Escalator Yo-Yo

 Escalator Yo-Yo

One of the best analogies of the stock market is that it is a man riding an escalator up with a yo-yo in his hand spooling up and down constantly.

Now the escalator itself might represent inflation or productivity over time, perhaps both, while the yo-yo spinning up and down constantly represents the inherent day-to-day volatility of the stock market dipping down and bobbing up.

Short-term, from the man's perspective, the stock market is demonstrating extreme swings in movement, yet all the while the escalator is slowly, methodically, moving higher and higher raising the relative baseline. 

Yet as we have all experienced, an escalator can and does stall or break. That is rarely for long. Mechanics come and "fix it" (read Federal Reserve) and it is off to chugging along again, day-after-day.

What makes this analogy so interesting is the combination of both economic and physical law truisms; namely inflation acts as ever-increasing entropy, while man constantly seeks technological solutions to life's challenges.

Coupled together, inflation and productivity push markets higher in both notional and real values, while the day-to-day swings offer prices points for entry and exit to millions of market participants.

One of the inherent functions of a market is timing. Timing in the purchase and sale of assets relative to their perceived value at that price point in time.

As we have seen on a nearly every-other-day basis this summer, traders are actively probing entry and exit points for equities. In spite of high(er) oil prices, two global conflicts, and daily (re)evaluations of tech pricing the markets have continue to rally higher.

So while short-term traders are watching the Yo-Yo, readers of this blog who desire to Invest Like A Farmer (ILAF) are using sell-off timing to their advantage and riding the escalator higher and higher while being prudent not to find themselves the "exit liquidity" many VCs and Investment Banks so cravenly need.

The Brass Ring

 The Brass Ring

Here at Invest Like A Farmer (ILAF) we play the long game, and you should too. Investing over the long-term, by definition, provides significantly more opportunities for you to compound your wealth than shorter, sporadic intervals. Even measly annual returns compounded over time can become great generators of wealth. We are not interested, however, in measly returns at ILAF...we seek the brass ring during life's carousel.

Getting the brass ring is tricky though, it takes a combination of skill and luck. For some, they are given a brass ring upon birth and their challenges are different; the adage "from shirtsleeves to shirtsleeves in three generations" is often aptly true. For those on the come, the deck and the game need to be understood.

Here is a quick primer: Modern economics in the United States has basically evolved from five (5) seminal events over the past ~100 years. One could go on the cocktail circuit for a lifetime simply addressing these five events.

The first was the creation of the Federal Reserve in 1913. For better or worse, this created an unelected quasi-government akin to Gringott's Wizarding Bank. Over time "The Fed" has arguably become the most powerful unelected (unaccountable?) organization in the world. Controlling interest rates is God-like power.

The second event(s) were World War I and World War II. Wars are extremely expensive in terms of resources, both physical and human capital. The United States transformed from a largely agrarian economy and culture to a full-on manufacturing behemoth. Some argue that the United States entry into WWII finally got it out of the Great Depression.

Bookending the two World Wars, there occurred the third and fourth events. The third was the creation of the income tax via the 16th Amendment in 1913 which effectively replaced tariffs for supporting the Federal, State, and Local government expenses. The fourth event occurred at the tail end of WWII, The Bretton Woods Agreement in 1944 which made the U.S. Dollar the de facto reserve currency for the entire World.

Finally, the fifth seminal event following the creation of the Federal Reserve, the 16th Amendment, WWI & WWII, and Bretton Woods was in 1971 when President Nixon took the United States off of the Gold Standard.

Often referred to as the "Nixon Shock," it effectively ended 2,000 years of monetary policy which had tethered gold to a unit of global government money.  These five events are critical to the long-term game plan of investors seeking the proverbial brass ring.

What the five seminal events normalized was the loss in buying power of the United States Dollar over time, ie a dollar today is worth more than a dollar tomorrow. The Fed organized it, the income tax solidified it, wars (WWI, WW2, Vietnam) expanded it, and Bretton Woods transmitted it around the world.

These five events have made it possible for the government(s) to essentially print unlimited amounts of money without necessarily creating any additional value. Everything humanity knows is finite, except fiat money. That is infinite. The only way around this quagmire is for investors is to: 1) Create value by increasing productivity in some manner, 2) Buy Assets, and/or 3) Live a long time. The crib notes? Create Value, Buy Assets, Live Long...CVBALL.

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.

Risky Business

Risky Business

 

 

In the classic movie Risky Business Tom Cruise's character Joel Goodsen says, in a slightly edited version, "Sooner or later, a man has to say 'What the heck, and make his move!'" The Federal Reserve is stuck in neutral as "transitory" inflation over the past 38 months has PROVEN to be "sticky." The Fed needs to make their move.

With the Truflation© index now well over 50% in the past 3 years, it is difficult to understand WHY the Federal Reserve has not continued to hike rates. Gas alone in California is up over 75% from Jan 21 until today! The other components of the index are also all markedly higher. The value of the dollar is collapsing all around us, yet no one in Washington, DC seems to care.

When the Federal Reserve does not do its job, literally billions of people around the world suffer. This is the impact of having the world's reserve currency, great responsibility. NOT making decisions based on data visible by everyone at the pump, grocery store, landlord's office, health insurance premium stub, or at the bursar is a dereliction of duty.

 

The Federal Reserve has a both a fiscal and moral responsibility to maintain a stable currency. It is failing terribly at this, as evidenced by massive price instability. Historically, price instability has proven to be disastrous. The domino effects of price instability often result in the toppling of nations.

Resolution to the inflation crisis can be straight-forward and transparent, raising interest rates until Truflation© falls and prices stabilize, or it can be exceedingly painful by doing nothing and watching while multiple demand shocks hit the economy. Hopefully elected leaders choose a sustainable future starting first with price stability.

The Big Squeeze

The Big Squeeze

 

 

Chin up patriots, that most heinous annual civic duty is upon us! This solemn April 15th Tax Day, chronologically the year 2024, sure feels financially and socially like Orwell's 1984.

Multiple wars being financed by the United States, zero sovereign border security save that offered by the cartels, and a Congress which is really, really good at its primary function...spending money...has resulted in economic calamity.

The result? Crippling inflation is at 40-year highs resulting in the US Dollar having lost some 50% (you read that correctly) of its purchasing power since Joe Biden took the Oath of Office on that chilly morning in January 2021 watched by thousands through Concertina wire in our Nation’s Capital.

American citizen taxpayers are being squeezed out of their own country; consider, every 100 days now another $1,000,000,000,000 is being added to the National Debt!

Without significant increases in productivity, the US Dollar will careen towards zero value; put another way, when everything is free, nothing has value. The REAL “Green New Deal” is the collapse of the US Dollar because baby, this “green” has no value.

Socially, if ever there was a group of unrepresented, unspoken for, downtrodden, ridiculed, huddling masses it is surely composed of US taxpayers. April 15th should be a National No Tax Day; the effects would be immediate and staggering.

A Tax Holiday would result in annual productivity spikes which would defy comprehension and immediately trigger a Nobel nomination in economics. Imagine a world where citizens didn’t have to pay their own government to launder money!

The one upside to paying “your fair share,” is that at least we can still pay in U.S. Dollars, instead of something of real value like say gold, bitcoin, or real estate. Thankfully the words “This note is legal tender for all debts, private and public.” is still WRITTEN on U.S. currency. Be VERY concerned when the US Government no longer accepts US Dollars.

Truflation© Exceeds 50%

Truflation© Exceeds 50%

 

 

No hyperbole man, Truflation© on a cumulative basis since the start of the Joe Biden Administration in January 2021 now EXCEEDS 50%!

 

Truflation©, as per its definition, is a basket of goods that consumers actually "touch" on a daily basis and are required for living in a modern society. This basket includes five elements: Food, Housing, Gas, Education, and Health Insurance. 

 

The five pillars of Truflation© have now cumulatively exceeded a 50% increase since January 2021. In essence, consumers have LOST over 50% of their buying power in real terms. The effects have been particularly devastating for young working American families on the hook for supporting a large portion of entitlement programs, many of which it is unlikely they will ever benefit from personally.

 

What is a financial farmer to do? Well it is no coincidence that the price of gold, the stock market, real estate, and crypto to name a few assets are UP over 50% since January 2021. Fiat paper money like the USD has literally been "heading for the hills" almost as fast as it is being printed. Investor cash has sought refuge in physical commodities, ownership stakes in companies, and good old fashion dirt.

 

 

Debt Bomb

Debt Bomb

 

 

Besides Defense, a stable currency is the best thing a nation can provide to its citizens. The current Administration is adding approximately $1,000,000,000,000 ($1T) to the National Debt every 100 days. This pace is unsustainable because an equal amount of value or productivity is NOT being created along with the corresponding debt. This is how a country is destroyed.

 

Over the centuries many governments have attempted to solve their economic problems by debasing their currency; whether by decreasing the content of gold or silver in coinage, increasing the supply of paper money relative to precious metal backing it, or altogether removing a currency from the Gold Standard. 

Almost always, the debasement of a country's currency has been the result of funding war. War is extremely expensive not only in resources, but also loss of productivity to the warring countries. The larger and longer the conflicts, the greater the hit to the Treasury.

Currently the United States is waging at least three (3) Wars; one in the Middle East, one in Ukraine, and the other one on the Southern Border. The argument could be made that there are also multiple other skirmishes happening 24 hours a day, 365 days a year around the world in which the USA is involved. Putting those aside though, the three major conflicts are costing America vast sums of money. Think in terms of TRILLIONS, not billions.

To look at the stock market or real estate or gold or Bitcoin one would think that this economy is booming. Record highs are being notched daily. There is jubilation in the trading pits. Every month a new high in single family home prices! Yet, just the opposite is occurring with the VALUE of the USD becoming increasingly worthless. As discussed frequently on this blog, inflation has by my estimate destroyed over 50% of the USD buying power over the past 3 years alone. And there is no end in sight.

Barring AI, the major increases in the share prices of many S&P 500 members has simply been a function of increased pricing. Anyone who shops at a grocery store knows this. Or fills up their car with gas. Or pays for health insurance. Or pays for education. Or resides somewhere other than a cozy cave. Truflation© has been running double digits for years. And that compounds quickly.

I have understood the relationship between gold and value for a long time; gold is hard to find, easy to buy, and can not be made by man. Similarly, I also understood that higher and higher stock prices are typically a result of both higher earnings, but also to a large extent, inflation. Same thing for real estate; a classic supply and demand scenario with the added factor of uniqueness. But Bitcoin has puzzled me.

I have come to believe that Bitcoin is a bet. It is a lasting bet against stupidity, greed, and corruption. Meaning Bitcoin, given its cap of 21,000,000 units, should continue to move higher in USD terms indefinitely until some time that sane monetary and fiscal policy is restored...but that day may never come.

$12 Eggs

 $12 Eggs

 

 

 

Joe Biden has egg on his face. When the cost of a dozen eggs in the grocery store reaches twelve bucks, the economy is broken. Inflation over the past 3 years has ravished the United States far worse than any enemy, foreign or domestic.

This author estimates that we have lost some 50% (that's right, FIFTY percent) of our purchasing power over the past 3 years alone. And it has hit us where it hurts most; housing, food, energy, healthcare, and education. Nobody really cares about the cost of a ton of soybeans, that is literally for bean counters in Washington, D.C.!

The median American has been decimated by rampant inflation in core goods and services. Paying for two wars and absorbing some 5-10% of the existing US population in new migrants has triggered massive price increases across the board. "Free" is probably the most expensive word in existence; trillions in spending adds up, especially if there is not a corresponding increase in productivity. Empty carbs kill.

Credit Card Nation

 Credit Card Nation

Increasingly Americans are just saying "charge it!" This has resulted in America becoming a Credit Card Nation racking up $1.13T in credit card debt. The timeline to the run-up in credit card debt overlaps almost perfectly with the run-up in consumer prices. This author has argued for some time that the "truflation" consumers bear is most likely around +50% over the past 5 years.

With prices up so high and wages stagnant as a forest mushroom, the consumer has been forced to put purchases on the proverbial "loan shark in their wallet" to help cover expenses. By-and-large, the greatest costs borne have been in terms of housing, food, and energy...especially over the past 3 years when inflation has spiked sky high.

Given the rate of growth in debt, it is going to be nearly impossible for many people to EVER pay off their credit card debt. Especially when the usury rates are almost at 30%. It becomes a vicious cycle punishing people repeatedly for a purchase made on a credit card. Obviously it also punishes the poorest in our country as well because the rich pay off their balances monthly.

A strong, prudent man from Delaware, where the largest credit card companies are incorporated, sure could make a difference. Perhaps the Consumer Protection Bureau could look into the favorable deals given to credit card companies so they can charge so much interest? Who is on the dole? And why?

Barring some inclusive and diverse help, there will be a greater rate and dollar amount of defaults in the coming months. Ultimately consumers will slow spending or risk having the spigot of cash turned off. The upside? The dollars you owe today are worth less than the dollars you spent yesterday.

Dow 50,000

 Dow 50,000

 

 

Forty years of Dow Jones Industrial Average performance begs the question "When?" not "If?" the DJIA will reach the 50,000 milestone.

 

As often discussed on this blog, the greatest dangers to the financial farmer are taxation and inflation. In regards to the DJIA, we can clearly see the effects of inflation; the average has a relatively stable linear trajectory from 1984 to 2024. Albeit, there are some SERIOUS instances of volatility cause tremendous slides and spikes. 

With that said, we are about 32% away from Dow 50,000 or just about a third. Over the past forty years the Dow has risen some 37,000 points or 3200%. Is America 32X BETTER than it was in 1984? Doubtful.

As best I can tell, the major "advances" over the past 40 years have largely been in the PRICES. Real wages have fallen after having peaked sometime in the early 1970s. What has increased? The price of nearly everything save perhaps for COMPUTING power. And that is what I argue has been the REAL growth over the past 40 years, indeed perhaps even dating back to the invention of the microprocessor itself.

Nearly every component of the Dow, the the members have changed significantly over the past 40 years, have by definition been industrial companies. Over time though those components have weighted more and more towards technology. The same can be said of the broader S&P 500 Index, whose 505 members are a cross section of the largest companies in the United States.

Today fewer companies make more of the profits, and naturally those companies have higher market capitalizations. It has gotten so extreme that less than a dozen technology companies account for the majority of the capitalization. 

There have been several seminal events over the past 40 years of Dow performance which has driven the market significantly higher. In the early 1980s the taxation structure was significantly changed in the United States under President Reagan. This led to an unprecedented boom.

After the crash in 1987 and recession in the early 1990s I argue the next seminal event was in December 1994 when the Netscape Navigator browser was released. That opened the world to the internet. And even during multiple upheavals during the next 30 years the internet gradually came to dominate global commerce.

I believe we are at a similar inflection point to December 16th, 1994 the day after Netscape Navigator was released with AI today. Via ChatGPT and distribution via the largest company in the world, Microsoft, I believe the world again is going to pivot higher in terms of real growth.

What does this mean for the Dow Jones Industrial Average? Assuming more of its components harness AI, or are even replaced in the Index BY AI-dominate companies, the Dow itself should see meaningful increases in the year(s) ahead and not just due to inflation, but rather TRUE growth in terms of productivity. If the Netscape theory holds, then we should see Dow 50,000 sooner rather than later.

How to Buy (& Sell) Gold

 How to Buy (& Sell) Gold

 

 

Buying gold as a store of value and protection against inflation seems like an easy thing to do, if you know how to do it correctly. Buying gold is only one side of the proverbial coin though, with selling proving to be the challenge many holders face. Thus, it is important to "begin with the end in mind," because it is far easier to buy gold close to spot price than it is to sell it near spot price.

First, it is important to understand some terms in the gold market. Chief amongst them is spot price. Spot price is the price paid for a certain weight of gold on the global exchanges with New York and London being the primary pricing markets. Gold is almost universally quoted in dollars.

Gold generally trades 24 hours a day, 7 days a week. The vast majority of this trading is via contracts for future delivery of gold. Spot pricing is for a certain moment in time. The spot price also refers to a certain fineness of gold, typically 24K. 

24K implies 99%+ pure gold. Other common measures of fineness include 22K, 18K, 14K, and 10K. An easy rule of thumb to mentally figure out what those different fineness benchmarks mean is to divide by 24K. So for example, 10K gold would be 10/24 or 41.67% gold.

There are many schemes to swindle the uneducated gold buyer out of their hard-earned cash involving spot price, weight, and purity. That is usually done on the selling side, but buyers need to be aware of what they are really buying.

Generally speaking, retail buyers should attempt to buy physical gold in liquid known instruments. That is a fancy way of saying gold coins and gold bars minted by either governments or the handful of private commercial mints.

To get the best pricing a buyer should shop around on several of the largest exchanges, eBay is a good starting point. There you can find hundreds of different sellers, many of whom have their own stores outside eBay. Companies with thousands of positive transactions with decades of experience are generally a safe bet.

Depending on what state you live in, there may or may not be sales tax on gold. In California for example, purchases UNDER $1500 are taxed, while those OVER are not. This is meaningful when you purchase say a 20 gram gold bar for $1450 and another $120 is tacked on for sales tax. Imagine if you were charged sales tax every time you bought a stock!

If you don't have $1500 or more to buy physical gold, or if you don't want to buy physical gold, there are other good options. Multiple companies have sponsored holdings called Exchange Traded Funds. These ETFs store gold in audited physical vaults with each share of this ETF representing a portion of that gold. 

The advantages of a gold ETF are significant. First they are very easy to buy and sell at close to spot prices. Second, you don't have to worry about storage or security for your gold. Third, the sales tax problem goes away. The downside is you don't physically have your gold in hand. There is an old saying in the gold buying world, "if you don't hold it, you don't own it."

Along with ETFs there are gold mining companies whose common stock can be readily bought and sold on most exchanges. This offers investors the upside of owning companies with gold mines. The downside is you have to be right twice; once on gold itself and second (perhaps more importantly) on management of these companies. In the Gold Rush era, it was extremely common for investors to own "feet," or literally the measured foot of a gold mine and be paid on that holding quantity every Sunday in dividend.

Buying coins, bars, and nuggets are all ways to physically buy gold. And generally the closer you get to the source, the closer you get to spot price. Dealers typically tack on a 2-5% premium ABOVE spot. If you contact a miner directly it is possible to get nuggets at up to 10% below spot. A lot depends on who you buy from and in what quantity.

One of the great conundrums of buying gold is that to get close to spot price on the buy you typically have to purchase larger quantities, unless you decide to go the ETF route. The real danger to an investor who has properly sourced a purchase of gold and perhaps needs to sell a portion down the road is SELLING it.

Of all the years I have been active in the gold market I have successfully only sold gold ONCE for above spot price, and that was for a gold bar still inside its protective plastic case. Barring that, you can expect to get a significant haircut SELLING gold; anything from 5-10% (or more!) depending on who you sell to. Seller beware!

Who you sell to is important. There are all types of schemes to lighten your load. They include trying to confuse you with different weights (pennyweights, grams, troy ounces, etc.) Then there is the old acid test where a piece of your gold is scraped against stone and different acids are applied to determine the fineness of the gold. Of course fineness is then called into question.

To help avoid these situations, physical gold like 1 Oz U.S. Gold Eagles, 100 Gram Gold Bars, and similar well-known instruments are best. For scrap gold or unknowns, it is almost always best to work with a smelter, but identify ahead of time what your estimated gold content is before a melt. Know the value before you sell!

This obviously is where ETFs have a significant advantage over physical gold. Liquidity is as easy as hitting "Sell" on the computer screen. The ETF shares are sold and funds deposited into your account immediately. Another advantage is that since ETFs trade as stocks rather than actual commodities any taxable implications are also treated favorably. 

As Johnny Cash said, "This world is rough, and if a man's gonna make it he's gotta be tough." The same can be said of the gold market. There still is tremendous friction in buying (and especially selling) gold. Scams and cheats abound, a little of the Wild West remains in every gold transaction. But if you know what you want to buy, can identify it precisely, and "buy smart" adding gold to your portfolio can be a smart move.

 

Taxflation

Taxflation

 

 

It is hard to believe there was a time in the United States, nay the world, where there as NO income tax! Indeed, for the first glorious 137 years of our Republic there was no income tax. Save for a brief period of fundraising for the Civil War, 3% for incomes over $800 from 1861 to 1872, there was no Federal Income tax. 

 

In 1913, however, the Democrat Party along with Progressive Republicans helped usher in the age of taxation with passage of The 16th Amendment which provided that "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration."

The initial 1913 shakedown was minimal; less than 1% of the population paid income taxes at the then 1% rate. Oh how things have changed. The passage of the 16th Amendment quickly led to nearly every State then implementing an income tax. Not to be outdone, many local municipalities jumped on the bandwagon and passed legislation implementing THEIR own taxes.

Over time the RATE of income taxation has gone up in percentage terms considerably, where for many high earners the net take-home pay is less than half the amount earned. For some 110 years the trend has been for the Governments (yes plural; Federal, State, Local) to take MORE.

This is obviously a serious concern for an investor, and especially a financial farmer because we know how much effort and labor it takes to create capital, grow it, and even harvest it. That entire process is now steeped in taxation. But it gets worse.

America has long been involved in many conflicts, obviously the Civil War, World War I and World War II immediately come to mind. There have been numerous other large scale conflicts such the Korean War, Vietnam War, Cold War, Iraq Wars, Afghanistan, and also day-to-day funding of parawars in Central America, South America, Africa, Ukraine, and Israel to name but a few. Wars are expensive, very expensive.

In nearly every single one of the example illustrated above, this country needed to raise funds. This was accomplished by either increasing (starting) taxation or printing more money. Productivity gains, winning wars, and general population growth developing Western States generally took care of the Civil War, World War I, and World War II. We saw taxation rates stabilize and fall. Inflation spiked, but then cooled. The straw that broke the proverbial camel's back, however, was Vietnam.

To pay for Vietnam a combination of increased taxation and more spending wasn't enough. Ultimately Nixon needed to take the United States off of the Gold Standard in 1971. This allowed the government to print virtually unlimited money to pay for the war and inflate our way out of the financial situation. At least for a time, because we never went back on the gold standard. And the results have been disastrous.

 

So what is a financial farmer to do regarding taxflation? The most important thing to do first is realize the danger taxflation poses to your economic well-being. It is in your best interest to make the best tax-advantaged moves you can make. A lot of that has to do with WHERE physically you generate income. Another concern is HOW MUCH income your generate, and it there are ways to reduce that number. Finally, if we are all using the fiat dollar, the one must put serious thought in how to squeeze immediate value from the currency.

 

Not everyone can move to Florida or Texas, control their income generation, and buy gold, real estate or stocks with whatever dollars they do generate. But for many of us, there are other salient options available such as reducing "friction," ie triggering gains unnecessarily, frequent moves, consuming rather than saving more resources than needed, or wasteful behavior. Those all have meaningful long-term impacts.

 

Ultimately, growth in real terms springs from increase in productivity. Stores of value, like gold and real estate, help protect against inflation because gold talks toil to obtain while real estate is a need universal good. But growth in a function of productivity...doing something in a new way; faster, cheaper, smarter than we are currently doing it. And that is what we are looking for as financial farmers.

 

Escape Velocity

Escape Velocity

 

 

"Escape velocity is the speed that an object needs to be traveling to break free of a planet or moon's gravity well and leave it without further propulsion." - Northwestern University

 

As financial farmers striving to build, grow, and ultimately subsist off of our portfolio it behooves us to understand this aerodynamic concept.

As we have discussed many times, the greatest threats to the investor are taxation and inflation. Generally speaking, a financial metric like the S&P 500 will continue to increase in value over time because it is composed of survivors; ie only companies who remain prosperous remain in the index, while losers are dropped or go bankrupt. But even the S&P 500 fights a tough battle against inflation. 

The question investors need to ask themselves is whether real growth is occurring are we simply seeing an increase in prices? Inflation often disguises itself as growth. A superb example is M2, or money supply. Does increasing the supply of money increase its true value? Not if it isn't backed by productivity gains.

Knowing that every dollar is worth less tomorrow than today due to inflation, an investor should seek to capture the value of that dollar sooner rather than later. Over the past 5 years the 3 assets classes which have been able to do that are gold, real estate, and stocks (S&P 500 as the preferred benchmark.)

For the worker who has been saving cash the past 5 years it has been brutal. And for those who have been steadily socking it away for decades even worse. The traditional saver has been inflated out of a good portion of their buying power, some 50% in the past 3 years alone!

In the example above, a spaceship needs enough velocity to escape a planet's gravity well. Velocity in our situation are resources, whether gold, real estate, or stocks. Assets that not only hold their value, but perhaps offer growth potential as well. The "gravity well" can be considered that suffocating burden of taxation and inflation which erodes true value and stifles growth.

The reason we Invest Like A Farmer is to achieve sustained growth over time. That rarely happens by chance. An investor needs to understand the value of their paper money and how best to deploy it quickly as fiat currency apparently has a half life in the current environment of about 3 years.

 

Why You Can't Buy a House

 Why You Can't Buy a House

 

 

You can't afford to buy a house because the Home Price to Median Household Income Ratio is at the highest level ever at 7.56. Historically that ratio has been around 4. Things are even worse, much worse, if you are in California.

 

Many of the small, medium and large cities in California are into the double digits. Are you a young family considering moving to Santa Barbara, CA? Good luck. With a median household income of $89,000 relocating to this beautiful city with a median home price of $2.4M results in a HP2MHIR of 27!

 

California is so bad because of the effects of Proposition 13 which has allowed a singular generation to capitalize on the real estate market by essentially capping their taxes while simultaneously allowing for unlimited upside potential. This law has kneecapped future generations. 

Historically real estate has been an IDEAL investment (Income, DEpreciation, Appreciation, Leverage), but with a HP2MHIR at 7.56 (or worse) what is a young, ambitious gainfully employed American family to do?

Well, first it helps to have 2 incomes. Ever since more women have entered the workforce rather than raise families the HP2MHIR has steadily risen. This makes sense. Money will chase good housing, and only those who have more money can get into better housing.

This brings up the next point; it is far better (from a housing standpoint) to have no children. Children are expensive, and the cost of childcare, either directly or indirectly, is tantamount to LOSING one income. Good housing incentivizes childless couples, while penalizing families with children.

 

All of these factors has lead many young families to be "trapped" in a never-ending renting loop that shows zero signs of abating. These families can afford to rent in a area that has good schools perhaps, but there is little to zero chance of them ever being able to purchase in these very areas.

 

As the population grows there hasn't necessarily been in a growth of good places to live, or housing for that matter; demand is increasing, but supply is not. By definition, prices will continue to march higher as demand outstrips supply. Naturally the demographics will also change. Santa Barbara is a good example.

 

What has historically been a sleepy surf town just two hours from Los Angeles, Santa Barbara has now become a large open air retirement enclave with many East Coast urban transplants along with many from the Chicago area whose politics fit neatly in their new home. The result of this migration has been the establishment of the owner class and the servant class. This scenario is playing out daily throughout coastal California.

 

What is a young family that wants to have children to do? Immediately, probably the best course of action is to prioritize the best schools for your kid(s) even if that means renting. Alternatively, you could also look to a 2nd or 3rd tier area to live which may not have everything you want, but it may have everything you NEED.

 

The United States is vast, so there really should be no housing shortage. Over the longer term, the best way to absorb the excess demand is to create more housing. There is plenty of room for multiple entire cities to spring up across the country. Creating more housing will lower the HP2MIHR.

The most obvious, and impactful, solution would be to increase productivity in the United States with a combination of monetary and fiscal policy that is pro-growth; the impact of this would be to significantly REDUCE inflation.

Inflation has bee the true scourge on the economy, causing prices to rise over 50% in the past 3 years alone. Couple that with dilution in the value of American Citizenship and we have some serious problems. The road ahead for potential home buyers is a slog. Unless there is a meaningful drop in prices, an increase in income, or both we have a polarized future of owners and renters who can never own.

Wage Collapse

 Wage Collapse

 

 

One of the greatest challenges Americans have faced over the past 3 years is the collapse in real wages caused by poor fiscal and monetary policy. 

As an investor, one of the primary goals is to increase the value of your portfolio over time. Value is typically associated with a dollar sign, ie the more your portfolio is worth in dollars over time, then logically one would assume that it is more valuable as well. That assumption would be a serious mistake.

M2, or money supply, generally increases over time for a variety of reasons. Ideally that increase is stable, predictable, and backed by productivity gains. Since the US Dollar is a fiat currency (ie not backed by anything but "the full faith and credit" of the United States government), an investor should keep a close eye on the M2. Why?

As M2 increases without a corresponding increase in productivity or physical commodity backing, it DILUTES the value of every other dollar. So say you're a guy named Dollar Bill just minding your own business looking to make a purchase of a good or service. And out of nowhere a hundred, perhaps thousands of NEW Dollar Bills appear out of nowhere and want the SAME good or service that you do!

The net effect of too many Dollar Bills is dilution in purchasing power. Value has decreased. The illusion created by flooding the country with dollars is one of prosperity and wealth, the reality is just the opposite. Wage earners feel the bite of this con worse than anyone else because wages are typically fixed, whereas the monetary supply, stock market, and gold market react immediately and exactly to the con.

Consider the charts below representing 5-year snapshots. The M2 increased by some $7,000,000,000,000 ($7 Trillion) over the past five years in nominal terms or roughly 50% MORE U.S. Dollars were created out of thin air. Not surprisingly, the stock market, as measured by the Dow Jones Industrial Average, also "gained" some 50%. As did the price of gold. Did your wage increase by 50%? Probably not.

As a proactive investor, it behooves you to understand the greatest challenge you face is probably inflation, especially if you are a wage earner. And broadly speaking, probably 80%+ of all Americans are wage earners; whether you are a blue collar worker on an assembly line with an hourly salary or a white collar worker behind a desk or in an office with a fixed salary or even a "no collar" worker on the gig economy with a hybrid salary, the vast majority of us are all subject to a recurring price paid for labor. Typically the wage lags, or never catches up, the price charged by the manufacturer or service lead.

What does this all mean? Vigilance coupled without action is useless. So the prudent financial farmer needs to have what I call an "Argentine Mindset." Americans can learn a lot from socialist countries that are corrupt and face raging inflation. Namely, what do their citizens do with cash when they get it from their jobs?

 

Answer: They dump local currency ASAP and turn it into (pick one or more): a more stable currency, gold, real estate, stocks and/or physical goods or tools. They literally cannot spend it fast enough because it depreciates so rapidly. Indeed, it has been recounted frequently that inflation was so bad in the Weimar Republic (pre-WW2 Germany) that a cart full of banknotes was left outside a bakery. When the owner returned, the cart was stolen.

If the goal is to increase the value of a portfolio over time, one should understand the true value of their country's money and deploy it accordingly.

Corruptflation

 Corruptflation

 

 

"Where there is smoke, there is fire," the old adage goes. So too is the relationship between corruption and inflation; where one finds raging inflation, inevitably one will find corruption pushing those prices up via any number of nefarious schemes.

 

As per the Bureau of Labor Statistics, consider the following facts since January 2021: Overall Inflation UP 17.2%, with Food UP 33.7%, Housing UP 18.7%, and Energy UP 32.8%. If you are a small business owner or someone working in the private sector paying full boat for your mandated healthcare insurance, that number is approaching UP 50% depending in which state your reside. It is no wonder that inflation is often referred to as "the silent killer."

When too many dollars chase to few goods or services, inflation is the natural result. Too few goods or services are often a victim of government regulation which often seeks to control outcomes by restricting free market choice. Stifling private competition is a classic tactic of big government.

Joe Biden's "Inflation Reduction Act," culpably passed by Congress, is as laughable as a Netflix comedy special. It may have done more damage to America than anything since Obamacare was forced upon us. The destruction to the economy is in the trillions, as freedom of choice has been destroyed and replaced with mandatory purchases at government mandated prices.

 

Consider how crazy things have become: If you do not purchase healthcare insurance as a legal California resident, you can be thrown in jail. Yet, if you are an illegal resident in California, you are provided with free healthcare insurance. Think about that one.

How did we get here? Tremendous power begets tremendous lobbying. And the taxpayer citizen really has no representation at an individual level anymore. The best a taxpayer citizen can hope for is perhaps membership in a labor union to shake down other taxpayers or such wealth that they cannot be ignored by their "representatives."

 

Barring those two scenarios, a taxpayer citizen is left at the whim of chance. The net result of fiscal corruption results in inflation which reduces your purchasing power. Your "fair share" has silently become whether you can afford to buy a house, start a family, or even retire in dignity.

 

 

Systemic Inflation

 Systemic Inflation

 

Systemic Inflation is one of the greatest risks to the survival of America. The debasement of the U.S. Dollar has resulted in wholesale destruction of value. And the rate of inflation is only increasing as poor monetary and fiscal policy has resulted in surging costs for diminishing values.

What is inflation? Inflation in practical terms is too much money chasing too few goods or services. "Money" can be considered the Federal Reserve's supply of funds to facilitate the functioning of the economy. Per Trading Economics: "Money Supply M2 in the United States averaged 5163.74 USD Billion from 1959 until 2023, reaching an all time high of 21703.20 USD Billion in July of 2022 and a record low of 286.60 USD Billion in January of 1959." -Source, Federal Reserve.

Visually that data looks like this:

 

 

From a pragmatic perspective, what this means is that every dollar you have in your pocket today is worth less tomorrow, and increasingly so.

 

The problem with fiat currency (money not linked to a physical commodity, like gold) is that is has unlimited notional "value." The Federal Reserve, at the direction of the U.S. Treasury and Congress can literally create as much money as they need to fund whatever they want. Hence, as there is no "check & balance' on the U.S. government. There is no limit to the money that can be created.

 

It wasn't always this way. In fact, looking at the data it is clearly obvious when things started to change. The moment the United States went off the Gold Standard, then under FDR made it illegal for Americans to actually own gold, then finally to create money to fund Vietnam Nixon took us fully off the Gold Standard. 

The level of political corruption *might* have been as bad in the past as it is now, but at least there was some "check & balance" on the currency because it was linked to a physical commodity. Now there is no tether supporting the value of the dollar, which as we have well seen has spiked to whatever sellers are willing to charge. $10 for a gallon of milk? Sure. $100,000 for a new truck? OK. $2,000,0000 for a starter home? What a deal!

Systemic Inflation has ravished our country and there is no end in sight. Here at Invest Like A Farmer we like to provide readers with some actionable solutions. First, as a society we need to take back control over our currency. Please support The Gold Money Act, which is a first step to restoring some semblance of sanity to our monetary policy.

 

The GMA will be a tough act to pass, as politicians are afraid of gold; it transfers power away from them and returns it to the citizens. If you live in an area of the country where your voice is ignored and your vote doesn't count, then there are a couple other options besides seeking representational relief.

Knowing that Systemic Inflation is only getting worse, the antidote(s) can be found in several areas. Since the definition of inflation is too much money chasing too few goods or services, it would behoove the inflation weary to own those goods and services which are being pursued by ever-increasing dollars. Who doesn't like to be wooed?

Land seems to make sense as there is a finite supply and you can also live on it. And for some, you can also sustain some level of farming. Obviously gold itself makes sense as it is both finite and extremely portable, liquid, and valuable. Ownership of select companies that are increasing their profitability in real dollar terms while also decreasing the number of outstanding shares.

 

A couple more esoteric plays: Locking into long-term contracts with either insurance companies or city, state, federal governments in which you pay a fixed cost indefinitely and they bear the burden of Systemic Inflation. Buying tools that increase your business productivity on favorable long-term fixed debt terms.

Systemic Inflation is like gravity; it is inevitable due to the human condition (that's a nice way of me saying corruption, malfeasance, and downright stupidity.) The best we can do as financial farmers is protect our farms by taking concerted, concrete actions to stymie Systemic Inflation.

Moon Dollars

Moon Dollars

The infamous investor Warren Buffett once quipped: "5% interest rates will attract money from the moon." Dear readers, that is where we are at now. As the global economy craters due to rabid inflation, new business activity drys on the vine like raisons, and government spending is punched into overdrive, dutiful taxpaying citizens are left holding the bag, yet again.

For a large swath of the elite wealthy population these are Halcyon Days. Risk has been outsourced to the Middle Class. The Fed, whose benefit packages to themselves are an insult to the citizen-taxpayer, rackets the lever higher. Tech giants can now effectively capture hundreds of millions in risk-free interest. Consider, Apple's $200B cash hoard earns an extra $500M each 0.25% increase in the Fed Funds rate. There will be 3 jumbo 0.75% hikes this year...so some quick math 9 X $500 = $4.5B. That's nice.

Retail investors like us can also jump on the hay ride. Who wouldn't like some of this 5% gravy train? The one "bright spot" in the economy has been the strength of the dollar which is allowing US buyers of foreign goods to make a proverbially killing. Especially in French Chateaus. Swiss Chalets. And English Castles. For those peasant Americans who still need mortgages, the story isn't so sweet. The effective mortgage rate has doubled. Younger generations of Americans are completely priced out of the real estate market (unless they want to live OUTSIDE America.)

Moon Dollars should help the extremely wealthy protect their assets in risk-free Treasury Bills until the back of inflation is broken. Since they don't use mortgages, the borrowing costs won't bother them. A large segment of the ultra wealthy DO, however, borrow from themselves via the "Buy, Borrow, Die" investment strategy. The Fed Funds increase won't be as dramatic as their falling equity prices. The old adage of "Don't Fight the Fed" rings true.

So from a big picture perspective, expect the next 0.75%+ hike on Sept. 21st to be a final nail in the coffin for small businesses, especially those that don't have fat government contracts. Unions should do well. And of course the largess of government will also do well...their benefits are never reduced when there is vast economic destruction laid on the feet of citizen taxpayers.

What is a financial farmer to do? Bet on crops that have the best chance of survival. If cash is paying a good rate, take it. With blood in the streets there are bound to be good opportunities for savvy buyers looking to capitalize on the failure of other businesses. A crisis always offers a glimpse into opportunity. Like the svengali Rahm Emanuel once said: "Never let a good crisis go to waste." Go and do likewise financial farmers, these Halcyon Days of ineffectual leadership and disastrous economic policy won't be with us forever! 

Ode to the Taxpayer

Ode to the Taxpayer

Taxpayer burdens increases by the day, yet their representation crumbles with the dilution of citizenship. How long can the Republic last?

Inflation, corruption, and dilution are all intricately linked. As financial farmers poor economic and monetary policy steals your seed capital, and ultimately your harvest as inflation swindles us all. The cost to plant is higher. The cost of the land is higher. Fertilizer is higher. Labor is higher. Even God's water is higher. All of this is a result of too many dollars chasing too few goods.

Obviously there is a problem(s). The current economic cycle *should* be firing on all cylinders as we are well out of the pandemic. But as any farmer knows, it is tough to make progress with the plow stuck. And that is where we are right now. Inflation has ripped the heart out of the American growth miracle and left us hobbled, bleeding out in a fallow field.

Until the ravages of inflation are dealt with we are in a precarious position. And the lonesome taxpayer will be called upon, yet again, to bail out a government increasingly bought and paid for by foreign interests (read China.)

But even this would be surmountable if the value of citizenship wasn't being diluted by the hour. That is the crux of the problem dear readers. A society's riches can only support a finite number of people well. Historically, those people have been citizens with the legal right to accept the largess of their own labors. 

The value of citizenship was similar to farming; the land from which you toiled yielded crops for your benefit as you tended the land, harvested the crops, and received benefits in return for your labor, intelligence, and sacrifice. Abundance came with increased work, yield from the fields, and protection from droughts, plagues, and marauders all capable of stealing your harvest.

We now have too few in the Middle Class, typically the 85% of the population working in small, family-owned businesses that built America, bearing too much of the yoke. Representatives are no longer representing their constituents. The Federal Government is no longer enforcing laws in violation of their respective oaths of office. What we're seeing is the collapse of a country. Next on the ballot? "Non-citizen voting rights."

Citizen-taxpayer options are steadily decreasing. Most now work for the privilege and duty of paying taxes to support healthcare for all, education for all, housing for all, etc., etc. And the tax burden grows. Get ready for the 1099-Ks coming your way in 2023 for purchases/sales of $600 or more. All while the barn door is open out back letting TRILLIONS blow away.

So here's a toast to you taxpayer, on the final day of withholding in 2022: Make sure you withhold some money (preferably gold) for yourself, and if you've taken a 30% haircut this year in your income, make sure the IRS gets their haircut too. We're in this together, right?

 

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.