Wednesday, October 30, 2019

Why no Asset Class can Outperform Gold over Time

Contrary to popular belief, gold has never lost its status as money. It is still the most reliable unit of account when it comes to measuring how well an investment portfolio is doing. This is a central point in my book, Gold Oriented Investing. Rather than using currencies to measure performance, we should use gold. Only when we beat the gold price can we say that we did well. Consequently, when the chances of beating the gold price are low, gold is where we should store our wealth.

Thousands of years of history has shown us that the value of gold can deviate from its mean by a lot, yet always return to this mean over time. As investors, all we have to do is to calculate where we are relative to the mean, and make our decisions based on this. An example of this on my part is the house I sold in Norway two years ago. It was sold close to an historic top relative to gold. In the two years that followed, I made 40% more on my gold investment than I would have made on my house. Including taxes and fixed expenses related to the house, my gain has been even greater.

But why exactly does the gold price behave in this manner? The answer to this becomes clear when we consider the physical demand for gold in the production of jewelry. This demand sets a minimum price for gold relative to the cost of all other assets, including food and housing. There also has to be a maximum price at which point all physical demand disappears. From this we know that gold prices can only fluctuate within a band of relative prices. When the gold price tags the bottom line of this band, we can safely buy gold as it cannot go farther down, at least not for long. Conversely, gold tagging the upper line of the band cannot continue to rise. We must then buy real-estate or stocks.

Townhouses in Victoria Australia.jpg

By PinkAechFas - Own work, CC BY-SA 4.0, Link

Tuesday, October 29, 2019

Tower Cranes Above Porto

Porto Cathedral overlooks the river to the south and the city of Porto to the north. Standing there the other day, I was struck by the number of tower cranes that dotted the skyline of the city. I have never seen so much building activity before. There were cranes everywhere. However, far from everyone is in operation. There is one such crane at the center of a lot down the street from where I live that has been standing idle for several months.

There is a shortage of skilled labor. There are more projects than available resources. The consequence of this is that projects take longer to complete than was originally estimated. They cost more to complete due to scarcities of labor and other resources. Unless the demand for the final projects end up greater than what was estimated, the projects will end up less profitable than was calculated by the entrepreneurs.

All of this can in turn be traced back to our current monetary system which treats currency as something separate from real world resources. The fact that currency can be cheaply provided in times of scarcity illustrates this perfectly, and the result is mallinvestments of various kinds. The monetary system fails to function correctly by signalling abundance when in reality there is scarcity. The entrepreneur cannot judge the real level of scarcity by looking at the price of currency. Scarcity has to be put into calculations as a fudge factor, when it should properly have been reflected in interest rates provided by the banking sector.

The various entrepreneurs behind the current building projects in Porto will be very disappointed with the profitability of their ventures, unless they factored in a great deal of scarcity as part of their costs, or some good fortune sends the price of their finished projects higher than they expected.

Tower crane Dubai 2010.jpg

Sunday, October 27, 2019

The Great Enabler of Vice

There is a general confusion about the word "sin", and hence its related concepts of vice and hell. The original meaning of sin was to miss, as in err in our striving for happiness and joy. Seen in this perspective, the concept of vice and hell become easier to grasp.

Vice is any habit towards sinful behavior, and hell is the mental state we find us in when we sin. Contrary to the Hell of myths, hell is most certainly real. Anyone who has suffered from depression or anxiety can attest to this. Most people who have had such an experience can also attest to the fact that the hell they experienced was in some way related to the seven deadly sins. This is clear when we list these sins and contemplate what may happen to a person that engages in them on a habitual basis:
  1. Lust - watching too much porn is known to induce depression
  2. Gluttony - eating too much results in all sorts of ills
  3. Greed - leads to an inability to appreciate what we got
  4. Sloth - postponing urgent matters leads to loss
  5. Wrath - disproportionate anger destroys more than it mends
  6. Envy - leads to an inability to appreciate what we got
  7. Pride - leads to an inability to fix things and improve our ways
My own experience with anxiety and depression was due to a mix of sloth, greed and pride. However, I managed to mend my ways, and I have never felt better about my place in the world. While still inclined towards "laziness", I no longer postpone urgent matters. I'm more humble in the way I see myself in relation to the world, and I have developed a simple savings plan that keeps me from taking actions based on greed.

Another interesting observation that can be made is that the state has a tendency to encourage vice. In particular, the state encourages sloth, envy and pride. Welfare states enable people to wallow in their own moral weaknesses. People are paid to do nothing. Envy is everywhere, and pride is promoted as some sort of virtue.

Caught up in this, people loose their ability to think straight. Even the most intelligent people become muddled in their thoughts. The epidemic of nonsense that we see all around us can be traced back to the state and its associated banking system. Corruption of money has allowed vice to spread through state funded programs. The predictable consequence of this is hell. A lot of people are going to suffer greatly. Especially when the welfare state eventually buckles under the weight of its own unsustainable debt burden.

Pieter Bruegel the Elder - The Tower of Babel (Vienna) - Google Art Project - edited.jpg

By Pieter Bruegel the Elder - Levels adjusted from File:Pieter_Bruegel_the_Elder_-_The_Tower_of_Babel_(Vienna)_-_Google_Art_Project.jpg, originally from Google Art Project., Public Domain, Link

Saturday, October 26, 2019

Bitcoin Volatility

Two years ago, I made the prediction that Bitcoin would become more volatile over time due to its lack of fundamental use value. The price is in no way reflecting its value as a means of exchange, and with no other practical value, prices can fluctuate wildly without Bitcoin becoming more or less desirable for that reason. Detached from reality, any price can be seen as reasonable.

As it turns out, Bitcoin has been a lot more volatile over the last two years than it was the two previous years, and the last two days has seen some truly insane volatility. It is up some 50% in less than 48 hours. While exiting to those holding Bitcoin, this is in no way a good sign as it further undermines the idea that Bitcoin will some day be money.

For something to be money, it has to be a unit of account and a store of value. High price volatility relative to all other assets renders it useless. Bitcoin can never become money, and it seems to me that we are seeing its final death throws. As predicted back in 2017, Bitcoin will become wildly unstable right before its final demise. The past 48 hours may be evidence that this is indeed what's going on.

Casascius coin.jpg

Brass token currently priced at around 10,000 dollar

Friday, October 25, 2019

The 5th Empire - Pragmatic Culture, Small State

Key to the success of medium size towns is their relatively small local government, combined with a pragmatic conservative culture. There is no tolerance for rioting, looting, muggings and the like. People inclined towards this kind of behavior have to either move out in the country where they can indulge themselves in their antisocial ways, or they have to move to a large city where they can team up with like-minded antisocial individuals.

From the perspective of the concerned citizen, small government is a good thing. So is a pragmatic culture based on property rights and respect for privacy. This means that counties with large governments should be avoided. Cultures of surveillance, property confiscation, forced conformity and mandated tolerance should also be shunned.

Portugal is an interesting case study in this respect. It was once the richest and most powerful state on the planet, certainly when accounting for its relatively small population. This led to all sorts of horrors, such as the inquisition and a general atmosphere of terror. From its peek of power in the 18th century, it decayed into fascism. By the 20th century, Portugal was the poorest country in Western Europe.

Today, Portugal is an example of a country with a relatively poor state apparatus, combined with a pragmatic culture. Drawing on its Judeo-Christian heritage, it is home to a large number of brotherhoods and secret societies. Much power is located outside of the official state apparatus. There is a general spirit of pragmatism. Laws are seen as dictates that have to yield to pragmatism whenever their strict interpretation become too bothersome. This is particularly evident in the way traffic rules are constantly disobeyed, with the police turning a blind eye unless the violation is right out dangerous or disruptive.

One thing Portugal got right during its colonial past was that it encouraged cultural expansion as part of its colonial program. People in former Portuguese colonies speak Portuguese, practice Christianity and act and behave in ways that closely resemble the culture in Portugal. People from Angola, Brazil and other former colonies may look different from the typical Portuguese, but they do not act noticeably different.

Portugal has managed to integrate people of different races, ranging from Anglo-Saxons to Black Africans, Indians, and Chinese, without falling into the trap of Multiculturalism. To be Portuguese has very little to do with race. It is almost entirely a cultural description. This lowers the chance of race based unrest, without the need for segregation or other race based policies, as seen in places like South Africa and the United States.

Having recently risen from the depth of fascism, people are generally skeptical to government mandate. People organize themselves freely along pragmatic lines rooted in Judeo-Christian traditions of free will and property rights. The culture is conservative, with a liberal bias towards drugs, sexuality and freedom of association. It has a distinctly libertarian feel. An apparent reverence towards communist and socialist ideas do not include any desire towards uniformity and tyranny.

This is not to say that Portugal is perfect, or that it is the best place for a concerned citizens to migrate. However, it has many of the qualities required for social stability, so I can highly recommend it as a place of refuge. But other places have similar mixes of small state and pragmatic culture. There are more places than just one that will serve as a safe haven should things turn ugly.

Av Aliados 5 (Porto).jpg

Thursday, October 24, 2019

The 5th Empire - Sustainable Towns

Things are starting to heat up. Riots and gang violence are becoming increasingly frequent in large cities all over the world. Those in a position to move are starting to look for more sustainable places to live. Some are already uprooting themselves, moving to safer towns and cities.

What is interesting to note is that small and medium size towns are seeing something of a revival in all of this. It appears that towns in the size range of 100,000 to 250,000 are doing particularly well. Such towns are too small for rampant corruption, and are therefore better run than larger cities. They are also too small to house large number of people on welfare and government programs. Their main source of revenue is usually an industry of some sort, rather than politics and finance.

Other things that add to the safety and sustainability of smaller towns is a conservative culture, a network of voluntary organizations, including secret societies and brotherhoods, and a general spirit of self sufficiency. Such towns will have little  trouble organizing a well armed militia, or bypass draconian laws passed by a hostile central government. They have the size and the infrastructure to get things done, making them ideal places of refuge in the event of a societal collapse.

It was the well armed, walled towns, that were the safest places to stay during the middle ages. Neither large cities nor small farms fared particularly well during those turbulent years. The same is likely to be true should we see a collapse similar to the one experienced when Rome fell under the weight of its own corruption.

I live in Porto, a medium size city in the north of Portugal. It is slightly larger than the ideal stated above. However, it is an industrial and commercial city, rather than one dominated by politics and finance, and people are quite self sufficient. Many have personal connections into the rural and industrial areas surrounding the city. I am therefore quite confident that Porto will remain relatively stable. But in the event that I'm wrong, smaller towns are not far away. Since I'm both financially independent and mobile, I can get out of dodge at short notice.

The Toural square in 2009.jpg

Guimarães - small town north of Porto

Friday, October 18, 2019

Controlled Opposition

The politics of the state apparatus is always about the expansion of its power. In opposition to this is the politics of liberty, which aims to reduce the power of the state. Once we fully realize this, it is fairly easy to identify real opposition, as opposed to controlled opposition. Real opposition to state sanctioned power is always against essential elements of the state apparatus. The controlled opposition, which is no opposition at all, is always about the expansion of state power.

Any protest in support of more taxation and more government control is by this measure a part of the controlled opposition. Whether or not such protests come into spontaneous existence has nothing to do with this. Spontaneous demand for more government control is as manageable and benefiting for government as is a carefully designed and orchestrated protest movement. In fact, if the demand for more government control is truly spontaneous, it is all the more useful for the state.

Identifying real, as opposed to controlled, opposition is in this context easy to do, provided the demand of the protesters are clear cut and uniform. A demand for lower taxes would be real opposition, clear and simple. However, a demand for increased state subsidies would fall into the category of controlled opposition.

When we have a demand for both lower taxes and more subsidies, we have a hybrid protest. The state response to such protests will typically be one of dialogue and compromise. The protesters get some of their demands met on condition that they stop protesting. Through skillful negotiations, the state usurps more power for itself, while giving very little back.

The way to deal with real and spontaneous opposition to state power, is to infiltrate the organization with controlled opposition. A pure tax revolt can in this way be turned into a hybrid protest that can in turn be dealt with through dialogue and compromise.

Party politics is very rarely about true opposition. Very few opposition parties insist on less power to the state, and when they do, it is rarely anything but empty words. Party politics are completely dominated by a mix of power and controlled opposition. What little real opposition remains is typically branded as extremist. Marxists and libertarians are bundled together as if they were two sides of the same coin.

This rhetoric is everywhere. Schools, colleges and universities defend it. The media repeats it. To be opposed to growing state power is to be an extremist. This is easy to see in the way true opposition is treated, as opposed to controlled opposition. True opposition leaders are muffled, put in prison and quietly forgotten, while controlled opposition gets all the limelight.

Extinction Rebellion-12.jpg

Thursday, October 17, 2019

Currencies Take What the State Gives

The Norwegian state passed a generous budget this year, up 4% in expenditures, with no corresponding increase in taxation. Just about everyone was a winner.

By the looks of it, it was a free lunch for all. However, a fall in the Norwegian currency (the NOK), demonstrate the old saying about free lunches. They do not exist.

Less than 2 weeks after the budget was passed, the NOK is down 2%. This reduces the purchasing power of the average Norwegian household by a corresponding 2%, because just about everything they buy is imported. Half the free lunch is already gone, and the most likely outcome over the next 11 months is that the NOK will be down 4% or more, rendering the free lunch null and void for all.

This illustrates yet again that the state cannot create wealth. It can only push wealth around. When the state seeks to create wealth through expansion, the local currency yields all the gains back into the economy.

20-kroner-1874-Norge.jpg

20 NOK bought 8 grams of gold in 1874.
It now takes 3500 NOK to buy the same amount.

By Unknown - Oslo Mynthandel, Public Domain, Link

Tuesday, October 15, 2019

Liquidity

Financial liquidity refers to the ability of something to deliver cash on demand. A liquid asset is an asset that can easily be sold. A liquid company has no trouble paying its bills. A liquid financial system has sufficient cash to go around so that things can be bought and sold without delay.

Liquidity is the lifeblood of the economy. Liquidity shortages, such as the ones we are currently seeing in the Repo market, are therefore indications of serious underlying problems. There is a mismatch between price and reality. Things have become so expensive that there simply isn't enough cash to pay for it all.

Without central bank intervention, liquidity shortages lead directly to lower prices. Those short of cash are forced to sell more of what they have. Those holding cash can wait until prices again reflect reality. However, with central banks, liquidity can be injected directly into the system. Sellers can bypass the market and go directly to central banks for cash.

Central banks can create cash out of thin air. They can offer any price for an asset, and thereby push prices higher than they otherwise would be. The patient buyer, holding cash in the event of a liquidity shortage, is thereby bypassed. Liquidity is restored without prices having to adjust downwards.

Central banks were created specifically for the purpose of helping out in the event of liquidity shortages. Their interference in loan markets are therefore to be expected. They benefit the over-extended borrower at the expense of the saver. The bargains that the cash holder hopes for, never materialize. Even when prices crash, they bounce up again before they reflect a healthy return on investment. Prices are permanently skewed upwards relative to underlying value.

The long term effect of this is that the cash holder, the so called rentier, has been euthanized, as recommended by John Maynard Keynes. However, this does not solve anything. It merely removes the cash holder from the economy, making central banks the only cash providers. The market is replaced by central banks. Central banks go from being lenders of last resort to lenders of only resort.

With cash holders permanently removed from the economy, any substantial cash demand will have to be met by central banks. Eager to keep asset prices elevated, central banks will continue to offer above market prices. However, resources available to an economy are not without limits. An unlimited supply of cash from central banks will therefore send prices higher, not only for financial assets, but also for resources. Everything becomes more expensive.

When the price of resources move higher, liquidity shortages reappear. Companies will again find it hard to cover their expenses. They will ask for more cash, which central banks will be quick to provide. The demand for cash will explode higher. Prices for everything will explode higher. Unless central banks change course, we will have hyperinflation.

German Hyperinflation.jpg

By Wolfgang Chr. Fischer - Template:Wolfgang Chr. Fischer, CC BY-SA 3.0, Link

Friday, October 11, 2019

Bitcoin and Negative Yielding Bonds

The world of finance is becoming increasingly like a casino where only dumb luck, or perfect Poker skills, determine the outcome. As a whole, no-one but the casino owners and their dealers win.

This is perfectly evident in the bond market where people are dealing in negative yielding bonds. Anyone holding such bonds to maturity looses money, so it is only those with luck or above average skills that win. Staying too long at the table guarantees a loss. Only the issuers and primary dealers, together with a handful of exceptionally lucky or skillful individuals, win in the long run.

This is true for any investment in things that decay faster than they generate income. Commodities like grains, fish and meat must be sold before they spoil. Real-estate, if not rented out, must be sold at a price higher than the purchase price in order to cover fixed expenses. Cash must generate interest above the rate of inflation.

Bitcoin generates no income, and is in this respect a commodity. It must be sold at a higher price than what it was bought for in order to yield a profit to the holder. This may not seem problematic to the casual observer, because Bitcoin is like gold or silver. They last forever. Gold and silver can be kept free of charge in a secret hiding place of our own making. Bitcoin can be kept in a private wallet.

However, there is a widely overlooked aspect of Bitcoin. It requires a network of computers in order to exist, all of which requires energy and maintenance. The Bitcoin network as a whole requires a constant inflow of resources. Bitcoin is in this respect like negative yielding bonds. Anyone holding them for a long enough time are guaranteed a loss. The only winners in this game are energy companies, dealers in hardware equipment, and those lucky or skillful enough to ride the waves of ups and downs.

Cryptocurrency Mining Farm.jpg

By Marco Krohn - Own work, CC BY-SA 4.0, Link

Wednesday, October 9, 2019

Fallacy - Taxation is a Sign of Civilization

The difference between taxation and free exchange is that taxation is done under threat of punishment, while free exchange allows for the option to refuse. Free exchange is voluntary, taxation is coercive. This means that taxation is civilized only to the extent that coercion is civilized.

Inmate uniform (striped).jpg

Monday, October 7, 2019

Fallacy - Low Interest Rates Foster Growth

Central banks seek to foster price stability and economic growth through their interest rate policies. However, since central banks do not themselves provide real resources to the economy, they cannot grow the economy directly. All they can do is interfere in capital markets by distorting price mechanisms. The idea that central banks are a benefit to the economy rests therefore entirely on the idea that price distortions are better than no price distortions.

When central banks choose to interfere in the economy, they do this by setting interest rates either higher or lower than what the market would have done. When setting interest rates lower, they make it easier for businesses to do things that would otherwise be unprofitable. We get production of goods and services for which there is little real demand. We get zombie businesses that exist solely due to the low cost of money. These businesses consume real resources without adding any value, with a general impoverishment as a consequence. We also get credit based consumption in which individuals spend today what would otherwise be spent at a later date. This distorts the time aspect of consumption, making people feel rich now by letting them steal from their future selves. Resources are miss-allocated, and time preferences are manipulated. None of this fosters growth.

When central banks on rare occasions set the interest rate higher than a free market would demand, we get the destruction of viable businesses. This too is clearly counterproductive.

Seal of the United States Federal Reserve System.svg

By U.S. Government - Extracted from PDF version of the Federal Reserve's Purposes & Functions document (direct PDF URL [1])., Public Domain, Link

Friday, October 4, 2019

Fallacy - Minimum Wage Laws Help the Poor

Minimum wage laws makes it illegal to enter into work contracts where the salary offered is below a certain threshold. It does not matter if both the employer and the employee agree to the proposed salary. If it is too low, the contract is illegal. There will be penalties and fines.

This means that a number of contracts that were once valid become illegal. They must be terminated. There will be new salary negotiations at a higher rate. Some will get this higher rate, and others won't. No new jobs are created in this process. However, a number of jobs will disappear. The net result of minimum wage laws is therefore an increase in salaries for some at the expense of others who loose their jobs.

The tragedy here is that low paying jobs are often entry level jobs that help poor people get into the job market. After a few months, or years in the workforce, most are able to find better paying jobs. With fewer entry level jobs available, more people become permanently shut off from the job market. Minimum wage laws are therefore a hindrance for the poor in their efforts to better their situation.

Barrido Manual Sinder.jpg

Wednesday, October 2, 2019

Fallacy - Universal Basic Income Will Reduce Poverty

A universal basic income will do nothing to reduce poverty. It will most likely increase it. The reason for this is that it will tend to reduce the overall production of goods and services in the economy.

If the state ever starts handing out money to the public, everyone at the lower margin of income will stop working, or demand vastly higher salary. People who are currently barely scraping by with two full time jobs will naturally decide to stop working if the basic income matches what they are currently making. In the process, they will go from having virtually no leisure to having an abundance of leisure. This moves them from the bottom of society, to the lower ranks of the independently wealthy. Who wouldn't want such a transformation?

However, if the entire lower end of the income spectrum suddenly disappeared, all sorts of services would stop, and the only way to re-start them would be to jack up salaries, and hence the price of these services. All sorts of things would become much more expensive.

Handing out money to people does nothing to increase production. It merely increases the money supply. With more money chasing a steady or decreasing supply of goods and services, prices will go up. People will quickly discover that the checks handed out by the state are insufficient, and increasing the size of the handouts will not help.

The only way to reduce poverty is to increase the production of goods and services. This requires freedom to do this. It requires investments and free access to resources. Giving people incentives to do nothing will make us all poorer, not richer.

British club scene.jpg

Tuesday, October 1, 2019

Fallacy - The Rich Hoard Resources

When we hear that somebody is good for billions of dollars, it is easy to conclude that this person has a bank account with billions of dollars of readily available cash. Knowing from our own experience that cash corresponds to food and other necessities available in stores, some conclude that the rich simply refuse to use their money to help the poor. Rather than spending their money on helping the poor, they hoard it in big piles. An image of a dragon on a pile of gold comes to mind.

However, riches do not translate into readily available resources. Riches are tied up in capital. They are the factories and the stores, the ships and boats, the ports and cargo-trains that make society function. These things have all come about due to the profit motive of the owners. In a free market where profits can only be made if both sides of a trade benefit, none of the above capital can be said to benefit the owner alone. It benefits us all.

Rich people will typically take out only a tiny part of their profits for consumption. The rest is put back into investments that will further enhance the wealth of everybody. No-one gets poorer in this process unless some coercive entity forces the trades so that one side gains to the detriment of the other.

Government can mandate by law that people buy certain products or services. This will typically benefit the capitalists at the expense of consumers. Alternatively, government can tax capitalists, which will benefit government at the expanse of both capitalists and consumers. This is because taxation reduces the incentive to invest in new production. With fewer products and services available for consumption, both consumers and capitalists end up worse off.

Re-distribution of wealth is no remedy for poverty. Such actions can only reduce the overall production in society. On the other hand, free trade and free access to unused land will go a long way towards eradicating poverty. With freer access to resources, and fewer obstacles to free trade, poor people can get involved in the economy. They can start producing things for themselves, compete directly with large land and factory owners, unhindered by the bureaucracy of the state.

Smaug par David Demaret.jpg

By David Demaret, CC BY-SA 3.0, Link