Risks vs. REWARDS:

Interest Rates – The Cost of Money

How about those Guardian Angels in NYC – 6 versus 300 and the rioters lost!! How about the police that have shown up for duty despite the hate, abuse, and risks from doing their jobs protecting us. Hallelujah!! They are HEROS. May my Lord send angels to protect them.

Quite a contrast with our governor and the mayor of Richmond as they pound their chest and scream “Take that you Civil War statue!”. From my cheap seat it looks to me that those commemorated for their leadership in the Civil War display more courage and valor then those two politicians playing to the crowd. You cannot change history, you can only learn from it. There are some critical lessons being ignored because of emotion. That is a shame and a loss.

Talk about bad leaders, at least Obama is consistent. Yesterday he encouraged the protestors/rioters to keep up their “good work to force change”. Really? I am supposed to admire and hold up for honor the folks demonstrating in the street, killing cops, and destroying both private and public property? A good leader would say “This is America. You have the equal opportunity to work for what you want. Go to work. Stop whining for someone who is working to give you something”. I have met too many folks who had little formal education but went to work, became the best at something, and accumulated wealth.

Across our country, cities are on fire, mobs control the streets, shop owners are seeing their lives be destroyed, good folks are being killed, and we are told by our elected “leaders” that the police are to blame. Really? Are the police supposed to control a street mob by handing out designer ice cream? How about a group hug? Not too tight. In the words of one of my buddies, “That dog won’t hunt”. My question is “When do the adults show up” in this drama?

Only an idiot thinks those mobs are concerned about the tragic death of anyone. They are out to loot and raise …. well, Cain. And please stop lying to me about white supremacists being the cause of the mobs. Antifa is the modern-day equivalent of Hitler’s Brown Shirts. Thugs for hire. Will someone please determine whether the money funding them is from Soros or the billions of Dollars we taxpayers gave Organize America in the 2009 stimulus bill? Someone bought those pallets of bricks and whoever is financing the mobs should be liable in court for the damages.

Remember when Mike Bloomberg bragged about owning Virginia’s governor and legislature who in return for his money pledged gun control in Virginia? How do you feel today about the anti-gun crowd? Me, I think I need more ammunition.

There were a few stories in some of the media about shop owners who “dissuaded” the mob from attacking their stores because the shop owner was visible inside their store with an AR-15. Does that answer the question the Democrats love to ask “Who needs an AR-15?” Should I get one to protect my home? Did the Virginia Democrats outlaw AR-15’s yet? Did any Democrats in the legislature buy a gun this past week?

Capitalism built the USA, anarchy can destroy it.

Capitalism depends on the profit incentive combined with the cost of money to allocate resources appropriately. Profit occurs when the return earned on an investment exceeds the “cost of the money” invested. That is called “Positive Leverage”. Negative Leverage is a disaster.

Even if cash is used for the investment, the “cost” of the funds invested is the potential return available elsewhere such as the “Safe Rate” of a Treasury note or bond matched to the duration of the investment. This combination is referred to as the “invisible hand” that absolutely propels forward a capitalistic society. It has been and is an amazing force in our economy.

The absence of this invisible hand in a socialistic/communistic society leads to the misallocation of resources and ultimately the economic collapse of that society. The USSR, Venezuela, and in the future China are some examples of what has, can, and will happen. Historically, the maximum danger occurs as the economy is collapsing and the emperor/dictator realizes failure is about to occur. The result is usually a war. Think … Hong Kong.

China has achieved dramatic economic growth through their massive misallocation of resources. The result of such behavior in a functioning financial market is the devaluation of that country’s currency and economic collapse. In a recent Wall Street Journal article a currency market investor discussing the recent Chinese government devaluation of the Yuan was quoted as saying that the devaluation was acceptable to the market because “everyone needs to hold some Yuan in their portfolio”. Really? I wonder if they also need to hold Fool’s Gold in their portfolio? Do two worthless assets make a balanced portfolio? Is the Tooth Fairy your investment advisor?

Since the entire world lacks a truly functioning financial market, market participants are basing investment decisions (allocating capital) on the signals the central banks are sending. This is Hyper Dangerous because it is a first cousin to the Chinese communist government ruling its financial markets by Xi’s decree. False signals lead to the misallocation of capital which results in bad investment decisions which long term leads to economic disaster.

Let me differentiate between Fiscal Policy (the activity of the Federal government tax revenue versus expense) and Monetary Policy (the activities of The Fed controlling interest rates, the supply of money in circulation, etc.). In this Wuhan Virus pandemic, the Federal government is spending money in excess of tax receipts in a fruitless effort to replace the cash flow of our economy. At best they can only replace a portion of the cash flow.

To raise the money being spent that is in excess of tax revenue, the Federal government is issuing Treasury Bonds. This new issuance should cause interest rates to rise to attract money to an increasingly risky investment because there are no tax receipts to pay the interest much less repay the bonds. The Fed is buying those Treasury Bonds in order to (1) enable the deficit spending by the Federal government (2) while preventing interest rates from rising because rising interest rates would slow down the economy. The result is artificially low interest rates.

In 2018 The Fed tried to “normalize the financial markets” by raising interest rates and bleeding down their portfolio of Treasuries. Unfortunately, they were too aggressive, so interest rates rose too far and too fast. In 2019 The Fed had to reverse their steps which proved that any “normalization” will have to occur over a long period of time. The USA was in a similar financial situation after WW II and The Fed took 15 years to “normalize”.

Politicians for decades have talked about the need to cut spending and pay down our national debt without any action other than increased deficient spending. They are correct in being concerned about the problem but solving it would cause them to lose their well-paying job with great benefits. In our “Alice in Wonderland” world today, that passes for leadership.

If you are still awake, you must be asking – “Why is this important?” Because, the combination of Monetary Policy and Fiscal Policy employed to offset the effects of the Wuhan Virus has put the USA further in a financial hole with no politician willing to cut spending. We cannot afford to pay the interest on our national debt if interest rates were “historically normal”! The only way out is for The Fed to keep interest rates lower than inflation for perhaps 10 maybe 15 years.

This will devalue the Dollar making our debt easier to service. We can service our debt with “normal” interest rates if the value of the U.S. Dollar is reduced by 50% (which means 100% inflation). Continued deficit spending means more inflation/devaluation needed. The only time in history that I am aware this type of “financial management” worked was post WW II. The historical norm, this type of financial management spirals out of control.

So, your task as an investor today is to make investments that earn a rate of return above inflation/devaluation over the long term. Here are some simple guidelines for you:

1. New homes –This market will explode with the extremely low interest rates. Not every segment of the market will react the same. The Wuhan Virus experience will encourage new homes with home office(s).
2. Suburban Growth – The urban mobs and the Wuhan Virus are two huge forces that suggest a migration out of the city into the suburbs. Gen Y will make this transition.
3. Retail – Thousands of stores will close due to Amazon and the Wuhan Virus.
4. Industrial – Demand for distribution space will increase with altered shopping patterns from the Wuhan Virus.
5. Office – Dramatic change to this market because of remote work becoming a norm.
6. Cash – Savers will be abused by low interest rates during the cyclical economic dislocations that will occur, “Cash will be King”.
7. Land – Not all types of land will enjoy the same return, but my preferred asset class.

“Peace I leave with you; my peace I give to you. I do not give to you as the world gives. Do not let your hearts be troubled, and do not let them be afraid.”

(John 14:27 New Revised Standard Version, Oxford University Press)

Next week, more “REWARDS” coming from the Wuhan Virus if we remain a capitalistic economy. Capitalism builds wealth, socialism consumes it.

I serve an awesome God. Stay healthy,
Ned