However, Trump may not get off so easy with his stupid tariffs.  His boneheaded negotiations are costing us a lot of money, but he is taking the blame in another form.  When he announced he was considering raising the rate on tariffs, the stock market plummeted.  It was easy for the financial media to link his threat of tariffs with the falling stock market.

While I think tariffs are quite harmful to our living standards, I don’t think his tariffs will cause a recession.  However, if a recession just happens to occur as he is hiking tariffs, then Trump will get extra blame for it.

Most of the blame for a recession should be put on the Federal Reserve for its massive monetary expansion from 2008 to 2014.  This misallocated resources that will need to be corrected by the market. This is why it is appropriate to call a recession a correction.  Unfortunately, the Fed doesn’t typically allow the full correction to occur.

Trump can’t escape the Austrian Business Cycle Theory.  The yield curve already inverted once in 2019, and it is near inversion again.  But if we go into an obvious recession before November 2020, some people may be forgiving of Trump.  Not everyone will blame him.  That is why he is playing with fire with his tariffs.  If his tariffs coincide with a recession, it will put more blame on Trump, even if his tariffs didn’t directly cause the recession.

This is why his stupid tariffs may be his downfall.  He deserves to go down for many reasons.  Unfortunately, we aren’t going to like whoever replaces him.

I recently watched a series called Money Revealed.  It was a series of interviews with entrepreneurs in which they talked about money and the secrets to gaining wealth and success.  Most of the people have a favorable view of entrepreneurship and free markets.

The people being interviewed included Robert Kiyosaki (Rich Dad Poor Dad), Patrick Byrne (CEO of Overstock.com), and John Mackey (co-founder and CEO of Whole Foods), just to name a few.

There were many less well-known people too, and they offered great perspectives.  I particularly liked some of the contrarian aspects, such as whether it is wise to invest in a 401k plan, a topic I have touched on before.

In one particular interview, the person pointed out that you gain wealth by helping people.  In other words, your gain isn’t somebody else’s loss.  It is actually the opposite.   As long as you are helping people honestly and non-coercively, then the more you gain, the more you are helping people.

I watched most of the interviews, but they were available for free for only a short time. You can buy a package where you can have all of the videos, plus some bonus interviews.

There were definitely some common themes amongst the successful entrepreneurs.  This is typical in life though.  The paths are different, but the successful people tend to have certain characteristics, or they tend to do certain similar things, which are usually somewhat basic.  This is true with things outside of business too.

One common trait amongst entrepreneurs is that they aren’t afraid of failing.  But I say that with a caveat.  It is relatively speaking.  A successful entrepreneur may be afraid of failing to some degree, but they are more afraid of not doing something.  In other words, their fear of failing to be successful trumps any fear of failure in the short term.

Another common trait I see is that entrepreneurs push through the moments that are hard. No matter what kind of business you are in, you are going to hit roadblocks.  They will be frustrating.  The key is to find a way to get through (or around) the roadblocks.  You keep pushing when most everyone else would have quit.

Hard Decisions, Easy Life

In the very last bonus interview with Tucker Max, he said something to the effect that making hard decisions leads to an easier life, while making the easy decisions leads to a harder life.  In other words, sometimes you have to put in the time and effort up front in order to make things much easier on the back end.

This could be true with many things in life.  If you take the easy way out in parenting when your child is young, you may end up paying for it every single day thereafter.

It could be true with having a pet.  If you work hard and train your dog when he is a puppy, then you will more likely have a great dog that you can enjoy.  If you don’t put in some upfront work, then the dog will just always be getting into trouble and not listening.

And so it is with business.  If you build up your skills early on, they will compound.  It is like compounding interest on your money (which is another good example).  If you set up a business that generates income and doesn’t require as much of your attention once you put in the work, you can profit for a long time. You make the hard decisions (time and effort) early on, and your life will look comparably easy.

There are people who work 8 or more hours a day doing hard work.  Many of these same people will tell you that starting up a side business is too hard, or they just don’t have the time.  But if you step back and look at the big picture, what is really hard?  What’s hard is getting up every morning, 5 days a week, to go to a job that you don’t like for the next 40 years.  Now that is hard.

Learn the Real Lesson from These Teachers

When it comes to investing, I like to point out that Warren Buffett gives advice in doing the opposite of what he did to become wealthy.  Buffett says to invest in index funds and hold for a long time. Yet, he did just about the opposite in order to become the wealthiest investor on the planet.  He purposely picked specific companies to invest in where he saw great value and long-term growth potential.

In watching the Money Revealed episodes, I found a similar theme, except they weren’t telling people to do the opposite of what they did.  However, if you observe closely, many of them made their money in a different way than the message they were preaching.

In the first day of interviews, Robert Kiyosaki spoke about wealth, investing, real estate, etc.  It was good stuff. I know some people have been critical of Kiyosaki, saying that he is a phony.  His “rich dad” seems to be more of a montage of people he knew and experiences he had.  Regardless of what you think of him, most of what he says regarding wealth building is true and helpful.

But the bigger point I see is that Kiyosaki largely got wealthy because of what he taught.  It is the books he has written, and it is the seminars that are put on because of the popularity of his books and his brand. I certainly think real estate investments played a significant role in his wealth building, but it is his Rich Dad Poor Dad that is his bread and butter.

In another interview, there was a guy talking about investing using options.  And I’m sure he had some success in doing it. But he sells some kind of course to other people on how to make money using options.  My guess is that he has made more money from selling the course than actually investing in options.  Again, this is just a guess on my part.

To be clear, I am not being critical of these people at all.  I think the interviews were fantastic.  I just want others to understand how they truly made their money.  Sometimes the best lesson is not explicitly stated.  You have to reveal it yourself.

I also don’t want you to think that there is not valuable information in what they are teaching. There is a joke about infomercials selling wealth-building courses.  They will teach you how to get rich by selling a course in teaching others how to get rich.  There is some truth to it, but I don’t want you to think that everything like this is a scam. The people that sell these types of courses tend to be great marketers.  You can learn a great deal right there.  But even the information that is being sold is often quite valuable.

It is a good idea to listen to people who have made it, assuming that is where you want your life to go.  You should listen to the content, but you should also observe what they are doing (and have done) to make it big.

One other common characteristic amongst the great entrepreneurs: They are all great marketers.

The FOMC released its latest monetary policy statement.  As widely expected, the Fed left its target rate unchanged.  More specifically, it left the range the same for the federal funds rate at between 2.25% and 2.5%.

However, as has been the case for a while now, the news isn’t really with the federal funds rate. If you really want to find out what is going on, you have to look at the Implementation Note that accompanies the statement.

The Fed will actually lower the interest rate it pays to banks on their reserves by 0.05% to 2.35%.  The reason is to get the federal funds rate more in the middle of its target range.  The Fed has had a bit of a balancing act figuring out where the exact federal funds rate would settle as compared to the rate paid on bank reserves.

So even though the news says that the Fed kept rates the same, it actually just kept its target range the same.  It actually did lower the rate, albeit slightly, that it pays to banks for parking their deposits with the Fed.

The even bigger news – if you want to call it news since it seems to be more of a footnote from the financial media – is that the Fed is already tapering its balance sheet reduction.  Instead of allowing $30 billion per month in Treasury securities to expire, now it will only be $15 billion per month.  At least for right now, the mortgage-backed securities will continue to be drained off at $20 billion per month.

The Fed was supposed to have this policy of monetary deflation last for a while in order to drain down its bloated balance sheet from its unprecedented expansion from 2008 to 2014.  The Fed’s balance sheet barely got below $4 trillion, and it is already slowing down the deflation.

The crazy thing is that the market (i.e., stock investors) was actually slightly disappointed in the wording of the Fed’s stance on inflation because they used the word “transitory”.  Stocks went down supposedly because of this one word.  Since the Fed doesn’t see the supposed lack of inflation as persistent, investors now doubt whether there will be an official cut in rates before the end of the calendar year.

This is crazy because if you go back to 2018, the Fed was hiking rates, and it was expected the Fed would continue to hike rates through 2019.  Now the market is slightly disappointed because there may not be a rate cut this year.

Of course, that could change quickly.  The yield curve, as measured by the 3-month yield vs. the 10-year yield, inverted back in March for a brief time. It is now close to flat.  If the stock market starts to tank, or if there are any other signs of a possible recession on the horizon, it is obvious what the Fed will do.  It will start to lower its target rate, and it will quickly stop its policy of reducing its balance sheet.

In fact, it is a relatively safe bet that if a recession is happening, or even looks likely, that the Fed will start another round of digital money printing (also called quantitative easing).  This will be QE4, as QE3 ended back in 2014.

As to the whole discussion on inflation, meaning price inflation, it is unbelievable that the Fed sees this as low.  They say it is running below its 2% target.  This is based on the PCE measure that the Fed uses.  If you use the CPI or median CPI, it is near or above 2%.  If you look at housing or stocks, it is certainly above 2%.  If you look at health insurance premiums over the last 10 years, it is certainly above 2%.

You can get your flat screen television for less than what you would have paid 10 years ago, and it is a lot nicer too.  The bad news is that your health insurance premiums are like buying a couple of flat screen televisions every single month.

I don’t know what the next bubble will bring when the Fed starts QE4.  But we know that there is a lag effect.  The Fed will not be able to cover up the next bust with its money creation, just as it was unable to stop the financial crisis in 2008.

CNBC ran an article titled: The Fed is looking at a new program that could be another version of ‘quantitative easing’.

The article states that Federal Reserve officials are floating the idea of getting banks to reduce their reserves while increasing their ownership in U.S. Treasuries (sometimes purposely misspelled as “Treasurys”).  This would supposedly enable the Fed to reduce its balance sheet further, while still maintaining some liquidity for banks.

The Fed massively expanded its balance sheet from 2008 to 2014.  With that, commercial banks increased their excess reserves by a huge amount.  In other words, a good portion of the money that was created by the Fed was not lent out by banks, but instead parked at the Fed “earning” a small interest rate.

The Fed has been trying to reduce its balance sheet from the previous unprecedented monetary inflation, and it has been doing so recently by $50 billion per month.  However, it has signaled that it would wrap up its balance sheet reduction program this fall.  This coincided with its halt in raising the federal funds rate due to a shaky stock market and a nearly flat yield curve.

The Fed is basically trying to juggle two fears here.  On the one hand, Fed officials are worried about a recession, as they should be with the recent brief inversion of the yield curve.  On the other hand, the Fed is also seemingly concerned about its massive balance sheet and what that could mean for the future.

And what happens if we do hit a recession in the next year or so?  Will the Fed dare to expand its balance sheet even more?  There has to be a limit at some point. That limit will be a loss of faith in the U.S. dollar.

The Fed tried a lot of new tricks starting in 2008 from buying mortgage-backed securities to paying interest on bank reserves.  It has seemed to work out so far, at least from the Fed’s perspective. Sure, it has massively misallocated resources and made our living standards lower than they otherwise would have been, but most people don’t understand this stuff.  If unemployment and consumer price inflation statistics look good, then the Fed must be doing a fine job.

But just because everything has worked out for the Fed for the last decade, it doesn’t mean it will last.  And just the fact that they are discussing these unusual ideas should tell us something. I’m just not sure if it is a sign of overconfidence that they can just keep tinkering with the market and everything will keep humming along; or if it is a sign of fear that something bad is about to happen.

With this latest plan, banks would be substituting Treasuries for actual bank reserves. Treasuries are not as liquid. Just how liquid they are depends on their maturity term.  I have to believe that the Fed will quickly swap back liquidity (bank reserves) for the Treasury bills if an emergency situation came up.

There’s No Free Lunch

It’s not clear what this talk means, let alone what would actually happen if implemented.  I think the Fed just wants to have options on how to deal with a future recession and/ or financial crisis.

When the recession/ financial crisis struck in 2008, the national debt was less than half of what it is now, and the Fed’s balance sheet was about one-quarter of what it is now. So if another recession started right now, the Fed would be building on top of all of this.  Its starting line is way ahead (or is that way behind?) where it was last time.

Is Congress going to double the national debt again within the next decade?  Is the Fed going to quadruple (or more) its balance sheet again?

We still haven’t felt the full effects of the loose monetary policy of 2008 to 2014.  The misallocations have largely not yet been exposed.  When things get tough, they will get tough quickly.  We could see falling housing prices and falling stock prices as we did over a decade ago.  This time, I think the fall in stock prices will be even worse than the fall in housing prices, unless you live in a really bubble area such as San Francisco.

Just because things have been humming along (despite the middle class struggles), it doesn’t mean it will just continue to do so.  Even the Fed has limits.  It can only digitally print so much money until there is a loss of confidence in the dollar.  This doesn’t seem likely to happen any time soon, but emotions change quickly, especially during difficult times.

When the next recession hits, the Fed will likely start another round of so-called quantitative easing.  But no matter how people react, it will just do more damage in the long run.  It might curtail investment even more, while the investment that does happen is malinvestment that is consuming resources that would have been used in other areas to satisfy consumer demand.  And if the Fed really gets carried away, then eventually we will see rising consumer prices.  It may be like the stagflation of the 1970s.  I can’t imagine the Fed letting the CPI rise beyond 10% without acting as Paul Volcker did, but you never can be sure during times of crisis.

It is quite difficult to predict anything at this point, but we know that the Fed is considering its options for when it needs them.  The Fed will continue to play its monetary tricks, but ultimately it can only engage in monetary inflation or monetary deflation.  They aren’t sure which way to go right now, but we know which way they will go when the next recession becomes evident.

Bill Weld has announced his intention to challenge Donald Trump for the Republican nomination for the 2020 presidency.  Weld’s most recent run for political office was as the nominee of the Libertarian Party for vice president in 2016.  While the VP candidate must be officially nominated by the Libertarian Party delegates at the convention, Weld was the choice of the presidential nominee, Gary Johnson.

I wrote quite a bit on Weld and his establishment credentials at the time.  On May 29, 2016, when comparing the Johnson/ Weld ticket to Trump, I stated the following:

“At least with Trump, there is a chance for a less interventionist foreign policy.  If Johnson gets in, then Weld gets in.  If Weld gets in, then the Republican establishment gets in.”

Is there any contesting now that Bill Weld is part of the establishment that seeks to maintain the general status quo of U.S. empire and statism?

You could rightfully argue that the Republican establishment got in with Trump anyway.  After all, you can’t get much worse that John Bolton and Mike Pompeo.  But at least with Trump, he sometimes takes some reasonable stances with regards to foreign policy.  He hasn’t started any new major wars yet, although you never know what tomorrow may bring.

But just imagine if Gary Johnson were president, with Bill Weld as vice president.  Does anyone honestly think that Johnson would have carried through on anything in regards to a less interventionist foreign policy?  Would he have withdrawn troops from the Middle East?

Gary Johnson, if he was even being honest with some of his non-interventionist rhetoric, is weak. If you are weak going into a position like that, you will not survive, or at least your agenda will not survive. Even if he did have a somewhat honest agenda of reducing the U.S. empire, he wouldn’t have been able to carry through on any of it.  Weld would have had his guys running the show from day one.

Donald Trump has been too weak to even get troops out of Syria.  He went further than almost anyone else would have been capable in that he announced a withdrawal from Syria.  But then Bolton and the rest of the establishment put him in his place and delayed the withdrawal.  Trump is weak, but he is not as weak as Johnson.  If Trump can’t pull a few thousand troops out of Syria, there would have been no hope for Johnson.

I even said similar things about Rand Paul when he was running for president.  He has been better on foreign policy issues since his run for the presidency ended.  But if he was not willing to stand up to the establishment while he was running for office, there would have been little hope had he actually been elected. Maybe there was a tiny bit of hope with him because it is possible that his father (Ron Paul) would have scolded him in private and told him to do the right thing and start bringing the troops home.

Weld – An Establishment Plant?

Sometimes conspiracy theories run too far and too deep for me.  Sometimes you don’t need a conspiracy to just believe that people acted in their own self-interest.

Bill Weld obviously got a little notoriety by being the vice-presidential candidate on the LP ticket.  But the more I look at the situation, I can’t help but wonder whether he was a plant, who was put there by and for the establishment.

Most people knew that the Johnson/ Weld ticket was never going to win the general election, barring something extraordinary.  Even if Trump and Hillary had both been recorded on video doing explicitly criminal acts, and the videos had been released a week before the election, it probably wouldn’t have led to anywhere near a Johnson/ Weld victory.

I think Weld’s main purpose was to stop Donald Trump from getting in the White House.  In other words, his main purpose was to help elect Hillary Clinton, which obviously didn’t work.  In the run up to Election Day, Weld was out there essentially campaigning for Clinton.  I still wonder whether Johnson felt betrayed by this, or if he was part of the plan.

Now Weld is set to run against Donald Trump in the Republican primaries.  I can’t imagine that Weld would be delusional enough to think that he could defeat Trump.  It’s possible that he could get really lucky at the last minute and something bad could happen to Trump.  But even here, the Republican electorate would likely find someone else to replace Trump instead of Weld, even at the last minute.

Weld is being put out there to challenge Trump not because anyone expects him to win.  It is simply a strategy to weaken Trump. Weld will hammer away at Trump and do the establishment’s bidding.  While the Democratic candidates (and there are many) hammer away at each other, at least there will be someone else outside of this crop of politicians who is also attacking Trump.  The main focus of the Democratic primary debates will be who can give away more “free” stuff, and who can attack Trump more.

We will have all of the Democratic candidates going after Trump.  The establishment media will obviously continue with their attacks.  And we’ll now have Weld from the Republican establishment side going after Trump.  The more, the merrier.

Lessons Learned for the LP?

The biggest takeaway will be whether the “Libertarians” who supported Johnson/ Weld will learn anything from this.  Unfortunately, I doubt it.  But I have to imagine that there will at least be a few people who scratch their heads and rethink the strategy of putting up “respectable” people as the Libertarian Party nominees.

I had a few debates with Libertarians over this in 2016.  I was told that the LP just wanted two respected former governors who have name recognition and credibility.  If Weld is what you want to call credible, then the word has lost all meaning to me.

He is only credible in the sense that he is a reliable shill for the establishment and statism. He is highly dependable to take the position that most favors the state.

The Johnson/ Weld ticket did get the most number of votes ever for the LP in a presidential election.  But so what?  It is meaningless.  Some of those votes were just protest votes against Donald/ Hillary.  They were not necessarily votes in favor of liberty.

The duo of Johnson and Weld did little to educate people on the benefits and morality of liberty. If anything, they did a great disservice by clouding the libertarian message.  Now there may be some people who think that Johnson and Weld are what it means to be a libertarian.

They didn’t grow the party with actual libertarians.  They didn’t help spread the message of liberty.  They didn’t set any foundations for future growth in the liberty movement.  They didn’t even do much to help us on any of the individual issues.  It didn’t take great courage to come out for the legalization of marijuana in a time when it is already happening by popular opinion.

The LP needs to find another Harry Browne (although nobody could match what Harry Browne did). There are a few promising prospective candidates out there now, such as Jacob Hornberger of The Future of Freedom Foundation.

It would be interesting to see what an actual libertarian could do in the general election. At the very least, maybe the next LP nominee could actually help educate others on what it means to be a libertarian.  It is almost the opposite of the things that are advocated by Bill Weld.

I am a big advocate of investing financial assets in a permanent portfolio as outlined by Harry Browne in his book Fail-Safe Investing.  I recommend at least half of one’s financial assets go into a permanent portfolio or something similar.

The setup is straightforward.  You are buying just 4 asset classes, all in equal parts.  They are as follows:

• 25% stocks
• 25% long-term government bonds
• 25% gold
• 25% cash or cash equivalents

The idea is to protect your assets in virtually any financial environment, while still getting long-term growth.  It isn’t the most exciting way to allocate your money, but it can help you sleep at night.  The portfolio can be a little frustrating during a bull market in stocks (as we’ve had for the last decade) when it seems like everyone else is making good money.  But when that environment changes, you will be thankful for the permanent portfolio.  You don’t need to ride a constant roller coaster.

I go into detail of the permanent portfolio in my short e-book titled How to Set Up a Permanent Portfolio.

One alternative option to the permanent portfolio is to invest in the Permanent Portfolio mutual fund.  The symbol is PRPFX. It makes it easy and convenient to get a permanent portfolio, especially if you can buy it in a retirement account.

However, I do warn people that PRPFX is not a perfect match to the actual permanent portfolio as described above.  There is more speculation in it, which can be good or bad.  Like any mutual fund, you also have to pay a management fee for the fund.

The Current Allocation

Here is a breakdown of PRPFX according to the annual report ending January 31, 2019.  The breakdown is as follows:

• 20.66% gold assets
• 5.89% silver assets
• 7.49% Swiss franc assets
• 7.61% natural resources (stocks)
• 12.59% real estate (stocks)
• 20.39% aggressive growth stocks
• 17.13% corporate bonds
• 7.46% U.S. Treasury securities

It adds up to almost 100%.  As you can see, the allocation is quite different from the permanent portfolio.

The portion allocated to Swiss francs may actually be down a little from where it once was.  I never agreed with this allocation, and I still don’t.  You don’t need foreign currency.  You are protected against dollar depreciation (or whatever currency you are using) with your gold allocation.

And why the Swiss franc?  I know it has been a historically stable currency, relatively speaking.  But it is no longer backed by gold (just like every other currency).  The franc could easily go down, just like the euro or yen.

The next thing that may stick out to you is the allocation of over 5% to silver.  In the real permanent portfolio, the only metal you invest in is gold.  With PRPFX, the gold allocation is reduced closer to 20%, so the precious metal allocation is still close to 25%.

The problem here is that silver is far more volatile than gold.  It will likely do better than gold in a bull market for precious metals.  But when the metals perform poorly, silver will tend to do far worse than gold.  In other words, the additional silver allocation adds more volatility.

In terms of stocks, PRPFX goes way over the 25% allocation.  It is actually over 40%.  And more importantly, it speculates in particular stocks. The fund isn’t just buying a broad index fund, such as an S&P 500 fund.  It is buying specific stocks in specific sectors.

To be sure, if any one stock went to zero, it wouldn’t hurt PRPFX terribly, but it would be a little noticeable.  And if there was a general crash in stocks, the stocks picked by the fund managers could very likely go down even more than the broader U.S. market, especially if energy and real estate took a big hit.

Meanwhile, the bond and money market allocations are light, and part of the bonds are corporate bonds, which can technically default, especially in a down market.

I am not sure how well PRPFX will hold up in a major recession or depression, especially if it is somewhat deflationary where stocks are crashing and gold and silver are also going down.  In this scenario, I think the real permanent portfolio will hold up a better than PRPFX.

This isn’t a recommendation against PRPFX.  Again, the fund is very convenient, and it adds a little more aggressiveness in a portfolio that was designed to be very conservative.  Some people may like this aspect.  I just want to make sure you know what you are getting into if you decide to purchase PRPFX in lieu of setting up a regular permanent portfolio.

There is this ongoing fear of technology in terms of economics.  Perhaps we are right to fear technology when it comes to nuclear weapons or the government spying on us.  But when it comes to doing things more efficiently that make our lives better, we should not fear technology.

It has become common to hear that robots are going to take our jobs.  This has been one of the main lines of argument for those promoting a universal basic income.  After all, if people don’t have jobs, how will they buy anything? Therefore, it is “reasoned”, we need the government to redistribute wealth by providing a universal basic income.

Those who do not fear the takeover of robots point out that other jobs are created.  For example, cars put the horse and buggy industry out of business, but it didn’t mean that people were worse off for it. Other jobs were filled, some having to do with the new technology.

If you go back 200 years ago, the majority of people in the United States were farmers or did some kind of agriculture.  Now, it is less than 2% of the population that do the farming for everyone else.  This has freed up the time for the rest of the population to do other things to better our lives.

The ones who are scared of the coming robots (or who want others to be scared) reject this. They say, “This time is different.”

Why this time will be different is never fully explained.  Are we supposed to believe that robots will do everything? Are they going to run a massager parlor?  Are they going to work as nurses?  Are they going to raise children?  Are they going to provide all of our entertainment?  Are they going to pet sit?

We live in a world of virtually unlimited wants, but we have scarce resources.  As long as that situation exists, there will be jobs for people.  If we ever got to a point where everything was provided by robots, then we wouldn’t need jobs anyway.

Those who are scared of the robot bogeyman will sometimes admit that there will still be jobs available.  But they say that the skills of people laid off won’t match the skills needed for the new jobs. They also say that if people could fill those jobs, then the wages will be so low that they won’t be able to buy the stuff that robots make anyway.

Understanding Free Market Economics

This is just a terrible lack of understanding of the market economy.

First, if people can’t afford to buy what the robots are making, then why would the robots make anything?  Who is paying the capital investment to make robots that can’t sell the products they are making? Why would they have these robots if they can’t make a profit?  It isn’t going to be very profitable if there is just a tiny circle economy of just the capitalists who own the robots.  Most entrepreneurs rely on the middle class as customers (and employees) in order to make significant profits.

Second, there is a major missed point in all of this.  If robots take the jobs of people, it means they are more efficient. They are more cost effective. It means that, assuming we have a relatively free market, the lower costs and competition will drive down consumer prices.  So even if nominal wages did go down, the cost of living would be going down too.

Imagine if all products were like electronics have been for the last couple of decades. Televisions get better and better in quality while the price keeps going down (in spite of monetary inflation and rising consumer prices).

Third, there is this worry about skills, but human labor is very versatile.  In addition, if robots take the jobs of all truckers (self-driving automobiles), it doesn’t mean all of the unemployed truckers have to go into the exact jobs that are created.  There is a market process, where price plays a function. In this case, it is the price of labor.

Let’s say we need more people in healthcare and we need more teachers.  It doesn’t mean all of the truckers have to go into these professions.  If there is a high demand for nurses, then wages for nurses will rise.  This will encourage other people to go into these professions.  It could be young people going to school, or it could be people changing professions.

Maybe someone who was going to be an accountant will become a nurse.  Someone who was going to be a plumber instead decides to be an accountant.  Maybe a former truck driver then decides to become a plumber.

The market sorts all of this out as long as it is allowed to function.  This is the price mechanism at work.  Prices allocate scarce goods, whether it is consumer products or labor.

Technology will make us richer.  It will even improve the living standards of those people who lose their jobs to robots, at least in the long term, assuming the market is allowed to function.  Real wages will go up.  Someone working a minimum wage job today is likely much better off than someone who was considered middle class 200 years ago. We have access to electricity, refrigeration, air conditioning, smartphones, and a long list of other things that mostly did not exist back then.

So to answer the question – How will people buy stuff when robots take their jobs?

They will buy things easily with higher real wages.  Things will be much cheaper if the free market is allowed to exist.

I recently listened to a podcast about investing in dividend stocks.  It is not necessarily clear on how to define a “dividend stock” other than the simple definition that it is a stock that pays a dividend to shareholders.

The only problem with this definition is that there are many companies that pay a dividend to shareholders, but they wouldn’t really be considered dividend stocks because the dividends are so low.  When the current dividend of a stock is lower than the yield on a short-term bond, it is hard to get excited about that stock just because of the dividend payout.  After all, you could just buy an essentially risk-free bond with a higher yield.

This podcast episode sparked some discussions in a forum, which is specifically for people interested in financial independence (FI).  Therefore, you would expect the people in the forum to be somewhat financially savvy, or at least above average.  Unfortunately, a little bit of knowledge can sometimes be harmful.

Someone posted that dividends are the only reason stocks are worth anything.  In other words, stocks really have to pay out dividends or have the potential to pay out dividends in order for the stock to have underlying value.  It was simply an academic point.  He made it clear – at least to me – that this was not investment advice.  He wasn’t saying that you should only invest in stocks that pay dividends.  He was just making the point, “Why would you ever invest in a stock if you knew the stock would never pay out a dividend?”

There is the greater fool theory, meaning that you just hope that someone will buy it from you at a greater price that what you paid.  You don’t care if the stock goes down in price, as long as it happens after you sell it.

It is quite clear that you can make money on a stock that never pays out a dividend, and the original poster on this forum would agree with that.  You can buy a stock, and then later sell it at a higher price.

But if you knew that a stock would never pay out a dividend, why would anyone think this has value in the long run?  What would be the point of owning something that never pays out any of its profits?

The responses to this original post were astounding.  It was one person after another being critical of the original comment. Again, the comment was supposed to be an informative point, and it wasn’t a suggestion to just buy dividend stocks.

The responses kept saying that you can make money on stocks that don’t pay out dividends, even though the original poster made it clear that he agreed with this point.

There were posts saying that dividends are irrelevant to the price of a stock.

There were posts saying that it doesn’t make sense to buy a dividend stock because the price of the stock goes down every time a dividend is paid out.  (This is a lack of understanding of how stocks are valued in accordance with dividend payouts.  The price has to change, all other things equal, otherwise you could buy a stock for $40 per share the day before a dividend payout, and then sell it again for $40 per share the day after the payout is made.  Why wouldn’t everyone do this?)

It was one comment after another of people who were completely missing the point of the post. There were a few people who saw the intelligence of the post and backed him up, but it was a minority to be sure.

There were a few people who pointed out that you buy stock so that you own a tiny share of the company and that you own a tiny share of the assets.  This is correct by itself, but it doesn’t refute the point about dividends.

If you own shares of Microsoft, you could say that you own a tiny piece of the office buildings and the office equipment.  But even this is questionable.  If the company were to declare bankruptcy and all of the assets were liquidated, the senior bondholders would get paid first.  The shareholders are typically last in line.

The reason you would buy Microsoft is not primarily to own the actual assets.  It would be to own a piece of the operations. More specifically, it would be to get a share of the profits from the software and other goods and services that it sells.

Would You Start a Business and Never Pay Yourself?

This is obviously confusing for many people.  Most of the ignorant comments I read were from people who regularly invest heavily in stocks, yet they don’t even understand the purpose of owning a stock outside of “making money”.

Let’s say you start a business.  After the first year, you break even.  Your revenue equals your expenses.

In the second year, your revenue exceeds your expenses by $100,000.  But instead of taking that profit as a salary, you keep it in the bank.  You then decide that you will take that $100,000 and spend it on better equipment and more marketing.  There is nothing wrong with this.  You are trying to grow the business.

The next year, you profit $300,000.  You make the same decision to take this extra money and buy even better equipment and to go even heavier into marketing and hiring more people.

The following year, even though your business is bigger, your profit is still $300,000.  You have to decide whether to put even more money into more equipment, labor, and marketing, or to start paying yourself a salary.

At some point, as the sole business owner, you are probably going to want to start paying yourself a salary, especially when you aren’t getting that much more bang for your buck with more investment capital.

Your other option is to sell the business.  Maybe someone would buy your business for $1 million, counting on the fact that they can turn a profit of $300,000 per year for the foreseeable future.

Paying yourself a salary is similar to getting a dividend from owning shares in a company. The only difference is that the sole business owner can decide himself whether to pay himself a salary. With shareholders, they are dependent on the decision of the company as a whole on whether dividends will be paid.

If you do sell your business without ever taking a salary, there is nothing wrong with this. But you have to assume that the next guy will probably want a salary at some point.  If you just keep rolling all profits back into the business forever, what would be the point of having the business?

That is the same as owning shares in a company.  It doesn’t have to pay a dividend to have value, but there at least has to be a potential of a dividend in the future.  If a company announced that it would never pay out a dividend, there would be no reason to own the company, unless you thought people would foolishly buy the stock knowing this.

Investing Advice

This isn’t investment advice, but I think it is important to know if you are investing.  It is important to understand why something has value and why it is a good idea to invest in something.  It is fine if you just want to try to get capital gains, but you should at least understand why there would be capital gains.

This is a little harder to write right now because there is seemingly a bubble and the “irrational exuberance” that goes with it.  It does become something of the greater fool theory.

But the market usually corrects this over time.  If companies aren’t profitable, they aren’t going to keep going up in value forever.

It’s not to say that a stock is good just because it pays a dividend.  In some cases, the company shouldn’t be paying out a dividend if it is in financial trouble.  If you are a business owner, you might have to cut back your salary (your dividend) during tough times.

If we had a normal functioning free market, I think dividends would be much more common. The tax code and other laws have greatly distorted the whole stock market.  The central bank (the Federal Reserve) has done the same. It is a system that favors capital gains over dividends.

But even distortions can be corrected to a certain degree.  If a company has no dividends, and if it has no prospect of dividends in the foreseeable future, why would the price of the stock go up? The capital gains can’t continue forever without the prospect of dividends.