Purchasing Power

Purchasing Power

Arguably the biggest casualty of the Vietnam War was on August 15th, 1971 when Nixon ended the direct convertibility of the dollar to gold. Since the United States abandoned the Gold Standard in 1971, the United States Dollar has lost 98% of its purchasing power. So after 55 years, for every dollar indexed to 1971, the American citizen is left with 2 cents. Hopefully, the United States never removes the penny from circulation...what would be the purchasing power of the dollar then?

Here at Invest Like A Farmer we have long been champions of owning gold, indeed we were among the first to suggest investors consider buying their own gold mines (in the form of gold mining claims.) Why is that? Investing ultimately boils down to cash flow. Cash flow implicitly implies a certain standard of living or purchasing power. Purchasing power over time is paramount, and gold is one of the best stores of wealth (toil) of any asset class. You do not want to have to earn your money twice!

Alan Greenspan once quipped that: "I can guarantee the amount of future Social Security benefits and for how long, but not their purchasing power." That is a very salient comment. At some point, cash flow needs to be tethered to reality, and that reality is purchasing power. Gold is elemental in its ability to store value.

For many Americans outside of the Baby Boomer generation the American Dream remains elusive, if not completely out of reach. It is out of reach because assets of high quality (read real estate) are in high demand with frequent hoarding by both generational wealth and corporations now. The world is awash in cheap goods and services labeled as "free" which collectively siphon off trillions of zinc pennies at a time, but those assets of true value (real estate, education, healthcare to name a few) are very dear indeed.

Assets of true value are almost unobtainable for younger generations because: 1) there is an artificial shortage of housing (lack of supply for several reasons), 2) there has been virtually zero real wage growth in 50 years, 3) there has been an utter collapse in the purchasing power of the USD.

Since time immemorial governments have debased currency in the attempt to spend more than the currency can afford; some of the earliest known tricks were to make coins of lower grade gold or silver, make coins smaller, cut edges off, change from gold and silver to silver and copper, change from metals to paper that was redeemable for gold or silver, paper that was redeemable for nothing, and most recently electronic money which can have an infinite supply and perfect traceability.

Much of the reason why America grew so quickly was an abundance of land and the California Gold Rush of 1849. The Gold Rush triggered one of the greatest migrations in human history. That also added in today's dollars TRILLIONS in "God's money" aka gold to the financial system. Gold is so powerful FDR actually criminalized the ownership of gold in 1933 via Executive Order 6102!

There has rarely been a better time to purchase or stake a gold mining claim in the United States. With gold trading at $5,000 oz-t. mineral rights on these claims can be worth millions of dollars in gold. Of course one must have sufficient knowledge, capital, and the willingness to work; but the average high school student properly trained, duly equipped and unleashed in gold country stands to make more in a week than an entire summer flipping burgers or mowing lawns.

As the Age of AI dawns upon us, many layers of work will disappear. Vast segments of labor will no longer exist. Promises of utopian society have begun to emerge with Universal Basic Income solving humanity's woes. The reality, however, almost always reverts to basic human nature of self-preservation and survival. Our bet at ILAF is that gold will have a central role in that future of protecting purchasing power, stock up.

Golden Years

 Golden Years

These are not the "Golden Years" of which many Americans have dreamed. Over the past 3.5 years inflation has destroyed ~45% of purchasing power. Proof? In January 2021 gold was fetching approximately $1850 per troy ounce. Yesterday we reached yet another all-time high in the noble metal, closing the day at $2686. So in less than 4 years almost HALF of your purchasing power has been wiped out.

Why does this matter? It provides concrete evidence that there has been wholesale destruction to the purchasing power of the American dollar. The prices in the grocery store, gas pump, and doctor's office are all real, and they hurt. Gold is a great litmus test because governments cannot create it, unlike fiat money like the US dollar. Much has been written of gold on this blog and how it is a physical form of truth.

America needs to move away from a policy of "Tax, Spend, and Regulate" to one promoting creation; ideally this country facilitates growth by a meritocracy of ideas stabilized by the rule of law.  We want the best engineers, scientists, physicians, entrepreneurs, and leaders. The problem with policy failure is that accountability takes at least 4 years at the national level. By that time chaos can reign, but there is hope for creators.

One surefire way to reduce what I consider to be the bane of society, inflation, is to increase productivity. Increasing productivity is a function of treating creators and their capital, both mental and fiscal, well. If that is not an outcome in the coming months, then prepare for gold's luster to shine even brighter. Expect the US dollar to further weaken with increased debt not supported by increased productivity.

Many of society's problems can be both addressed and solved by unleashing the power of productivity. Enable creators to operate in free markets to create solutions. Removing over-regulation facilitates outcomes in the best interest of society because it is the very members of the society who will make economic choices in their own best interests. Choice is the cornerstone of freedom and democracy. 

Ideally capital flows where it is best utilized and not via a laundering system which charges an exorbitant toll to deliver diminishing funds; consider the overhead in the existing income redistribution model. How many hundreds of billions are collected simply to hand out hundreds of millions? Less of the middleman is better for the middle class and nearly everyone else too.  

For the majority of Americans the answers are both simple and obvious; we know what is broken, we know how to fix it, and we know who is accountable. The challenge is can we still get a fair shake at the voting booth to elect leaders who can implement the will of the people? Does the rule of law still exist? Will an unelected shadow cabal run this country? These are the challenges of our Golden Years.

Inflation Kills

 Inflation Kills

Coming soon to a purchase near you...inflated prices! Often called "the silent killer," in economic terms that's exactly what inflation does; it strips away the buying power of the consumer. This morning's Consumer Price Index (CPI) release by the Bureau of Labor Statistics was truly shocking, well at least to people who haven't eaten food, driven a car, or purchased any physical goods for the past several months. For average Americans, there has been no doubt the damage being done to their purchasing power. Everything of value is markedly higher. A lot higher.

Over the past 12 months the all items index rose 4.2%, the largest increase in 13 years. That doesn't sound like much, right? Consider some of the outlying data: the index for used cars and trucks rose 10% in APRIL alone, this was the largest 1-month increase since 1953. The energy index has risen 25.1% over the past 12 months. Food they claim "only" rose 2.4%...assuming you're buying in bulk, and I don't mean Costco, I mean TONS of soybeans. Who are they interviewing for these price points, animals on a farm?

As previously mentioned, inflation is the silent killer. Why does inflation kill? Inflation kills because it marginalizes the backbone of our society: the American Middle Class. The Middle Class is the most sensitive to out-of-pocket purchases; typically they are small business owners or employees subject to the inelastic demand for vital goods-and-services; like gasoline, food, housing, education, medical for example. Inflation ravishes the American Dream because the cost for life necessities consume an ever-increasing share of the Middle Class wallet.

What can be done? As financial farmers you can vote with you money by buying stocks in companies that have the power to pass on increased costs to consumers. Darwinian? Yes. Effective? Yes. Buying inflation pegged consumer staples puts you in lockstep with bad government policy, at least you don't get crushed twice. Second, you can vote members of Congress out of office who do not have a sense of fiscal responsibility. Unfortunately, this takes years. So an alternative approach is to vote with your feet to lower cost areas of the country. If this isn't a viable option, then stick with ideas 1 & 2, and in particular make a God-awful stink to your local, regional, State, and Federal government. Remember they work for you!

Failed fiscal and monetary policy results in rampant inflation. The first flight is usually into dirt (real estate) and gold...fiat paper money continues to lose purchasing power until costs become absurd. In Weimar Germany wheelbarrows full of money were needed to purchase simple goods. Are we there yet? Not by a long shot, but rampant spikes in real estate, food, and vehicles indicate that people aren't dumb to what is occurring...money for nothing never ends well. You can't expect to burn a candle at both ends and not have the lights go out.

 

Asset Inflation

 Asset Inflation

Headlines abound with terms like "mania" and "exuberance" in regards to recent stock market IPOs, journalists should rather focus on the collapse of the dollar.

With Fed Funds rate at essentially 0% consumers aren't stupid. Money is flowing like lava from a Hawaiian volcano into real estate and stocks (especially platforms.) Why? Well the chart above helps to illustrate approximately 100 years of the dollar's decline. Granted, a lot of things have become cheaper, or weren't even available to purchase a century ago (iPhone anyone?), but some things never change: the flight of dollars into real estate, gold, and businesses has been real.

What does this mean for the average investor? Well the average investor, one who typically does not receive pre-IPO shares or hold significant private equity wealth, is troubling. Given the market's recent spike to all-time highs it can be argued that stocks are frothy. Same thing with real estate. Gold may still offers value, in my opinion, to say Bitcoin.

Bitcoin has eaten up the traditional safe-haven status of gold. Bitcoin is an asset that is easily traceable, easily seizable, extremely tax-inefficient, hard to do business with, and limited in supply to 21 million units. Obviously ILAF isn't a fan.

What is a prudent investor to do? Where else can money be allocated? It is hard to believe bonds or CDs offer anything greater than an arena of cash storage with most likely a real yield that is negative...that's right, you are paying a bank to hold your money. They in return offer you protection on the amount (not the value) of the declining asset. Your opportunity cost is the true victim.

A good farmer, and investor coincidently enough, weighs the opportunity cost in making a decision. The future is nebulous, but the past often provides a looking glass into what has worked in prior situations. Most notably, I would turn your attention to the 1918-1920 time period in global history. The Spanish Flu most coincides with our current predicament.

With 50 million dead in the span of several years, which also coincided with World War I, Spanish Flu could arguably be categorized as humanity's singular worse disaster. Technology has offered some relief today. The world is also significantly more unified in a response (Operation Warp Speed should clearly be the Nobel Peace Prize Winner.) So politically, medically, and financially the "world" has acted considerably more in concert than 100 years ago. If the current scenario plays out similarly to the 1920s (which I think it will) prepare yourself for even more asset price gains...think Roaring 20s all over again, and a baby boom to rival the end of WWII.

Bottom line? After covering your monthly nut for housing, medical, education, etc. turn those remaining dollars into ownership in something more sustainable than cash...real estate, gold, business ownership, etc. Oh yeah, and don't forget to save something for the Big Guy! Trump Tax Cuts are 1st on the chopping block under the new Joe Biden regime.

A World Awash in Money

     Even as real wages as measured in constant dollars haven't risen in DECADES, the world seems awash in money. How could this be? This is how: the purchasing power of those dollars has fallen like a rock in terms of real value. The giant vacuum sound you hear my fellow financial farmers is the real dollar value of your fiat currency being sucked away into a global vortex. When a buyer can get a million dollars to purchase a home for little down at 2.75% 30-year interest rate, there is a serious problem that is going to fuel a massive societal shift. A great report detailing this seismic financial shift was recently published by Bain & Company. You can read it here: A World Awash in Money But as a side note, consider buying the only money created by toil: Gold

"Yeah, But Gold Doesn't Pay Any Interest!"

Courtesy of our friends at the Federal Reserve Economic Data (FRED) division, pictured above is the Purchasing Power of the Consumer Dollar. Essentially from 1975, the US Dollar has lost more than 95% of its purchasing power.

As those who like to Invest Like A Farmer, we don't like losing purchasing power. It is a really bad thing; you receive less and less in terms of goods and services over time for each US Dollar you save. Traditionally this was offset by having FDIC-insured risk-free savings accounts that yielded interest. 

With interest now completely laughable, in some countries it is even NEGATIVE now (meaning you pay the bank for the pleasure of them then lending your money,) savers either have to chase risk in the hopes of getting a higher return on their dollars or seek an alternative asset class to hold their fiat currency.

Although having seed capital available has always been a good idea, the mechanism of value in which that capital is stored is very important. Holding cash money long-term has proven to be a big-time loser for protecting the purchasing power of consumers.