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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

There are typically three aspects involved in becoming financially independent:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Yet, the stock market plunged anyway.

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

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

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

Life is expensive.  A few months ago, one of the springs on my garage door broke on a Sunday.  We had one car inside and one car outside.  We would need both cars on Monday.  I quickly realized it wasn’t a do-it-yourself fix, especially since I needed my car on Monday.

Luckily, two guys were able to come out that afternoon and fix everything.  That is the good part.  They replaced both springs and also had to do some other fixes.  There were also a couple of minor things they recommended I do.  They also did a small fix with the sensors that they didn’t charge me any extra for.  When all was said and done, it was over $700.

That is a huge expense.  I still have the same garage door, and even the same motor.  It needed to be done, and I paid for it.  I don’t blame the business at all.  I looked at a review website and the company’s prices are competitive, or maybe even better than average.

It took the two guys probably a little over an hour.  I can’t imagine these two young guys are making any more than $30 per hour, and that might be generous.  Their time and gas for their vehicle couldn’t have been any more than $100 out of the more than $700 bill.

But if they are only getting a small fraction of the total amount I paid, then where is all of the money going?

It would be easy to say that the company is making a huge profit, but somehow I doubt it.  The company is obviously profitable, or else it wouldn’t be a business.  We need profitable companies in this world so that they are there to serve us.  But there are many garage door repair companies in my area.  In a relatively free market, it is unlikely that a whole bunch of companies competing against each other are making extraordinary profits.

Obviously there must be other costs.  There are the costs of the parts to fix the garage door, and I believe the replacement springs weren’t cheap.  Even here though, one has to wonder why there are so many things that seem so expensive now.  How much more are the springs because of tariffs, regulations, and other taxes?

Then consider the costs associated with the employees.  If they are making $30 per hour, the actual cost to the employer may be double that.  The employer is likely paying for benefits.  We all know how expensive health insurance is.  The employer has to pay the employer’s share of payroll taxes.  The employer has to pay for unemployment insurance.  The employer also has to buy his own insurance in case one of his employees gets injured or in case someone decides to sue the company.

Here in 2018, we are supposedly in a boom.  In some ways this is correct.  There is a stock market boom.  There is somewhat of a housing boom, at least in some areas.  There is an employment boom in the sense that unemployment is low.

I know that some will say that the unemployment rate is much higher than what the government’s statistics show.  This may be the case.  But most people looking for a job today can find a job.  It just may not be a desirable job, or it may not be a job that is not worth the pay, especially if you can collect welfare instead.

Some employers are actually struggling right now because it is hard to hire good help.  If you are an employer and have a good employee or good employees that you rely on, then I suggest you give them a significant raise to make sure they stay with you.

Some will say that the current boom is built on loose money, artificially low interest rates, and massive debt.  To some extent, I agree.  I think it is a mix.  We are obviously gaining in wealth and productivity in some areas, but there are certainly many misallocations as well, where the boom is artificial.

The problem I am pointing out here though is that this isn’t really a boom for consumers.  Again, life is expensive.  It is great that most people who want to be employed are employed.  The problem is that their paycheck isn’t carrying them very far.

The middle class continues to struggle, despite the good economic numbers.  Perhaps consumer price inflation is understated.  Regardless, there is a large segment of the population that doesn’t feel the boom as much as the numbers should indicate.  They have a job and their 401k balance has been going up, but then they are close to living paycheck to paycheck with little money in the bank.

This is similar to around 2006/ 2007 when housing and stocks were booming.  Yet, many people were struggling to keep up with their bills.  They probably felt embarrassed and ashamed to a certain extent.  They probably wondered how all of these other people could afford these nice houses, but the truth is that many other people weren’t affording the nice houses.  That is one of the main reasons why foreclosures exploded.

It may sound odd to hear this, but we actually need a recession.  In the long run, if the government and central bank do not do something too drastic in response, then a recession would actually be good for middle class America.  Sure, it would be especially difficult for those who lose their jobs.  It would be tough watching your 401k balance go down if you own stocks.  It would be tough to take a pay cut.

However, there is a major upside that is missed.  Unless the Fed resorts to massive inflation (which isn’t impossible, admittedly), then there should be a reduction in consumer prices.  Maybe it would only cost $500 for that garage door fix instead of $700.

There is a reason that a recession can also be referred to as a correction.  It is a correction in the allocation of scarce resources.  It is a correction in that it is redirecting resources to their proper use in accordance with consumer demand.  It stops the resources from being funneled into the unsustainable bubbles.

Life is expensive.  Unfortunately, in order to solve that, we are going to have to get a recession to cleanse out the malinvestment.  Then we need a drastic reduction in government spending and we need for the Fed to stop inflating the money supply every time the economy turns down.  Until then, look forward to a relatively expensive life, even if you are trying to be frugal.

On April 17, 2018, I wrote a post titled How We Know That China and Russia Do Not Want War.  In that post, I pointed out that China and Russia have economic interests that would be in contradiction to a conflict with the U.S. government.  Of course, it is obviously not in the interest of the politicians to get into a nuclear war too.

I stated that China was still the number one holder of U.S. government debt.  Then I stated the following:

“And while Russia’s holdings are small in comparison to China, even its holdings have stayed relatively stable.  Its holdings went up in early 2017 and then declined later in the year.  But year-over-year, its holdings are up slightly.  We’ll see in a couple of months if anything changed in March and April, but it is doubtful that it will be significant.

“If China and/ or Russia really wanted to make trouble for Washington DC, it would sell all of their Treasury holdings.  If Russia did it, it might not have that big of an impact.  But even the announcement of a sale of almost $100 billion of U.S. debt into the market would have its effects.  Interest rates would likely move up in response.”

Little did I know that just three months later and Russia would have sold off the vast majority of its holdings of U.S. Treasury bills.

The Treasury releases a report of major holders of Treasury securities each month.  In the latest report released on July 17, 2018, Russia was no longer listed.  It is now lumped in with “All Other”.

Meanwhile, China is still near $1.2 trillion in holdings with no signs of a decrease.  The only other country that is anywhere close is Japan.

As reported by RT News, the Russian central bank’s latest holdings totaled just $14.9 billion.

As I write this on the evening of July 23, 2018, long-term interest rates jumped higher earlier today with news of a possible change in course with Japan’s monetary policy.  Yet, this news of Russia from a week ago barely registered.  The news about Russia dumping its holdings was not widely reported, although there are some articles out there about it.  If this had happened in the pre-Internet era, we would be in the dark about it.

The selling off of almost $100 billion in U.S. Treasuries by Russia had virtually no impact.  The total holdings by foreign countries (meaning their central banks) actually went up in May 2018 (the latest figures) from the previous month.  So even though Russia dumped its holdings of U.S. government debt, other countries apparently picked up the slack, and some.

Say what you will about Putin, but he is smart.  He knows about the rhetoric coming out of the U.S. media and political figures that is into Russia bashing.  He understands the game that is being played, and he doesn’t want to take a chance of having more assets frozen or just getting outright stiffed on the U.S. Treasury holdings.

I’m sure Putin was in on this decision by the central bank.  I don’t think it was a move to poke at Washington DC.  It was a defensive move.

China is the elephant in the room when it comes to Treasury holdings.  The Chinese central bank really could move the market in a significant way.  The thing is, the Chinese officials are a bunch of mercantilists.  They think they have to hold U.S. Treasuries in order to hold down the value of their currency and subsidize their export industries.  The Chinese have continued to hold massive amounts of U.S. government debt, in spite of tariffs and tough talk by Trump.

Trump complains about the trade deficit, but he should be careful what he wishes for.  The Chinese could help the U.S. trade deficit by dumping a massive amount of U.S. debt.  Is that really what Trump (the low-interest rate guy) wants?

Unless things really get carried away with China, I don’t think the Chinese central bank is going to be doing a massive dump of U.S. Treasuries any time soon.  China and Russia are very different.  Putin may be a mercantilist to some extent (aren’t most politicians?), but he is more of a nationalist.  He isn’t foolish enough to attempt to subsidize exports by holding onto excessive U.S. government debt.

The Chinese “leaders” are foolish.  They are being pushed around by Trump.  Any new threat of tariffs, and the best the Chinese officials can do is to threaten a small amount of tariffs on U.S. goods in retaliation.  In other words, they will just shoot themselves in the collective feet.

The one major economic weapon that China has is its holdings of U.S. government debt.  They don’t even have to make threats with it. They can just send a signal over the next couple of months by selling off about $100 billion per month.

But again, they are mercantilists.  They are communists in name only, but they are still economically stupid.  They believe in a command economy, and I don’t expect any significant reductions in Treasury holdings by China in the near future.

While it isn’t surprising that the establishment media and the establishment in general continue to attack Donald Trump, it was surprising just how much vitriol was poured on with the Trump/ Putin meeting in Helsinki.  Here are some random thoughts regarding the meeting and Russian relations and the reactions.

1. While Donald Trump has been a divisive person, it is the establishment’s reaction to Trump that has been even more divisive.  When the media is calling Trump disgraceful, and worse, treasonous, for meeting with Putin, it is causing those who actually listen to the media to hate Trump more, while those who don’t trust the media back Trump more.
2. It is crazy how most of the people who criticized the Iraq War and the lies of weapons of mass destruction are all of a sudden giving Trump a hard time for not backing “his” intelligence agencies.  The intelligence agencies – especially the CIA, FBI, and NSA – lie.  Then they corroborate each other’s lies.  Even Michael Moore and much of the political left are going after Trump for not trusting the intelligence agencies.
3. The most disappointing thing for me personally is that many libertarians have bought into the lies of the intelligence agencies.  They somehow believe this nonsense about Russia hacking our elections, despite the fact that there has been absolutely no proof given.
4. I continue to hear this lie that Russia invaded Crimea.  Putin was asked about Russia’s annexation of Crimea in an interview with Chris Wallace on Fox News, and Putin corrected Wallace that it was not an annexation.  It was the U.S. government, and in particular the CIA, that helped overthrow the democratically-elected government of Ukraine (Putin did not say that part).  After that, the people of Crimea voted (extremely overwhelmingly) to join Russia, as the population there is mostly ethnic Russian.  All that Russia did was accept Crimea’s vote to join.  Even the great Judge Napolitano got this wrong, writing that Putin “has invaded Ukraine.”
5. No matter what Trump did or said at the meeting with Putin, there would have been heavy criticism.  Remember that Trump was already set to meet with Putin before the phony indictments were issued by Mueller just days before.
6. The establishment has pushed this narrative against Russia ever since Trump was elected.  They are trying to kill multiple birds with one stone.  It is an excuse on why Trump won and Hillary lost.  It focuses on the leak of the DNC data instead of what was actually in the leaked data.  And it continues to keep tensions high with Russia to help fund the war state and the military-industrial complex.
7. It is unbelievable that the political left and the entire establishment hate Donald Trump so much that they would rather take him down and risk war with Russia than have peace.
8. Even watching Fox News has been frustrating, as most of them buy into the whole thing about Russia hacking the elections and that Trump should have backed his intelligence agencies.  There are a few exceptions.  Tucker Carlson has been good.
9. While I was highly critical of Rand Paul, especially during his presidential campaign, he has correctly defended Trump’s meeting with Putin and how it was handled by Trump.  He has been a bright light in standing up to the lying media.
10. Trump has made many mistakes, but particularly in surrounding himself so much with the establishment.  He did his own thing in meeting with Putin, which is good, but then he seems to fall back in line with the establishment in most other ways.  While I don’t like Steve Bannon, it would be nice if Trump had somebody more independent and outside of the establishment that he could consult with.
11. Trump was right not to side with the intelligence agencies when he was meeting with Putin.  I believe they are lying on purpose in order to destroy Trump.  But then Trump doesn’t want to give the appearance that he doesn’t have control over his own administration and his agencies (which he doesn’t).  I would rather Trump come out and identify the deep state and tell the American people that the deep state is running independently of him and trying to destroy him.
12. Sometimes Trump seems really brilliant to me, and then other times he seems more like Inspector Gadget.  I wonder if there is anyone working behind the scenes who is constantly saving his butt without him knowing it.
13. The Russian central bank has sold off virtually all of its U.S. Treasury holdings.  This was a smart move by Putin and the Russian government.  You have to wonder if China will ever wake up and do the same.  More on this in a later post.
14. If the establishment is able to take down Trump in some manner, the backlash is going to be great, and I really don’t know what to expect.  I think the establishment is scared to take him down outright, either through assassination or impeachment or some other method.  There are a few who are saying he has committed treason and should be jailed or executed, but I think most of the establishment knows better.  They want to discredit him and take him down through popular opinion.  Otherwise, they risk a major backlash that might be worse (for them) than Trump himself.
15. And finally, I wish that Trump would hold a primetime speech to the American people that the media would be essentially forced to cover.  He should address the deep state and the lies of the intelligence agencies.  He should say that if he gets killed, then it was inside forces in the deep state.  He should say that Russia didn’t hack the DNC server as is being claimed and that if there is any proof to the contrary, that it should be presented.  There are a lot of people who don’t read Twitter and who listen to the mainstream media and the headlines on their news feed.  Trump needs to address the country as a whole and he could probably get his approval ratings above 50%.

For anyone looking for safety and stability with an investment portfolio, I advocate a permanent portfolio as described by Harry Browne in his book Fail-Safe Investing. Even if you are looking for something with more risk and reward, I still recommend a portion of your investments be put into a permanent portfolio, while allocating a certain portion for speculation.

Unfortunately, the permanent portfolio is too boring for most people, so they don’t listen to the advice.  And if you do tell someone about it who is outside of libertarian circles, they think it is crazy to have a 25% allocation towards gold.  Most financial advisors won’t recommend any more than 5% towards gold, if any at all.

Still, there are some who do follow the permanent portfolio, or at least a basic outline of it. I have been working on writing a report about the permanent portfolio and possible tweaks that can be made to fit each person’s situation.

With that said, I received the following question the other day via email.  I asked for permission to write a response via a blog post.  The background and question is as follows:

“You know how experts will say ‘don’t invest in stocks if you don’t have at least xxx years before you need the funds.’  Well I am contemplating a move to another state in 3-4 years and maybe a house purchase there. I have no idea the exact time (but it’s at least 3 years) nor how much of my savings it would use. In a situation such as that, what are your feelings on the PP for my savings as opposed to just treasury bills?  I have adjusted my PP a bit, upping the cash and lowering the gold.  So the daily volatility is very low.  So the only real risks I see is if stocks AND long term treasuries both crater in unison. Or of course if my ETFs go bust.  As an aside, I have adjusted my PP to 40% cash, 25% Stocks and LT Bonds and 10% Gold. All ETFs.”

My response:

The permanent portfolio is different as compared to stocks.  I don’t agree with advice from the so-called experts that people should invest the majority (or all) of their funds into stocks.  However, if someone does take the advice to invest heavily in stocks, then it is correct that you should only do so if it is for the long run.

Even here, what is the long run?  If someone had invested in the Japanese market at the top in 1989, they would still be down by almost half nearly three decades later. If someone had invested in U.S. stocks near the peak in 1929, they would have waited at least a couple of decades to recover.  When most advisors recommend staying out of stocks if you need the money in the short run, they aren’t talking decades.

The good thing with the permanent portfolio is that you are not vulnerable to these prolonged downturns, or at least not as compared to stocks.  There are no guarantees in life, so it is theoretically possible that the permanent portfolio could be down over the course of, say, 5 years.  But it is highly unlikely, and it hasn’t happened so far in the United States in modern times.

In fact, in the few years that the permanent portfolio has been down for a calendar year, it tended to give double-digit gains the following year.

Therefore, if you don’t need the money for at least 3 to 4 years, I would recommend just putting it all in the permanent portfolio. The chances are very slim that you would lose money over this timeframe.  And since you don’t know exactly how much you will need to move to another state, and how much you will need for a down payment on a house, then you have some wiggle room anyway.  If the portfolio were down by 10%, it doesn’t sound like it would be that devastating.

I agree that it is unlikely that both stocks and long-term bonds will perform really poorly over this time.  If we hit a recession and stocks tank, then I expect U.S. government bonds to do well.  And if we continue on this little boom (at least for those with assets), then stocks should hold up well.

Of course, nobody can predict the future with certainty. While higher price inflation and inflation expectations do not seem to be on the horizon, we know that things can change quickly.  An unexpected war or some major event could shift things quickly, and maybe gold will resume its bull market from where it left off back in 2011.

Since you may need some of this money, you should not buy physical gold coins for your gold portion, or at least not the majority of your gold position.  It is always a good idea to have a little bit of physical gold.  But if you are going to sell off part of your portfolio to use as a down payment on a house, then you want to have some of your gold in an ETF or something similar where the transaction costs are low. You don’t want to be buying and selling gold coins in a relatively short period of time because of transaction costs.

As you get closer to your move and have more certainty as to how much money you will need, then you can start shifting more money towards cash (or cash equivalents).  If you know you are moving within a year and will need the money, then that is the time to go even more conservative towards cash and out of the permanent portfolio.

One other consideration is to use the mutual fund PRPFX.  While this does not perfectly mimic the permanent portfolio setup, it is a pretty good alternative.

In conclusion, I believe the permanent portfolio is stable enough that you can keep your investments in it for a 3 to 4 year time window and be reasonably sure that it isn’t going to lose value in nominal terms.  Once you get within a year of needing the money, then it is appropriate to move towards a stronger cash position.