On economic matters, Trump gets things wrong.  He has a few good instincts as far as reducing regulations and reducing some taxes, but after that he lacks a basic understanding.  With many politicians, you wonder if they are just lying in order to gain power and influence.  But with Trump, you really get the feeling that he just doesn’t understand economics.

One of the issues tied to Trump’s tariffs is the trade deficit.  Trump says that trade is not fair.  He says that the United States is getting ripped off with a huge trade deficit, and he is trying to correct that.  He’s also going to find out, if he hasn’t started to realize it already, that it isn’t easy to turn around the trade deficit.  And if you do solve this imaginary problem, you probably just created a whole set of new problems that aren’t imaginary.

There isn’t really such a thing as a trade deficit if the trade is done voluntarily.  There is stealing.  If one country invades another country and takes some of its resources, then perhaps you could say that this is a trade deficit. But that’s not really what Trump is talking about.

The main reason that the United States runs this so-called trade deficit is because it is an attractive place for investors.  A good example is China selling goods to the United States.  But the Chinese often don’t get goods in return. The exchange might be in the form of services.  Or the exchange might be in the form of investments.

If there were any trade deficit at all, it would be other countries getting the short end of the stick.  They are manufacturing goods and sending them to the United States.  They are often not getting any hard goods in return.  They are getting the equivalent of certificates in investments that may or may not be returned in full.

One of the main things bought by the Chinese and Japanese are U.S. government Treasury bills and bonds.  In other words, they are purchasing U.S. government debt.  So the Chinese will manufacture goods and send them to the United States and receive a bunch of IOUs from the government.  And Trump is complaining about this?

This is actually the one area where trade deficits do matter in the long run.  When these foreign central banks accumulate U.S. government debt, it allows the U.S. government to sustain its reckless spending for longer with cheaper interest rates.  So in this sense, it hurts us.  But that is a problem of spending and debt.  It is not caused by the trade deficit.  The trade deficit is just a reflection of the spending and debt.

But Trump isn’t telling foreign central banks not to buy U.S. debt, let alone actually sell it. He is a low interest rate guy.

Other than the national debt, the trade deficit is basically irrelevant.  It is mostly the workings of the marketplace given the circumstances.  Sure, if the Chinese economy were freer, then maybe the Chinese would invest more of their capital at home.  But the fact that their capital flows to the U.S. does not harm the U.S. economy (other than the government debt as discussed above, which is the fault of the U.S. government).

Let’s say you live on an island with 99 other people.  A foreigner comes in and offers to trade with you.  He will give you some food and luxury items in exchange for a small hut on the island.  You agree.  He decides to come to your island for two weeks out of the year and live in the hut.  As long as he is peaceful, there should be no problem.  This could be considered a trade deficit for the 100 people on your island though because the hut is on the island.

Maybe the foreigner comes to your island and offers to give you food, and in exchange you will give him food five years from now.  Again, this is a trade deficit.

Maybe the foreigner comes to your island and offers to give you food in exchange for one hour of consulting on how to survive on a small island.  You provide your services and get the food.  Although you gave him a service, it was not actual hard goods.  Therefore, you have a trade deficit.

You can start to see how absurd this whole thing is.  Yet there are economists who worry about the trade deficit, and Trump worries about the trade deficit.  It isn’t really a deficit if it is voluntary trade.  The trade just involves different types of goods and services.

We all run trade deficits at a personal level.  If you go to the store and buy a pair of shoes, then you are running a trade deficit with the store.  But the owner of the shoe store will take the money and run a deficit with someone else.  This is how it works. It doesn’t change much just because there are national borders involved.  The only difference is the exchange in currency.

The trade deficit can be a reflection of certain things.  As mentioned above, it is probably higher because of the overspending and debt issued by the U.S. government.  But then it is just a symptom of the problem and not the problem itself.  So if Trump really wants to reduce the trade deficit, then drastically cut spending and allow interest rates to rise.  Unfortunately, I don’t think he is going to take this position.

There have been two newsworthy events in the last couple of weeks.  One is the scandal within the Catholic Church, and the other is the death of John McCain.  One of those events, the death of John McCain, received far more media attention.

To be sure, the revelations of the child sexual abuse scandal of the Catholic Church in Pennsylvania certainly did receive some headlines in the so-called mainstream media.  It is hard to ignore a long cover-up within the church where it is reported that hundreds of priests sexually abused more than 1,000 victims, most of whom were minors.

This happened over a span of perhaps 7 decades.  It included the sexual abuse of little boys and girls, although it seems to have been more boys than girls.

Then there is Pope Francis.  I have never liked Pope Francis since right after the time he became Pope.  He has had a left-wing agenda.  He blathers on and on about social tolerance, environmentalism, wealth redistribution, and socialism.  He talks about these things more than he actually talks about, you know, Catholicism.  The few good things he has said are overshadowed by his seemingly communist agenda (and I try not to use that word lightly).  Overall, I have thought he is a hypocrite and a fraud.

Now, there are credible allegations that this scandal was known about at the top.  Pope Francis has personally been implicated, and he doesn’t seem to be denying the allegations.  I know this doesn’t automatically make him guilty, but you would think he would have something to say on the matter.

Pope Francis likely knew about what had happened, and he likely helped cover it up. Archbishop Theodore McCarrick has been implicated as one of the abusers, and he was sanctioned by the previous Pope, Benedict XVI.

According to the allegations made by Archbishop Viganò, “He [Pope Francis] knew from at least June 23, 2013 that McCarrick was a serial predator.  Although he knew that he was a corrupt man, he covered for him to the bitter end; indeed, he made McCarrick’s advice his own, which was certainly not inspired by sound intentions and for love of the Church.  It was only when he was forced by the report of the abuse of a minor, again on the basis of media attention, that he took action [regarding McCarrick] to save his image in the media.”

When Pope Francis said that we should be tolerant of homosexuals, most people didn’t realize that it included homosexuals who rape little boys.

The problem is that this is an explosive story that has not received the vast media attention that it likely deserves.  If you are just watching the mainstream media, you may not have heard about these credible allegations against Pope Francis.

Instead, we got to hear over a week’s coverage on the death of the maverick, John McCain. McCain was a maverick (according to the establishment) because he crossed party lines.  In other words, he supported all of the worst policies of both major parties.  Most importantly, he could be counted on to support any war, regardless of the party in power in the White House.

McCain is regarded as a war hero because he dropped bombs on innocent people in Vietnam.  He was captured and supposedly tortured, although there are many disputes about what actually happened.

There is one thing that isn’t in dispute though, and that is that McCain spent the rest of his life shilling for wars to expand the U.S. empire overseas.  Instead of talking about the brutality of war and spreading a message of not putting others through the same pain, he chose the opposite path.  Since he got to fight and suffer through war, he was quick to make sure that others would suffer as well.

McCain was one of the worst elements of society.  He was evil in almost every way.  But if you watched the establishment media last week, you would never know it. If you believe their words, then McCain was a hero and a great man of principle.

Conservatives like to refer to the mainstream media as the liberal media.  This is obviously not a reference to classical liberalism. Still, it is even hard to call it the left-wing media.  It is the establishment media that will shill for big government at every turn. You must worship the state.

Fox News was, of course, paying homage to McCain.  But all of the other networks were doing the same.  They are all in agreement on this point – that John McCain was a great man.  For that, we can be sure that the opposite is true.

The establishment media can’t be too far to the left because they are paying homage to a war criminal. There are a few leftists out there who referred to McCain as the war hawk that we was.  But there were few of them in the last week.  It seems to be only some libertarians and a handful of hardcore leftists who are willing to tell the truth about McCain at this point.

Most of the leftists support McCain now because him and Trump were enemies.  They care more about taking down Trump than they do about war.

Meanwhile, during this same time, there was little said about the allegations against Pope Francis?  Why would that be?

It is because the establishment media loves Pope Francis.  He is their favorite Pope because he is a defender of the state in all its forms.  He wants more centralization and more socialism.  Therefore, the media would rather keep these allegations (against Francis) quiet if they can.  They will only address it if it becomes too explosive to ignore.

So that is the world we are living in today.  The media pays homage to the war criminal, while they ignore these explosive allegations of Pope Francis helping out child rapists.  It is a good thing we have the Internet.

The Federal Reserve (“the Fed”) currently holds about $1.7 trillion in mortgage-backed securities.  Prior to 2009, the Fed owned zero mortgage-backed securities (MBS).  It began its accumulation in January 2009 in the wake of the great financial crisis that appeared in the fall of 2008.

The Fed went through three buying sprees of both U.S. government debt and MBS.  They were labeled quantitative easing (QE). There was QE1, QE2, and QE3. QE is nothing more than monetary inflation.  The Fed buys assets with money created out of thin air.  Most of this money is not created on a printing press.  It is digital.  That is why I often refer to digital money printing.

QE3 ended in October 2014.  For almost four years, the Fed has not been inflating the money supply directly.  The money supply can still change based on bank lending and bank reserves.

The Fed is actually reducing its balance sheet right now, although at a relatively slow pace. Still, month after month, those tens of billions of dollars in assets start to add up to some real money.

The Fed is currently reducing its balance sheet by $40 billion per month.  $16 billion of that is in mortgage-backed securities. The FOMC implementation note does not say that the Fed is to sell off these assets.  Rather, it is to not roll over maturing securities up to these amounts.  These reduction amounts are supposed to be increased again, but things can change.

The thing that is not clear is what happens with any assets (debt) that the Fed owns that are defaulted on.  This obviously is not an issue with U.S. Treasury bills and bonds, as the U.S. government does not default on its debt, unless you factor in the depreciating value of the currency.  The problem is with the MBS.

First we have to understand how the Fed collected these securities.  During the housing bubble, banks and other lending institutions made loans to people for houses (and other types of residential properties).  It was common for these loans to have low down payment amounts, such as 3%, instead of the more conventional 20%.  When the housing bust happened, somewhat in sync with the financial crisis, many people defaulted on their mortgages.  They either couldn’t pay, or they chose not to pay.  If you have a $200,000 mortgage and your house is now worth only $150,000, it is sometimes easier to hand your keys over to the bank and default.

The Fed’s buying of MBS from the banks was part of the bailout.  While the public complained to some extent about the bank (and other) bailouts, the bailouts kept happening for many years after 2008, as the Fed bought up these MBS.  The Fed was not paying market value for them.  They were buying these securities for what they were previously worth.

With these mortgage securities, some people would have continued to pay their mortgage, while others did not.  In many cases, there were negotiations to refinance or allow the homeowner (more of a renter, with the bank acting as landlord) to stay in the house with modified payments.

No matter what, we have to assume that a certain portion of the currently-held $1.7 trillion in MBS is bad debt.  We have no idea what percentage this is.  So what happens with the securities that are bad?

I don’t know what tricks the FOMC has up its sleeve, but I see no way to completely drain this portion of the balance sheet without somehow acknowledging that some of it is bad debt.  Therefore, you can’t actually reduce the balance sheet with a retraction in the money supply for all of these securities.

Is the Fed just reducing its balance sheet without actually deflating the money supply when it comes to these MBS?

We know this isn’t the case with the U.S. government debt.  The Treasury actually pays back the interest owed and the principal amount for maturing debt.  The Fed ends up returning most of this money to the Treasury after it funds its own expenses.  It is a tricky game, but at least the accounting works with the Treasury. When the Fed reduces its balance sheet of U.S. Treasury bills and bonds, then this money is sucked back up by the Fed.  There is monetary deflation.

With the MBS, it is unclear what is taking place or what will take place in the future.  The Fed could write off the bad debt, but this is ultimately inflationary.  The Fed printed money (digitally speaking) to buy this debt, and then it is letting the debt expire or be written off without reversing the original digital money printing.  If people aren’t paying these old mortgages any longer, then there is nobody to collect the money from to reverse the original monetary inflation.

There is no question that the Fed is currently engaged in a slightly deflationary policy.  But we don’t know for sure to what extent, and it is also tricky trying to figure out how banks will react to this in the near future.

The excess reserves held by commercial banks have been going down since 2014.  Part of this is in lockstep with the Fed’s tighter monetary policy, but it seems that excess reserves have gone down a bit faster than the Fed is reducing its balance sheet.  Therefore, the Fed’s policy is slightly deflationary, while the banks seem to be slightly inflationary.

There is a lot of confusion to sort through with the Fed’s balance sheet and bank reserves. That is another reason why a permanent portfolio setup is ideal at this stage of the game.  It is also why it is easier to follow the yield curve and let the bond market tell us what is happening.  If the yield curve inverts, then maybe I will speculate a little in shorting stocks.  Until the inversion happens, anything goes.

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.