Walking With a Cane

One of the charms of living in Porto is that there's a wealth of old stuff everywhere, so when I asked my wife if she knew anyone with a good old fashioned walking cane, she could inform me that her mother had one at her house that I could borrow.

The cane I've borrowed is less than a meter long, so it was never meant as support for weak legs. Rather, it's a reference to the sword that gentlemen used to carry with them during the 18th century. When this became illegal in most cities during the 19th century, the sword transformed into the walking cane, of which I now have a specimen for my own use.

The purpose of the cane is the same as that of a sword. People carried them as warnings to pocket thieves and aggressive beggars. The message was clear: Get too close, and I either knock you on your head or poke you with the pointy end. It's also ideal in this day and age where hobby fascists abound. No-one has stopped to shout at me since I started carrying a cane on my daily walks.

The effect is immediate and primeval, and I absolutely love it. Not only does it keep the fascists away, it makes me feel secure and strong in a very basic way. It's as if the very act of holding a cane in my hand releases testosterone into my bloodstream. We're talking basic caveman stuff. The guy with a stick is one notch up from the guy without a stick. If you don't have a stick yourself, don't mess with the guy who has one. If you have one, and you upset someone else with one, be prepared for a duel.

I'm sure a society full of guys carrying sticks is way harder to rule over than a society where everyone is wearing a mask in fear of a virus, so the last thing politicians and hobby fascists would like to see is the return of this habit, and that is in itself a good reason to revive it. It also explains why the habit of carrying a walking cane has been greatly discouraged over the last century. Fashion houses have waged a war against masculinity for decades, no doubt in part to please their buddies in politics.

As is often the case, the solution to my problem has been blindingly obvious from the start. All my wondering and scheming have been nothing but blind alleys. The answer was there all along in the dress codes of old. People carried a walking cane for a reason. The cane wasn't just an eccentric bit of accessory. It was of great practical and symbolic importance, and we should revive it as part of a push towards a more civil society, because the potential for violence is not something to be feared. It should be embraced as key to civil behaviour.

Symbolism of this kind is not mere adornment. Every era of history has its dress code, art, architecture and literature that reflect the ideas of their time. If we are to retain our liberties into the next era, we better start acting and dressing in ways that reflect this. I suggest for starters that we start carrying a cane or some other symbol of violence to set the general tone of what we want to achieve.

Me with a cane

How to Identify an Asset Bubble

Asset bubbles are hard to spot. They tend to sneak up on us, growing slowly into something unsustainable. Then they hang around for much longer than the typical sceptic would predict, making them seem normal. Then, all of a sudden, they pop, taking most people by surprise.

Only in retrospect are they obvious to everyone. However, that doesn't mean that they were impossible to see. It just means that most people ignore the warning signs, preferring instead to ride the tide in the hope of quick profits or in fear of missing out. There's a great deal of wilful ignorance in all of us, and that's the main reason that so many of us get ourselves into financial trouble. But bubbles are relatively easy to spot when we're willing to look.

My preferred method for spotting an asset bubble is long term charts of price action relative to gold or earnings. I find such charts revealing. They make it immediately clear where we are relative to historic peaks and troughs. However, they don't tell us why a certain price range can be considered overvalued while another price range can be considered undervalued. Why is a bubble a bubble, and why is it never different this time? Why can't prices stay permanently overvalued?

To answer these questions, we need to look into the fundamentals of our existence, that we must consume in order to live, and that most of us cannot or will not be productive our entire lives. There is a period in our lives when we consume without producing anything, and the only ways we can do this is through some form of capital income, or by selling something that we bought earlier.

Also of importance is the value we attach to our time and labour. We don't generally accept that a life of hard work and prudent living should return nothing but a meagre allowance. We should be able to sustain a reasonable level of consumption through our unproductive years, and there should ideally be something left for the next generation in way of an inheritance. To attain this type of comfort, we're prepared to put aside somewhere between 5% and 20% of our after tax income over a maximum period of 45 years of labour.

With this in mind, we can take a closer look at the three main asset classes of stocks, real-estate and gold.

The simplest of these is gold. It's a metal. It generates no income. Its only financial virtue is that it requires no maintenance, and it can be stored for free. All things being equal, gold retains its value over time. It's purchasing power goes neither up nor down. It can therefore be used as a measure of value relative to real-estate and stocks. Gold is what we save in when both real-estate and stocks look expensive. Otherwise, it's not a good investment. Someone putting aside 5% of their income in gold will have to save 20 years to achieve 1 year of retirement. Putting aside 20% achieves only 1 year of retirement for every 5 years of savings. 45 years of work results in only 2 to 9 years of retirement.

Things get a little more complicated when we consider real-estate. If neither lived in nor rented out, real-estate is like gold, only with the added problem of fixed costs. There are taxes, fees, service charges, and maintenance costs. Owning a piece of real-estate can be expensive, so it has to be lived in or rented out to make sense as a long term investment object.

A simple way to judge the general price level of real-estate is to compare the cost of rent to that of ownership. If the full cost of owning a house with a 100% mortgage comes out about equal to that of renting a similar property, we can say that the price is fair, provided interest rates are at their historic average of about 6%. If interest rates are lower, the cost of the loan may be deceptively low. If the interest is above the historic average, the opposite may be true. It all depends on the rate of inflation, and hence the real inflation adjusted interest rate.

A more straight forward way to judge the cost of buying a house is to calculate the number of years it will take to pay it down, assuming no change in salary and no inflation. A modest house should take no more than 15 years of our lives to pay down at a maximum savings rate. Otherwise, there's not enough time to amass savings for day to day expenses during our retirement. We'll be forced to sell our house, and the rent over the next 15 years is likely to consume the entire surplus, leaving nothing for day to day expenses.

The reason we should assume no change to our income is that we could, if we so chose, buy gold for an equivalent amount. If house prices are relatively high, gold is likely to outperform real-estate due to the above mentioned selling pressure. That makes gold a better investment than the more complicated and costly alternative that is real-estate.

The great virtue of stocks, as well as the only long term reason for owning them, is their future earnings. They represent working capital from which we can derive capital income. Ideally, we should be able to amass enough working capital during our careers to provide capital income equal to our living expenses. Otherwise, we'll be forced to sell some of our stocks during our retirement. We may even have to sell all of it, in which case we run the risk of not being able to pay our bills at the very end of our lives.

This explains why stocks priced above 15 times their earnings are to be considered expensive. There have to be some very promising future returns on the horizon to justify such prices. The reason for this is that we'll be unable to amass sufficient capital at such prices to support our future expenses. The situation becomes similar to that of gold, with the only difference being a modest earnings stream during our years of capital accumulation. While it's true that compound interest can add up to quite a lot, even at low rates, we're not going to be wildly more successful saving in stocks at prices above 15 times earnings than we would be if we saved in gold instead. But for simplicity, let's say that we manage to get a return twice as much as gold. Our 45 years of work would then result in savings equivalent to 4 to 18 years of work. That would require yields from 5% to 20% in order to cover our living expenses, only barely inside the 6.5% implied in a price/earning rate of 15.

This means that stocks priced at P/E ratios above 15 will see selling pressure some time in the future. It must happen, because most people don't put aside the required 20% of their earnings for their retirement. Only a fantastic increase in productivity can save us from having to sell stocks during our retirement years. With the S&P 500 currently registering a P/E ratio of about 40, we can safely say that stocks are not the place to be invested at the moment.

From the above analysis, it would appear that there are no good investments at the moment. Gold has no earnings. Houses take longer than 15 years to pay down, and stocks are priced way above 15 P/E. However, this misses the most important point about gold, namely its function as money. Gold is where we hide out while real-estate and stocks are overvalued. Gold is where we lock in profits. It's where we avoid taking future losses. The reason we cannot use cash for this purpose is that cash is debased by central bankers over time. It doesn't keep its purchasing power nearly as well as gold over long time periods. Cash can even go to zero, as happened in Weimar Germany.

On a similar note, we know that Bitcoin isn't money either. There are fixed costs associated with Bitcoin that makes it similar to unutilized real-estate. The fact that it has no utility beyond being a lottery ticket makes it a very precarious investment. There's constant selling pressure in Bitcoin. With no corresponding real world demand, it's doomed to eventual failure.

This doesn't mean that gold cannot be in a bubble. Gold is in a bubble when both real-estate and stocks are relatively cheap. Hiding out in gold is a terrible idea when there's plenty of opportunities in other assets. However, it's a great idea when there's hardly any opportunities to be found. As things stand at the moment, there's a bubble in real-estate and a bubble in stocks, which brings us to our final questions. Why do bubbles tend to pop rather than deflate in an orderly fashion, and why is it so difficult to time the exact moment when this is about to happen?

The short answer to these two questions can be summed up in two words: forced selling. There is for every bubble a point in time when people will have to sell in order to cover their expenses. However, there's no telling exactly when this happens. But when it happens, there's a cascading effect that forces others to sell. The first ones to sell are generally the most underfunded and exposed investors. Faced with immediate expenses, and unable to cover this through credit, they have no option but to sell.

This pushes the price of the inflated asset down, making it harder for the better positioned to cover their expenses. They must either take on more credit, or sell. If they choose the latter, prices go down further, exposing another layer of investors who in turn are faced with the same predicament. Suddenly, everyone panics, and the bubble implodes.

A key factor in this is credit. Cheap credit can push the day of reckoning into the future. It can also elevate a bubble to higher highs. The S&P 500 is a good example of this. Its P/E ratio hasn't been below 14 since 1990. It hasn't been below 10 since the mid 1980s. My generation of investors haven't seen cheap stock prices since we were in our early 20s, and I'm 57. So what happens when my generation goes into retirement? Pretty much all of us are underfunded. Will we be able to borrow our way through our retirement years? I doubt it, so a correction is likely going to come relatively soon. It may not be here tomorrow, but it's hard to see how this can go on for another decade without the whole thing imploding.

Reflection in a soap bubble

By Brocken Inaglory. The image was edited by user:Alvesgaspar - Own work, CC BY-SA 3.0, Link

A Perfect Cup of Coffee

My older brother's wife is a pastry chef. For a while, she made cakes that people could buy directly from her kitchen, all made with natural ingredients. However, the enterprise wasn't all that successful. People were disappointed with her cakes. They were not as delicious as the ones they were used to.

Exasperated with her clients, my sister in law gave up. "People just don't know quality when they get it", was her excuse, something I found conspicuously snobbish at the time. However, she had a point. I found her cakes strange before I found them delicious. I too had grown accustomed to factory cakes. Faced with the real thing, I had to get used to it before I could enjoy it. That took more slices of cake than my sister in law's clients were likely to have had for themselves when their cakes had been cut and shared among friends and family.

I was reminded of this the other day when my wife and I had a similar experience with some exclusive coffee that we bought down town, across the street from where we buy our Ceylon and Formosa teas, un-tampered with, and straight from the producers. Feeling adventurous, we bought two bags of freshly ground Columbia coffee, and two bags of freshly ground Peru coffee, both of Arabica beans. However, the coffees proved at first disappointing. There was none of the immediate recognition of quality that we've had with tea, and fine wines for that matter. The coffees tasted bland and uninteresting. They had a certain smoothness to them. There was also character, with the Columbian coffee distinctly different from the Peruvian, but that was all. We weren't exactly besides ourselves with enthusiasm. But we stayed with them. There wasn't anything very wrong with the coffees, and after a while, we got to like them.

The big surprise came when we ran out of our exclusive coffees. When we went back to our regular brand, it tasted burned rather than roasted. It was bitter. There was no smoothness to it, and no character. Just like that, we had been transformed into coffee snobs, and now there's no way back. We'll have to go back to the coffee shop to get our superior coffees.

Rococo cup with handle

By Vincennes Porcelain (France, circa 1739–1756), Francois Binet (France, active 1750-1775, born 1731) - Image: http://collections.lacma.org/sites/default/files/remote_images/piction/ma-31852871-O3.jpg Gallery: http://collections.lacma.org/node/229367 archive copy, Public Domain, Link

Greg Hunt's Sudden Illness

I wouldn't have been aware of this if it hadn't been for a random comment made in ZeroHedge the other day. It's evidently of no big concern to anybody, but Australia's Minister for Health and Age Care, Greg Hunt, got a serious leg infection only days after taking the experimental vaccine currently pushed by journalists and politicians alike.

The leg infection has nothing to do with the vaccine, we're told. However, I find it nevertheless interesting, because the legs were also where late Dr. Necklemann was affected shortly after taking the vaccine, as was my mother the other day, as well as countless others. There's definitely a pattern to this.

The irony in this is that Greg Hunt has been very vocal in his support of the vaccine. No amount of evidence has been able to persuade him against an aggressive rollout plan, with all sorts of jabs, including the now infamous AstraZeneca shot. Greg Hunt has not shown any concern about the horizon problem that all these experimental drugs pose.

No-one knows the long term effects of these drugs. Even the short term effects are relatively unknown. Now that Greg Hunt has taken the shot himself, only to fall ill shortly after, he may privately have some second thoughts. He will of course stick to the official story, that his illness had nothing to do with the vaccine, but deep down, I'm sure he's wondering what exactly he let into his body, and what it may be up to in the future.

Hopefully for him, and all the people who trusted him, the adverse effects are transient and not coming back. However, no-one knows. There has been no long term testing. There might be something unpleasant lurking over the horizon, but only time will tell us if it's there, and what its form may be.

Smallpox vaccine

By Photo Credit: James Gathany Content Providers(s): CDC - This media comes from the Centers for Disease Control and Prevention's Public Health Image Library (PHIL), with identification number #2674. Note: Not all PHIL images are public domain; be sure to check copyright status and credit authors and content providers. Deutsch | English | македонски | slovenščina | +/−, Public Domain, Link

Biden's Cantillon Effect

The Biden administration is currently rolling out a $1.9 trillion "American Rescue Plan" meant to stimulate the American economy. Around $450 billion of this is earmarked to go directly to Americans’ wallets, which is different from former rescue plans where the entire stimulus went directly to Wall Street institutions.

Most commentators expect the current rescue plan to pan out differently in the economy than previous plans.  There's an intuitive understanding that Main Street will spend stimulus checks differently from Wall Street, and the big question is what the average Joe will do. The discussion is centred around the Cantillon Effect, which states that the effect of a credit expansion is dependent on who receives the freshly issued money. The effect is not evenly distributed. It takes time for the credit expansion to move through the economy. Hence, some prices rise more than others, and at different times. It can take years, even decades, for price increases in one set of assets to trickle through to other assets.

When Wall Street was the exclusive target of government stimulus, financial assets rose with little corresponding price rises in basic goods and services. The spill over into the real economy has been slow and gradual. However, now that a lot of money has been targeted directly towards Main Street, we can expect prices in consumer goods and services to be more directly affected.

There's also a general expectation that financial assets will be affected more in direction of retail investor darlings than Wall Street favourites. Tesla and Bitcoin are frequently mentioned. However, it mustn't be forgotten that the $450 billion directed at Main Street is a relatively small part of the overall plan. Furthermore, the average Joe is not a speculator. He's a consumer. It's not like $450 billion is about to hit Tesla and Bitcoin. Speculators may even have overestimated retail interest in these names. In their eagerness to front run Joe Six-pack, they may find themselves overextended and forced to sell.

In short, there's no way of saying exactly where the money will flow. But it's safe to say that it will affect prices on Main Street more than previous rescue packages. However, the vast majority of the money is still directed towards Wall Street. That's where the real action will take place, and those guys will no doubt position themselves in such a way that they end up with most of the profits. A sensible move on their part would be to bid up prices on commodities required in the manufacturing of consumer goods, thereby draining the purchasing power of the average Joe in favour of themselves. The benefit to Joe Six-pack is likely to be less than what he imagines it to be. In fact, we can say with absolute certainty that he has been very much misled.

What is rarely mentioned, if at all, is that the rescue package is being financed through debt, and that this debt uses American taxpayers as collateral. Biden's $1.9 trillion are to be financed through future tax obligations. Main Street is receiving $450 billion today at the cost of $1.9 trillion in tax obligations into the future. That's a horrible deal that no-one in their right mind would have accepted if it was laid out clearly and honestly by journalists and politicians. But the numbers are clear for all to see, so there's no excuse for this blind trust in the wisdom of this. Joe Six-pack's enthusiasm for his stimulus check is a case of wilful ignorance. He wishes this to be some kind of Santa Clause fairy tale, so he refuses to think it through. However, that's not going to save him from the facts when they become apparent in the not too distant future.

The US has a population of about 330 million, which means that Biden's $1.9 trillion stimulus represents a $29,000 loan for a typical household of five. This same family receives $7,000 in stimulus checks, provided all its members qualify. This means that the Biden administration has just burdened this family with $22,000 in future expenses, unmatched by money received. There's also interest payments to be paid that stand at about $400 per year at current interest rates.

It's almost as if we can hear the pied piper coming down the street, and the question everyone should be asking themselves is what to do about the situation. My suggestion would be for everybody who objects to the deal to buy physical silver and gold, and to store it privately. That way, we can at least rescue our own children. We may even be able to force the elite to reconsider their reckless and deceptive policies.

The pied piper

By Artist: Kate Greenaway (1846–1901) Engraver: Edmund Evans  (1826–1905)   Alternative names Edmund William Evans Description English engraver and printer Date of birth/death 23 February 1826 21 August 1905 Location of birth/death London Isle of Wight Work location London Authority control : Q4529602 VIAF: 71519059 ISNI: 0000 0000 8392 8947 ULAN: 500023437 LCCN: n81059993 NLA: 35071074 WorldCat - Browning, Robert (1910) [1888] The Pied Piper of Hamelin, London: Frederick Warne and Company, pp. p. 41 Retrieved on 26 July 2009. (direct link to high resolution image here), Public Domain, Link

How Churn Creates the Illusion of Price Discovery

Basic economics tells us that prices are set in the market by matching supply to demand. From this it's easy to conclude that prices must reflect value. However, prices can be manipulated so as to misrepresent the true value of things. The naïve investor can be duped into buying something for much more money than it's worth. He can also be duped into selling things way cheaper than true value.

The way this is usually done is by introducing a certain level of churn in the investment target, and to systematically lift or suppress the price in the process.

As an example, we can imagine four guys coming together with the goal of lifting the price of some illiquid stock that they all own. Instead of waiting for outsiders to bid up the stock, they agree among themselves to trade their stocks in a circle. The first guy sells a given number of shares to the next guy, who sells these on to the other two, who in turn sell them back to the first guy. This is then repeated, every time in a slightly different manner so as to escape detection.

The result of this is that the price of the stock is set by the circle of friends rather than the market. If done convincingly, it looks like normal market action. Outsiders who monitor the market may not be able to distinguish the manipulation from normal price discovery. They see a sudden flurry of activity and conclude that something big is about to happen. They jump in to get a piece of the action. That's when the group of friends sell their stocks, leaving the outsiders to hold the bag.

Key to success in this is that the churn is big relative to the underlying asset. The more churn there is relative to actual retail demand, the more freely the price can be manipulated. We must therefore view with suspicion any market where there's a lot more churn than retail demand would suggest.

Looking at the turnover in the gold market as well as in Bitcoin, we get numbers that dwarf what we would expect based on retail demand. The London gold market transacts gold contracts every day equal to annual global gold production. Bitcoin exchanges have daily turnovers in the billions of dollars. Very little of this is driven by retail demand. Almost all of it is churn. Prices for gold and Bitcoin are largely set by big actors seeking to manage the markets to their advantage. However, there's a limit to how long such manipulations can continue before reality sets in.

Gold prices are known to be manipulated lower by bullion banks operating on behalf of central banks in order to make fiat currencies look stronger than they are. The churn is used as a way to keep gold prices down. However, this introduces opportunities for prudent investors with long time horizons. Gold is always cheap relative to what it would be if not manipulated. It's therefore a pretty safe long term investment. Its price will either follow a relatively uneventful trajectory upwards in line with what manipulators are able to engineer, or it will at some point explode higher when the bullion banks at some point run out of gold.

Conversely, Bitcoin prices are likely manipulated up by Bitcoin whales who introduce churn by trading among themselves, setting the price higher as they go. However, Bitcoin generates no cash flow. Holding onto Bitcoin is only possible at the expense of cash savings or going into debt. Making this all the more difficult is the fact that Bitcoin is constantly leaking dollars through fixed costs. Sooner or later, Bitcoin manipulators will run out of dollars. The only thing preventing this from happening in the short run is a steady stream of naïve investors, bringing fresh cash into the Bitcoin community.

Similarly, we can see that stock markets the world over are in a bubble. Stock prices are so elevated that investors find themselves in a situation similar to that of Bitcoin owners. Some stocks even have the same negative cash flow that we've identified in Bitcoin. That means that they must be sold at some point if the owners are to avoid eroding savings or going further into debt. Other stocks may have positive cash flow, but so little of it that investors nevertheless have to sell at some point. Very few stocks are priced at levels that allow the average owner to live off of their cash flow for retirement.

The stock market bubble is also a function of churn. However, this has come about, not so much from coordinated manipulation of stock prices themselves as from central bank manipulation of money supply and interest rates. Artificially low interest rates have made everything more expensive than it would otherwise have been, thereby making it close to impossible to save for retirement.

This problem is not confined to retail stock investors. It exists for pension funds as well. They too must sell in order to cover future commitments. The stock market bubble must therefore pop at some point, if not in nominal terms, then in terms of purchasing power. There simply isn't enough value in the stock market to support current prices over time. The future will see selling pressure, with few people able or willing to buy before prices better reflect earnings.

This is in the end the big difference between prices and value in markets. It is easy to mistake one for the other, especially when markets have been mispriced for a long time. But the fact remains that price is what we pay and value is what we get. The two are not the same.

Confusing price for value can be a costly mistake, as well as an embarrassing one, because true value always reveals itself in the end, clear for all to see. Not only does the bag holder loose his investment, he's also everybody's laughing stock. But just because something is unsustainable over time doesn't mean that it can't go on for a very long time. We mustn't confuse the inevitable with the imminent. That too can be a costly mistake. Many have gone bust trying to short a bubble or catch a falling knife. The fact that they are proven right in the end when the bubble finally pops, or the knife ricochets to new highs, is of little comfort to those who ended up broke on the way.

This is why we should make long term investments rather than short term bets. In the long run, prices return to fair value. They even have a tendency to overshoot, giving long term investors plenty of time to roll their portfolio over from one asset class to another.

Hot air balloon

By Kropsoq - photo taken by Kropsoq, CC BY-SA 3.0, Link

Tribal Tendencies and What to do About Them

As often happens these days, what has long been known to most people has now been proven by science. This time around it's the fact that tribal affiliations of all kinds are detrimental to our ability to think. Thus it has been proven that my strategy for a free society is good for our brains.

Central in my strategy is the refusal to attach any authoritative importance to party politics, patriotism, and other such team sports. We don't submit to this kind of authority. We don't send our boys to war, we don't pay taxes if at all possible, we don't drink the cool aid, we don't take the vaccine. We keep away from these things. However, we don't do this blindly or unthinkingly. We keep a watchful eye on all developments. We know that we're vastly outnumbered by the unthinking masses, so we have to be smart about what we do, which explains why independent minded people are smarter than the herd. Our constant vigilance trains our brains. We don't do things just because everybody else in our team are doing it, we do things because they make us better off.

This focus on what's good for us, rather than what's good for team leaders, protects us from doing stupid things, not only in politics but also in finance. We don't jump on trends and fads just because all the cool kids are doing it. We don't invest in things that we haven't first thought through. If something is doomed, we don't put any money into it just because it looks like it can go higher in the short term.

A further advantage is that we can change our minds as often as we like. We are currently home schooling our boy, but we plan to put him back in a private school this fall. Then we'll see what we do after that. It all depends on the general state of society and our mood. We have only one goal in our endeavours, and that is to be better off while sticking to the golden rule. That goal is best attained through careful navigation, and navigation requires flexibility of thought rather than mindless submission to authority.

Navigating through a storm

By maybe Allan C. Green or George Schutze or maybe Alexander Harper Turner - This image is available from the Our Collections of the State Library of Victoria under the Accession Number:, Public Domain, Link