Congratulations to Barack Obama and the Congress led by the Democratic party. You have now increased USA debt to 13 trillion (by this coming Tuesday). That’s $41,900 per man, woman, and child. That is higher than the per capita income. Since the democrats took control of Congress after 2006 election, the US National debt has increased from 8.67 trillion to 13 trillion. That is a 50% increase, or $14,000 per capita. Well, debt was a bad thing at 8.67 trillion. Why? Because US government debt is bad debt. At the household level, it is equivalent to consumer debt–debt that is spent and afterward you have nothing to show for it nor any income coming in as a result–all you have is increasing costs due to interest payments. It is stupid debt.
economy
The April USA deficit and buying gold
The Obama administration borrowed $82.69 billion in April, 2010. That’s about $8.90 per day per every man, woman and child in the USA. In my humble conservative opinion, such deficits have led and will lead to the devaluing of the US dollar, particularly because the Federal Reserve is keeping interest rates at artificially low levels.
What is the investor to do?
Gold hit a new high $1241.25 yesterday. Gold may decline in the short term but it is experiencing a secular bull market because of the inflation of all paper currencies. I don’t buy gold because I don’t have a safe place to store it and I don’t want to pay an army to guard it. I’ve instead traded gold mining stocks. At my discount brokerage, the commissions are lower than for buying and selling gold bullion or coins. I’ve had a lot of success averaging down and selling off a little at a time as the prices improve. My best buy was WGI (Western Goldfields), which later became NGD (New Gold), on October 23, 2008, at 88 cents; my ngd is up 183% over my average cost price.
In the last few weeks, since I learned about trading options, I’ve been selling near the money put options of abx and gg (Oct, Jan’11, Jan’12 contracts). If current trends continue, these contracts will all expire worthless (even the ABX put Jan’12 at $45) and I will simply keep the premiums. When doing this, it is important to reserve sufficient cash or credit to buy the stock at the strike price. But even if assigned, the purchase of the shares becomes part of the averaging down strategy. So for example, the $45 January 2012 put on Barrick Gold paid me $8.90 premium. The average cost price (after commissions) of the shares if assigned then is $36.29–a 22% discount off the current $46 market price.
Thoughts on Inflation
Andrew wrote at the City of God about inflation as welfare for the rich:
(I’m using “inflation” in the Austrian sense here: increase in the money supply, rather than increase in CPI price levels)
I just heard this recently, and it made sense to me:
1. The entire Keynesian scheme of monetary/fiscal spending to stimulate the economy only works because it takes time for people to catch on to the reality that newly printed paper is not real wealth. That is, people don’t immediately realize that they are spending fiat-money, and thus act based on thinking they have more money than they really do.
2. This temporarily causes greater investment, which has the potential to create real wealth and real economic growth.
3. However, as time goes on, sellers realize that buyers have more money, and thus prices rise accordingly, bringing the economy back to status quo ante, except with possibly increased debt (if enough real economic growth did not occur before the sellers caught on).
4. In the case of monetary policy specifically, newly printed money inevitably goes to the rich first: to banks, and from there to massive corporate investments.
5. As time goes on, more of the poor get the new cash, but it also simultaneously becomes less valuable, since prices are rising.Thus, monetary policy seems to be, inevitably, welfare for the rich.
(Note that none of this would be an argument against government welfare, based on tax-hikes (not spending fiat money), for the poor.)
I responded with some thoughts as an investor:
(1) CPI has not been affected by the inflation of fiat money because there has been no velocity (MV=PQ). Instead of lending money, banks have bought safe US treasury notes to pad their reserves. They have used TARP money to do this. Essentially the US government lends TARP to banks which lend it back to the US government. Also the Federal Reserve bank has bought CDOs from the bank, and the banks have used that money to buy US treasury notes as well.
(2) What we’ve seen since the 2008 credit collapse can therefore be better described as reflation–reflating shrunken credit with fiat money. There are still some mortgages that are collapsing so it may be sometime before we see the most serious detrimental effects of current US fiscal policy (1-2 years?).
(3) Investors are probably more aware of the potential dangers than the public. Therefore we have been making moves in anticipation of a US dollar collapse. This is known as the US dollar carry trade.
(4) Gold is an indicator of inflation, but it also experiences the anticipatory effects of panic about the dollar, as well as periods of profit taking. Its price may therefore at times suggest an overcompensation.
(5) The best hedge against inflation is debt. But you have to buy something with the funds you borrow in order to cover the interest: real estate, dividend bearing stocks, or income investments in foreign currencies or countries (a.k.a., carry trade). The risk is that the investment you make with the debt will not maintain its value, but I consider the current risk of loss of holding currency to be an absolute certainty. So better to own anything except money. For this reason, my current non-registered investment portfolio is 150% in stocks.
(6) Inflation caused by government deficits is not really generational theft as suggested so often by conservatives (or those criticizing current deficits). It is theft of current creditors, bank account holders, fixed income earners and workers, whose current paycheques are garnished through the hidden cost of inflation. It is true that CPI lags inflation, but then pay raises lag CPI. I consider inflation to be especially a heist of the retirement accounts of the older generation–financial advisers often recommend subtracting your age from 100 and that remaining number is what you should have in volatile assets like stocks. The remaining is to stay in fixed income. So if you follow this advice and you are over 70 years old, then 70% of your portfolio is subject to government theft by inflation. Many of these retirees just abandoned stocks altogether during the collapse and now they have cash which is being killed by inflation. It is not a pretty picture. But inflation is not a theft of the younger generation because when the enter the workforce they will earn the currency at its current value.
(7) Inflation in the US will be necessary: (i) to be able to pay the interest and principle on the current debt, inflation is the only way–it is a form of bankruptcy; (ii) to create an effective decrease in the recent minimum wage hike which has put millions of teens and other low wage earners out of work. (iii) to use bracket creep in order to increase everyone’s taxes; (iv) to make effective reductions of entitlement obligations which can’t be paid for.
(8) I am not “rich”, but as an investor, I’ve been able to ride this wave, and I’ve done very well thanks to being able to make the right kinds of move in anticipation of current US inflationary policy, but I may have to bite the bullet on an investment I made with my brother in Austin just before the collapse and that hurts.
(9) While not “rich”, we were able to get a huge amount of bank credit just when I needed it in Oct 2008. That has been great boost to my investments. So indeed, the banks were giving credit to some people, contrary to the widely held belief that no one could get loans.
(10) It is much better right now to be in Canada than the US.
(11) Inflation doesn’t rob the poor but the middle class and wealthy who have holdings which are not hedged against inflation.
(12) Ferengis will make money during periods of inflation.
I’ve since learned that CPI (Consumer Price Index) is manipulated and underestimates inflation by about 7% per annum.
On PoserorProphet’s advice
PoserorProphet challenged me yesterday:
It ain’t easy, eh, Peter? You might discover a new and more joyful life if you sold everything you have and gave the money to the poor (not something I usually suggest but it seems appropriate to what I’ve seen of you). Just a thought.
This challenge is evidently based upon the story of the rich young ruler (Mark 10.17-30 and parallels). I suppose that PoserorProphet is right, and I would be happier and certainly more care-free if I sold everything and gave it to the poor:
Nah, there ain’t nobody in this whole wide world
Gonna tell me how to spend my time
I’m just a good-lovin’ ramblin’ man
Say, buddy, can ya spare me a dime?Yeah, I don’t care when the sun goes down
Where I lay my weary head
Green, green valley or rocky road
It’s there I’m gonna make my bed
I just have a couple questions about the application of this advice to my life:
(1) After selling everything I have, may I just leech off my wife? I am more than happy to do that. Or must she also sell everything she has too? If that’s the case then:
(2) If we both sell everything we have and give it to the poor, what are we supposed to live on here in Canada? Do you want us to go on welfare? Should we live in government housing. You see as an investor and my wife as a business woman, selling everything we would mean unemployment. Or after selling her third of the business, should my wife return to her brothers and beg for her job back and work a salaried position? Why would that make her more joyful? Tell me what shall life be like after selling everything and giving it to the poor?
(3) Who is going to support our church, our priest and his family, when our contribution to the church is lacking. Surely some others will rise up, but wouldn’t you (Poser) require that they also sell everything they have?
(4) What of the numerous Christian ministries in theological education, evangelism, and benevolence that we have supported over the years? We will have to end our continued support for such ministries. That’s ok, as long as others step up, but then wouldn’t you tell those people too that they must sell everything they have and give it to the poor.
(5) Just exactly which poor are we supposed to give it to? The homeless? The almost homeless? The working poor? The poor in Spirit? The poor in Africa?
(6) Will the poor use the money in a responsible fashion? Let’s say I just go to downtown Toronto and hand some poor homeless person a $100,000 cheque? How would that change his life? Would it help him or would the money just be squandered within a matter of days or months? Would he just go buy blow and blow his brains away? Or would it actually change him so that he could become like I am now so that you would have to tell him too to sell all he has and give it to the poor? Then wouldn’t it just be better if I keep the money rather than putting him into the situation of you having to tell him to sell everything?
(7) What should I tell my employees? I suppose the 25 employees Cathy has would carry on after she sold her business to her brothers. But what if Cathy’s contribution to work is what holds the thing together and the business ends up bankrupt without her sound fiscal management. What will happen to those 25 employees, their wives, children and their other dependents? What of the Wycliffe student I promised a year long job too? What about my housekeeper? What are they supposed to do? I suppose they are certainly industrious and could find other employers, but wouldn’t you tell those employers too to sell everything they have and give it to the poor? And once there are no rich people left, who is going to employ the people looking for work? Sean Hannity has a refrain: “No poor person ever gave me a job.”
(8) What about the other people that depend on me? If we sold everything we have, there would be another family besides us that would be homeless, and then what should I tell them? Sorry, PoserorProphet called me to sell everything I have and you can come with me and live on the streets of Toronto too or in some homeless shelter (where ever it is that you are calling us to live).
(9) What about the volunteer work that we do for our church? We use our home as the base of operations. So we should just tell the church, sorry we can’t do that work anymore because we don’t have computers and the other equipment that we need to do those ministries? But we are more than happy to come and eat your food. Can you please pick us up from the shelter and give us a ride?
Craig Carter wrote this just two days ago:
Liberal Christians seem awfully confident that you can be half socialist and not go too far and lose all liberty. Maybe they depend on conservatives to keep them from going all the way – sort of like teenagers depending on parents to say no when they want something harmful. Instead of thinking for themselves they just rely on parents doing the agonizing and deciding where to draw the line.
I urge you to grow up a little bit and think about this flippant advice. Your current crop of professors don’t seem willing to give you this admonition (correct me if I’m wrong); either that or you’re not listening to them. Your counsel lacks wisdom. I know that you aren’t really open to taking me seriously because you think that I am hilarious. But what would be the personal ramifications to each “rich” person, their families, and their other dependents? What would be the effects upon their churches and the other ministries that they support, if they followed your advice? What would be the economic consequences on a macro scale if all the rich people in the world took your ill-conceived and juvenile advice? What if every responsible person took your advice? What would happen to all those who depend on them to be responsible and to work hard? “And the last state of that man is worse than the first.”
I know it was what Jesus commanded the rich young ruler. But Jesus was a prophet, not a poser, and he knew that man and the ramifications of his selling everything. Unlike this new generation of socialist and radical Christians, Jesus did not give this same advice to every rich person he encountered. And how do you know that it wasn’t just a test, like the requirement that Abraham sacrifice Isaac? Is it not enough for God to know that Abraham was willing to sacrifice his son? So had the rich young ruler showed his willingness, maybe Jesus would have said that he’d passed the test and would have permitted him to remain rich provided that he live for the advancement of the Kingdom of God instead of for his own personal kingdom. The vast majority of rich Christians in the early church were not required to sell everything but admonished to remain generous and supportive of the mission of the church, to be hospitable and to provide for widows and orphans. I.e., not too much different from what my wife and I endeavor to do, with the little money that the governments permit us to keep after taxes. And actually, we could retire now and go live well in some tropical country. But we still feel called to work so as to have something to give (Eph. 4.28).
The woman that you gave me
In certain Christian circles there is a new buzz word, “intentional”, as in “intentional Christian community”, in which people live together and they hold things in common. I once lived in an intentional Christian community, before I got married. Really, I’m a communist at heart, but my wife converted me to capitalism. It’s all her fault.
The female of a given species is far more sinful in her orientation than the male. I observe our two cats: Both have had their sex organs permanently removed, but certain sexually specific characteristics remain. Sam, our male cat is a good communist, owning nothing of his own, save the food he eats and the air he breathes. Bailey, our female, is a rich capitalist pig-cat (no offense intended towards the animals called “pigs”). The fact is I use the possessive pronoun in a very loose sense with our Bailey. We don’t own her; she owns us would be closer to the truth; possessive is correct in the sense of our boss. There is a saying, “Dogs have owners; cats have staff.” With Bailey we are closer to the Greek douloi, “slaves”. Bailey, the rich capitalist pig-cat, owns everything. When we originally received Sam into the house we thought he would keep Bailey company — a kitten for her to play with and make her feel better about being kitten-less. But she expressed her extreme displeasure at his presence; until one day she decided that she could use him as a punching bag. I built a scratching post for her years ago. There is no question that that scratching post is Bailey’s. She loves it and uses it daily. So I built one for Sam, introduced him to it, but he seemed uninterested. Then, he would use it always looking over his shoulder as though he were afraid of something–that something was Bailey. Well it soon became clear that the second scratching post also belonged to our rich capitalist pig-cat, and she would whack Sam if she caught him using either of the scratching posts. We notice also that Sam seems pretty nonchalant when it comes to kitty-cat visitors in our garden; he’s curious, he has a “I just want to get to know you” attitude. Not Bailey–she gets her hackles up every time she detects a friendly visitor and will defend her capitalist empire with screeches, hisses and threats, with every ounce of her being. “Give me liberty or give me death.”
When I was about to marry it soon became clear that we were not going to live out our days in our intentional Christian community because neither my fiancee nor any of the other fiancees, of the five of eight housemates who were engaged, wanted to live in intentional Christian community. They all wanted a place of their own. We tried to convince these women with every sort of persuasive argument that the intentional Christian community was more biblical and Christian, but the territorial instincts in the female of our own species are just too strong; it is comparable to the female of the cat species. Our females don’t seem to like sharing: the operative word is “my”, “mine”? My house, my man, my car, my garden, my scratching post, mine! That’s why they call it a “cat fight” when two females scuffle. The female has a strong nesting instinct and a need to carve out space, a place for raising babies, for which the man is a necessary evil. So while we men would be happy to share everything we have, our food, our toys, our socks and underwear, women are utterly disgusted by such notions. They want their own things. The female doesn’t seem to want to share her space with anyone, especially with other females. She wants a savings accounts too, from which she can draw unbiblical usury to provide security for her old age–I’m pretty sure that beer was invented by a man, and that the RRSP (registered retirement savings plan) was invented by a woman. So it’s not my fault that I am a rich capitalist pig. “The woman that you gave me” (Genesis 3.12), she made me do it.
The Righteous Investor 