Tuesday, August 30, 2022

Winter is Coming

 Winter is Coming


Winter is coming. For most of Europe this winter it will be the worst in at least a generation as potentially thousands will freeze. Why? For more than a generation Europe has relied on cheap Russian natural gas to prop up an economy essentially in decline that had not prepared for the possibility of having their primary energy source cut off.

With no energy bridge in place, Europe is completely at the mercy of Russia. President Trump warned Germany of this potential problem in 2018 and was laughed off the stage. The only laughter one can hear now is that from chattering teeth. 

The lesson financial farmers need to pull from this looming catastrophe is that old Boy Scout motto: "Be Prepared." Europe is not prepared, and its socialist leaders have led their people to a self-inflicted crisis. As previously blogged, corruption and inflation are intricately tied together. Almost always, where there is rampant inflation, there is widespread corruption.

Look no further than the ruling elites in Europe to pinpoint the source of corruption. It may take many names, but the result is the same: the people suffer, while the leaders jet off to cozy chalets for the winter.

For ambitious energy investors this is the primetime for profitability, as mismanagement of natural resources (and by that I mean not tapping existing supplies to achieve energy independence) has provided a window of unparalleled opportunity.

It seems Western Europe never remembers the past, while Eastern Europe never forgets.
 
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Wednesday, August 24, 2022

Inflation Production Act

Inflation Production Act


The deceptively titled "Inflation Reduction Act" is right out of Saul Alinsky's "Rules for Radicals" playbook. It is more accurately an "Inflation Production Act" than anything. How Joe Biden can claim otherwise is pure malfeasance. What's even more troubling is that ALL 50 Democrat Senators AND the Vice President went along with the lie. But isn't inflation just a "First World" entitled problem?

As the famous Janus God of investing Warren Buffett recently quipped, "Inflation swindles us all." And up until recently, high inflation was actually almost always a Third World problem. That is because there is a strong correlation between inflation and corruption. Where there is high inflation, there is almost always rampant corruption. The two are joined at the hip. Consider the lowly penny for example.

Pictured at the top of this blog post today is a penny from 1845. It is 4X as heavy, almost 2X thick, and nearly 2X as wide as the corresponding 2022 penny. Oh yes...and the 1845 version is also 100% copper. The modern penny is almost all zinc. The penny provides a nice visual example of inflation over the past 77 years.

Generally speaking, when too much money is printed not backed by physical value (think gold), then the cost for goods increases because too many people have too much money chasing too few goods. That is the textbook definition of inflation. This is how a nation robs its people of value. It increases the money supply without increasing the value behind the money. You pay more for less.

The "Inflation Reduction Act" accomplishes this at scale by spending dollars we don't have on things we don't need at a price point that is too high. Even more troubling, it acts as a government clearing house for picking winners and losers rather than embracing a free market system where citizens are the deciders on how best to allocate their own capital. And then there is the IRS issue. 87,000 new armed tax police.

If this country is going to escape from a self-inflicted recession, then we need smart economic and monetary policies. Elected representatives should embrace the principle on which this country was founded, namely a "wide horizon, free range" mentality of low regulation, few laws, just enforcement, and a focus on self-reliance; from energy independence to USA manufacturing to leading the world in engineering, medicine, and free thought in all its forms...movies, painting, poetry.

The only thing holding this country back from enjoying a long stretch of uninterrupted Halcyon Days is hypocrisy...that failure to recognize, accept, and act on truth. Financial farmers would do well to concentrate on identifying ownership opportunities where truth reigns paramount.

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Saturday, August 20, 2022

Leaky Cauldrons

Leaky Cauldrons


Fans of the monumentally successful Harry Potter series will well recognize the "Leaky Cauldron" reference in this blog post...in Harry's world it is a tavern. My reference is to the economy, and in particular, the fine balance between regulation and production. A leaky cauldron has many benefits.

Consider how a nation's economic success follows a delicate arc between enforcement and laissez-faire; the Joe Biden Administration would be wise to loosen the chokehold on small businesses and entrepreneurs in America. Today in the United States nobody really even knows how many laws there are. Most Americans need professional help figuring out their own taxes. Why is this? Absurd!

Rather then hiring 87,000 more armed IRS agents to enforce an encyclopedic tax code, this President and Congress should laser-focus on taking care of its Veterans by offering direct Small Business Loans from the Federal Reserve for the express purpose of buying small businesses. The citizens in this country who volunteered to serve should not be left behind on sidewalks while their government builds edifices to itself. A great benefit to a leaky cauldron is that not all the money gets to the people who waste it the worst, namely Congress.

Individuals will always waste money the best, ie in their own self-interest. We few proud scorned citizen taxpayers elect members of Congress for the primary purpose of spending our tax money. Think about that...every American citizen has their own personal shopper, who in reality rarely buys what you want, for the price you want, or even when you want it! A leaky cauldron helps to alleviate this problem.

Finally, a leaky cauldron bubbles over rather than causing the cauldron to explode. That's a good thing. Explosions cause a lot of damage, while bubbles typically can be mopped up. So in summary, government officials should focus primarily on understanding the Laffer Curve and loosely regulating an economy based on a "leaky cauldron" principle. Financial farmers should LEAN OUT hard against increased government regulation, enforcement, and penalization. All of those are taxes on productivity which shifts power away from the people. Remember, your government works for YOU.
 
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Wednesday, August 10, 2022

Banana Republic

Banana Republic


The United States officially became a banana republic (and I don't mean the cargo-pant slinging clothier) on Monday August 8th, 2022. Couple the Trump Raid with the looming passage of the "Inflation Reduction Act" adding 87,000 armed "tax police" and we are there dear readers. As my good friend Jackie Chiles would say "Outrageous, Egregious, Preposterous!"

Under the auspices of non-compliance with an Archives Act violation (what is that anyway?) the FBI raided former President Donald Trump's Mar-a-lago home Monday August 8th, 2022 in the most brazen political hit job this country has ever witnessed. On the heels of this raid, Democrats have voted 51-50 to send arguably the most freedom destroying legislation to the House. The impact of creating an armed partisan tax police with 87,000 new recruits boggles the mind. This country is in trouble.

When justice is no longer blind to political affiliation or religious beliefs or the Bill of Rights truly storm clouds brew. Such is the case now as the country will undoubtedly become more polarized along political lines as the Constitution becomes a notion rather than an ideal.

What is a financial farmer to do? Oddly, the market continues to rally into the better-than-expected horrible inflation number (8.5% vs. 9.1% previously) so a crest in inflation may sling-shot us out of a Bear Market. But to a larger extent, the market is always forward-looking. How far forward is a matter of debate, but something along the lines of 6-9 months is a reasonable assumption. And based on inbound data from recent macro events it *appears* that with inflation peaking the Fed may only have to raise another couple points. 

"Only have to raise another couple points" is a tricky proposition nonetheless, as mortgage rate increases tied to the 10-year Treasury Note dictate the housing market. Expect purchasing to slow, inventory to rise, mortgage payments to be missed, and a general malaise to hit the housing market. It is hard to believe housing will continue to rally into a near-doubling of rates. The one savior (economically speaking) of this economy is the unemployment rate.

With historically low unemployment and steady to higher wages, the consumer has some semblance of protection from inflation, protection in the sense that they can now get less for more; "grin and bear it" has become the signature economic policy of the Biden Administration.

That's where we're at now as a country, trying to shoulder the burdens of inflation without breaking our backs all the while watching the rule of law disintegrate. But keep faith dear readers, as so plainly spoken in "Unbroken": "If you can take it, you can make it."
 
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Thursday, August 4, 2022

Heat Waves

Heat Waves


It is said that farmers live and die by the weather, so too with financial farmers. Particular amongst weather events are heat waves. These heat inductions outside nominal weather conditions typically have rapid onsets. We know they're coming, but not necessarily the time or place. So too with Bear Markets. A confluence of events result in both; for farmers a heat wave can lay waste to their crops and livestock; for those of us farming for profits and cash flow, a Bear Market can do the same to our portfolios.

World War Z has one of my favorite lines: "First to know, first to act." It relates to the measures North Korea took to prevent the spread of the Solanum virus. It is application to both farmers and financial farmers is immense. In terms of farmers and ranchers, knowing weather patterns allows them to prepare (somewhat) for conditions on their farms and ranches. Sadly, most are held hostage to the weather they get. There is a limit to the actions that can be taken; increase the watering, provide shade perhaps, and maybe move the herd. The investor, however, has multiple choices when a heat wave is imminent. 

As discussed in a previous post, financial farmers have the ability to pursue an Absolute Alpha approach. This strategy harnesses early warnings systems to alert an investor to changing economic conditions. But just like heat waves and meteorology, the time and place of a Bear Market aren't precisely known to economists. Say hello to our old friend Pareto.

Pareto's Principle states that 80% of most results are directly proportional to 20% of the inputs. For our purposes we are keen to know where we are in an economic cycle and the corresponding stock market rotation (Bull/Bear). Why? Unlike farmers and ranchers beholden to heat waves, investors have the opportunity to take drastic, immediate action to protect their portfolios. 

Being on the right side of a trade is vital; stay too long on the wrong side of a trade and you risk serious financial pain that may not be recoverable in the short term (or long term.) Also, being on the wrong side of a trade naturally implies you are NOT on the right side of the trade...hence the opportunity cost of a being on the upside. Farmers, ranchers, and investors all know time is a valuable commodity. Maybe the most valuable. And generally speaking, being wrong for extended periods of time is bad for business.
 
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