Financial Literacy

The last 12 months have shown that the media and governing elites have no idea what they are talking about. Let’s review just a few of the most glaring examples:

1. Donald Trump has zero chance of winning the presidential primaries, let alone the presidency. If Donald Trump wins the presidential election, the stock market and economy will collapse. (He won, and jobs are increasing).
2. Britain will never leave the European Union. If Britain does leave the EU, the British economy will implode. (The British voted to leave, their economy is doing very well).
3. If India removes high-denomination paper currency, it will reveal huge untaxed wealth and terrorism financing because they won’t turn in the soon-to-be-banned currency. Experts and economists estimated that only 50-60% of that banned currency will be turned in to banks. (But 99.9% of it was turned in). Once large currency is banned and the Indian Central Bank controls more of the economy, the economy will greatly improve. (Removing large denomination currency eliminated an estimated 5 million jobs, small businesses closed for lack of capital, and agricultural prices collapsed which financially crushed farmers; who are now protesting).
4. The Venezuelan dictator, Maduro, certainly won’t let his countrymen starve from socialism. (Not only has 75% of Venezuelans lost 19 pounds over the last year from a lack of food, Maduro is consolidating more political power to enact even more destructive socialism where poverty has now engulfed 90% of the population).
5. There is no way the Obama administration wiretapped or spied on the Trump presidential campaign. (Turns out several U.S. security agencies actually did, without cause or warrant, and Obama appointees made hundreds of “Unmasking” requests for the names of people working on Trump’s transition team so they could leak their names to the media to create political damage).
6. The U.S. Federal Reserve has raised interest rates 3 times in the last 3 years to get ahead of increasing inflation from the low unemployment rate. Investment advisers and media kept forecasting that this was the correct move. (Oops, new inflation numbers show that inflation is declining, not increasing, plus the velocity of money keeps declining. This means that the Federal Reserve experts have been doing the wrong thing: raising interest rates into economic weakness, exacerbating the problem).

You need accurate information in order to make planning decisions for investing, career, and business. Economists, political analysts, and investment advisers that are using an inaccurate world-view frequently make highly-inaccurate forecasts of major events. If your sources of news were totally wrong about these major events, then you may want to find some new sources of information that are using a far more accurate world view.

In the 2008 financial crisis of too much debt, the Federal Reserve acted by:

1. Lowering interest rates to near zero
2. Buying $4.5 trillion in loans and bonds, putting money into the economy

Lower interest rates made debt easier to service and pushing so much money in the economy re-inflated the stock market and real estate price bubbles over the last decade.

This week, the Federal Reserve announced that they are changing course and will start reducing their balance sheet. Starting next month, they will sell $10 billion a month, increasing each quarter until it is $50 billion a month. This is a reduction in the money supply of the banking system, the fuel of the economy.

At the same time as the Federal Reserve is effectively withdrawing money from the banking system, the U.S. Treasury wants to add another $600 billion to their Rainy-Day Fund, which will withdraw even more money from the money supply.

What does this mean?

There will be less money for primary treasury dealers so there will be less demand for all kinds of securities: stocks, bonds, and U.S treasury securities. Yes, sovereign wealth funds and other central banks are buying U.S. securities, but the combination of the Fed and Treasury is a withdrawal of $1.3 trillion from the U.S. banking system by 2020. That is going to show up in lower prices, sooner or later.

Don’t be the last person to realize the music has stopped and your portfolio is down by 40%. The stock and bond markets are still strong today, so consider is selling some off each month and then leaving that money in cash. There is no way that anyone can time a stock & market top. However, to reduce your risk, I’d offer a vague target of reducing your stocks, bonds, and mutual funds so that in 6 months, at least 50% of your portfolio is in cash.

It has been nearly 10 years since the global financial crisis was caused by skyrocketing defaults on mortgages. In the chart you can see the U.S. Federal Reserve’s response to the crisis: they stepped in and bought bad loans and bonds to provide liquidity that kept banks solvent. Their continued buying has expanded the balance sheet of the Federal Reserve by over $4 trillion dollars. This money has flowed into and created price bubbles in the stock, bond, and real estate markets.

The U.S. isn’t the only central bank propping up markets like this; the Bank of Japan, the Bank of England, and the European Union central bank is also buying bonds and stocks every month. The Swiss central bank is now among the largest owners of Apple and Tesla stock shares. It used to be called socialist nationalization when governments bought companies, but in today’s upside down world of Newspeak, it is now labeled “providing liquidity to the market.”

This month, the U.S. Federal Reserve is going to begin a reverse program of reducing their balance sheet by starting to sell bonds each month. The red line on the chart will begin a steady decline. Pulling money out of the economy must be a contracting force to the economy, and so the blue line of the stock market will likely decline along with it.

Are you positioned for a possible decline in asset bubbles, like the stock, bond, and real estate markets? Consider this your Early Warning Alert of a likely decline in the next few years.

Financial professionals have mathematical formulas for investment portfolio diversification. However, we’ve all heard the simple phrase about investing, “Don’t put all of your eggs in one basket.” In my opinion, an options-trading expert (Don Kaufman) offers the most illustrative analogy, “You don’t want all of your soldiers in one spot when the bombs start dropping.” This is very important to know because, sooner or later, there is always an unexpected bomb strafe. You, alone, are the Field Commander responsible for the survival of your army on the battlefield.

Let’s examine how to apply this strategy to your potential investments:

• Are all of your retirement accounts invested in the same stock index or fund – or are they spread among several asset classes and types of investments?
• Are all of your rental properties in one city – or are you geographically diversified?
• Are you only positioned long the stock market – or do you have some short positions?
• Are all of your investments in your home country and currency – or do you have several?
• Are all of your options expiring at the same time – or do you have multiple expirations and multiple strike prices?
• Are all of your assets subject to lawsuit – or are some held in entities or investments that are protected from any creditor?
• Are all of your personal valuables hidden in one location – or do you have them in several locations and some secured offsite?

Whatever investment risk you can conceive, there is some way to minimize it with diversification or hedging. Take some time to look at all of the savings and investments that you have and consider, “If unexpected bombs start falling and one fell on this, would I be totally wiped out and have to start from scratch?” If so, then you need to make some immediate strategic and tactical investment moves.