Weekly Article 05-15-2018
I spend a lot of time researching investments and trying to explain why a certain asset is either worthy of our interest in owning that asset or not. It occurred to me that while I often write about stocks, bonds, real estate, oil, gas, gold and silver, etc. the real reason to invest is to get ahead and be able to have assets that will allow us one day to retire comfortably- for the most part.
It has been incredibly tough to try and accurately value any assets as the central banks have basically become the “markets”- if you can still call them that after they added $21 trillion in assets to their balance sheets in the past 10 years or so.
While this level of interference is beyond any bounds of reality as it existed 10 years ago there is more going on here than just “printing up money” and buying real assets. I believe this is just the last act.
Going back to the beginning people used to barter goods. Obviously, that was before “money” as we know it, was created. Of course, money needed to be created so that people who produced things- mainly perishable goods like fruit, vegetables and meats could have a claim on their current labor in the future. The “money” wouldn’t spoil like their produce. This allowed production to continue and commerce to increase as much waste would be avoided.
The key concept here is that, as you trade the fruits of your labor for “money” you expect that the money will buy you what you need when you need it. You expect it to retain its value.
In 1944 the US Dollar became the world’s reserve currency and was backed by gold. In 1971 Richard Nixon “temporarily” took us off of the gold standard and our currency became backed by the full faith and credit of the USA.
Without the anchor of gold to reign in excesses the dollar has since been printed in unlimited amounts and our debts have skyrocketed at the same time. There is no country in the history of the world that has ever been as indebted as we are here in the USA right now.
Many say- so what- we owe it to ourselves. That is incorrect. In addition to the many foreign countries that buy our debt every single US dollar is a debt instrument. Look at any bill. On the bill it says “Federal Reserve Note” What is a note? An instrument of debt. That debt is owned by the central banks and owed by us. Take a look at Greece and Argentina as examples of what happens when the debt collectors show up. They expect to be paid.
The unlimited creation of fiat currency- and therefore debt has put the US dollar in a precarious position. Since 1913, when the Federal Reserve was hatched, the dollar has lost 96% of its purchasing power since then. Since 1971 the dollar has lost 84% of its purchasing power. That means that, just since 1971 you would need $6.19 in your pocket today to equal what $1.00 would buy you in 1971. (Dollartimes.com/Inflation) By the way- gold is up 37X since 1971 (1300 today- $35.00 then) Hmm.
This makes it that much harder for anyone to accurately predict the amount of dollars that are needed to sustain a person or family after your productive years have passed. This has also led regular folks- like my grandparents who ONLY had money in banks and “safe” assets back in the day to become modern-day gamblers to keep up with inflation. So many people I know- many clients who, in the past, wouldn’t look at anything not FDIC insured are invested in almost anything you can imagine to create yield so they can continue to live off of those investments and not dissipate their savings. People are forced to seek out better returns because of artificially low interest rates and inflation that is far higher than official reports. Trust your own eyes- not massaged numbers!
Many people who retired comfortably 20 years ago are suddenly finding it hard to survive. Their income is stable but rising prices are forcing them into a more austere lifestyle.
The insidious thing about inflation is that 99% or more people don’t understand it. It is a way for those in charge to take more of your labor for less. It gives the appearance that prices are rising while all that is happening is that your labor is being devalued as each dollar earned buys you less and less real goods.
Growing up, it was thought that those who could make $100,000.00 were doing extremely well. Today, someone making $300,000.00- just 25 years later are in a similar circumstance. The middle class is being squeezed by both rising prices for assets as well as the necessities of life.
If there was any morality with those in charge they likely wouldn’t have defaulted on the gold standard and handed over the creation of “money” in unlimited amounts to central banks. The central banks, if they had any morality, likely wouldn’t be “printing” money out of nowhere and purchasing real assets. I also believe that “printing” money out of nowhere and charging interest on an “asset” that didn’t previously exist before a keystroke and charging interest on it is a little over the top also.
Since it seems to me to be risky to entrust my wealth to a debt instrument I prefer real stuff. I have said many times that families have preserved wealth with art, real estate and gold throughout recorded history. I also believe that anything that needs to be produced and cannot be conjured up out of nowhere is important to have- particularly the necessities of life- like water, food, oil, gas, etc. and the companies that produce these goods. It is likely that in the near future people are going to realize that fiat currencies all revert to their intrinsic value of near zero. At that time people who have the foresight to hold assets that hold value will be able to get assets that they can’t imagine owning in today’s world.
While I am pointing out many problems that beset us in the near term I look at this situation as possibly the greatest opportunity that we will have in our lifetimes to create substantial wealth and create a better world for our children and grandchildren.
We just have to … Be Prepared!
Mike Savage, ChFC, Financial Advisor
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