Can a Strong Dollar Stifle Profits?

AMA1-29-15Can anything stop Apple? The computer giant posted record earnings for its most recent quarter, fueled by sales of its flagship device, the iPhone. Though it looks as if nothing can make a dent in Apple’s performance, one thing might: the performance of the dollar in world currency markets. And that has repercussions not just or Apple, but for US companies large and small.

According to a new report from Business Insider, this past quarter was the most profitable in Apple’s entire corporate history, with profits topping out at $18 billion. But the company still didn’t make as much money as it could have, and the much discussed global currency war is to blame.

In recent months international finance experts have termed the overall volatility of the world’s currency markets a “currency war,” as various national banks make currency policies to further their own agendas. Case in point, the Swiss franc’s recent surge – a move viewed by many as a white flag of surrender in a game of brinkmanship between the Swiss National Bank and the European Central Bank.

In January 2015 the Swiss National Bank removed its cap on the Swiss franc’s trading value against the euro – a cap that it had held firm for over three years. The decision to let the franc float against the euro came as the European Central Bank was making plans to begin a program of quantitative easing to boost the euro.

That plan, similar to the US Federal Reserve’s plan to help the economy by buying bonds, involved buying large amounts of securities to get more euros in circulation. The Swiss National bank’s hard line on capping the franc’s trading value was seen by many as a political bone of contention. The Swiss surrendered – and paid the price.

The franc soared in value, forcing Switzerland to buy up large amounts o foreign currency to keep up. Neighboring nations, whose debt was denominated in francs, scrambled to renegotiate and back the debt with more foreign currency. Even US currency trading giant Citigroup felt the hit.

The fate of the Swiss franc offers some insight about life on the front lines of the currency war, where the US dollar, also trading very strong, is also causing ripples around the globe – and making a dent in the profits of Apple and other companies doing business worldwide.

As the dollar gains strength against traditionally strong currencies such as the euro and the yen, global markets are bracing for another round of adjustments that could change the way goods are priced in various markets.

A strong dollar seems like a good thing. The dollar is after all the model of stability and security among the world’s monies. It’s the foreign currency of choice in places where local currencies are unstable or losing value. The dollar’s reputation in the world’s money markets was made clear in the early weeks of 2015, when the Russian ruble’s value declined by half in just six months. Fears of a currency collapse led Russians to convert their savings into foreign currencies, mainly the dollar, and to acquire as many dollars as they could. In debt-ridden Argentina, too, the dollar trades briskly on both black and official markets.

Like the Swiss franc, the dollar denominates debt for a number of countries around the world – and changes in the value of the dollar can mean changes in that debt as well, as indebted nations turn to other foreign currencies to back up the debt.

And as the dollar rises, the value of other currencies sinks. That means that foreign customers buying US goods (such as Apple’s iPhone) will have to pay more for those goods than previously. And that means less revenue for the company providing those goods.

The company has to make a choice: adjust pricing to accommodate the new currency valuations, or leave things as they are and absorb the hit to profits, which is what Apple has done in most areas of the world.

The currency wars pose a problem for just about any company doing business on a multinational level, not just giants like Apple. The world’s currency markets are constantly in flux regardless of interventions like the European Central Bank‘s quantitative easing plan. And as the dollar stays atop the list of the world’s most stable and desirable currencies, it will remain a player in the world’s currency wars – and the profit margins of its multinational corporations. (Top image:Flickr/imagesofmoney)

Sources:

End, Aurelia. “The Swiss National Bank is the First Casualty of the Modern Global Currency War.” Business Insider. businessinsider.com. 28 Jan 2015

Holodny, Elena. “Russians Scrambling To Get Their Hands on US Dollars.” Business Insider. businessinsider.com 16 Dec 2014

Udland, Myles. “Apple Just Reported a Record Quarter. But Analysts Wanted To Talk About Only the US Dollar – Here’s Why.” Business Insider. businessinsider.com 28 Jan 2015.

Read more from The American Monetary Association:

US Banks Hit By Swiss Franc Fallout

Who;s Winning the Currency Wars?

The American Monetary Association Team

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AMA

AMA 107 – Dr. David E. Goldberg talks about changing engineering education with Jason Hartman

 

Dr. David E. Goldberg is a professor, writer, and a civil engineer. David has written several books on the topics of engineering and algorithms. Some of these books include The Design of Innovation, Genetic Algorithms in Search, Optimization, and Machine Learning, and, his latest book, A Whole New Engineer. Jason sits down with David to pick his brains on the latest in AI technology, why there’s a decline in engineers, and we also get to find out a little bit more about David’s most recent book.

 

Key Takeaways:
2:10 – David jumps right in and talks about AI, Artificial Intelligence, technology.
5:20 – To design a kidney by human hands is impractical, but nature has been able to create one for the past 3.5 billion years and more.
9:15 – As better or new technologies arise, so will the ethical questions.
12:45 – What’s happening in engineering education right now?
15:40 – Engineers were seen as heroes and that view reached its apex around World War one and two.
17:55 – Roughly speaking, 6.9 billion of us owe our existence to technology since our agriculture days.
20:30 – It’s not just in the US where engineers feel unwanted; it’s happening in Asia too.
24:10 – Closing thoughts? Students who feel trusted end up doing the most innovative things.

 

Tweetables:
It seems to me that these innovations get baked in to systems in ways that we’re not even aware.

If you go back into the time machine into the 1800s, there’s this period where engineers were rockstars.

It’s remarkable how little we teach about capitalism history.

 

Mentioned In This Episode:
The visible hand by Alfred Chandler

http://bigbeacon.org/

http://www.amazon.com/David-E.-Goldberg/e/B000APHEJU

 

Transcript

Jason Hartman:
It’s my pleasure to welcome Dr. David E. Goldberg to the show. He is emeritus professor of engineering at the university of Illinois and he’s the author of several books starting way back in, I believe, 1989. Just a couple of titles here for you, one we’re going to talk about is A Whole New Engineer; The Coming Revolution in Engineering Education, The Entrepreneurial Engineer and The Design of Innovation: Lessons from and for Competent Genetic Algorithms. This is interesting stuff, folks. So, even if those titles don’t sound super interesting or maybe they sound nerdy, stick with us, because you’re going to like what Dave has to say. Dave, welcome, how are you?

Dr. David E. Goldberg:
I’m great, Jason. It’s really good to be with you.

Jason:
Well, the pleasure is all mine. I had to say that for our non-engineer listeners of which I am one, I guess. So, you know, I don’t know what we should talk about first. We kinda got two broad topics I really want to cover in this interview and I really kind of want to talk about your renown research and expertise in the field of AI or Artificial Intelligence. So may people now are talking about the singularity. Maybe for those who don’t know you can start off by explaining what that is.

David:
Yeah, so there’s this idea that technology is accelerating so rapidly that we’re going to come to a point where it overwhelms us and perhaps takes over from us and that’s the singularity and whether or not we believe in that it’s pretty clear that technology is accelerating and becoming ever more important in our lives. So, people who know my recent work on engineering education reform may not know this background that you alluded to in doing Artificial Intelligence. I’m a trained civil engineering that migrated in computer science and as part of my dissertation work to do some work on something called generic algorithms or evolutionary computation.

You can give a really simple cocktail party of it. It’s the idea of using Darwinian survival of the fittest on the one hand and ideas from genetics like the idea of having a chromosome and the idea of using mutations and cross-over recombinant DNA, if you will, and you take those two things, throw them into a computer, so instead of designing by hand a jet engine, you would create a chromosome that represents different jet engines and mom jet engine and dad engine would get together and have baby jet engine and overtime you would evolve generations of more efficient jet engines and this isn’t science fiction. This is something that has been used by General Electric to evolve jet engines or companies in Japan have evolve production schedules for steel plants and even people have used genetic algorithms to evolve music and art. So, it’s very cool stuff.

Jason:
That is fascinating. Is this considered singularities? Is this bio-engineering? I mean, I’m quite fascinate by the idea of 3D printing of kidneys or whatever else we might need.

David:
So, generic algorithms can be separated from biological applications, so you’re using the idea of genes to create an artificial genetics that helps you to evolve the solution to whatever problem. So, of course, you can turn on biological problems and use genetic algorithms to evolve solutions to the design of all kinds of thing. If you think about things like nanotechnology, for example. Nanotechnology and biotechnology for that matter you’ve got perhaps 1,000 or 10,000 or millions of decisions to make in designing an artificial kidney; to use the example you’re talking about; to do that by hand is impractical, but nature has been doing this for 3.5-4 billion years in this way, so we use nature’s algorithms of choice for evolving and solving hard problems and voila you end up with pretty good solutions and not in billions of years. We’re doing this on computers, we’re doing it real fast, we can do it efficiently. So, some of the work I did was instrumental in helping us understand how quickly we can evolve to solutions to how complex to a problem.

Jason:
How much of this can we do now? I mean, we’re growing ears and body parts in labs, right? When do you call it cloning? When do you call it engineering? I don’t know. There’s this blurry line I don’t exactly understand what to call things anymore. I guess that we means we’re approaching the singularity right?

David:
Well, I’m not sure about that, but I think you can, you know, so when you’re a scientist or an engineer and you’re involved in these kinds of projects..when you’re the outside looking in things look a bit magical and a bit mysterious when you’re on the inside using these algorithms, you know they work for good reasons and these designs come out and you test them and if they function according to plan, they’re doing something good. So, when you’re in the middle of it, you can sign causality or you know why things are working for the most part so it’s not some of the hype around not knowing as is may be a bit overblown.

Jason:
Really, this is just incredibly fascinating stuff. Can you speak at all, this is probably not your area, but I thought I’d ask, you know, what this stuff means to us, what it means to the economy, what it means to the society as a whole, and then I want to ask you about the education side, which is fascinating too.

David:
I think you started off right in saying it’s not my area. When we look back on prognostication in eras that were much more slower moving than ours. That kind of prediction was almost always wrong in profound kinds of ways. That’s one of the things that’s so interesting about human creativity. Now with these kinds of tools and these kinds of leverage that we have, it’s perhaps even more difficult to predict what these things mean to us, but it seems to me that these innovations get baked in to systems in ways that we’re not even aware.

To a certain extent, some of these advances and machine learning and artificial intelligence are already being baked into IT systems that we use on a daily basis and more of that is coming and as you say there are these nano/bio kinds of technological designs that are intractable without using tools like this. So, things like this are either here or on the way and they, I think, they will continue to provide opportunity and there’s also a negative and there’s a potential for doing harm. So there are ethical questions to the degree in which we use these technologies and we know what they’re producing and the side effects that we’re producing and the extent to which those are predictable or not. So, there are very real questions about sustainability and growth and the ethics of using these kinds of technologies and there are no simple answer.

There are no answers like putting your hand up against history and saying stop. That doesn’t work very well and, on the other hand, fully laissez-faire and unregulated of trails of say various kinds of genetics outputs could be very dangerous of us. So, in many ways that could be why we need to boarded the education of scientists of engineers in the century.

Jason:
Yeah, absolutely. Well, one of the areas where I think this has just fascinating, wide-ranging impact is in the field that is…It just seems like it’s booming right now and that’s the area of longevity sciences. We might be on the verge of just cracking the immortality code. I don’t mean immortality in the pure sense, that might be, you know, maybe…it might never happen, but certainly some major, major advances in the field longevity are seemingly pretty close. I study this stuff and I find it fascinating. Think about what it means to the economy. Think about what that means to the social security system. The retirement age. The sustainability. You know, I always like to give environmentalists a hard time when they’re giving everybody else what they should do, but the fact is everybody alive and that they are alive, they’re consuming resources and, you know, Malthusian idea that people are just not a resource they’re a cost only, but people solve a lot of these problems. They do create. So, we’ll see where that balance goes, but just in the area of longevity alone, wow.

David:
I couldn’t. So, I agree. There is a sense sometimes if you listen to people who are speaking strictly from an environmental sustainability perspective that everything is a cost and everything is a resource. It tends to ignore the innervation capability of human beings. I think I agree with you that it’s a huge mistake and it’s one of the ways in which predictions are wrong. Predictions can either overshoot and undershoot and there is often times a tendency to over predict harm. I mean, when was the last time you saw an optimistic science fiction movie where the future looked more interesting and bright than the future that we have and yet, in many ways, if you look back into the 40′s or 50′s and project forward, those were the lives we’re living right now and there are brighter and things are more optimistic than people projected back then.

Jason:
Yeah, they certainly are. Very interesting. Well, what’s going on in the field of engineering education with the exception of many stars in engineering mostly in Silicon Valley, I guess. You hear about the people that got into a start up and made it big and so forth. It doesn’t seem like engineers are very well paid on the whole and I think that’s kind of unfair because everything we look around, everything we use all day is the result of some brilliant engineer. There’s this funny commercial, I wish I could remember what it was for. You’re probably know what I’m going to refer to where it had these rockstars and all the women were tearing their shirts off and then it had the Indian engineer guy that invented USB and it flipped the world around. They should be tearing his shirts off. This is something we use everyday, right? You know, it’s just kind of funny our culture doesn’t seem to allocate the recognition and maybe the pay correctly. Your thoughts?

David:
Well, there is an ebb flow in history to how engineers are viewed. If you go back into the time machine into the 1800s, there’s this period where engineers were rockstars and, I mean, we talk about electric engineers and computer scientists now, but think about the late 1800′s, Maxwell equations have just come out so people are predicting and some of the first results on magnetics and electromagnetics or radio just come out and so there were all kinds of companies started and engineers were really stars and not just electrical engineer, civil engineer has built bridges and buildings and ships were built of enormous unprecedented size.

So, there were this sense of emergence large technology and large scale business, which engineers were at the center of. There’s this terrific history of large scale business in the United States. The visible hand by Alfred Chandler and he talks about, well, who invented modern business enterprise and it was the civil engineers who started the rail roads, because they were the first people to work across vast distances and they needed a difference kind of organizational structure, so they made up modern business enterprise. There was a sense of excitement back then, which then got squelched in World War one and two and there’s phrase that philosopher Steven Goldman, he says, engineers became socially captive in World War one and two. I think that’s a good description.

So, these very large vertical integrated return to scale kinds of companies were built and engineers were working bees in those companies and that continued and was really sort of reached its apex just post World War two and the Cold War. So, what you’re alluding to in Silicon Valley is a phenomenon between the end of World War two and what has happened now. I called them the three missed revolutions. We had the quality revolution where statistical quality control when Japan came back and the Japanese beat us around the ears with it, the entrepreneurial revolution of various garages in Silicon Valley, and the IT revolution from the microchip to the personal computer to the internet.

So, here we are in the opening moments of the 21st century and we live in this really different place that where once after World War two, we wanted obedient engineers to shut up and sit down and do what they were told and now we want the next Steve Jobs who wasn’t an engineer, but we want our engineers be that guy or that gal whose starts the next great tech company and many of our young people, the students, going into engineering have those aspiration, because they see these role models out there.

Jason:
So, why is engineering education so important to our economy?

David:
Well, so again, there are roughly 2 million or so in the US who call themselves engineers. There are about 4 million or so that are in mathematical and computer science. I mean, it’s a pretty big part of the work force, but if you stand back from it and say, look, we’re on this planet. We’ve got 7 billion people on this planet and more coming. If you just do a fundamental analysis of the situation and say, alright, well, what would happen if we did like some people would have us do and turn off the technology. Where would be? It’s hard to know exactly, but if you dial back to the days when there was only crude technology like agriculture, if you go back before crude agriculture.

Say, dial back 7,000-8,000 years or so, what do you got? You’ve got about 100 million people on the planet. So, roughly speaking to 6.9 billion of us owe our existence to the technology that’s been developed since agriculture. So, turning off technology isn’t an option. Keeping it going and having it function well and better and serve us better as human beings is even more important than ever. So, in that very fundamental sense, having the next generation of engineers be chosen from amongst our best and brightest is really important.

Jason:
It certainly is. So, I’ve always thought that engineering was a very, very important career choice. I appreciate engineers like crazy and you look at it compared to the, you know, how they’re getting sucked away into the game of Wall Street in that, what was that movie called, Margin or..I can’t remember the name of the movie, but it was a couple of years ago and the founder of this huge brokerage firm depicted in the movie as probably Lehman Brothers, they were probably predicting; I’m not sure; comes in at midnight asking this young kid, you know, who was a quant who just figured out this whole situation they had that no body else saw in the company managing the risk and the billion head of the company says, so, you know, what’s your background kid? And he says, I have a PhD in blah, blah, blah, he says, basically what that means is I’m a rocket scientists. He says, well, what you’re doing here? And he says, well, Wall Street pays a lot better than engineering. I think that’s a sad commentary. I really do.

David:
If you talk to the kids today, the students today, the motivations aren’t entirely financial, but if you factor in the fact that engineering is itself fairly uninviting and there’s this possibly of a larger paycheck, it’s hard to fault people. It’s not just an American problem. One of the interesting things we found out in researching the book and I had the pleasure in working on engineering education change in Singapore. We often think of Asia, okay, if we don’t generate enough engineers in America, well, at least we can always turn to China and India and they’ll give us the millions of engineers that we need, but even in Singapore is a the canary in the Asian coal mind for engineers.

I was working at the National University of Singapore and one of the things the engineering dean told me was that it used to be that engineering was the number one choice of young people accepted at NUS. That’s what where you went and many of the people in government were engineers, many of the people in the top jobs were engineers. Engineering was respected, but they too have fallen on this kind of sense that almost anything, but an engineer. It seems as though when countries become sufficiently affluent, kids wanna do something other than become engineers. So, one of the things that…

Jason:
The distinction though, the Wall Street example I gave is that, you know, the financial in engineers and the financial innovators on Wall Street are really just leaches on the economy in almost every case in my humble opinion, disagree with me if you like, but all they’re doing is find ways to move things around and relabel things and, you know, cut things up and make derivatives out of them. They don’t actually create anything anymore. Okay, granted, companies need capital to grow and thrive, and so forth. So, conception ally, I don’t have a disagreement with the idea of capital formation of the stock market, of course, but it has just become such a corrupt…as I always say, the modern version of organized crime. You know.

David:
I would agree there are excess. I guess I’d disagree to the extent that all of that activity, you know, so efficiently and capital is important and I personally know hedge fund managers and people who work with business to help restructure them more efficient so…

Jason:
Yeah, I get it. I have investment banker friends too and hedge fund friends too, but the real value creation is when you create something new out of thin air and it changes everybody’s life. That’s like actual value. Of course you need capital to do that many times, so I get it. There’s a middle ground.

David:
I think if you go back..So, again, if you go back in our time machine to the invention of securities back with the Dutch example and I think the early trading companies. So, the whole capitalism is a fair early invention and remarkably..It’s actually remarkable how little we teach about capitalism and its history and many of the objections to capitalism are objections that were held back in the 1500 and 1600s when it was first emerging and we seem to be in the same argument over the course of centuries, but..

Jason:
I am a complete capitalist. So, don’t worry about that.

David:
Those things be it the idea of the invention of shares and selling shares and having markets and the efficiently that brought to capital and the way that allowed business to scale was the kind of innovation that you were talking about.

Jason:
Okay, we don’t need to debate that one, but I get it. Okay, so I want you to give out your website and then ask you for some closing thoughts.

David:
The website for our work on changing engineering education is www.bigbeacon.org and there’s a movement to transform engineering education to help bring about engineers that can face..we’ve been talking about the ways which our times have changed and how do we education..how do we unleash the courageous engineers we need for this century is what the Big Beacon is all about and the book is called A Whole New Engineer.

Jason:
I hope that has an impact on things and we see a lot more people getting into the field, because, as I mentioned, I think it’s just incredibly important. So, yeah, good stuff. So, any closing thoughts? Anything I didn’t ask you, you didn’t happen to say, you know, just to wrap it all up for our audience?

David:
I think, in terms of the key, and one of the big surprises in what we found in working on education today was the sense that of empowerment that we give students and it really comes from three things. Trusted students; when students are trusted by faculty or other students, they end up finding the courage to take an initiative, which leads to real learning and that’s the emotional equation that lends to the kind of learning that we need in this century and that’s a message that doesn’t apply to engineers. It applies to all kinds of entrepreneurial thinking, it applies to kinds of opportunities that we face in this century. So, that equation from trust to courage to initiative seems to be the kind of unleashing reaction that we are missing in education generally and we need to get into it.

Jason:
Good, good stuff. Well, Dave, thank you so much for joining us today and talking about some of these issues and I always say, it is an amazing time to be alive. I think the next 5, certainly the next 10 years, it’s going to blow our minds, quite literally. We’re going to have amazing stuff coming down the pike. It’s really exciting, it really is.

David:
I couldn’t agree more. Thanks Jason for having me on the show.

Jason:
Everybody, that’s David E. Goldberg, an emeritus professor of engineering at the university of Illinois and the author of the several books that we mentioned.

AMA

US Banks Hit By Swiss Franc Fallout

AMA1-22-15In the tightly knit world of global finance, what happens halfway around the world can have devastating effects at home. Case in point: the fallout from the recent Swiss bank decision to drop its cap on the franc, which is hitting even US banks and the sturdy dollar.

The Swiss National Bank’s move to let the franc float against the euro went largely unnoticed outside of financial industry ad business news. But the move was widely viewed as another salvo in what’s being called a modern currency war – and that meant it had wider implications for currencies all over the world.

In mid January 2015, the Swiss National Bank removed its three-year-old cap on the franc;s exchange rate against the euro. The move had been intended to keep the franc from appreciating too much against the euro.

The European Central Bank was planning its own version of quantitative easing, a plan to stimulate the euro zone’s economy by buying up large amounts of securities. The plan would put more euros into circulation – and that by extension would increase demand for the Swiss franc, a favored “safe” currency for chancy times.

In order to pave the way for the ECB’s plan, the Swiss had to bow out, relinquishing the capon exchange rates for the franc and letting it “float” against the euro. It was a costly maneuver, to be sure. Some investment firms crashed and the Swiss National Bank was compelled to buy up massive amounts of foreign currencies to keep pace.

Though the immediate fallout from the Swiss decision was felt in adjacent Ares such as Eastern Europe, where much national debt is denominated in Swiss francs, it also rippled around the world, hitting even US megabanks such as Citigroup.

In addition to its place as one of the largest banking institutions in the US, Citigroup is also the world’s largest currency trader. In the wake of the Swiss National; Banks decision. Citigroup lost more than $150 million, according to a recent article from Bloomberg Business.

Though that isn’t much money in the high stakes, high volume world of international currency trading, financial insiders point out that the issue isn’t so much money lost, as it is trust lost. Citigroup’s losses as a result of the Swiss decision point to risky positions on global trading issues – and that might raise red flags for investors.

Citigroup isn’t the only one feeling the heat from the SNB’s move, either. Hedge fund management companies, brokers and smaller banks whose transactions involved the franc are also facing losses. And on the international front, major international banks such as Germany’s Deutsche Bank have also faced struggles.

Interestingly enough, Swiss banks themselves haven’t suffered significantly – yet. But some industry watchers point out that the long-term effects on Swiss institutions – and the economy a whole – could be severe, as the flow of assets into and out of the country could slow. What’s more, the credit ratings of Swiss banks could suffer, along with their existing accounts with other European banks.

With Citigroup and other US banks feeling he impact of the Swiss National Bank’s decision, what does the “currency war” mean for US investors – and the health of the US dollar at home and abroad?

European import and export initiatives dealing in euros and francs could suffer. But like the Swiss franc, the dollar is still a go-to currency in most parts of the world, valued for its stability and security. And as the currency wars heat up, vulnerable investors and citizens concerned with safeguarding their assets may well keep turning to the dollar, not the franc, as a safety net in a world of volatile currency trading.

Those conditions also make investments on US soil more appealing. International investment in Us real estate, for example, is reaching historic highs, thanks to its reputation as a highly stable asset that can keep investment funds safe from turmoil at home. And as the front lines of the currency wars expand to other areas such as Asia, demand may be even greater for a stable, safe haven for assets and savings.

Historically, that was the promise made by the bankers of Switzerland, who offered international investors a discreet, secure home for their assets in a tumultuous world. Now, as the Swiss franc floats in free fall against the euro and the global currency world struggles to adjust, new players – and old – may step up to claim victory in the world’s latest currency wars. (Top image: Flickr/PINEAPPLEXVI)

Sources:
Eno, Aureloa. “The Swiss National Bank is the First Casualty of the Modern Global Currency War.” Business Insider. businessinsider.com. 18 Jan 2015.

Logutenkovo, Elena. “Bank Losses from Swiss Currency Surprise Seen Mounting.” Bloomberg Business. bloomberg.com 19 Jan 2015.

Read more from The American Monetary Association:

Who’s Winning the Currency Wars?

Interest Rates:TRends for 2015?

The American Monetary Association Team

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Who’s Winning the Currency Wars?

AMA1-18-15It sounds like the plot of a bad science fiction movie. A mysterious, invisible war is going on behind the scenes of the world’s major banks, with cutthroat brinkmanship and dirty strategies to get the upper hand in the global currency markets. It’s not the plot of a grade B flick, but by many accounts, a reality. Just ask the Swiss, whose recent power play with their franc brought the “global currency wars” to public attention.

Hardball money maneuvering might seem commonplace among the hard-charging emerging powers of Asia and other areas of the world, but it’s little Switzerland, that historically neutral country that’s known for its elegance and discretion in money matters that’s standing on the front lines of this new financial battlefield. And the outcome could ripple through the rest of the world’s major currencies – including the US dollar.

In 2012, the Swiss National Bank imposed an exchange rate “floor” for the Swiss franc against the euro. The plan was to keep the franc from appreciating too much against the euro. But, according to a recent article from Business Insider, by mid-January 2015, the SNB had abandoned that floor, allowing the franc to float freely.

The world’s money markets run on a complex system of constantly shifting rates and conversions that keep national banks largely stable and hold the line against runaway exchange rates that put local economies and international trade in jeopardy. International exchange rate boards such as Libor and a variety of banking commissions and consortiums monitor and adjust the flow of currencies and prevailing exchange rates.

But the behavior of individual banks, along with changes in local and global economies, can shift the balance dramatically. That’s why the Swiss national Bank’s decision to capitulate and abandon its floor for the franc against the euro sent shock waves through the global financial community.

Without the artificial imposition of the SNB’s floor, the frank immediately gained 30 percent against the euro. Stocks in export dependent Swiss companies plummeted. Eastern European countries whose mortgage debt is carried in francs were also hard it. And the situation raised fears around the globe that other currencies might follow suit.

Some financial experts speculate that the SNB caved because of expectations that the European Central Bank might embark on a new program of “quantitative easing” – an initiative to buy massive amounts of bonds that would get more euros circulating in the market. That in turn, the ECB expected, would actually increase demand for the Swiss franc, which has a reputation as a “safe” currency.

In the face of these developments the Swiss had no real option but to retreat and pull the floor out from under its own currency.

Quantitative easing is an term that’s become familiar in US financial circles of late, thanks to the Federal Reserve’s foray into manipulating the behavior of interest rates and currency values through bond- buying. The latest round, termed QE3, was a massive intervention designed to prop up the country’s struggling economy in the aftermath of the financial collapse of a few years ago.

With improving economic signals, the Fed’s version of quantitative easing is tapering down. But the same strategy of buying up large numbers of bonds and other kinds of securities as a financial prop for a shaky economy has been applied in other countries as well, with mixed results.

While the Fed’s program came under fire for its scope and aggressiveness, variations tried in European countries such as Spain and Greece have been equally criticized for not being aggressive enough to have a lasting impact on the currency crisis facing the country.

Now, as the European Central Bank contemplates its own version of bond buying, the Swiss reluctance to abandon the floor on the franc’s exchange rates appeared to be a politically hostile move. Capitulating in the face of the ECB’s plans might have been a politically savvy move – but it was certainly costly. The Swiss National Bank ended up buying massive amounts of foreign currency – an amount equivalent to 85 percent of the country’s gross domestic product.

The effects of this latest skirmish in the global currency wars aren’t limited to just the euro and the franc. The turmoil could spread to other markets such as those in Asia and Latin America. And the US dollar isn’t immune, either.

Because the Federal Reserve expects interest rates to surge as its own quantitative easing plans taper down, those rising rates, and the dollar’s performance against the euro and other leading currencies, could play a role I heating up the currency wars. For now, new Fed chair Janet Yelllen has taken a largely hands off approach to manipulating the dollar, but as the front lines of the currency war move closer to home, that could change. (Top image:Flickr/ju-x)

Source:
Eno, Aurelia. “The Seis Natioal Bank Is the First Casualty of the Modern Global Currency War. Business Insider. businessinsider.com 18 JN 2015

Read more from The American Monetary Association:

AMA 106: New York STate Tax with Ashlea Ebeling

Bond Rates Plunge- But Where’s the Crisis?

The American Monetary Association Team

Final_AMA_Logo-150x1502

 

 

AMA 106 – New York’s State Tax with Ashlea Ebeling

 

Ashlea Ebeling appears as Jason’s AMA guest. She is a Forbes editor and talks about the different estate taxes you might face all across the United States. She also touches on federal and income tax on the show. She tells the audience every year she develops an interactive map on Forbes of where you should not die in the United States that you can check out in the show links.

 

Key Takeaways:
2:50 – How does New York’s state tax have a 164% marginal tax rate?
7:20 – Can you avoid estate taxes? Ashlea breaks down four way you can do this.
11:30 – You have to be careful of inheritance taxes and need to look carefully into that before you give your properties away.
14:20 – Ashlea likes the idea of Roth IRA. Jason thinks there’s nothing stopping the government from changing the rules.
18:10 – There are a lot of new tax rules and regulations happening for 2015 that people need to be aware of.

 

Tweetables:
The lesson is people need to know about state to state taxes.

Everyone says Florida, but there’s 7 of these no income tax states.

Good luck calling the IRS ‘cus they’re predicting 34m wait times for the 53% of people that wait on the line.

 

Mentioned In This Episode:

http://www.businessinsider.com/bond-market-panic-phase-of-financial-crisis-2015-1

http://www.forbes.com/sites/ashleaebeling/2014/09/11/where-not-to-die-in-2015/

http://taxfoundation.org/

https://twitter.com/ashleaebeling

 

Transcript

Jason Hartman
It’s my pleasure to welcome Ashlea Ebeling to the show. She is an associate editor with Forbes magazine and Forbes.com. She wrote an interesting piece recently about the New York state tax and how we should be aware of a 164%, yes you heard that right, marginal tax rate and profiles different states around the country and their tax situation and a whole bunch of interesting things. So, it’s a pleasure to have her on today. Ashlea, welcome, how are you?

Ashlea Ebeling:
I’m just fine. Thanks for having me on the show.

Jason:
Well, it’s good to have you. First, let’s dive into this article. I mean, this is insane! I can not believe it. How do we get to more than 100% tax.? As if 100% isn’t bad enough.

Ashlea:
So, New York state tax has this provision called a cliff and people are trying to change it. It’s obviously a problem, but the one thing is New York made sweeping changes to its state tax law just this year and they doubled the amount that is exempt. So, if you had over 1 million dollars before, you would owe a state tax on that amount and they doubled it now to 2.625 million, but the cliff problem is if you die with 5% than that new 2 million dollar number, you face this cliff and that’s where the crazy marginal tax rate would come in.

I can give an example. So, Sharon Klein with Wilmington Trust, she kind of gave me an exact example, because the New York state department of taxation, they did a summary memorandum on the new law, but they neglected to spell out of the affects of the cliffs. So, her example was a taxable state of $2.625,000 would pay no tax, but if you had $2.1 million dollars, you’d have a tax liability of $49,000, so that’s more than the $30,000 of an increase of the value of the state. So, your state has gone up by $37,000, but your taxes would go up by $49,000. So, that’s the affect of the cliff.

Jason:
Boy, this is crazy.

Ashlea:
So, the lesson is people need to know about state to state taxes. The federal estate tax is almost..that’s been changed, so there’s a big, big exemption. The federal exemption of $5 million per person indexed for inflation is now permanent and that is indexed for inflation, so next year the exemption it’ll be $5.43 million. So, obviously most people don’t have to worry about federal estate taxes as all. In the meantime, the state estate taxes can be as long on inheritance taxes it starts at the first dollar and the states with state taxes, New Jersey is the lowest exemption with $675,000. So, people with a nice house, they’re in a state tax territory.

Jason:
Right, they certainly are. So, what do you think, what change do you think will come to this law?

Ashlea:
Well, there are people trying to change that cliff, so it’ll be more gradual. So, that’s a possibility that could get tweaked in the next legislative session and the good news in New York is the law that’s been put in place is it’s eventually going to match the federal exemption in two year. In 2017 the New York state exemption will match the Federal exemption. For most people it’s not going to be an issue.

Jason:
So, when one looks at a state to consider a move, they need to consider what life stage they’re in. If they’re in their career stage and are earning a lot of money, you obviously want a state with no or very low income tax. If you’re retired as mom retired many years ago and she, you know, I told her she should move to Texas and she said, no way, the property taxes are too high and she didn’t care as much as income tax. Texas has no state income tax. So, it really depends. It’s like, where to live during your career years, where to retire, and then where to die. Where to retire and die may be two different things, right?

Ashlea:
They’re very different. It’s going to depend on each family’s specific situation, but you’re right you’re going to have to look at the whole tax picture. You want to look at income tax, sales tax, property tax, there’s a state tax, gift tax. It’s a little crazy that there’s that much to look at, but it makes a huge difference and then for retirees, there’s state pension tax breaks that come into play. So, that’s another. That even goes into the category of income tax, but you have to see whether your state tax is social security or whether it doesn’t. My mom just moved from Virginia to Connecticut, so now her social security is being taxed when it wasn’t in Virginia.

Jason:
Wow, okay, so you’re in Connecticut, I believe, right? And that’s the only state with a gift tax?

Ashlea:
That’s right, Minnesota had one, Tennessee got rid of theirs, I think that was 2012 and Minnesota put one in in 2013 and then last year..earlier this year they finally got rid of it again, so gift taxes are a bit controversial, but the idea with the gift taxes is that the state don’t want people giving big amounts to their heir in a way to avoid the state to state tax. So, Connecticut, for example, has a 2 million dollar limit that you can’t give more than that without having to pay a tax that would go to 12%.

Jason:
So, do we see a lot of people in these states where you have a high state tax, you know, especially in New York, what do they do to get around it? Do they use a charitable remainder trust or what is the vehicle they’re using or do they just try and spend all their money before? I’m spending my children’s money…

Ashlea:
There are probably four big ways that people avoid or get around the state estate taxes. One would be moving, so you could be in New York and then also have a home in Florida and you’d make Florida your residence, but you’d have to really do it, you’d have to be there more than a 183 days a year, you’d have to change bank accounts, drivers licenses, there are all kinds of residency rules to make sure New York doesn’t pull the estate back into their territory. So, moving is the big one. Everyone says Florida all the time, but there’s 7 of these no income tax states.

The second big move that people do is setting up a traditional credit shelter or bypass trust when the first spouse dies and that puts the money that goes into that trust would then be exempt from a state tax, but the tricky thing is is on the federal level you don’t have to worry about, because there’s something called portability and you have all of this..So someone who has $5 million dollars when at the federal level they can send the money over to their spouse and the it’s protected even without a trust, but the state level there’s still more of a need to a trust and estate planning.

Jason:
Very interesting. Anything more you wanna say about different taxes in different jurisdictions, because I want to just wanna touch on some of the other stuff that you’re following and writing about.

Ashlea:
Well, if we look at the, for the state estate taxes, it’s 19 states plus the district of Colombia that have these taxes and why you need to keep track of it, we have an interactive map that we keep on Forbes.com called where not to die and every year it’s updated. There were 8 states that were ensuring changes for 2015, so that’s one place to look. The tax foundation has great maps on tax climate on income tax, taxes on all these other states, so that’s another place for people to look.

Jason:
I’ve seen some very complex charts as you were talking about the comparisons a few minutes ago. I’ve seen very complex charts in terms of all 50 states or maybe 51 one with district of Colombia, 52 with Puerto Rico, which has got some very desirable income and capital gains tax opportunities right now. It’s just a really complicated metrics of all these different issues one needs to consider.

Ashlea:
Well, when you’re thinking of capital gains tax, that’s another thing that people completely don’t think about and that can be taxed in California. I think it’s up to 10.3 there is the top rate for income tax. So, if you’re selling real estate that you know that when you’re going to into it with the capital gains rates are going to be. Not just the federal rate, which has been increased now to 20% to higher income earners, plus there’s another net investment income tax and then there’s the state capital gains tax. You have to add all of those together to really know what your tax rates are going to be.

Jason:
So, I’m looking at the where not to die map now. I found that while you were speaking just a moment ago and I guess the red states, are those the undesirable ones?

Ashlea:
Those are the estate tax states. The blue states are also undesirable in their inheritance tax state and again that’s something a lot of people don’t know. The difference in New Jersey and Maryland, they have both the state and inheritance taxes are a little different, because it’s who gets the money, who pays the tax, whether or not you pay the tax, so Pennsylvanian is a good example. It used to be the spouses paid Pennsylvanian inheritance taxes of 6% tax rate and then people complained about that, because generally for state taxes, spouses don’t pay state taxes at all.

You can give anything when you die to your spouse and it’s state tax free, so this inheritance tax, they were paying 6% in Pennsylvanian, they cut it to 3% in 1994 and then the next year they cut it to 0% and then they get similar to other states, but there’s still..in Pennsylvanian, if you have an estate going to children, grand children, or parents, it’s a 4.5% tax and if it goes to a bother or a sister, it’s a 12% tax, if it goes to a nephew or a niece, it’s 15% tax. So, New Jersey has a similar law to that too and there’s people changing it there too where they think it’s not fair if you’re single and giving your estate to your sister, you’re taxed, but if you have children and you’re going it to them, you’re not taxed.

Jason:
Yeah, very interesting. We should mention the red and blue on this map are not political red and blues, so..

Ashlea:
No, but to some extent to it is if you see like the north east as this big chunk of estate tax states. Washington has the highest rate. Washington state has the highest rate of 20%.

Jason:
Wow, that’s something else.

Ashlea:
Then, the interesting thing, there is prescient for repeal. If you look at this map a few years ago it had a lot more estate tax states. North Carolina and Indiana repealed their taxes in 2013 and Kansas, Ohio, and Oklahoma all repealed theirs in 2010.

Jason:
It is interesting that it follows the political map to some extent and that doesn’t surprise me, but tell us about some of the other stories you’re working on. I know you cover some real estate stuff. I’m kind of looking at your portfolio here on Forbes.com.

Ashlea:
One of my favorite topics is philanthropy and you mentioned charitable remainder trusts, that’s something that’s another great tax move for people who are charitably inclined and I had a nice example of a son who inherited a vacation house in the family and they put it in a charitable remainder trust and then it’s a way to give, to give real estate to charity that works.

Jason:
What do you think of the Roth IRA versus the traditional?

Ashlea:
Well, we at Forbes are huge fans of Roth IRA, but again, it’s a tax place, so if you’re going to be in a higher bracket in retirement, it’s a total no-brainier, you definitely should do it, but some people who should be doing, but aren’t thinking about it are actually in a low tax bracket now and they’re young, so they should be putting money in a Roth, because they don’t get any advantage of the pre-tax that you would for a regular traditional IRA.

Jason:
So, just to explain to the listeners who don’t know, a Roth basically says, pay the tax now, but let it grow tax free. So, you can take it out and the idea is that the tax rate would be much higher later in the future as the country is more fiscally insolvent and looking for money and you’ll just have that money that’s compounded for you over the years tax free because you paid the tax earlier. My fear and why I…maybe I’m just being too paranoid, but the reason why I’m not a big Roth proponent is I just think the government is going to become more and more hungry in years to come and they might just change the law. I mean, what is to stop them from doing that?

Ashlea:
Some people do have that fear and I can’t say that’s implausible, that it could never happen, but I think that’ll be such a outcry that it wouldn’t happen and then another point, you’ve got this two buckets. You automatically, if you’re at a work place plan, any employer money that goes into a plan and earning pre-tax, so some people like doing some Roth, some pre-tax to hedge their bets and whether you actually take money and pay taxes on it to do a Roth conversion, which you can do to try and get more money into a Roth that that’s would be more of a heads in a basket way of what you’re saying.

Jason:
I think these retirement plans are going to become the low hanging fruit in a hopefully not, but a very likely, unfortunately, I think, desperate where the government will say, you know, they wanna nationalize them or, you know, it’s just so easy to attack the retirement plans.

Ashlea:
Well, they’re already proposals out there in the administration that you can only put a certain amount in your retirement plans and after that point then once it’s a, I think, it’s at 2million dollars, once it’s at a certain balance, they’re different numbers depending on the different proposal that you wouldn’t be able to add anymore. So, when you say the proposals out there there’s a reason to be somewhat scared.

Jason:
It seems like the guard against that might be to have a retirement plan whether it be a Roth or traditional that’s one issue that we’ve already discussed, but have it be self-directed, because if it’s self-directed and the assets aren’t just with big brokerage firms and really simple electronic transactions, that’s not going to be low hanging fruit for the government. You know, the self-directed plans if you’ve got, if you own some notes or mortgages, you own some real estate…

Ashlea:
Self-directed plans are great for people who are…you have to really research what you’re putting in with them and make sure you’re not worried about the self-dealing rules, but there are definitely is a place for those for folks. I think though if the government puts in limits, they’re going to apply across the board whether it’s self-directed or through a regular brokerage. Theoretically if you have Roth money in there, you have more money in if they’re just putting limits on and not making a difference between Roth and pre-tax, you can basically have a bigger retirement pot with Roth money.

Jason:
Very interesting. Any other stories that you’re working on or have recently covered that you wanna talk about? Just thought I’d open it up for you.

Ashlea:
Well, I guess the biggest one I finished that got a lot of attention was about the upcoming 2015 tax filing season, which you wanna think about fourth quarter, but the IRS commissioners are warning that it’s going to be the worst season ever and congress is now back in lame duck session and they have 50+ tax extenders that expired, tax clause that expired at the end of last year they still haven’t they decided what they’re doing with. So, there’s a lot of tax news by year end that people should pay attention to, because what happens on those bills is going to affect your tax that you’re paying when you write your check in April or when you’re getting a refund, you’ll get less of refund.

Jason:
Ashlea, so, when you say it’s going to be a really difficult season, what do you mean by that? Law changes, audit risk, what?

Ashlea:
So, law changes, because of these tax extenders, whether some of them..and it’s everything from taking the reduction for sales taxes to teaches to buying $250 worth of supplies to $4,000 college tax breaks, commuter tax benefits, it’s a big list. So, chances are one of the things on that list will affect you and if they don’t, if congress doesn’t get around to figuring out what they’re going to do with those laws by early December, then the IRS commissioner that’ll delay the whole processing of returns, they might have to delay the start of the tax season and that might potentially delay refunds.

Jason:
Wow, what a mess. You know, I remember I was talking to Steven Forbes and then he gave a speech to our group and he just, you know, as a proponent of flat tax, he is so right. You know, he just said, let’s just drive a stake to the school system and start fresh, because this is so overly complex. I mean, I can’t believe it, Ashlea, you know, I am scared to death to sign my tax returns every year, there’s no possible way I can understand the hundreds and hundreds of pages that I’m putting my name on every year. I mean, I don’t even think one highly qualified CPA can understand all of that.

Ashlea:
Well, there are always people say three people get three different answers if they file your taxes for you, which is unfortunately is right and if you call the IRS hotline, you might get two different answers if you call two times and then good luck calling because they’re predicting 34 wait times for the 53% of the people that actually hang on till they get a live person there. So, I wished I had better news on that front, but that’s kind of the way it is. You do the right thing and try and understand the tax laws and get the right kind of advise and one of the reasons they also said about the delay is they’re putting..they’re going to have on the website, on the IRS website a list of tax prepares and obviously if you go to a CPA or an enrolled HN, they’re high standards they have to hold too, but there’s never been a problem with unregulated tax prepares, so we always have to warn people of that. They are going to put up, the IRS is going to start putting up on their website a database of qualified tax preparers.

Jason:
Very, very interesting. We will see how it’ll turns out. Ashlea, give out whatever website you’d like, is it just Forbes.com or something specific?

Ashlea:
Oh, so Forbes.com. The where not to die you can type in if you’re interested to learn more about estate state taxing and my name is Ashlea. So, that’s an easy why to find my articles too and I’d love you to follow me on Forbes or Twitter.

Jason:
What is your Twitter?

Ashlea:
Just Ashlea Ebeling.

Jason:
Okay, Fantastic. Well, thank you so much for joining us, Ashlea. Very informative.

Ashlea:
Thank you, me too. Take care.

Bond Rates Plunge – But Where’s the Crisis?

AMA1-16-15Ever since the financial collapse and recession of a few years ago, financial experts have been watching the sky or signs of falling. They’ve scrutinized the behavior o US assets at home and on the world stage for sings of another collapse and recession. Currently topping the list of assets to worry about: the plunging yield rates of US Treasury bonds and other assets in world trading.

According to a recent article from Business Insider, the rate of G3 government bond yields in the global marketplace has averaged lower than 1%. That’s a historic plunge, not seen even in the 1930s, when the Great Depression paralyzed the US.

The G3 is a currency group consisting of the US dollar, the euro and the yen. Its one of a number of designations describing currencies with similar characteristics, such as clout in global trading or political significance. It’s a variation on the more familiar G7, a group of 7 countries associated in terms of their outlook and behavior in international money markets.

The drop in 10-year yield rates affects all three of those currencies, not just the US dollar. As reported by Business Insider, in early 2015, the US yield of 1.959% was trumped by the yen’s drop to 0.288. In the Eurozone, the German yield hit 0.443.

Those kinds of rates are raising concerns about another widespread financial crisis. In the past, plunging rates have signaled a lack of confidence in the markets – the “panic phase” before the crash, as in the run-up to the Great Depression, when currency rates and values fell and so did devastated bankers.

But, say global financial experts, that’s not the case right now. The US economy is by many indicators on the road back from its downturn of 2008. The housing collapse that came about from years of reckless lending to unqualified borrowers led to the discovery of widespread bank malfeasance and forced a cleanup of lending standards.

The Federal Reserve stepped in to prop up the struggling economy with a string of stimulus plans, collectively called Quantitative Easing, which pushed lending interest rates historically low. The last version the Fed’s plan, known as QE3, is now winding down – and that’s fueling worries that the US economy might retreat again, hamstrung by rising rates ad a decline in borrowing.

Similar scenarios are plaguing other countries with major stakes in the global financial market, too. In the Eurozone, Greece continues to struggle with its own major debt default. And turmoil continues in countries on the fringes of that zone, including Russia and Ukraine, that are facing their own difficulties with devalued currencies and the specter of deflation o inflation.

Still those very scenarios are keeping the dollar robust. It’s the currency of choice for worried savers in countries like Russia and Argentina, and it continues to trade solidly against the euro and other leading monies.

If that’s true, then what’s behind the plunge in asset prices – and what do the mean for the future? Should investors worry that another panic is just around the corner?

Not necessarily, say advisers for the G10, a group made up of the G7 (the US, Germany, Japan, France, the UK<, Canada and Italy), plus Belgium, Netherlands and Sweden.

While those 10-year averaged yields are in fact at historically low levels and apparently inclined to hover there for the foreseeable future, those low rates in themselves don’t constitutive a run up to a serious global economic downturn.

The global economy can be fragile, vulnerable to sudden shifts and crises with both local and worldwide reach. But it’s also stubbornly though, riding out natural disasters, economic collapse ad political turmoil to remain on a largely even keel.

In the G3, for example, the Eurozone’s struggles are countered by the relatively strong performance of the dollar, which is in some ways driven by the money worries of Russia and others.

Though today’s low bond yield rates are unprecedented, they’re only one indicator of the world’s financial health. And, say market watchers, they may be a symptom of a panic that’s unlikely to materialize – a vote of no confidence that things will make a dramatize improvement.

The drop in bond yield rates offers a glimpse into the complex workings of the global money markets – but for worried investors, the sky may not be falling just yet. (Top image:Flickr/rutio)
Source:

Ro, Bam, “It’s Like We’re In the Panbic Phase of a Financial Crisis.” Busines Insider. businessinsider.com 6 Jan 2015

Read more from The American Monetary Association:

Interest Rates: Trends for 2015?

The Bitcoin Bounces Back

The American Monetary Association Team

Final_AMA_Logo-150x1502

AMA 105 – Smart Indianapolis Real Estate Investing With David Porter

 

David Porter is a long time client of Jason Hartman’s real estate company. He has been working closely with Jason’s team since 2009 and has made several investments in both Indianapolis and Arizona. He catches up with Jason about how he is doing with some of his properties, talks about why the Indianapolis market is so great, China’s economy, the future of shipping, and more on this week’s episode of AMA.

 

Key Takeaways:
3:10 – David first bought his Indianapolis property in 2009.
8:40 – David talks a little bit about his background.
17:10 – You’re more in control with real estate investing than you are with stocks.
22:15 – Take advantage of your ability to borrow and invest it in a conservative way.
24:25 – David has since an increase in retail shipments this year.
28:45 – Will China be stronger than the US’s economy?
33:15 – Jason and David think the United States can stretch out their debt problem for a while.
41:50 – 3D printing, glowing trees, and more. Jason talks technology.
49:30 – David wants to buy homes he can see himself or his children living in one day.
53:50 – David has experienced a 700k appreciation since he started in 2004.

 

Tweetables:
Cash flow is a pretty reliable thing. I mean, it’s not perfect, it does change, but it doesn’t fluctuate a lot.

As mismanaged as the US is in so many ways, I think they can kick this debt down the road for decades long.

 

Mentioned In This Episode:
Abundance by Peter Diamandis
Makers by Chris Anderson
Khan Academy
David Porter’s first interview – http://www.jasonhartman.com/89-%E2%80%93-the-%E2%80%9Cfree-lunch%E2%80%9D-metric-what-it-tells-about-income-property-%E2%80%93-an-impromptu-discussion/

 

Transcript

Jason Hartman:
It’s my pleasure to welcome on of our clients back to the show. He was actually on a long time ago. I think it was maybe 5 or 6 years ago when he started investing with us. His name is David Porter and it’s a pleasure to have him join us today. Dave, welcome, how are you?

David Porter:
Great, Jason. It’s great to be back with ya, yeah, I think it was a good 5 years ago when I last joined you on a podcast.

Jason:
I remember that day all too well. I remember I was rather stressed out sitting in my office and your investment counselor, Sara, kind of came into my door with you and I was thinking, please don’t bother me, I’m so busy right now! Then Sara said, Jason, you gotta hear his story. This is David Porter, our client and you just gotta hear his story and it was a really cool story of, I think, your first investment property that you got from us Indianapolis, right?

David:
Right. It’s so funny, you think, Jason, when we first met the economy was crashing. It was 2008. Yeah, some of these foreclosure opportunities were developing. I purchased my first property with you guys with Indiana.

Jason:
Good stuff. Then you started buying up Indianapolis, you were kind of quite the real estate mongol there. I don’t really know what you’ve done all these years. I know Sara has been in touch with you, but I haven’t..I hear about you once in a while, but tell us how it all went and what you’ve been doing and so forth.

David:
So, let’s see, we got started, I just looked at some records before we got to talking here. We started talking late 08. I purchased my first property in Indianapolis in March of 2009. That was an unbelievable…You think about it now since the prices have gone up since then, but $85,000 in that foreclosure market, we picked up a 3000 sq ft, 5 year old home in a suburban, very, very nice neighborhood. It’s incredible. That property today is renting out for $1250.

Jason:
One of the things that I was talking about way back then and I’ve talked about it many, many times since then. I’m probably boring my listeners saying the same stuff over and over, but it was the concept of buying below construction cost. It was also the concept I’ve talked about a lot that I call regression to replacement cost. You have a background in financial services and then the transportation business, shipping and trucking companies and so forth. By the way, I wanna ask you some insights, because those are really interesting parameters about the economy and global and national trade and so forth, so maybe we’ll get to that, but you bought this house; I thought you paid $89,000 for that house and your insurance company told you you had to insure it for $240,000 or something?

David:
Yeah. Your memory is very, very good. Those numbers are almost spot on. That was the story repeatedly, because after that I bought 8 more properties in Indianapolis. When you think about it, it’s okay, the insurance company made a mistake, they’re trying to charge me too much, and all that kind of stuff, but it kind of makes sense when you think about it. To rebuild and buy all the lumber and to create a 3,000 sq ft house, it’s going to cost you a couple of hundred thousand dollars, it doesn’t matter what you pay for it. So, that’s kind of their thinking and that’s what I kind of had to do. I shopped it around.

Jason:
So you bought the house for $85,000 or $89,000?

David:
$85,000

Jason:
Okay, $85,000 and the insurance company told you you had to insure it for $240, is that?

David:
It’s real close, I don’t remember the exact number, but it was $240 or $250 or something like that.

Jason:
So, at first, that must have upset you. You’re thinking, why do I have to pay insurance on such a large amount when I only paid $85,000 for the house, but the insurance company was thinking, if that house burns down, that’s what it’ll cost to rebuild it, right?

David:
Right, as mad as I was, the only thing that would have been worse is if they’d say, no, we’re only going to insure it for $50,000, because you only paid for…

Jason:
Yeah, that wouldn’t have been good.

David:
Yeah, the way you put that. It was really a great way for me to think about it. There was blood in the streets at that time. Again, the economy was falling apart, people were very concerned about what was going to happen. I’m telling my friends, hey, I’m buying these houses in Indiana, so I’m here in California. They were like, okay, Dave, you’re buying houses in Indiana, that’s really strange.

Jason:
They probably thought you were crazy right?

David:
They thought I was crazy, absolutely. I didn’t know at the time we were buying these homes over the course of 3 years. You never know if you’re buying at the bottom or really where you at. I’m a very conservative investor, I don’t like a lot of debt. I felt it was a very conservative investment, because based on what I knew the rents were and the rental market was relatively strong despite everything else because everybody else was losing their homes. The rental market is still a great place to be me. Even if it went down 10%, I mean, how much lower could it go given the fact I’ve got this plot of land in a nice suburban area and relatively new construction and good size, right? How much lower could it go? It couldn’t go to nothing like a stock.

Jason:
I agree with you. Even if it did, you’re still really a prudent cash flow investor. Cash flow is the name of the game if you get the capital appreciation. Hey, you’ll take it, I’ll take it, that’s the icing on the cake. Either way, cash flow is a pretty reliable thing. I mean, it’s not perfect, it does change, but it doesn’t fluctuate a lot. These investors, well, they call themselves investors, I call them gamblers, but who invest in these high priced markets just waiting for something incredible to happen, I don’t know, I think they’re in trouble.

David:
That’s speculation, right? One of the biggest regrets I have in my real estate career is one of the houses I first bought to live in. California went through one of its down markets and I sold it at a loss and wrote a check to leave and I wish I would have just held on to it, I’m sure you’ve heard that a million of times, but other than that I’ve never sold property. I think there’s only so much real estate. They’re not making new real estate. If you have property in a solid area, that’s a great long term investor. My whole strategy around this is to create a nice passive income stream to take me into retirement.

Jason:
Absolutely. I think you’re doing a great job at that. So, tell the listeners, if you would, Dave, how many properties did you end up buying in Indianapolis or greater metro area of Indianapolis?

David:
So, I bought 9 all together in the greater Indianapolis area.

Jason:
What gave you..I mean, you saw the blood in the streets. Back then you were in the shipping business. You were in the container shipping business and that was experiencing a down turn. I mean, global trade was suffering. I used to read articles and I remember asking you about this and there were just empty shipping containers everywhere. It wasn’t even wise to run these freighter ships, because, you know, there was so little trade. It was a scary time. What gave you the confidence to invest back then?

David:
You know, it was really the best place to go at the time with your money. So, I had a career in shipping for about 20 years at the point, so you’ll learn I’m not a very good market timer. In 2007 I left the transportation business to go into financial consulting for investors. We will putting together portfolio of stocks, basically mutual funds, of high net worth investors. At the time I heard you commercial, I mean, things were just falling through the floor. Lehman brothers thing was happening at that particular time and I was just kind of curious. There must be another way.

When I learned about the approach, when I saw, again, these assets in some over built markets that taken such a hit, but the rents had stayed solid and my goal was rents. My goal was the cash flow. My welfare would be independent of the value of the underline asset really, as long as the rents hold up. I really liked that idea. If you think about a stock portfolio, a mutual fund portfolio, the rule of thumb for advising clients for retirement is you can take out about 4% of your portfolio per year and that’ll last you well into your retirement, perhaps even 30-40 years. Things like that. They run a lot of back testing, there’s no guarantees with that, but it’s kind of safe.

So, when I looked at the kind of income I could generate with the portfolio of houses, I would need much more money invested in mutual funds to generate that equal amount of income. So, that’s the way I looked at it. What would I have to invest in order to generate a certain amount of income. Real estate was clearly the winner at the time. It was fact back. I saw the market was so beaten up, I didn’t see a big down side even on the value of the asset itself.

Jason:
I agree with you. When you were buying the properties in Indianapolis, which maybe we can get to, but when you were buying those were you paying cash for them or were you getting financing on them. I can’t remember, I think you mentioned on the show a couple of years back.

David:
It was a combination of the two. At the time when I went into this, Jason, I had zero debt in my life. Zero debt.

Jason:
And you met me and you got into debt, right?

David:
Yes, you corrupted me.

Jason:
I’ve done my job.

David:
I’m still conservative. My cash flow has paid off on several of these properties, but what I did I just had some other property that was owned outright. Basically, if you were credit worthy at time, they were throwing money at you, very low interest rates, historically low. I did take out a loan and I’m paying on it today. It’s 3.49% fixed interest for 30 years.

Jason:
Oh my gosh. Until recently, Dave, you’ve been getting paid to borrow that money, for sure. I mean, I would say, and I’d have to admit as much as I don’t like admitting this or even have it be this way, that inflation is actually pretty darn low this last year now. It was definitely higher in the last few years, but it’s calmed down. I’m really surprised. Do you listen the podcast regularly?

David:
Not regularly, but sporadicly. I’ve listen to a couple dozen of them over the years. I haven’t heard any recent ones.

Jason:
I’m surprised inflation rates aren’t higher, I’m surprised interest rates aren’t higher.

David:
I am too.

Jason:
I think inflation is coming back, I don’t think we’ll see it low for very long.

David:
It’s not going to last forever. I did hear, you interviewed Richard Duncan. He is my favorite economists and even he as bright as he is and he does this full time, you know, are we going to die a death of icey deflation or hyper inflation, I mean, it’s hard to tell. Neither one of those scenarios is very good, but clearly what we’re doing isn’t sustainable.

Jason:
Who the heck knows. It would be sort of possible to predict economic scenarios with some accuracy if it wasn’t for central bank intervention. You just never know what they’re going to do. They just interfere with markets and they pervert the whole thing. You can’t predict stuff very well because of them. I mean, you could think, what would they logically do and you can sort of predict that, but it’s still, you know, it’s difficult.

David:
I don’t think we’re operating in a logical world right now. Richard Duncan puts it real well and I think he said it on your podcast. This is what really broke my heart. When I was in the financial services industry. I was with a very good firm. They were thinking about things, they weren’t speculating in stocks or penny stocks or any kind of thing. It was a pretty conservative approach, but people would like to think they’re investing in capitalism, but they’re not investing in capitalism.

As Richard Duncan says so well, it’s sadism, and that’s to your point. What is the government going to do with the banking system? What’s the reserve requirement? What are they going to do with interest rates? All these things throw stocks for a loop. You know, when you’re taught in school and I have an NBA, I am a fiance major, that’s my training. They tell you that you evaluate stocks by the value of earnings of the company. Well, I wished that was the case. It’s not the case, it’s part of the equation, but..

Jason:
It’s more about the story, right?

David:
Yeah, it’s the story and it’s what the government decides they’re going to do with their policy and how that’s going to impact a particular industry.

Jason:
That’s ridiculous.

David:
And there’s no way to factor that into a spreadsheet.

Jason:
I agree with you. So, what exactly was your background in financial services? Were you an adviser, did you work with clients and help them invest their money?:

David:
Yes, I was. I was a registered investment adviser. We dealt with high net worth clients and we put together portfolios of index funds, so within in the world of investing that’s a pretty conservative, reasonable, well-diversify way to go. We had all types of portfolios that would be in alignment with somebody’s age and risk tolerance, basically.

Jason:
Ladies and gentleman, what we have here is a defector.

David:
I still have a foot in the camp and..

Jason:
I’m glad you came over to the other side.

David:
I am too. So, going back to my investing in real estate story, I came to realize largely with your help and I can honestly say if I hadn’t attended some of your sessions and had some of the conversations, and read some of your material, I wouldn’t have thought about it this way, but having untapped ability to borrow, having that ability to borrow and not utilizing it is kind of like sticking money under your mattress, you know. Maybe it’s even worse than that because you don’t even get the money.

So, what I did is I took that ability to borrow and I put it to work in a very, very, very conservative way and it was clear to me my income stream would more than pay for debt service I would have and in addition you get all the benefits our tax code allows us to do with those interest payments. So, it really helped me a great deal. I don’t borrow as much as I could borrow. I’m comfortable where I’m at. I’m still in a very conservative position, but what I did was I took some money out of some property holdings I had and paid cash for a number of properties in Indiana.

Jason:
So, you didn’t really completely follow my plan. I would have said lever everything up.

David:
I know.

Jason:
Because it’s kind of counter-intuitive, I think the more conservative position is to actually be the borrow. I know, I know that goes against the grain to what a lot of people think. I completely get it, you know, I used to in the old days think pay everything off and, you know, I remember having this conversation with a friend of mine. We were on the board of a caner charity in Orange Country, California, where I used to live. Her name is Katherine. I remember her parents had some financial hardship and I remember thinking, gosh, they were losing their house.

They had this gorgeous home and they were going to foreclosure and I remember thinking, you know, the thing to do is to just pay off your own home so at least you own that and all the other investments could be leveraged and you’d never lose your house, but the reality is we have a perpetual lean on our houses called property taxes and in some cases a second lean called a home owners association.

You know, those agencies or their investors, because people buy tax leans as a trader-able asset, they look at those in a predatory fashion. If you’ve got a lot of equity, you’re target. I don’t like having big equity in real estate, even though I own some homes with equity, but if I could lever them more, believe me I would.

David:
So I’m kind of in between where I was and where you are now, but..

Jason:
Move the needle a little bit.

David:
You’ve moved it a lot really, you know. It’s worked out well. Also with Platinum’s help, I went into Arizona. So, that’s a different market. You told me at the time, I went into Indiana, you said, Dave, you were cautioning me, you said, you need to get more diversified. You’ve got too much in Indiana. You said, Indian is like a bond, you shouldn’t expect a lot of appreciation there, but it seems like the rents are pretty stable, so it’s good for that if that’s what you want to have and that’s what I was looking for. The income, the stable, long term income, but the Phoenix market, as you well known and you’ve taken well advantage of, got beat down awfully hard.

I think the dynamics of that market is you got the weather there and a growing economy and it attracts people and if you look at the demographics of North America, I knew people were going to come back to Phoenix again. So, we bought a couple of properties in suburban Phoenix, Gilbert and those have worked out extremely well. The thing I love about Arizona is the property taxes are low, insurance is low, and I did get some really nice appreciation on those properties as well.

Jason:
Yeah, Phoenix is a very desirable city. Now that I’ve lived here for a little over 3 years, it’s kind of a gem. A lot of people don’t know about it. People in California that lived in Orange Country, where I used to live and LA where I grew up as a kid, they think I’m nuts. I ask them like, when was the last time you were actually here? You know, it’s a really nice place. We’ve got super swanky restaurants and all kinds of nice things here. Other than three or four months, hot, but it’s a dry heat, it’s a pretty nice place. Although, right now, it doesn’t make sense for an investment stand point. It’s too expensive. It’s a hybrid market. Indianapolis is a linear stage of California. You’re in Southern California, right?

David:
That’s right.

Jason:
That’s a sicklier market. So, Phoenix is in between the two. We’ve moved in and out of Phoenix a couple of times. Sometimes it just gets over valued or at least, maybe I don’t want to call it over valued, I just want to call it where the cash flow isn’t good enough for us and that was one of those time.

David:
But, I’m holding on those properties there and I think that..

Jason:
Your basics are low.

David:
Yeah and it’s worked out very, very well for me and on top of that we’ve got a couple of properties I’ve held for a long time in California. So, yeah. I’m a happy real estate investor.

Jason:
Good for you. One of the things I wanted to go over was that concept you were…Oh gosh, forgive me, I’m having a senior moment here. See, I can finally say I’m having a senior moment.

David:
Are you over the line now?

Jason:
No, I’m not over the line. The AARP is still a long ways away I’m glad to say.

David:
Good for you.

Jason:
Oh gosh, it’s something you just mentioned. It was the concept of debt or…eh, I don’t remember. I’ll remember after we finish the talk here today, of course. But, what are your thoughts..you’re in the trucking business now, so what do you do exactly?

David:
So, the company I’m associated with in Southern California, we do local trucking and a large part of what we do is taking domestic shipping containers to the railroad from all the warehouses that are unloading all these containers that are coming from China, Vietnam, Japan, Korea, and so forth. We do a lot of local trucking shuttling goods from the harbor to the railroad most of the time and then we also consolidation/de-consolidation, and some warehousing work as well.

Jason:
So, your industry has a really good parameter on the economy. You know what the volume of trade looks like, where it’s coming from, where it’s going to. Are there any thoughts that you have or ideas that you just wanna share or maybe we can sort of hash them out?

David:
What I’m noticing..So, we deal with a lot of the large retailers from all over the country because the goods that we’re picking up here they wind up in Chicago, New Jersey, Atlanta, Dallas, Memphis, where ever for the large retailers. It seems to have been a strong retail session. At least, they ordered a lot of stuff. I don’t know if it’s going to sit in a warehouse on the east coast or not, but I can tell you in previous years we hadn’t seen this level of activity. This is, what we call, peak season in shipping is a season from basically labor day up until just after Thanksgiving leading up to Black Friday there and all the shopping that gets done. This peak seasons was unbelievable. It was extremely busy. I haven’t seen it this busy for many, many years.

Jason:
Are most of these goods coming from good old China?

David:
Yeah, especially in California. Our manufacturing zone is called Tijuana. No body is making anything here. What ships out of here is brought in from overseas or just over the border in Mexico or Tijuana.

Jason:
We can thank NAFTA for that for better or worse. What are those called, the Maquiladora zones.

David:
Exactly.

Jason:
I remember Ross Perot talking about them in the giant sucking sound.

David:
He was right about that.

Jason:
He was right about a lot of things. I wish he would have been elected as nutty as he seemed. I think it would have been the only guy who would have actually shaken things up and made something different.

David:
You know, it’s fumy, I voted for him and then I voted for him the second time and he kind of got a little off kilter with some of this theories about the Republican dirty tricks committee trying to ruin his daughter’s wedding and all that. You know what, even if that’s true, I wouldn’t say it.

Jason:
Makes him sound like a paranoid freak, right?

David:
Exactly.

Jason:
So, there’s a lot of talk about how China is really beginning to slow down and they are suffering and, you know, years ago you used to hear people like Peter Schiff and others like him, sort of the doom and gloom committee talk about the concept of de-coupling. How China will de-couple from the United States, meaning they’d create their own middle class, they’re own consumer base and they’ll have countries around them that trade with them and they won’t need us anymore and when they won’t need us they’ll stop buying our treasury bonds and our interest rates will sky rocket and we will be dead, but the exact opposite has happened oddly. It’s really interesting. They’ve just not been successful at creating their own middle class and their own consumer base. The people with money are bringing it over here.

David:
Exactly and that’s great for the real estate situation we’re talking about.

Jason:
It’s great for the everything situation.

David:
And the stock market as well. When I read about their real estate market, the bubble is finally..at least the air is coming out of it. So, it’s interesting, I mean, my view on that, you know, Peter Schiff. He’s interesting. I read his books, but, you know, I think maybe he’s got a little too much invested in that gold camp and all that type of stuff.

Jason:
Yeah, I agree. The gold camp really has gotten it wrong most of the time.

David:
Well, you know, they’re going to be right. What do they say? A broken clock is right twice a day, but I don’t discount it entirely. Overtime, I would not be surprised to see all of that to come to fruition over time. I don’t think that’s going to happen, you know, by 2020 or any time real soon. I mean, we just heard some statistics recently how China their GDP is going to surpass ours earlier than what everybody expected prior to 2020. Some measures of the economy would show that their economy is larger than ours right now, so I think over time you can kind of see how the trade is going and what the direction is, but no body wants to piss off their largest costumer and that’s us. For better or worse, it’s kind of hard to bet against the United States in the long run.

I do have some very serious concerns about this house of cards we have with our debt situation and all that, I don’t know how that’s going to play, but again, going back to Richard Duncan, I hate to keep quoting him, but this could continue for much longer than what for most people think it could continue. Japan has shown that. Their economy is not like the model economy or anything, but people would rather hold yen than rupees right now. People thought Russia was the way to go not long ago.

Jason:
I just think as illogical and unfair as it may be, the United States finds itself in a really impressive place in history and has benefited from a lot of that. As mismanaged as it is in so many ways, I think they can kick this can down the road for decades long.

David:
That’s exactly right, you know. So, to prepare your entire life for something..hey, it could happen. China could make some nutty announcement next year, I kind of doubt it, it could happen, but I would tend to agree with you some time after 2020 we’ll be well into retirement and who knows. You can’t live your whole life in fear.

Jason:
I agree with you. The interesting things about China, and we don’t have to talk about this forever, with China as soon as they start to maybe gain a foot hold, say things go really well for China, then they’re going to be facing this really huge ugly demographic problem and that’s the same thing is really behind hurting Japan so much or at least inhabiting their recovery. They just don’t have any young people.

China has far too big a male population, not enough females, and the one child policy in 10 years, they’re going to be looking at a really tough demographic problem. If they ever hope to get any real social safety nets there…I just don’t know if that’s ever going to happen. I hope it goes well for them. Listen, it’ll be nice if the whole world would prosper and we all live in harmony and it’ll be great, but if you’re comparing countries, like you say, it’s really tough to bet against the United Sates. I just don’t know how you could really do it.

David:
Yeah, it really is. The one thing that really is very interesting and I’m sure you’ve read about this, how China and Russia are gaining away from…

Jason:
They’re trading outside of the dollar.

David:
Of the reserve currency of the US. The thing that saved us, I think, the only thing that saved us that can’t save a Greece or an Italy is no body will allow them to indefinitely print their money and accept it. You know, we’ve got this weird license that allows us to do that. Other people can’t do that or they would be fined too. So, I don’t think that we’re so smart or so great or whatever. I think you’ve put it well. We’re in a unique spot in history. I think we’re allowed to do that. It’s kind of relic of what we used to be. It’s not rational or logical, we do get to do that and it’s saved our butts. No body gets to do that.

Jason:
I agree, I agree. We’re just kind of…We worked our way through the industry revolution, we won that guy, and now we’re just kind of lucky.

David:
Let’s hope we can catch up. There are some unique things going on right now. I’ll throw out a book too. Have you happened to read Ray Kurzweil’s Abundance?

Jason:
Oh, that’s actually Peter Diamandis.

David:
Oh! I’m sorry. Peter Diamandis, thank you.

Jason:
They talk about Ray Kurzweil a lot in there and Steven Colter was actually on the show. I love that book. It is amazing. It leads me to another question, but what were you going to say about that?

David:
I was just going to say that there is a lot of reasons to have home and there are with the advantages of technology and with the speed that things are moving along, people don’t even realize, you know, you’ve got technologies increasing every year and a half or so for the same cost. We’re at the point now, initially, we’re making experiential gains in what we’re capable of doing and what we’re going to have access to and that’s going to provide a better standard of living for everybody. I think the next 10 years is just going to be an amazing time for us.

Jason:
For the whole world. The whole world is going to benefit from this. We’re in a position where we have, what I’d like to call, the democratization of everything. You know, other than the wall street and cronies and the crony capitalism and the unholy alliance between, you know, government and mega business. I’m not even going to call it big business, it’s mega business, whether it be pharmaceutical companies or the banks or whatever, right. Elizabeth Warren, I’m definitely not a democrat, but she gave a great speech that I just posted on my Facebook page where she just outed all these criminals with Citi bank. Criminals, I’m using this word loosely, obviously. Just my humble opinion. You know, it’s just a total scam what’s going on, but the technology is just leveling and flatting and flatting the earth. I mean, crowdfunding, 3d printing, all of these things, gene sequencing.

Last night I watched a TED talk..Have you heard of this kick starter, this glowing plant?

David:
No, I don’t know about this.

Jason:
Oh, it’s mind boggling! Basically what you can do is you can go to a website now, and you can do this today, and you can design, for better or for worse, you know, it is scary I’ll admit. It’s Frankenstein whatever, but you can design your own life form made of whatever DNA sequence you want. You can put your credit card in and you basically, this website, helps you make this blueprint, and you can order this life form and the UPS guy will deliver it to you. Someone did that and made a glowing plant. It’s a kick starter project, they raised a ton of money, and they hope they ultimately trees will replace street lights. I mean just fathom that for a moment! It’s incredible.

David:
Oh my god. I’m going to check it out.

Jason:
Google it, you’ll find it. It’s an amazing time to be alive!

David:
So everything is leveling out. Another great example, they were talking about the Sony hacking situation with North Korea.

Jason:
Right, that’s kind of scary.

David:
I haven’t followed my way on to it, but this is dark side of the internet that you can get to do to, the dark net, what I heard yesterday, if you or I wanted to do that, it would cost us about $1,000 to find somebody in Russia or China that will do that for us. To take down a corporation for $1,000 bucks!

Jason:
Wow.

David:
When they started to talk about this, I thought the person would say 10 million dollars or something like that. $1,000 bucks! You could do it.

Jason:
Wow, that’s mind boggling. Now, that might cost you your freedom and your life, but wow, that’s mind boggling. The power is moving to the people and it is really, really cool. Now, one thing I wanted to ask you, because you’ve got so much familiarity with shipping and in the book Abundance and I’ve been talking about it for years on my show, but 3d printing. Is that going to move a lot manufacturing back to the US? It’s not for mass production, I understand.

3D printing is for more like artisan-type production and there’s a great book I read last year when I was in Europe and it’s by Chris Anderson who has written three great books that I know of. He is the editor of Wired magazine and I believe he owns TED now, the conference, and the book is called Makers. It’s all about the 3d printing revolution. I mean, are those ships be needing to come here quite as much because we’re just going to print stuff? I read an article yesterday we basically emailed a wrench to one of the astronauts at the international space station and what I mean by emailed is emailed the design for the 3d printing they have now and four hours later he had a wrench in his hand made of matter, made of atoms.

David:
Isn’t that amazing?

Jason:
It’s incredible!

David:
So, I’ve sat in some of these conventions I go to in transportation and logistics and that’s a very real thought. I mean, it’s not going to happen real soon, but to kind of ask two questions. Is 3d printing going to have a big impact on shipping? Yeah, I think it will in time. The second part is a lot of things are coming back. Again, with the dynamic in China, wages are increasing there. They’re calling it near shoring. It’s not necessarily coming back to the United States, some is, but a lot of it’s going back to Mexico. Some stuff was in Mexico and those Maquiladors moved to China, now it’s coming back.

Jason:
Wow, it’s really quite fascinating what’s going on in the world. What an amazing time to be alive. Just sit back and witness this stuff. Certainly we have our share of problems, but like I say, technology might save us all.

David:
Well, I think so too. I think that for our kids, I really believe there’s never been a better time to be alive in terms of there’s never been more opportunity for everybody. I mean, you could be the poorest poor person, maybe not the poorest poorest, but if you have the access to the internet, you’ve got unlimited education and access to information, role models..

Jason:
For free! You’ve got the Khan Academy, it’s free! You can learn, you can get 10 PhDs at the Khan Academy for free, it’s amazing.

David:
That’s just tremendous opportunity. I read where they’re predicting in the next 10 years, we’ll have our first high school billion. We already have plenty of kids that dropped out of college to become billion, but imagine a high school kid becoming a billion, not just because our currency is debased, but because they’re creating real value. Yeah, so it’s an amazing time. There’s unlimited opportunity out there. Yeah, there’s problems, but Jason, you’re a little younger than me, but when I was growing up and you probably heard some of that stuff too, I literally, my elementary school teacher in third grade told us, “You know what? I don’t think you guys will live to see 30, because there’s going to be a nuclear war.”

Jason:
Wow, really?

David:
What kind of manic teacher was..

Jason:
Today you’d get fired for that.

David:
I think justifiably so. That was a ridiculous thing to say to young kids, but that’s what we were worried about. Nuclear annihilation, cold war, all these stuff. There’s really, we’ve got these terrorists, but not massive nuclear annihilation as a very real possibly. There’s always something to worry about.

Jason:
There’s always something to worry about, but hey, before you go, I just wanted to ask you about real estate for a moment. Have you estimated your returns on your portfolio or do you just like collecting your checks and you don’t think about it too closely?

David:
Yeah, I tend to do it each year as I’m getting the taxes done. I can tell you that..well, just over the last 10 years, which is really kind of my real estate timeline outside of personal residences and vacation properties we use for our families and so forth. We’ve seen a 7 digit, I shouldn’t call it that, because that could imply up to $9 million dollars, but over a million dollars in just in appreciation and the return that we’ve earned, again, it could have been much greater because we didn’t chose to use a lot of leverage, but..I’ll tell you this, when I was running the numbers when I was doing the analysis in terms of what I was going to buy, routinely my returns with a moderate amount of leverage, not a lot of leverage, was 25% to 30%.

Jason:
Annually?

David:
Yeah and that was only assuming a 4% annual appreciation and I have received much more appreciation than that. I haven’t figured it out in terms of what is my appreciation. Really, the right way to think about this, I think, is what your appreciation has been, what your cash flow has been, and what’s your…and think of that cash flow in terms of the tax benefits you’re getting. Here’s the other thing, the great advantage of these properties that we bought in foreclosure. You get your statement from the county and it gives you the assessment.

Jason:
Your property tax assessment.

David:
Yeah. The 80% of the value was in the building, right. So you get depreciation on all that. So, I’ve had some very nice sessions with my CPA, because these properties I get to depreciate so much. It’s totally legitimate. I’m using the documents that the government is giving me, so it’s very much a tax advantage return. I’m not paying any taxes, obviously, on the appreciation and on my cash flow I’m getting a nice tax flow benefit.

Jason:
Yeah, depreciation is the holy grail of tax advantages. It makes income properties the most tax favorite asset in America by a long shot. I mean, I don’t know of anything even close, because it’s a phantom write off. You don’t pay anything to get that. Your property could go up in value, have positive flow, and the way IRS looks at it you’re still losing money, which is good in that sense.

David:
I don’t want to ruin that. It’s a beautiful thing. If you go back to the bond analogy you gave me all those years ago, it’s almost like it’s municipal bond. You get those wonderful tax advantages. The other thing I want to share with you too, Jason, kind of the experience of being a real estate investor is a person who has a full time job, a family, 3 kids, you know, on the go, some people are like, Dave, okay, you’re buying these out of state properties. First of all, that’s nuts. How are you ever going to see your properties? My answer to that has been, well, I’ve had rental properties in California and they’re in the same city I live in and I very rarely went by there. If you’ve got good property mangers and you’re kind of managing your property managers. My management of my property mangers consists of calling them when I see I have a vacancy or sending them chocolates at Christmas each year. I don’t spend a lot of time doing it.

Jason:
You send them chocolates? Wow. I never give anything to my managers, maybe that’s why they like you better.

David:
I’ll give you a great example and this is one of your property managers that one of your local market specialists turned me on to and, again, this was in Indianapolis. I wasn’t happy with my insurance premiums out there, so your local market specialists is the one that turned me on to the property management company. The property management company turned me on to a insurance group that allowed me to package all these properties and reduce my insurance premiums by 50% in that market. I wish I could remember right now, but I checked it out at the time, very high rated insurance companies. So, they can take very good care of you. I want them to like me more than the other landlord they have when they have one tenant and two houses and need to decide where they want to put the tenant.

Jason:
You want them to think maybe we’ll get some chocolates from this.

David:
Exactly. Let me get that chocolate benefit. You know, I spend very little time on this because I do use property managers. I’ve gone the other route and tried to manage it myself.

Jason:
You did self-management from a distance, because I do both and I’m just shocked that I could even do that. How was your experience? It sounds like you weren’t keen on it.

David:
I wasn’t. Well, I tired to be a property manager here on the properties in California what happened is when it started south. I wasn’t going by the properties enough and then when it started going south, quite honestly, I didn’t know what to do as far as taking people to court stuff and all that.

Jason:
Tell us what happened. What do you mean? Did you have an eviction?

David:
Yeah, I had an eviction. So, what happened at that point in time, I found a property manager and said, hey, get me out of this mess and you can manage the properties from now on and that’s what we did and it’s worked out great. I think these people earn their 7-8% or whatever it is that you’re paying them for me. Now, maybe if I was a retired guy and I liked doing that stuff, fine. So, the work I think with getting these investment properties was really deciding which ones you were going to buy and doing your due diligence in that regard. Certainly you were a big help, your team was a big help in helping locate the appropriate markets that had the good returns in certain areas in those markets and all that, but even after that you have to decide, okay, which house are you going to buy? I really enjoy that process. Again, with all this technology we have, you can drive down the street, you can look in your neighbor’s backyard.

Jason:
You can do it Google maps. You can drive down the street.

David:
Yeah. I did it with every single one of them. One of the earlier podcasts, I would look at the schools, what is the whole situation with the schools.

Jason:
Dave, I forgot, you are the guy that created or discovered the free lunch metric!

David:
You remember that!

Jason:
Yes. I remember naming it that. It’s a good idea. Feel free to tell the listeners. It’s on the old podcast, which I’m sure is still posted, you can find it at JasonHartman.com and maybe on iTunes. I don’t know, those old ones on iTunes, I think they drop off after a while, but it’s on our webiste, I’m sure. It’s still posted. That was a great idea that you did. Tell our listeners about that.

David:
Everyone has their own view the types of properties they want to invest in and there is a need for section 8 housing, there is a need for penthouses, and there is a need for solid single family residences, which is what I was looking for. I didn’t want any trouble. What I looked at was what was the percentage of children in the local school that qualified for free lunch. So, if it was below 50% it was an area that I was comfortable with.

Now, the houses that we purchased, I always wanted to think about it as, you know what, I’d live there or my kids totally comfortable and happy with them living there. I’m very proud of our real estate portfolio. I think they’re very nice properties and I’m proud to own them and I think we provide a very nice housing arrangement for people. That kind of was one of those tests for me. If less than 50% of kids in the local school get free lunch, I was happy with it. I considered it a reasonably solid economic area.

Jason:
That’s a good metric. Like you said, there’s an investor and a property type for everybody and you like the A properties, kind of the nicer properties. We have those and we have B properties and we have C properties. Honestly, the C properties, they have the great numbers, the tenants are just more flaky. They’re just more difficult to deal with. The thing I say about C landlords is it’s going to require a little bit more of your attention and it’s going to require you to manage your emotional state better, because you’re just going to have more trials with C type properties. We’ve got them all, we used to only do A and B type properties. We got into the C stuff because a lot of our clients wanted it. So, they can take their pick and you know, you’ve got your pick and your model and it works for you, so that’s awesome. I love it.

David:
That’s worked well with me, but you know, there were some of these properties that I bought that I hadn’t, I certainly had never seen them, because they were out of state. I may have driven through the general area and I didn’t go to see them after a couple of years after the fact. I mean, that happened. I would talk to people about that and they’d say, how could you do that? How could you just trust that everything is okay?

Well, I didn’t just trust. I did my research. I can walk through the house virtually, I can walk through the neighborhood virtually, I know everything about the schools, I know everything about the crime report in the area. I can pull everything, and I did pull all that information up, when I would ask them though, what about these companies you’re investing in in your mutual funds, do you know what’s going on? Do you sit at the board of directors meeting? Do you know if they’re about to get sued or are in the middle of a lawsuit or are considering being bought or buy something or some legal problem?

Jason:
Or the CEO is just about to get nailed for some huge sexual harassment case, you know, you don’t know this stuff.

David:
I know more, virtually, of the fundamentals of the investment on this real estate if I never, ever go there. People, if they’ve own Apple stock, they’ve been to Copertino, and visited with the manager, they don’t do that, but they’ll have no problem putting $50,000 in Apple stock. So, people really need to understand how they’re talking about things. Everybody hears about the nightmare land, tenant stories, and..

Jason:
Like the one story, right, that everybody has had to discourage them.

David:
Yeah, but I don’t know my tenants, they don’t know me, I’ve got great property managers. I spend, it’s really just the accounting stuff. I spend an hour a month on it and it’s not a big deal and it’s just an investment I’ve been very happy with.

Jason:
An hour a month for how many properties by the way?

David:
13 rental properties.

Jason:
So, 13 rental properties only takes you an hour a month? See, I tell people, and I know this is high, but occasionally if there’s like a problem property, it could suck up a little bit more time, so I just tell people assume one hour per property per month. So, if you’ve got 13, I’d say 13 hours a month, but you only spend an hour a month for all 13 properties, huh?

David:
I’ve had good fortune, I guess. I mean, I just don’t have big problems with my tenants. I mean, you’ve got the occasional dishwasher, air conditioner, it’s an email in the middle of other stuff I’m doing, I’d say yeah, do that. No, get another quote. It doesn’t take much time. Once you’ve got them established and you’ve got the property manager taking care of it, I don’t see how it could take me 13 hours a month.

Jason:
Yeah, I agree with you. I think as humans, I mean, certainly we all do this. I know I do it, I’m sure you done it at time, everybody listening probably has to, we all kind of get into our way and we sometimes mirco manage stuff, we get upset about something and then we just get all freaked out about it and then it sorta just occupies our emotions and then we go dump on other people. It’s not exactly a good quality, but we all have to admit we’ve all done it.

David:
Well, I’ve been more than willing to pay, whether it to be property managers or the initial stage by these properties that aren’t new properties that need aren’t new properties and need a little bit of rehab. Now, my brother in law who is a client of yours, I referred him to you, he kind of had a different approach. He took vacation time, he flew down there, he helped rehab the properties,

Jason:
He’s a hands on guy.

David:
Yeah, little more handy type guy. I didn’t want any type of experience like that.

Jason:
Me either. I don’t like that. We don’t do that stuff.

David:
You know, he slept in the property.

Jason:
Oh my gosh, he’s like my mom. My mom is like that.

David:
Working on it and painting it and stuff, but he likes that. God bless him, if that’s what he likes to do, then that’s what he should do, but I consider that some type of torture and I don’t want to do that.

Jason:
That’s called work and I don’t like work like that.

David:
To me it’s all about passive income, so we’ve developed that and that provides some nice benefits from pay down some of these and not only that, but we’ve used the proceeds to investment in another business, which is doing quite well right now and generating even more passive income. It’s just been really good all the way around.

Jason:
Good for you, that’s awesome. So, just to recap. I’m keeping you long here, but it’s just been a great conversation, so thank you so much for coming on the show. So, you’ve made over a million dollars in appreciation and how many years? When did you start?

David:
So, that would be starting in 2004.

Jason:
Oh, 2004, but when you started with us..I mean, that was your California stuff.

David:
Right, so I started with you in 2009. So, those properties, well, all I have to do is black out my California properties there. It would be about $700,000 in appreciation in the California and Arizona properties.

Jason:
See, that Arizona, it’s a hybrid, but you gotta be careful you don’t give it back. Well, you bought early enough, you’ll be okay. If someone were to buy today or in 2006 in Arizona, they could eat it.

David:
Right.

Jason:
Same with California.

David:
I think, you say, there’s no such thing as bad…you know, there’s all these different markets all over the country and everyone raises and falls and that’s the great service that you and your team provide, which market makes sense to be in right now based on what your goals are, right?

Jason:
That’s what we do, that’s what we watch for people, and the comparison though is the Indie properties gave you much better cash flow than the California and even the Arizona properties.

David:
Yeah, absolutely. Those are going to be hard to beat from a crash flow perspective. I’ve been very pleased with the stability, the tenant base, the economy there, and, you know, because we did buy at the time we bought, we got much greater appreciation than one would expect normally to get in Indianapolis. I think you could still by in Indie and still do real well from a cash flow stand point.

Jason:
Oh yeah, Indie’s still good. The prices are still higher than they used to be, but you can still make your cash flow numbers there, which is why it’s kind of our market. I mean, we’ve got other markets that are great too, but Indie has been a very good market for us. I personally made a lot of money myself buying properties there. I love it, it’s good, good stuff. Well, Dave, it’s very inspiring story and thank you so much for sharing it with our listeners and coming back on our show again. I really appreciate it. It was great talking to ya.

David:
Alright, my pleasure, Jason.

Interest Rates: Trends for 2015?

AMA1-8-15With every new year comes a round of predictions about the financial future. This year, as in many others, the fate of interest rates in 2015 and beyond is the subject of speculation, most of it pessimistic. Financial experts and economists are once again predicting that US interest rates will soar in the coming months. But several surprising factors both foreign and domestic play a major role in what happens to those rates – and they’re largely beyond the control of US economists.

Interest rates can be a key indicator of economic health. Typically, lower rates for both personal and commercial loans mean a more robust consumer economy – more people can borrow money, and that means more purchases of major items, new business startups an other enterprises. That in turn feeds the job market, keeps houses selling and encourages world commerce.

In the US, interest rates have spent the last several years in an artificially imposed holding pattern. The financial collapse of a few years ago was driven in part by runaway lending, especially in the housing industry – and that put millions of unprepared buyers in homes they couldn’t afford, with mortgages they couldn’t maintain.

The housing crash and the recession that followed prompted the Federal Reserve to intervene with the much-publicized Quantitative Easing initiatives that involved buying up large amounts of bonds and mortgage backed securities. That plan, the Fed reasoned, would encourage banks to lend more at lower interest rates and get the economy moving again.

In the years after the crash, interest rates did remain low – reaching historically low levels that did indeed stimulate more home buying. The employment picture brightened too, and although the dollar struggled in world markets against currencies like the euro, it remained a standard for international finance.

Those and other factors were enough to signal the end of Quantitative Easing. When the Fed announced in mid-2014 that it would start “tapering” QE3, the latest version of the stimulus toward the end of the year, market watchers began worrying that without the Fed’s manipulation, interest rates would surge. And that, they feared, would stall borrowing and trigger another collapse.

So far, that hasn’t happened. Rates have crept up, pushed by market forces, and that’s triggered new concerns that as the stimulus winds down, those rates will finally soar. But as a recent Business Insider article points out, events outside the country can affect the rise and fall of US interest rates.

The global nature of 21st century finance means that in a kind of “butterfly effect,” what happens in one area of the world can affect conditions thousands of miles away. Economic upheaval in Russia and the countries of Europe and Latin America can affect what happens to US interest rates.

Russia begins 2015 with an uncertain economic future: struggling with debt, sanctions and continued unrest in Ukraine. The ruble is in severe decline. Russians of all walks of life are opting to either invest abroad or convert their assets to foreign currencies. And the currency of choice is the US dollar.

Other countries too are doing brisk trading in foreign currencies as they face debt and currency crises. Greece is attempting to restructure its debt after its recent collapse. Argentina’s black markets trade briskly in dollars after that country fell far into debt. Even though the dollar has fluctuated against other world currencies, it’s still in wide demand for its stability and security – and that helps keep rates low at home.

World energy prices play a role in the rise and fall of US interest rates – and those prices are set in response to a host of factors both political and economic. Low energy prices can play role in holding down interest rates, too, and at the close of 2014, those prices were relatively low.

Environmental factors can also affect rates. Destructive weather events and other natural disasters can stress local and national financial reserves and increase demand for funds. And on the economic front, rates of deflation and inflation also play a role.

The rise and fall of interest rates is a measure of economic growth – and one worth watching for investors and consumers alike. For now, a combination of factors at home and abroad are keeping rates low – and challenging the perennial pessimism of economic forecasters. (Top image: Flickr/gorfor)

Source:

Oyedele, Akin. “5 Reasons Why Interest Rates Won’t Surge in 2015.” Business Insider. businessinsider.com. 30 Dec 2014

Read more from The American Monetary Association:

AMA104: Learn About Africa’s Economy with Todd Moss

The Bitcoin Bounces Back

The American Monetary Association Team

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AMA 104 – Learn About Africa’s Economy With Todd Moss

Todd Moss is the chief operating officer and senior fellow at the Center for Global Development. His work focuses on U.S and Africa relations and financial issues that sub-Saharan Africa is facing. He is also an author and has written several books with his most recent one, The Golden Hour, being a national bestseller. He talks to Jason about Africa, the economy, and why it matters.

 

Key Takeaways:
2:50 – 7 out of 10 of the fastest growing economies in the world are in Africa.
6:10 – We are seeing Africans transition from being very, very poor to becoming middle class.
9:25 – There’s a lot more foreign investment in Africa and the countries that were very badly managed in the 70-80s are now being managed much better.
11:30 – Will outsourcing and manufacturing move to Africa? Todd explains in this segment.
13:50 – A lot of Africans speak English as their native language and the second largest language is French.
16:25 – Is there a strong Al Qaeda presence in Africa?
22:15 – Todd talks about his latest book, The Golden Hour.
24:30 – Africa is changing very rapidly and Todd hopes more people will look at Africa as a place to vacation to in the future.

 

Tweetables:
When you add a Africa’s billion people to the global economy, that’s a huge boost.

An African immigrant to the US is more than twice as likely as an American to have a graduate degree.

 

Mentioned In Episode:
Abundance by Steven Kotler and Peter Diamandis

http://toddmossbooks.com/

 

Transcript

Jason Hartman:

Welcome to the podcast for the American Monetary Association. This is your host Jason Hartman and this is a service of my private foundation, the Jason Hartman Foundation. Today, we have a great interview for you so I think you’ll enjoy it and comment on our website or our blog post, we have a lot of resources there for you, you can find that at AmericanMonetaryAssociation.org or the website for the foundation which is JasonHartmanFoundation.org. Thanks so much for listening and please visit our website and enjoy our extensive blog and other resources there.

It’s my pleasure to weclome Todd Moss to the show. He is chief operating officer and senior fellow at the Center for Global Development and former Deputy Assistant Secretary in the Bureau of African Affairs under George W. Bush at the U.S Department of State. He is also the author of The Golden Hour and it’s a pleasure to have him on with us today. Todd, welcome, how are you?

Todd Moss:
Good, thank you, Jason. Pleasure to be with you.

Jason:
It’s good to have you. Just to give our listeners a sense of geography, where are you located? DC?

Todd:
I’m just outside Washington, DC.

Jason:
You’re in the belly of the beast. Good. So, let’s talk about, you know, the global economy, national security, and why all this stuff matters to people, especially Africa. You know, Africa I sort of view as the kind of forgotten continent. It’s just has never really made any real, you know, real impact on the global stage it seems. I mean, 100 years of that is steadily declaring GDP for most nations there, what’s going on there?

Todd:
Yeah, I think most Americans think of Africa as a far away place that maybe has a few problems, but nothing we should really very involved in or nothing that has to do with us and certainly Africa’s economic performance for a good part of the 20th century was pretty terrible, but Africa is really particularly in the last 10 or even 20 years has really gone around a turn around that most Americans have not yet recognized. Right now, Africa is one of the most dynamic regions of the world economy.

7 out of 10 of the fastest growing economies in the world are in Africa. We just in just a few weeks we had the first ever US Africa Summit in Washington DC. Leaders from 50 countries came to meet with president Obama and really the highlight of it was billions of dollars in new investment announcements from big brand name American companies that are expanding into Africa and this includes IBM, General Electric, Coca Cola, you know, real household names that are very excited about the growth opportunities in Africa.

Jason:
I think most of our listeners would be surprised to hear that, that you said 9 of the fastest growing economies?

Todd:
7 out of 10.

Jason:
7 out of 10. So, what are those? What countries are those?

Todd:
So, the fastest growing economies are some of those that have had some of the worst headlines in the past. So, you’d probably be surprised that Ethiopia is one of the fastest growing economies and it’s doing remarkably well right now. Rwanda, which only in 1994 had the horrific genocide, has been growing very, very fast. Other countries include Ghana, Mozambique, Nigeria is growing very fast even though they have some problems. Kenya, Tanzania, Senegal. So it’s really quite broad based. It’s not only oil economies.

Jason:
Yeah, that’s amazing. Senegal, even. Wow. So, the first thing that everybody should obviously consider is that when you have a tiny economy, just like a tiny little company, it’s not necessarily that difficult to get it to grow quickly. Bigger companies, bigger economies, it’s harder to get it to grow fast. This is definitely good news, that said. I’m not taking away from that. What do you attribute that to? You know, some of the countries mentioned seem pretty backwards. I just gotta ask you, how much Muslim influence is there, because that, I think, not meaning to offend anyone of course, but I think that’s a growth inhibitor. It just seems that way to me.

Todd:
Let me take those two questions separately. What’s been driving growth in Africa, so yes, you’re partly right a lot of economies are still small so they’re growing from a small base, but what’s changed from the 1980s or the 1970s is that economies are starting to build momentum. Economies start going at a faster pace and it’s easier to maintain that and what’s very exciting I think both as an investment opportunity, but also for Africa’s future.

What we’re seeing in many, many countries is this once in an lifetime transition where families are going from being poor into the middle class. So, we’re seeing families buying their very first refrigerator that their families ever had. The very first television. Many are buying the very first motorcycle or car in the family and that’s kind of the transition we went through in the 1930s and the 1940s and that starts to perpetuate itself. So you can imagine when a family buys their very first washing machine, suddenly all the girls and women in the family, they don’t have to wash clothes any more, they can do something else even more productive.

Jason:
That’s really why I asked you about the Muslim thing. You can’t really grow and be, you know, do anything great as a country, I mean, unless you have massive oil reserves and you’re just lucky, if you’re going to obsess women and do this kind of crazy stuff. You are never going to encourage tourism if you’re cutting people’s heads off or stoning people.

Todd:
Fortunately for Africa, there are very few cases of some of the radical religious furor that you see say in Pakistan or that we’re seeing now in Iraq. In fact, Islam in Africa is generally very, very moderate. Many countries in Africa have large Christian and large Muslim populations. Now, occasionally politicians can kind of stoke people to get upset with the other side, but it’s actually quite rare you’d have an elitist base of violence in Africa and even in the country of Mali, which is where The Golden Hour, my new book, takes place.

For hundreds of years, Mali has been a country of extremely open and tolerant religious diversity where all kinds of different Islamic sects and other religions have come and traded. The kind of craziness that we’re seeing in the news now is as foreign to most parts of Africa as it is to us.
Jason:
That’s good to hear, I’m glad to hear that, because that’s certainly going to lead to advancement opportunities. So, what do you attribute the growth to? You know, countries that are doing things right in Africa, what are they doing?

Todd:
Well, there’s been a number of factors. Some outside factors has been commodity prices have been generally on an upswing just like oil and copper and gold have been pretty good. The international economic environment, other than the recession in 2008/2009 actually have been very favorable for Africa.

The international financial system is strong enough that African countries can tap a lot of..a lot of countries are tapping private capital markets now in a way that they’ve never done before. So, the international environment is general favorable. You’ve seen a lot of investment coming not just the US, but from Europe, China, Japan, Canada, Australian is putting a ton of money, Malaysia. So, there’s a lot of people looking to invest in Africa. That’s helping.

We’re also seeing some really positive internal changes. A lot of countries that were really badly mismanaged in the 70s and 80s are now managed pretty well. Now, that’s not to say there are lot of economic problems in lots of places, but in general countries are doing a lot more of the right things and they’re able to do attract investment and get their own economies going.

Jason:
I had Steven Kotlet on the show and he wrote a book with Peter Diamandis called Abundance: The future is better than you think. They talk a lot about in that book and I’ve heard a lot of other futurist talk about the raising billion and, you know, Africa has a population of about 1.1 billion people and if these people can enter the global economy, you know, at first blush marketers and business owners and, you know, governments might think, they don’t have much money to spend, but they are so big in terms of number, when you add a billion people even if they hardly spend anything, that’s a huge boost to the economy and that’s why Africa really is important.

I don’t know how much we’re going to see of it there,but you know, outsourcing, manufacturing, and stuff like that? You know, China has certainly prospered from that dramatically. Estimates are that about 275 million people have been lifted out of portery through globalization. This is excited and great news, but of course, you can argue the other side , US workers have been hurt by that and that’s certainly valid also, but I think we’re in a free trade environment, period.

That’s just the world in which we live nowadays and we’re going to have to learn to adapt to that and some of the advances in technology, like 3D printing, are going to on-shore a lot of this back to the US. Americans workers, you got some good stuff your way. It’s not all bad, but what about the outsourcing and manufacturing in Africa idea? Is that going to happen in any big way or is that going to remain the domain of China?

Todd:
Well, right now, it still largely an Asian story. Manufacturing is sort of the one real negative in Africa is that we have not seen manufacturing take off and in large part even as China has moved up the value chain. You had countries like Bangladesh step in and Bangladesh and dominates the textile market, which is traditionally the gateway for countries in the manufacturing sector.

Now, whether Africa will replace Bangladesh in 10 or 20 years, I don’t know. I think it’s probably more likely some kind of automated system or robots will be making our clothes rather than thousands of low income women in factories, but clearly these changes in Africa that you’re talking about, the demographics, are huge, huge opportunities.

When we look at something like the explosion of cellphones and banking services in Africa where companies are making huge, huge profits off of…by expanding and meeting the needs of relatively poor customers, we can see that the potential is huge. As those incomes raise, as people go from earning $1,000 a year to $5,000 a year. They’re just going to be buying all kinds of things that they don’t currently have that, you know, some American companies will be providing.

Jason:
Well, it’s really an amazing thing. It is a big deal, no question about it. What about the language issue though in Africa? I mean, you’ve got, you know, Swahili has been a language as English has, but you have all these different languages, you have these tribal factions, you have different religions. I mean, gosh, it’s a challenging place, isn’t it?

Todd:
It’s an extreme diverse continent. You do have, like anywhere else in the world, the business language is largely English. Many, you know, hundreds of millions of Africans speak English. A lot of schooling is in English. The second biggest language in Africa is French. So, there’s a lot of common languages and, you know, very common in Africa for you to meet somebody who speaks 5 or 6 languages. For us, I struggled just to learn Spanish, but all of my African friends have no problem with half a dozen languages or more. It’s an adaptive masochism that they’ve had that will help them be very globally competitive.

One more really interesting connection between the United States and Africa’s growth story is the immigrants from Africa to the United States, we don’t have that many because Africa’s pretty far. Most migrants go to Europe. The migrants that we do get in the US from Africa are extremely highly skilled. In fact, an immigrant to US from Africa is more than twice as likely as an American to have a graduate degree.

Jason:
Really?

Todd:
You are really getting the cream of the crop from Africa and what’s exciting for Africa is of course they do, you know, they’re starting businesses, they’re becoming doctors and nurses here in the US, but many of them go back and start businesses back in their home country. So, most of the booming, new African companies were founded by returnees either from Europe or the United States who maybe they worked for Goldman Sachs for years and they went home and started their own bank. That’s really good for them and really good for us.

Jason:
Todd, I just gotta take issue with that comment about the graduate degrees and so forth. I mean, I don’t see that. I see a lot of these African immigrants driving taxis in the US.

Todd:
A lot of the African immigrants the US will have college degrees even if they’re driving taxis, but certainly around Washington, DC, we have plenty of African cab drivers. We also have a lot of African doctors, economists, other kinds of professionals. You know, there are just..they are relatively small relative to our population, but they are highly educated.

Jason:
Let’s talk about the security, the national security about it. How big of a presence does Al Qaeda have? You did allude to that before, but I want to take a deep dive into this a little bit. There’s certainly problems with political instability, there are coups, ethnic violence, drug and weapons smuggling, kidnapping, address that for a moment if you would. It’s just kind of a broad question, take it where ever you want

Todd:
Sure, as the US hammered Al Qaeda in the middle east, we’ve seen Al Qaeda and Al Qaeda copycats sort of pop up in some very weak places including Somalia and including in the middle of the Sahara Desert. The original Al Qaeda groups that emerged in the Sahara Desert were Algerians that were fighting with their own government in Algeria and had migrated south to take advantage of Mali’s inability to country its border. That sort of merged with some, as we’ve seen Al Qaeda do in other parts of the world, they kind of merge with local grievances.

So, some of the Al Qaeda type groups and when I say Al Qaeda here, I mean people that declare themselves to be Al Qaeda, it’s not that they’re taking direct orders, but they’re replicating what they think Al Qaeda would do. They teamed up with some local groups that were upset with the government of Mali and they were able to take a large part of the territory in 2012 until French forces invaded and pushed them back.

So you are seeing this confluence where Al Qaeda is taking advantage of local problems, but in general it’s not, Al Qaeda is a much smaller problem in terms of numbers in Africa is just the potential from them to grow in Africa.

Jason:
Address that for a moment if you would, Todd. The reason there is a potential for them to grow is due to economic hardship and lack of opportunity, probably. You speak to it yourself, but that’s what I’m thinking.

Todd:
That’s part of that, but it’s also that some of the governments are unable to control their territory. So, the government of Mali might have had 3,000 troops, not very well equip troops, trying to patrol the area the size of Texas in 100 degree plus heat. No body has ever controlled that part of the world ever in the history of mankind and to hope that 3,000 Malian troops could do so, you know, is wishful thinking, but that just creates these sort of pockets where Al Qaeda an hide, they can operate, they can train, and that’s why the United States is going to be forced, whether we want to or not, is going to be forced to get involved more intensely in some of these places.

Jason:
Okay, very interesting. So, I mean, what do we do about that? You know, how do we, what’s the solution to this Al Qaeda thing? It’s just crazy what’s going on in the world with these…why do people want to live in the 7th century A.D? I mean, it blows my mind.

Todd:
I can’t explain it and unfortunately I don’t have any great answers for you to solve it, but I do think the one thing we can’t do is turn away and pretend and sick our head in the sand and pretend it doesn’t exist. I think we know already that’s going to make matters worse. We do need to be very clear in our objectives in those countries. We are expanding our military footprint in parts of Africa. The Washington Post reported just on Tuesday that we’re opening another drone base in the Sahara Desert, so I think we’re going to see more drones and more direct counter-terrorism operations from the military, but that’s really a band aid.

The real heavy lifting is going to come from African militaries themselves who are just going to be better able to operate in those environments and understand who the enemy is and that’s going to mean that the US is going to have to get a lot better at security corporation with those militaries. We do a lot of it, but we’re just not that good at it yet. So, I think that’s really what we’re going to have to do on the military side and then there are more economic and political actions that we can take to try and support more open, more inclusive societies.

Jason:
Todd, give out your website real quick and then I just wanna talk to you about one more topic before we wrap up here.

Todd:
So, the website is ToddMossBooks.com and The Golden Hour, the new novel about the American diplomat in Mali is on sale as of today.

Jason:
Fantastic. Your book talks pretty much as much as about the way Washington works as it does anything else and I just wanted to ask you or maybe I should say the way Washington doesn’t work that might be a more proper…*Laughter*. Maybe I shouldn’t say that to someone in government, right, but..

Todd:
No, no. You should, that’s the point of the book,

Jason:
Your book talks about the way Washington doesn’t work and, you know, what does it reveal though, what does your experience reveal though about how the different departments work together. I mean, the government is just so mammoth. It’s so over bloated nowadays, you know, does the State department work with the Department of Defense and the White House and the CIA? Do they all really work together well or is it….

Todd:
On occasion different agencies do work together well. More often the norm is that they don’t and even within the State Department there are dozen of offices and bureau that also don’t work very well together. It’s not that people don’t want to get along with each other, in general, these are all patriotic, well-intentioned Americans and they’re all trying to do the right thing, but when you have a bureau whose mandate is counter-terrorism and you have another bureau whose mandate is to promote democracy and you have a third bureau whose mandate is to not ruffle anybody’s features, just to keep everything quiet, you can imagine when there’s a crisis and you have to decide what to do, people have very, very different ideas of what’s the right course of action.

So, The Golden Hour is exactly about that where the protagonist, Judd Ryker is suppose help the State Department react quickly to a crisis in West Africa, but he finds that he most of his time doing battle within the building and the different agencies that are all trying out plank each other and that’s a big part of the story. I wanted to take readers inside the White House situation room, inside the State Department operations center and then inside the classified of a US embassy overseas to hear what, you know, how those discussions happen when there are all these different opinions and they’ve got very little time and very little information when they have to make very important decisions.

Jason:
Very interesting. It’s an amazing exploration and there’s just a lot of information here. You know, just any final thoughts on Africa before you go?

Todd:
You know, thank you for that. I’m thrilled that you liked the book, I hope your listeners will like it as well. You know, Africa is just changing very, very quickly. I’ve just been working for a very short time on Africa. It’s just about 20 years, which is nothing in the history of a country or a region and the changes I’ve seen underway are just remarkable and, you know, I hope that people maybe when they hear the word Africa they think of starving children or warlord or something like that that instead they’ll think, oh, maybe that’s somewhere I want to go on vacation or maybe something to think about investing or maybe read another novel about Africa. I hope that they draw that from The Golden Hour.

Jason:
Good stuff, good stuff. Well, Todd Moss, thank you so much for joining us today. The book is entitled The Golden Hour, we appreciate you coming on the show and talking to us about it.

Todd:
Great, Jason. It was a pleasure.

The Bitcoin Bounces Back

AMA12-29-14After a rough couple of years, the Bitcoin is surging back with a vengeance. Just a year after its fall from grace in the Silk Road drug site scandal, the digital currency’s market value has even beaten gold in the world’s markets. Whether hailed as a welcome alternative to government-controlled currencies or despised as a subversive tool for illegal activities, the Bitcoin is clearly a coin to be reckoned with.

Since it hit the scene in 2008, Bitcoin has been widely embraced not just by the small group of cybernerds who spend endless hours running algorithms to digitally mine the coins, but by people of all kinds, especially in countries where governments and currencies are unstable and untrustworthy. Because it’s totally digital, Bitcoin isn’t produced or controlled by any central bank anywhere, making it a major step in the democratization of currency worldwide.

Bitcoin transactions are virtually anonymous, and they can be used just bout anywhere two parties agree to use them. In the early years of Bitcoin’s existence it was viewed mainly as a medium for private transactions, more like barter than a fully functioning currency system. But after some high profile Bitcoin transactions involving in vitro fertility treatments, luxury cars and real estate, the coin made its way into global financial markets, where it traded at numbers ranging from a low of $20 to $1242 by late 2013, beating the price of gold at $1664 for the same period.

Bitcoin was fast becoming a legitimate player on the financial scene, The US Department of Justice proclaimed that Bitcoin cold be considered a legitimate means of exchange, and Bitcoin exchanges such as Mt Gox sprang up to smooth the way between the Bitcoin and traditional currencies. The IRS pondered ways to tax assets in Bitcoin.

But by 2013 the coin’s new higher profile had taken a major hit with its connection to illegal drug transactions, mainly on the booming online drug marketplace Silk Road. Silk Road was raided and shut down, its vast store of Bitoin confiscated by US authorities. The leading Bitcoin exchange Mt Gox also shut down, and heavy hitters in the traditional financial world began to strike back.

In the early days of its existence, Bitcoin was largely ignored by the mainstream financial word, dismissed as nothing more than a digital curiosity. But after Bitcoin hit the world currency scene and became the darling of the “shadow net’ of illegal online activity, government and financial entities took steps to neutralize the perceived threat.

US banking giant JP Morgan Chase published a patent for a “Bitocin killer,” an electronic alternative to Bitcoin that the bank could monitor and regulate. The Russian and Chinese governments declared Bitcoin illegal and transactions involving it void. Bitcoin was in quiet retreat, its value dropping and its exchanges closing down.

But nearly a year after the closure of Silk Road and the collapse of Mt Gox and other leading Bitcoin exchanges, the granddaddy of digital currencies is rebounding. Prices are rising again as Bitcoin eases its way back into the mainstream financial world.

Leading US newspaper The Chicago Sun Times announced in early 2014 that it would accept Bitcoin for its subscriptions and advertising. Online trading giant eBay added a “virtual currency” option to all its listings. Now, online colleges, led by Cyprus University, accept Bitcoin and Wells Fargo Bank is considering offering Bitcoin services too.

By spring 2014, Bitcoin prices had jumped, rising by 64 percent in little more than a month to reestablish its place as a legitimate form of currency. Its success has inspired a number of imitators such as the Feathercoin and LItecoin. The Bank of Canada even experimented with its own version of a digital coin. And a number of private trading consortiums and clubs have adopted a form of digital currency for internal use. But none of these variants has had the staying power and profile of the original.

In the few short years of its existence, the Bitcoin has changed the way the world views money. It’s fueled debate about who does (and should) control currency, raised issues such as Internet freedom and the right to privacy, and made users both rich and poor. As the digital upstart pushes old standbys like gold to the margins, it’s clear that whatever its future, the Bitcoin has made its mark on the way money works in a digital world. (Top image:Flickr/btckeychain)

Source:
Desjardins, Jeff. “Bitcoin vs Gold.” Infographic. Visual Capitalist. visualcapitalist.com. 30 June 2014

Read more from The American Monetary Association:

The dollar: The World’s Go-To Currency

Is Digital Currency Real Money?

The American Monetary Association Team

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AMA 103 – Jerry Robinson Talks Bankruptcy and strife on America’s horizon

 

In today’s American Monetary Association Show, Jason Hartman invites Jerry Robinson, author of Bankruptcy in Our Nation, to the show to share his views about what bankruptcy would look like. They discuss a variety of topics and consider frankly just how bleak America’s future could look. Robinson also gives his opinion on the impact of America’s international relations, as well as posing the interesting notion that we can see the path of America’s future by looking at the past of the rest of the world.

 

Key Takeaways
02.44 – Jerry Robinson’s Bankruptcy of Our Nation deals with facets of the economic crisis such as what happened, why it happened and what we thought would happen.
05.03 – In a number of ways, the 2014 picture we draw now looks very similar to the state of the world in 1914.
13.54 – No-one does anything for nothing. A closer look at the incentives can provide a lot of insight.
19.58 – The psychological impact of the economy is already taking an effect. People now expect prices and values to go up, and are surprised if they don’t.
26.14 – Maybe we need to reassess our definition of evil to better match today’s global situation.
30.09 – If the relationship between the US and Saudi Arabia changes, it could change the entire balance of power in the Middle East.
32.09 – Exports are always going to be vital, and we need to consider the impact if the US becomes energy-independent.
39.53 – International threats, and especially those involving cyber-attacks, must be taken seriously. Even if you’re living in a city, know the precautions you can take.
44.03 – Find out about Jerry Robinson’s Five Levels of Financial Freedom at www.FTMDaily.com/fivelevels.
01.00.02 – With mortgage debt, as an investor you don’t even need to pay this off yourself – your tenants pay it off for you.

 

Mentioned in this episode
Bankruptcy of our Nation by Jerry Robinson

 

Tweetables
So many people today try to formulate a solution to problems they don’t even fully understand.

Can we ever have peace as long as the Central Bankers run the world? Are they so money-focused?

The US can only keep playing this game for so long. Managing relationships in terms of who you are and aren’t fighting has a limit.

 

Transcript

Introduction:
This show is produced by the Hartman Media Company. For more information and links to all our great podcasts, visit www.HartmanMedia.com

Welcome to the American Monetary Association’s podcast, where we explore how monetary policy impacts the real lives of real people, and the action steps necessary to preserve wealth and enhance one’s lifestyle.

Jason:
Welcome to the podcast for the American Monetary Association. This is your host, Jason Hartman, and this is a service of my private foundation, the Jason Hartman Foundation. Today, we have a great interview for you so I think you’ll enjoy it, and comment on our website or our blog post. We have a lot of resources there for you and you can find that at www.AmericanMonetaryAssociation.org, or the website for the Foundation, which is www.JasonHartmanFoundation.org. Thanks so much for listening and please visit our website and enjoy our extensive blog and other resources there.

Jason Hartman:
It’s my pleasure to welcome Jerry Robinson; he is Editor-in-Chief of Follow the Money quarterly financial newsletter, host of Follow the Money weekly and author of Bankruptcy of Our Nation: Twelve Key Strategies for Protecting Your Finances in These Uncertain Times. Jerry, welcome, how are you?

Jerry Robinson:
I’m great, thank you so much for having me on. It’s a pleasure to be here.

Jason:
It’s good to have you. Your book is fascinating, and I want to just dive right in and talk about that. Let’s maybe start off with talking a little bit about the overall situation, and then dive into some of the discussion on the petrodollar and what that means to people.

Jerry:
Sure, well the book, Bankruptcy of Our Nation, I don’t think is really a prophetic book. Whenever I wrote the book, back in 2007, I was under the impression that we were going to be in for a major, major economic collapse. I was desperately trying to get the book published so we could get the word out, and no-one would touch it. In fact, no-one would even consider it until September 2008 when I was speaking at a conference out in Denver. I was talking about this very topic – in fact, the name of my speech was ‘Surviving Financial Chaos’. The market totally imploded in September 2008, as you well remember, and when I got back from the speech that I was giving, I had 5 missed calls from my literary agent and he said ‘We have 5 offers for the book’. It was such an exciting moment for me so we were able to get the book published. The publisher wanted to get it out very quickly so it came out just at the end of 2008 and towards early 2009.

The book really breaks apart what we thought was going to happen and of course, what ended up happening with the whole economic crisis. It kind of explains in layman’s terms what really happened, and I think it’s unfortunate that so many people today often try to formulate answers or solutions without firmly having a grasp of what the real underlying problems are. In the book, we lay out what these underlying problems are: ie, fiat money, a debt-based monetary system, fractional reserve banking. Many of these things that are very faulty, that have terrible foundations, that cannot last, that are unsound and that over time, are simply going to break down. That was the whole message of the book. The book goes on and explains how people can take actions to protect themselves, even some specific things that people can do. The book is a mixture of both what went wrong and what individuals can specifically do to insulate themselves from what we believe is still going to be a further downfall in the years ahead.

Jason:
What does that downfall look like when you talk about Bankruptcy of Our Nation? Obviously we create fiat money in mass quantities out of thin air, and we can get away with this for a few reasons. Number 1: Every nation can get away with it for a certain amount of time, and then it ultimately becomes unsustainable and the country collapses. The difference with the US is we have the largest military in human history, we have the reserve currency – at least for the moment, and there are several other factors that I think do make it pretty unique. What does a bankruptcy look like? Does it look like a collapse of the economy, or does it just look like we’re inflating away this irresponsible spending that the government has been engaging in for so many decades, and especially over the last 7 years? Most people are just impoverished by the inflation, but some are enriched by it – they know how to play the game and invest for it. What does the bankruptcy look like? What do you mean when you say ‘bankruptcy’?

Jerry:
Jason, what we usually refer people to is to look back to 1914, as opposed to where we are now in 2014. One hundred years ago, you had a very bloated British empire that was on its way down and everybody knew it, and then you had this ascending United States of America that was very disarticulated. It developed the Fed in 1913 and it suffered from the panic of 1907 before that. As we got into World War One, Europe tore each other apart, and this really benefited the United States. The United States then emerges and enters this Roaring Twenties era, and then has this Great Depression. Then World War Two, of course, is where the United States really takes off. It’s really since the 1940s that America has really had the stranglehold, so to speak, on the global economy, and it has had that world reserve currency status. It’s similar to what’s happening now. If we fast-forward from the 1914 picture to 2014, we see something very similar. The American empire itself is bloated, it’s over-extended and it’s all over the place. Our military is woefully under-prepared for some of the challenges that it faces and it simply cannot afford to take care of all of the things that it wants to take care of. It’s over-promised and now it’s going to under-deliver, and that’s exactly where the British Empire was 100 years ago. And China is the new United States, so to speak, in this picture, where here we have China rising and you have all these complaints: ‘China certainly can’t get much bigger’, or ‘Certainly, it’s going to implode’, or ‘Certainly, it’s going to have a problem’. That’s what they said about the United States back in 1914, and no doubt, it was a very disarticulated time for the United States. The US dollar was still being formed and it was nothing like it is now; it was still blocked out of many international financial markets so it took a while for the US to reach its state of ascendancy and finally reach its peak. This really came back in the Seventies and Eighties.
Since that time, we’ve been on the downward trend, even though it may not feel like it, and we have countries like China that are now rising to take our place. It is simply the mechanism of history, Jason, that empires rise and empires fall. I think whenever you’re inside of a declining empire, you tend to either A) ignore it or maybe you can’t see it because of the fog of war, or B) you think to yourself ‘This is going to be the worst thing that ever happened in the history of the world, because it’s a bit arrogant’. We all tend to think that our country and our situation is the most important in the whole world. Well, we expect the US to continue declining, not at a precipitous rate, but at a aggravatingly sharp rate.
I’ll give you an example.

Jason:
Is that worse than precipitous? I don’t know.

Jerry:
It is, but I’ll give you a perfect example. If you have a choice - and this is terribly morbid, but let’s think in the terms of empire – if you have the opportunity to kill the empire by throwing it off of a cliff or by rolling it down a steep grade and letting it hit every single rock on the way down, and then it dies, just throw me off the cliff! I think that’s what most people would say. Just throw me off the cliff; don’t roll me down the hill and make me hit every rock along the way. That’s exactly what the US is doing. It’s rolling down that steep grade. This is a slow, steady decline and it’s going to be not just economically challenging and economically damaging, but we’re beginning to see that it’s going to be psychologically damaging too.
Americans can’t quite come to terms with the fact that other nations may be rising or that other currencies may challenge the dollar. They just can’t seem to grasp that.

Jason:
I definitely get the idea of context. Fish live in water and I assume they probably don’t notice the water. We live in air, and thankfully, unless we live in Cairo or Mexico City, we don’t notice the air! So you’re right about that, and I definitely see that. There’s this kind of arrogance and there’s the fog of war and all that stuff, but it’s so interesting because this is such a contrast from one interview I did yesterday with a guy named Peter Zeiahn, who used to work for Stratfor as a VP. He wrote a book called The Accidental Superpower: The Next Generation of American Pre-Eminence, which talks about how this is a relative issue. America’s a mess, I agree, and I agree that it’s in decline, but look at the rest of the world. My God! We may be mismanaged and doing all sorts of things wrong, but everybody else has got fiat money too, and they don’t have the reserve currency, they don’t have the big military, they don’t have the big brand name and they don’t have our geography. I think the geography cannot be underestimated. Go ahead.

Jerry:
I think it’s a good point, but again, think about America’s military. The United States, right now, cannot afford America’s military.

Jason:
We’ve got to get out of everyone else’s business. This is just absurd, acting like the world’s policeman, and it’s usually not for humanitarian issues as we would like people to believe. That’s neither here nor there; Ron Paul is right. We’ve got to contract these military bases all over the world. It’s absurd and it’s every sign of empire, just like you said. I agree.

Jerry:
What makes it even worse, Jason, is the fact that it is too big. Yes, we are in too many places. And yes, we have too many bases. But the sad part of it is that China and other countries like it are the ones that finance it. Many people take great solace in knowing that yes, we are pretty bad, relatively speaking, but when you look at the whole world in focus, I guess things aren’t as bad as they could be. The truth of the matter is exactly the opposite.

It’s worse than we can imagine because what we have built, we can’t afford. What other countries have built, they can afford. What we have built, we need them to pay for, and when they get tired of paying for it, then what good is that military?

Jason:
So tell me about that. What happens when they get tired of paying for it? Certainly, many people, including yours truly, have said ‘What happens when China and Japan stop buying our debt?’ Then we’ve got to raise interest rates to attract investors. It’s such a freaking ponzi scheme, it’s disgusting, but our own Federal Reserve just buys our debt instead. What a scam! The whole thing’s a sham, obviously. So what? How does it look when that happens?

Jerry:
This reminds me of the 2008 and 2012 Presidential Elections. We just had Ron Paul on our weekly program last week.

Jason:
I’m a huge fan of Ron Paul.

Jerry:
Yeah, he was on and we were talking, and one of the things I brought up to him was so bizarre – I said ‘All the Conservatives and Republicans have this real fun saying. They say ‘Well, I love Ron Paul’s monetary economic side; I hate his foreign policy.’

Jason:
He’s right about his foreign policy. If he would just pander a little bit, he could have won. If he would just say ‘We’ll hang out in Israel, we’ll do everything we’re doing for Israel and we won’t let Iran get a nuke’. If he just would have said that, he probably would be President and the whole country would be better off.

Jerry:
Well, take that logic of someone who says ‘I really like Ron Paul’s In the Fed message, I like his sound money message, I just don’t like his foreign policy message’. When you take that and you add 1+1+1, you get a very strange answer – how in the world can you finance our foreign policy without a Federal Reserve? In other words, they want to get rid of the Fed, they want sound money and they want to keep dropping bombs on everybody. You see, you have to have a Fed..

Jason:
You can’t do both.

Jerry:
You have to have a Fed in order to fund those wars.

Jason:
Of course, and that’s why the Central Bankers love war and we’re never going to have peace as long as the Central Bankers run the world.

Jerry:
You’ve got it.

Jason:
It’s more than the military industrial complex; that’s just the first tier that everybody sees as somewhat obvious. The real complex is the Government Central Banking complex; that’s the real thing that creates the war. They have to have the war machine – they finance both sides! It’s absurd.

Jerry:
People just don’t think about it in terms of basic incentive. When I’m walking around in my own city, there’s certain incentives that I have and there’s certain incentives that I don’t have. Everybody, in their own life, can think ‘Why do I get up and go to work?’ ‘I get up and go to work because I need money’. Those are real basic incentives that we all understand, but many times we don’t apply that same logic to things like Central Banks.

What does the Central Bank want? It wants to loan money to a Government.

How do you loan money to Governments? You create a demand for loans from the Government.

What’s the perfect way to create demand for a loan from the Government? A war.

When you really back up into it, what you just said is very correct, but it’s because of the incentives. Many people don’t think that far; they realize that they’re driven by incentives, but they forget that these guys who are Republicans, Democrats, Central Bankers, whatever the case might be, have incentives too. Usually, they’re contrary to what is best for this nation going forward.

Jason:
Yeah, no question about it. So what does the bankruptcy look like? Is it just inflation? Well, not ‘just’, that could be really bad, obviously. When you say ‘bankruptcy of a country’, how does it look?

Jerry:
Look, America is unique in the fact that it does have more wealth on paper and even in physical form, than many other nations. We are very, very, very rich, relatively speaking. Again, that means that the bankruptcy is going to first take the form of a psychological pain. It’s a psychological denial; it’s ‘No, China is not getting bigger. No, China’s going to fail. No, the Euro’s going to crash. No, the Middle East stocks can’t possibly rise. No, India’s not going to rise’. It’s very America-centric, so there’s a psychological denial which will cause many people not to diversify their investments and to not take advantage of foreign growth. Therefore, they’ll stay right here in the United States, and as that ship sinks, we’re going to continue to see that psychological pain. The actual physical and financial pain that’s going to be inflicted is going to be, as you mentioned, inflation, in the fact that we have printed so many dollars and there’s so much demand for the dollar – therefore, the Central Bank has a permission slip to print money whenever we have a problem.

Think about the Alan Greenspan doctrine. The Greenspan doctrine was this: 1987, Alan Greenspan gets in to the Federal Reserve as the Chairman, and we have a big stock market crash. He cuts rates as the solution. In 1994, the Tequila Hangover, he cuts rates. 1997 and 1998, the Asian Financial Crisis, long term capital management debacle and all that, the Fed cuts rates. 2001, they cut rates. 2003, they cut rates. That’s all they do, and they keep printing more money.

Over time, once that becomes the solution to everything, then you become addicted to that solution. Here’s the problem: if the dollar itself is not in demand everywhere like it is now, you lose that permission slip to print money. Then you can’t solve the problems of the nation by simply hitting the Print button because there’s nobody around the world who’s willing to hold those. That’s how the whole thing works. If we can print the money and then get it out of the country, then we don’t have that inflation. What happens in a case like this is where you don’t have that global demand for the dollar because maybe people want to hold Yuan, or maybe people want to hold Euros, or maybe they want to hold gold or something like that. Then they don’t need as many dollars and as that demand for dollars goes down, we also lose the permission slip to create an excess of supply.

Here’s the big, big kicker. If you live in an economy, Jason – let’s say that we live in this fake economy and it has $1 million total supply. That’s it, that’s the total money supply. Well, you have no houses that cost $2 million, that’s impossible. Everything has to cost less than $1 million. In fact, it has to cost dramatically less because you have to spread everything out across that amount. That’s in essence what we have done. We have driven up the amount of money, and then we’re surprised when our 401(k)s go up, or when our house values go up, or when we get a raise. In fact, where we are today, Jason, and this is that psychological pain I’m trying to explain – we live in a time now where the present must be the minimum. People are dissatisfied if the market does not go up. Something is wrong if they don’t get a raise. Something is wrong if their house value doesn’t go up. Something is wrong if their IRA doesn’t go up. They’re addicted to the present being the minimum; everything has to be the minimum and everything has to go up from here.

The problem with that is it’s completely unsustainable. A) That’s not how things have worked throughout history because of the Gold Standard, and B) that’s an unsustainable model. Things cannot continue to go up in value, so here’s what we say: as we see a decline in the demand for the dollar around the world and for US debt, that’s going to translate into an overall deflation in the US prices. It’ll begin with an inflation. You’ll have all of these dollars come back from around the world – perhaps it happens instantly, but I think it’ll happen slowly. You have all these dollars flowing back and then we have to suck them out. How do we do that? We suck money out of the system by raising interest rates. If you and I are driving down the road and we see a bank and they’re saying ‘Hey, we’ll give you 8% a year for a CD’ - you know we’re hitting the brakes and taking all of our money out of the mattress and throwing it in the bank. That’s how the banking community and the banking industry sucks money out of economy to prevent high inflation. What they’ll do is suck the money in through high interest rates and that seems to fix the problem. We have so much excess money that we’re going to have to keep doing that over and over and over again to where it’s going to cause major problems. Think about the trillion dollars we have in student loan debt, think about all the credit card debt, think about all the adjustable rate mortgages out there. It’s just a mess.

If you get higher interest rates, that’s going to be very devastating to people. This ‘present is the minimum’ kind of psychology where everything should go up is going to be destroyed. In fact, it’s going to be the opposite. Things will be declining and deflating back to a place of normalcy and back to a place of sanity. That, I think, is going to be the hardest thing for people to understand: things don’t go up anymore, they just seem to be going down every year. That’s because we have too much money in the system; it’s going to have to be reduced over time because the global demand will not always exist for it, and that means the housing prices, stock prices, the amount you get paid when you go to work – all of those things are all factors based upon the amount of money in the system. If the money supply shrinks, so do all those values.

Jason:
Okay, so if the money supply shrinks, then we have deflation. If it expands, we have inflation. That’s the general rule as Milton Friedman would have said – inflation is and is always a monetary phenomenon, or something like that, as his famous quote goes.

I think the opposite will happen. I think that the government will print their way out of the irresponsible problem they’ve created – they’ll just create more money out of thin air. If other governments won’t buy our treasuries, of course we’ll attempt to throw our weight around and bully them into it, whether it’s by trade agreements or visa requirements or maybe invading the country with military. Whatever, I’m not saying it’s right, I’m just saying this is what goes on.

Jerry:
I think we’re on the same page there, we’re probably coming at it from different angles. What I’m saying is that we are going to see a period of great inflation, it’s going to be hyper-inflation of sorts. Hyper-inflation never lasts forever; it always ends in a period of great deflation and revaluation. It’ll begin as a period of inflation, but the rates will have to go up in correspondence with that, and we’re not going to be able to get the rates high enough to be able to manage the excessive amount of money. Even if they print money, if it doesn’t leave the country, they’re just going to be creating more inflation so they’ll have to raise interest rates. It’s a vicious cycle.

It’ll begin as inflation, there’ll be a big response to the inflation, and then as they raise interest rates and as the economy grinds to a halt, then we move into a period of deflation. Again, they don’t have a permission slip to print money anymore. If the Chinese will hold the dollars and keep them out of our banking system, we don’t have inflation. But if the Fed prints them and they don’t leave the country, that’s inflation and you can’t get rid of that. They can print all they want to, but if it doesn’t leave the country, you have inflation. Therefore, they’ll have to raise rates and that will stop working. They can keep printing, like you’re saying, but there’ll come a time when if the money is not demanded outside of the country, they’ll be smart enough not to hit it because they’ll just be creating a terrible amount of inflation that will ultimately lead to a period of deflation as we move back to a level of sanity.

Jason:
So, I think one of the challenges when we’re looking at this type of economy. Obviously, the economy in the country is very complex, but then you take it to a global scale and it gets incredibly complex. What economists are trying to do is anticipate how people, countries, companies will react to various stimuli. In the past 10 years, almost every prediction I’ve made about the economy and the real estate market has come true, except one glaring mistake I’ve made. The glaring mistake is interest rates. If you asked me in 2005, ‘Would we have significantly higher rates by 2008?’ I would have said ‘Yes!’ and I did, publicly. I was completely wrong about this, and the reason I was wrong is because it doesn’t make sense. This isn’t just about logic and math. There’s so much more going on here that is perverting the incentives. One of the things that’s doing that is this giant government we have, with its military and with the fact that it can kind of defy gravity and kick the can down the road. It’s been doing it for a long, long time and it’s really doing it now.

Who’s to say, Jerry, how much deficit and how much debt and how much unfunded entitlements for the future we can withstand? Is that number $17 trillion? Is that number $60 trillion? Or $220 trillion? I had Lawrence Kotlikoff on the show, and he said ‘Unfunded mandates are $220 trillion’. The whole GDP of the planet is only about $60 trillion a year. That’s insane, right? We would all agree with that, but it doesn’t exist in a rational world. I agree, if you do the math, absolutely.  We should be sucking wind by now and having 25% interest rates, but it’s not just math. Thoughts?

Jerry:
Well, I would say that’s certainly true. The interest rates being so low now, and you even used this word, it’s distorting.

Jason:
It’s artificial.

Jerry:
It’s artificial and it’s distorting incentives, it’s distorting the overall market, it’s hurting savers, it’s punishing those wanting to save and it’s encouraging speculation. It’s doing everything that we did in 2007. We haven’t learned a single lesson and we’re just repeating it over and over and over again. Countries get a few chances to do this, Jason, they don’t get a pass forever. You already have countries like China, Russia, India – the BRICs nations are coming together saying ‘Look, we’ve got to come up with a different solution’.

Jason:
You can’t blame them, we’re exporting our inflation to them. They’re the ones hit with it, not us. We are a little bit, but it hurts them more. It’s really unfair.

Jerry:
It really is, and it’s becoming more exposed as to America’s true intentions with all of this. Back in September 2000, Saddam Hussein emerged from a meeting with all of his cronies and they had decided to take a gamble and move from accepting dollars for all of their crude oil to accepting Euros. About 4 years later, he was hanging from a tree.

Then you had Iran do something similar, North Korea did something similar – they said ‘We’re not going to pay for anything, we’re only going to use Euros, we’re only going to buy from people who sell in Euros’, and then Venezuela did the same thing. Then we had Bush talking about this ‘axis of evil’ and these evil, evil countries.

Jason:
The people that don’t participate in the Central Banking cartel are the evil ones, right? Conveniently.

Jerry:
These countries are extremely evil, they have terrible human rights records and therefore we need to isolate them and call them the axis of evil. By the way, ignoring Saudi Arabia who still publicly beheads people and still has terrible human rights. If you’re going to talk about human rights, Saudi Arabia tops the list. Or China. But there was no mention of that because China and Saudi Arabia understand how the drill works – you use the US dollar and you don’t fight back. China has been fighting that, Russia has been fighting that and you’re beginning to see Russia now being labeled as part of this axis of evil. ‘It’s an evil empire we’re seeing’. It all has to do with protecting our petrodollar system that we built back in the Seventies after the Bretton Woods system broke down. The petrodollar system now is breaking down before our eyes, many countries are moving away from using oil for dollars and dollars for oil. Instead, they’re looking for other things. China and Russia are using their own currencies when trading oil, and this is the kind of thing I’m talking about, Jason.

If everybody around the world must have a dollar in order to buy oil, then it creates that artificial demand for the dollar, and that’s exactly what we’ve done. We’ve created an artificial demand for the dollar that didn’t exist prior to the Seventies. Everybody has to have it. They don’t want to have it, they have to have it. Well what happens when that goes away?
Suddenly you’ve got to figure out what to do with all these trillions and trillions and trillions of dollars. If those things aren’t going to be held by all these countries, they’re going to have to come back here. Then we’re going to have to decide on either A) everything that we have is now going to have to be worth more, or B) we’re going to have to suck this money out of the system and raise rates, and that’s going to lead to a period of deflation. This is what I’m saying.

Jason:
Okay, so let me just ask you about that before you go on. What you’re saying is that basically if those dollars have to come back, that’s because the dollar is no longer the reserve currency?

Jerry:
Yeah. There’s no further demand and no need. ‘I don’t need to hold the dollar, I can hold my own currency because now I have other countries who are willing to take my currency for things instead of making me convert to a dollar.’ Because all of these nations around the world with a gun to the head artificially have to prop up this artificial demand for the dollar to buy things, it’s created this permission slip for the Fed – any time we’ve got a problem, we just print money. Well, that’s fine, but what happens whenever these countries begin to trade in their own currencies is that they don’t have to keep the dollar around. They send the dollar back, and when the Fed hits the print button, it doesn’t go anywhere. All the money stays in the country, and that’s when the game is over.

Jason:
Okay, so what would lead up to that? What would have to happen? What you’re describing is the dollar not being the reserve currency anymore, right?

Jerry:
Exactly. A number of things could happen. 1. Saudi Arabia could suddenly decide that it no longer wants to use the dollar, it’s tired of the US and it’s going to have a new deal with China or with Russia. You could see something like that. I think Saudi Arabia, in my ways, is the linchpin that props up the dollar more than people realize.

Jason:
We sent our economic hit-man over there years ago to do the job, so when Saudi Arabia was a wasteland, we turned it into a semi-modern country. I kind of don’t want to say it’s modern when they’re cutting heads and hands off people, it’s despicable. Go ahead.

Jerry:
Well, of course. That’ll be a very big shock, I think, for many Americans, when they see bombs falling on Saudi Arabia because they’ve always thought that Saudi Arabia was somehow different from all of the other Islamic terrorist regimes that are over there in the Middle East. They’ve always thought Saudi Arabia was our buddy. They didn’t realize that it was just a back-room financial deal and that as soon as it goes wrong, the bombs are going to fall.

The United States hates Saudi Arabia and Saudi Arabia hates the United States, that’s no secret. What it a secret, though, is why we like each other. We like each other because they take dollars for oil and they don’t complain about it. They turn around and take those dollars and they invest them in US bonds – it’s called petrodollar recycling and it’s been going on for years. Saudi Arabia gets the whole thing and they get all the benefits. You’ve got groups like ISIS now, running around saying that Saudi’s the Great Satan and they want to take it down. Over time, when this royal Saudi family, which has really buddied up with America – when they lose power or when they change their minds, the whole balance of power in the Middle East changes and the demand for the dollar certainly goes with it.

The US is playing a very dangerous game, trying to manage all of its relationships around the world, trying to keep peace with the right people, and trying to continue to fight the other people. In the long run, it’s all going to break down.

Jason:
Okay, so let me just ask you one thing about that. One thing you didn’t address in that equation, which I agree with so far, is the fact that Saudi Arabia and the rest of the Middle East is about to lose its biggest oil customer. We are probably going to become an actual oil exporter pretty soon. The US is so much richer in terms of oil than we ever realized, and then Canada of course is too. The US is going to be energy-independent. Granted, it might be with fossil fuels to the chagrin of the Obama regime, but we’re rich in natural resources, as you mentioned earlier, and we didn’t even know it until fracking came along and oil sands technologies. Who cares about Saudi Arabia? They’re just going to have the rest of the world as a bunch of smaller customers after we’re gone.

Jerry:
Well, maybe. The way to look at it perhaps differently, is to say that somebody like Saudi Arabia created an artificial demand for the US dollar because they sell their oil in dollars. Because they do it, other OPEC nations do it. It’s kind of a domino theory. If the US begins exporting oil and doesn’t need Saudi Arabia anymore, then why would Saudi Arabia choose to sell all of its oil in dollars? Why not sell it in Yuan? Why not sell it in a different currency where somebody’s actually going to give them a benefit?

That’s the thing. We can sell all of our oil in our own currency, but if we lose all of our buddies around the world who are agreeing to doing the same thing, we’re still in the same boat. In other words, we have to have a global demand for our debt and we have to maintain a global demand for our currency. If we don’t, then we implode, and I think that’s the risk that’s facing Washington right now. They have to maintain this demand globally for both.

This is the double-edged sword of the oil exports that we have.  Yes, we certainly have an oil renaissance happening here, albeit it’s shale, rather than pure, conventional oil. Nevertheless, we are still exporting that, or we’re going to be able to export it and we’re going to do very well with that. Again, though, that just basically shoots all of our friends in the face who have been agreeing to take our currency for everything. If we’re now their challenger, they lose their incentive to continue to prop up our currency. It’s one of those things where it’s a real difficult thing for the United States, and it’s really going to be interesting over the next decade to see how Washington handles this going forward, especially all the oil you just brought up. That’s a whole other can of worms.

Jason:
Yeah, it certainly is. It’s going to be interesting, that’s for sure. The other wild card, Jerry, that I think it’s worth discussing just for a moment is that of course these countries are probably pretty disgusted with the US spending and the exporting of inflation. China sells stuff to us, we buy it and then we depreciate the value of the currency, so we force them to sell things on sale to us for less than they thought they were getting. That is definitely not a cool deal for them. It’s not like the US is going to sit idly by and let the whole world just decide they’re going to trade outside of the dollar and not go with the Bretton Woods plan and the petrodollar plan. We’re going to do something about it, right? We’re going to throw our weight around and say ‘Hey, look, if you’re not going to trade in the dollar, then we’re going to pressure you somehow. Maybe we’ll blow up your satellite.’

Jerry:
Oh yeah.

Jason:
This is not a friendly game. ‘Maybe we just won’t buy as much from you, or maybe we’ll impose tariffs or visa requirements.’ You can hurt other countries in a zillion different ways and pressure them in so many ways.

Jerry:
That’s right. Empires don’t have friends, they have subjects.

Jason:
Good point.

Jerry:
America’s an empire, no doubt. Maybe it’s a reluctant empire, but it’s an empire. Yeah, countries around the world – when they decide to make a change and the United States tries to woo them back, they’re going to have to do better than they have already. For example, the United States has been over there messing around with its Asian pivot over in South East Asia, and it’s been brokering deals, especially the one that’s made all the headlines as the TTP. There’s been a lot of concern about the fact that China has been left out of that trade agreement.

The United States has really just kind of shot itself in the foot; it’s really not doing a great job of reaching out and embracing the emerging countries. It’s been very selective with the ones that it’s befriending, and China and Russia have been picking up the slack and they have been forming relationships with many of these other emerging nations. You’re really kind of developing this bi-polar world – one that supports NATO and the US and the West, and another that supports this BRICs kind of development. I think that’s where you end up. You end up in a place where somebody’s going to have to choose sides, but the US has kind of lost its ability to come across as an honest broker. I think its hand has been shown; everybody knows now. We’re spying on all of our creditors!

Jason:
That’s just ridiculous.

Jerry:
You go down the list and you think ‘Gosh, when does the blow-back really hit the United States?’ I don’t even think we’ve seen the blow-back from the Snowden affair. I think Americans themselves are still trying to figure out what that even means. I don’t think many people even know how to process that, let alone the companies around the world, the foreign corporations who have been targets of that. There will be blow-back.

Jason:
When you say ‘that’, do you mean the NSA spying that Snowden revealed to the world?

Jerry:
Yeah, I should clarify. I’m referring to the NSA spying that’s been going on for so long. Imagine, Jason, if we were to find out that China was actually aggressively looking at us through our television screens as we sat and watched TV on the couch. Wouldn’t we be a little upset about that? Wouldn’t we have a little more distrust about China? Wouldn’t we be a little bit more concerned? It’s almost as if America just says ‘Well, deal with it, it’s tough, we’ve just got to protect our own,’ and they don’t realize that these nations have feelings and they also have their own share of wisdom and they’re going to say ‘This may not be the best thing to be hanging out with America the way that they’re proceeding’, and I think over time, you’re going to have a severe blow-back from that.

We’re already beginning to see that in the technology industry; many of our big tech companies are running into problems because of the NSA. I think it’s just this long, slow grind, Jason, that we continue to see this downward spiral. I don’t think it’s a off-the-cliff or we’ll run into a brick wall and it’s all over. I don’t subscribe to that theory; I think it’s a slow grind. I think it’s a terrible slow process that is humiliating both psychologically and financially. Our standing in the world is already being questioned now. There are so many things that we could talk about, but yes, I think that that’s where we’re heading.

Jason:
Okay, good. Good points. So what should people do? We’ve talked extensively about the problem, and in hundreds of other episodes I’ve done the same. What’s the best game plan for one to protect oneself against the problems we face?

Jerry:
I’ll tell you – I have an interesting story to share. I was living in Houston, Texas, of all places. It’s a very big city. It’s not where I’m originally from, but I went down there to start a business. I was down there for some time and a few years ago, something in me just really convicted me. I’m sure it was the Lord, and I just sensed that I had to get out of Houston and get out into the middle of nowhere. My wife and I began doing research and we said ‘Where will we move to?’ We started looking and we decided to move to North-West Arkansas, based upon all these different factors. We did a little spreadsheet and got kind of nerdy about it, but we really wanted to figure out where the best place to go for us was and for our situation.

We moved up here, we got a mini ranch, we built a garden, we are slowly getting off of the grid. We have wood-burning fireplaces, wood-burning stoves and we’re slowly getting off the grid with water by using a well. We’re doing everything that we possibly can because, Jason, I think not just the financial things that we’ve been talking about are a threat to the American people, but at the same time, some of the punitive damage that’s going to come to America is not just going to come through the barrel of a gun, it’s going to come through a cyber attack that shuts down your whole electric grid. Or it’s going to come through a cyber attack that takes down your bank, it’s going to come through a cyber attack that takes down your local utilities. Currently, the Wall Street Journal has been reporting ad nauseam, constantly about how many of these public utilities here in America are dealing with unbelievable amounts of cyber attacks from China, Iran, Russia and other places like that.
Eventually, one of those is going to succeed. I think it’s imperative for people to be ready. If they are currently living in a city, I think they can certainly take precautions. There’s some good books out there on urban survival, I’m sure you have some good materials as well.

Jason:
Hey, I do a whole show on it – the Holistic Survival Show.

Jerry:
Yeah, there you go.

Jason:
Absolutely. There’s a lot of great resources, and one of the things I want to stress, Jerry, is that this is not nutty. It’s nutty if you spend your whole life on it and you make it everything you do, but basically, for about $200-$300 per person in your household, you can gain a huge edge in prudent, rational preparedness. This is not difficult to do, okay. Even if you live in a city. It’s like the old story of two hikers – they’re hiking in the woods and they see a bear. One of them starts running away from the bear and one of them stops to tighten his shoelaces. The other says ‘Hey, what are you doing, man? You’ve got to keep running. Forget about tightening your shoelaces, you can’t outrun a bear.’
The other one says ‘I don’t need to outrun the bear, I just need to outrun you!’

Jerry:
[Laughs]. Right.

Jason:
And that’s really what it is. As vicious as that sounds, you just need to outlive or out-survive the people around you. When you do, there will be leftover resources available, to some extent at least. I think 3 days is the first magic number, and then 3 weeks is the next one. It’s 3 days water – you’re going to die if you don’t drink for 3 days (or you’re going to get close), and food is 3 weeks. Have a ham radio for communications off the grid. It’s just some really simple stuff; this is not difficult to do.

Jerry:
No, no, it’s really not. As you pointed out, it’s not nutty. I think what’s nutty is buying into the whole idea of the American dream and thinking that somehow, we’re not facing real serious issues and problems. I think that being awake and aware to that is vital. Some of the things we do, Jason, is we teach something called the Five Levels of Financial Freedom. It’s completely free, people can log onto our website and see it there.

Jason:
Give out that website.

Jerry:
It’s www.FTMDaily.com/fivelevels

Jason:
What are those five levels?

Jerry:
Those five levels are five kind of large steps with some micro-things inside of them. They’re kind of the big planks. These are five steps that my wife and I have taken to financial freedom. We call them the Five Levels to Financial Freedom. We went literally from a one-bedroom apartment to where we are now, and we’re much better off now than what we were. We used these five levels to get there, and they involve A) Diversifying your savings, B) Diversifying your investments, C) Diversifying your income sources. Along with that, basic preparatory type actions. We talk about the need for having a go-back, we talk about the need for having food and water storage, we talk about the need for people to actually invest in a portion of their savings – not actually invest, but take a portion of their savings and diversify. I’ll give you one example.

We have something we call DSL. It’s our Diversified Six-Month Liquid Savings Reserve. Most people tell you ‘Hey, you should have 3 months of liquid savings’, or maybe even six months of liquid savings. We agree, but we did a back-test in the study that showed that if you will take that savings and not just throw it in US dollars, but if you’ll diversify it, you can really get a lot more bang for your buck. We did a study that went back 25 years, that showed that if you took your six months of liquidity and threw it in 3 month bills and just kept reinvesting them over and over again, or if you had taken that same six-months liquidity and put one third of it in the bills and taken the other third and put it into stable foreign currencies, and taken the last third and put it into gold and silver, for a period of 25 years, the return is just outrageous. We even took out some of the extra gains in gold and silver to make sure it wasn’t being jacked up by that price gain in metals.

That’s one thing. We diversify our savings. We also diversify our investments with something we call ‘PACE’ – P: Precious Metals, A: Agriculture, C: Commodities, E: Energy. We talk about those areas as ways to diversify our investments against some sort of inflation, and then we also teach the absolute importance – and I think this is one of the most important things for people today – of diversifying their income streams. I don’t know how many people I’ve met over the years who have one income streams, maybe two income streams. The average US family today, in America, is three income streams. Usually Mom and Dad have an income stream, and then there’s usually some sort of seedy or money-market account that throw off pennies in interest. That’s usually their three income streams. They hope to get a few more by the time they retire. Well, we teach the importance of having many, many income streams. We have an Income University at our website where you can learn 22 different income streams and how to create them.

Some people have more time than money, and other people have more money than time, so some people may not be able to get all 22 income streams because they don’t have the ability, but if you have time, you can always trade it and receive money. If you have money, you can always take that and enhance its returns and do better as well. Some people will tell you they don’t have either, and those people usually have their priorities backwards. Some people will say that they have both, and that’s of course, a great place to be if you have both time and money. All 22 income streams cover all of those different situations, whether you have too much time and no money or a lot of money but not a lot of time. There’s plenty of things that everybody can do, and I think that oftentimes, we get so obsessed with trying to pay off debt – and I think that’s a good thing – but oftentimes we forget that we can add on new income streams.

Jason:
Yeah, and let me comment on the debt thing for just a moment, if I may. I know we’re kind of wrapping up here and we’ve been going for a while, but one of the things few people really understand deeply, and my listeners do because I’ve talked about it for so many prior episodes – it’s the idea that in an inflationary environment, and we both think we are going to see some significant inflation, debt actually transfers wealth from lenders to borrowers. Borrowers are actually enriched by debt because they pay the debt back in cheaper dollars. If you look at what happened in the Weimar Republic at the way that lenders and borrowers interacted together, you just see. When you put the debt against a commodity that has universal need, and my love is real estate – I love getting a 30-year mortgage, blow the rate of real inflation on low-priced real estate. That’s necessity housing, not luxury housing. I want it to throw of cash-flow the day I buy it.

Then, the debt is debased by inflation. I created a little trademark term and it’s a mouthful: inflation-induced debt-destruction. It’s just an amazing phenomenon; it’s like the hidden wealth creator. Then you have a commodity like precious metals – think of what little houses or apartment buildings are made of. They’re made of copper wire (a commodity), lumber, concrete, petroleum products, glass, steel. These are all things that are traded globally, not indexed to any one currency.

I just think that’s such a good equation. Have some metals and some other things and some preparedness too, of course. I wouldn’t totally rush to pay off debt unless it’s consumer debt. I like the mortgage debt because that’s being paid by someone else. I don’t pay my own real estate debt, my tenants do.

Jerry:
That’s a good strategy. We mention that too. The one caveat with that is to make sure that your audience or whoever follows that advice locks it in on a fixed interest rate.

Jason:
Oh, most definitely. Never adjustable rates, no way.

Jerry:
If you have an adjustable rate, it works against you, actually.

Jason:
Oh yeah, absolutely. You’re going to get payment shock when the inflation finally does hit and the rates go up, but who knows how long they’ll kick that can down the road. When you’re borrowing, I’d say real inflation now is always understated by the government. Real inflation, now, is probably 6-8%, in reality, although the government would have us believe it’s much lower. If you can borrow at 4.5% for 3 decades, if someone takes out that mortgage today, they’re not going to make the last payment – or I should say, their tenant’s not going to make the last payment until 2044. Do you know how much inflation we’ll probably see in the next 3 decades?

Jerry:
Oh sure!

Jason:
It’s insane!

Jerry:
And you know, Jason, I’m an economist, I do a lot of investing, I’m a real estate investor.

Jason:
I didn’t know that, I’m glad to hear that you like real estate.

Jerry:
Oh, sure. It’s one of our income streams that we love. We’ve built many different income streams and I love rental real estate. I love, as you said, that 30-year mortgage. I would take a 40- or a 50-year mortgage.

Jason:
Oh, I’d take a 200-year if I could.

Jerry:
I could go on like Dave Ramsay and other people who say ‘Don’t have any debt at all’, but we do like the whole concept of real estate. Many people today, as you well know, are very happy to borrow as much as they possibly can. Some of the wealthiest people I know are borrowing to the hilts at fixed interest rates.

Jason:
Oh yeah, and borrowing specifically against a commodity that has universal need, like housing.

Jerry:
Exactly.

Jason:
That’s a great deal, and of course, it’s the most tax-favored asset in America. We don’t even have time to go into that one, but taxes are the modern version of slavery. If you want to really lower your tax bill, own a lot of long-term buy-and-hold income property.

Jerry:
I agree.

Jason:
Just prudent, non-sexy, boring stuff in markets that don’t make the headlines. It’s not going to be Southern California. You want to own stuff in Texas and Georgia and Tennessee. These are great markets, we love them.

Jerry:
Well, many of the things that we teach over at our website include things like options trading for people who maybe want to do that, rental real estate for sure. We also talk about affiliate marketing. We have 22 different income streams, so anybody out there who’s just wanting to add another income stream on, that’s what we love to do. We’d love to help them.

Jason:
Good stuff. Really good. Jerry, give out your website again.

Jerry:
Yeah, it’s www.FTMDaily.com

Jason:
And just remember from the Nixon-Watergate days, deep-throat said ‘Follow the money’, so there you go. Good stuff. And the book is on Amazon with 4.5 stars and good reviews. Any closing thoughts?

Jerry:
I would just tell people to really keep their eyes open right now. I expect the market overall to probably do fairly well as we head into the year and into the next year; this is historically from the stock traders’ almanac and from all the investors and all the different cycles that we’ve studied, this is usually the best time to be in the market. It’s the third and fourth year of a Presidential candidacy and cycle. The third and fourth year are often great times to be in the market. We also offer, at our website, a market barometer. We were able to step aside and get out of the market before the collapse. I really do pride out system on catching that. I expect to see another major collapse. I don’t expect it to come within the next year – I think we’re still a couple of years out, but we don’t really guess at that. We have a system called the market barometer which has a great track record, going back all the way to the 1929 crash (we back-tested it). Maybe you have money in a 401(k) or an IRA and people say ‘I don’t want to sit through another one of these major collapses’. We have a market barometer that is available at our website that people should definitely check out.

Jason:
Jerry, I’ve got to say, I’m a little surprised that you’re a stock market fan. I call it the modern version of organized crime, and a conservative guy like you, I would think that you wouldn’t be too in favor of the stock market.

Jerry:
You know, the stock market has been really good to me because I’m a trend-trader. I trade with the trend, and so when the market goes down, I make money. When the market goes up, I also make money because I use options and I use inverse ETFs and leveraged ETFs. It’s been really good to me, so it doesn’t really matter what the market’s doing. I don’t really root for the market to go up, I just root for the market to move. If the market moves, I make money. When the market’s stagnant and kind of moves in a sideways motion, okay, you’re right and it’s probably a bad place to be. When it’s going up or down, I can’t complain and I like the market at that time.

Jason:
Good stuff. Well, Jerry Robinson, thank you so much for joining us today. The book, again, is Bankruptcy of Our Nation, so check it out on Amazon and all the usual places. I appreciate you joining us.

Jerry:
It was great to be here, thanks Jason.

Outro:
The American Monetary Association is a non-profit venture, funded by the Jason Hartman Foundation, which is dedicated to educating people about the practical effects of monetary policy and government actions in inflation, deflation and personal freedom. Our goal is to help people prosper in the midst of uncertain economic times. This show is produced by the Jason Hartman Foundation, all rights reserved. For publication rights and media interviews, please visit www.HartmanMedia.com or email media@hartmanmedia.com. Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate professional if you require individualized advice. Opinions of guests are their own, and the host is acting on behalf of the Jason Hartman Foundation exclusively.

 

AMA 102 – Tim Carney Talks Big Business and Big Government’s Irreversible Impact

 

Jason Hartman invites Tim Carney, author of The Big Rip-Off and Obamanomics and writer for the Washington Examiner to come on the show and give his thoughts about the huge and potentially irreversible impact that big business and big Government are having on America. They also discuss topics such as human rights to information and what you say when Goldman Sachs offers you a position.

 

Key Takeaways
05.55 – Tim Carney provides some examples where regulation seems to have an alternate outcome to what was hoped.
10.50 – A look at the options of how we can possibly dislodge the power of big business and government.
11.57 – Politics and the economy are starting to work together because fewer people are now gaining from a specific policy.
14.28 – Government agencies don’t even have to worry about subtlety; if they want you they’ll do what they can to get you.
16.16 – Why is it that they can spy on us and we get no information about Government actions, even when they affect us?
17.53 – Big business benefits from and lobbies for big Government to the detriment of the consumer, the competitor and the tax payer.
20.23 – Technology could be our undoing or it could be our liberation. We’ll have to wait and see.
22.36 – To read Tim’s articles, head to www.WashingtonExaminer.com and his Fellowship is with the American Enterprise Institute: www.AEI.org

 

Mentioned in this episode
The Big Rip-Off by Tim Carney
Obamanomics by Tim Carney
www.AEI.org
www.WashingtonExaminer.com

 

Tweetables
You never hear the dogs that don’t bark; you never know which businesses are just out of the range of existing.
Whenever something is put in the arena of ‘Government’, it becomes a home game for big business.
The Government should rethink what they think is the public’s business.

 

Transcript
Introduction:
This show is produced by the Hartman Media Company. For more information and links to all our great podcasts, visit www.HartmanMedia.com

Welcome to the American Monetary Association’s podcast, where we explore how monetary policy impacts the real lives of real people, and the action steps necessary to preserve wealth and enhance one’s lifestyle.

Jason Hartman:
Welcome to the podcast for the American Monetary Association. This is your host, Jason Hartman, and this is a service of my private foundation, the Jason Hartman Foundation. Today, we have a great interview for you so I think you’ll enjoy it, and comment on our website or our blog post. We have a lot of resources there for you and you can find that at www.AmericanMonetaryAssociation.org, or the website for the Foundation, which is www.JasonHartmanFoundation.org. Thanks so much for listening and please visit our website and enjoy our extensive blog and other resources there.

Jason Hartman:
It’s my pleasure to welcome Tim Carney to the show, he is a Senior Political Columnist for the Washington Examiner, and a visiting Fellow at the American Enterprise Institute, and author of The Big Rip-Off: How Big Businesses and Big Government Steal Your Money. Tim, welcome, how are you?

Tim Carney:
Good, thanks for having me.

Jason:
Good, it’s good to have you on. This is a hot topic, unfortunately, but it’s very true. Tim, it’s interesting because when you look at the political divide with the Left and the Right, it seems like one side is for big business and against big Government, but I kind of think it’s just a big wrestling match. It’s fake. This is like a fake dichotomy; it’s sort of the same thing, nowadays at least. Your thoughts?

Tim:
Absolutely. I think the professional wrestling analogy there is apt. Very often, big business and big Government are not in fact the opponents, although they fool Democrats and Republicans into thinking they are, but often they’re the allies. What they want are regulations that keep out competitors, they want hand-outs, corporate welfare, bail-outs, eminent domain-taking mandates and the losers end up being consumers, small businessmen, people who want to be small businessmen and tax-payers.

Jason:
Yeah, or the small businesspeople that want to be medium sized businesspeople but who can’t grow because of the onerous regulations. It’s just interesting to me that you’ll see the people who run the corporatocracy – they’ll be on TV or in media, complaining and grousing about Government regulation, but what they’re secretly thinking (I think!) is ‘Gosh, this regulation is great because it’s just impossible for new companies to enter the market and compete with us.’ This is certainly true on Wall Street with the security laws and with the Jobs Act, maybe there’ll be a bit of a shift there and with crowd-funding and so forth. Talk about that a little bit. It sounds like we agree.

Tim:
A couple of my favorite examples are the tax preparers – you think of H&R Block, for example. I was reading that an analyst at one of the banks said ‘How is this company doing? What are their prospects?’ And they were looking at H&R Block. They called them the biggest tax preparer in the country and said they were probably going to do well over the coming years because the new regulations from the IRS really make it much harder for smaller businesses or independent operators to function as tax preparers. H&R Block has the size to deal with and to absorb the cost of these regulations, and to crowd out some of their competitors. Sure enough, when small tax preparers sued to block it, you had the government saying ‘Well, these regulations can’t be that onerous, even H&R Block affords them.’

This happens in all sorts of industries and you saw James Dimon, the CEO of JP Morgan saying ‘There’s a lot of things about this Dodd-Frank financial regulation that I don’t like, and there are ways in which it will definitely hurt our bank, but on another level, it protects us.’ He used the term ‘emote’ and said that these regulations created emote, and it’s a beautiful image. It digs this trench so the guys who are already in the middle, on the island, in the castle get to stay there, and they have protection from competition. If that’s one of the major effects of regulation then you can see that it actually hurts consumers rather than protecting them.

Jason:
Yeah, all the entrenched interest, they can deal with it. If you want to take your company public, or you want to maintain your company as a public company, if you’re big, you can spend $1 million on compliance. If you’re little, you can’t even play the game. Who’s representing the small business out there, Tim? No-one. Where is their lobbying group? What the Chamber of Commerce? I don’t know. There’s a couple of groups but..

Tim:
Yeah. The Chamber of Commerce is good when it comes to opposing regulations, but they end up supporting big spending, bail-outs and again, even those primarily go to the big guys – the guys who can afford to hire the lobbyists, the consultants, the former congressional aider, the former Congressman. The guys who can afford to hire them are the people who are going to get their hands on most of the Government money when that’s being handed out. One of the problems is what economists describe as ‘concentrated benefits with a diffuse cost’ – the benefits of a Government program, a regulation, a subsidy go to a small group, and they get it a lot. There’s a billion dollar subsidy, and it goes to one company. It costs every tax-payer about $3, so who’s going to lobby harder? The big guys who get the hand-out or the little guys who are paying it? It’s the same with these protective regulations where the businesses that are hurt are often businesses that haven’t even come into being. It’s the guise of ‘You know what, I’d like to start up a food truck and compete with these restaurants, and then he starts dealing with the rules and the regulations and says, ‘OKay, never mind”.

Jason:
Yeah.

Tim:
So there isn’t really a lobby for the businesses that want to exist but yet exist.

Jason:
Tim, that’s a great point. It’s the ones that don’t yet exist. There’s that principle in economics; you never hear the dogs that don’t bark. They don’t bark because they don’t exist yet. They might exist, but we’ll never know if they could enter and if they could play the game.

Tim:
Exactly, and so you asked about the lobbyists. The couple of times that I feel like the small guys won are the best demonstrations of these rules and of hurting consumers. Here in DC, we’ve had a couple of fights. One was over food trucks where the Restaurant Association of Metropolitan Washington was saying we should severely limit where food trucks are allowed to park, and their argument at times was openly protectionist. They said ‘Look, we’ve invested a lot in these communities and these food trucks will hurt us.’

Then the other one had to do with Uber, where the Unions and the companies that run the taxi cabs around here didn’t want this smartphone-powered, basically a limo service being allowed.

Jason:
It’s a much better system.

Tim:
And so they proposed all sorts of rules that would either bar Uber or at least really limit their activity, or at least make sure that another competitor doesn’t come in. In both of those cases, there was a strong public push-back. Because the consumers of these were rich and upper-middle class, young, politically active, urban progressives, all of a sudden they said ‘Hm, maybe these regulations aren’t helping us, they’re helping the incumbent businesses, hurting consumers, hurting would-be competitors’, and there the big guys have actually lost because the consumer base is active enough to apply pressure to the politicians.

Jason:
Yeah. It just kind of begs the question, and I’m probably going to offend someone here, I’m sure, but I debate these things with people on the Left, with Democrats, and I just can’t help but think how can Democrats be so dumb? How can they not see this? They’re always pleading for more regulation. When the financial crisis happened, they were saying ‘Oh, well these big companies weren’t regulated enough, and that’s why it all happened’. That’s the surface argument, and I can see how one would think that, but what we never hear about is the fact that they became too big to fail because of the regulations. You can’t compete with Lehmann Brothers, you can’t compete with JP Morgan. Well, Lehmann Brothers is obviously an old example, but you get the idea.

Tim:
Yeah, and so a lot of what I like to point out is that if you are somebody who doesn’t like big business dominance, if you’re somebody who loves small business, loves local business, then in a lot of cases, I would argue that the right answer here is not, in fact, more Government regulation, but is the opposite. It’s not only getting rid of regulation, but also getting rid of the spending, which as I said, goes to benefit the biggest guys. One example I write a lot about are export subsidies. The export/import bank is not a bank; it’s a Government agency, and it subsidizes exports. They’ll always talk about ‘Oh, here’s a small pickle producer who goes ahead and gets these subsidies and it really helps their growth.’

Guess what? 80% of export/import bank subsidies go to big business, and the small businesses who get the other 20%, in some cases, can be up to 1500 employees. Not only that, but a third of export/import bank subsidies go to one business – Boeing, which is the largest exporter in America.

When the Government sets up these programs, it helps the big guys. One thing I always say is that whenever something is put in the arena of Government, it becomes a home game for big business.

Jason:
Yeah, it does. OKay, so what are some action steps that people can take? What can we do about this? It just seems like you get these entrenched interests and they can just never be dislodged. They’re so powerful and they have such scale. Is there anything that can be done?

Tim:
First I’ll say the reasons to be depressed. It is a self-reinforcing thing. The politicians and the lobbyists and the big businesses that can hire them become an inside circle and they can all benefit each other. How can everybody be benefiting in this sort of situation?

There’s two ways in any kind of economy that everybody benefits. 1: If there’s actual creativity and growth and creation, but that’s not happening here. The other is if they can extract wealth from everybody else, and that’s exactly what’s going on here. Everybody in power is benefiting, and everybody out of power is losing. That’s the depressing part of the answer.

On the other side, I have seen things like technology creating these decentralizing effects. The way that things like Uber and food trucks have been able to win, and then there was a law called the ‘Stop Online Piracy Act (SOPA)’ a couple of years back. These had all the special interests, all the insiders behind it, and the small guys won because of organizing over the Internet and over social media. That’s one half of it.

The other half is just the political pressure. I think the Tea Party has been a very good source within the Republican party because what it is is all of a sudden, then are politicians where if they have a message that really resonates with people around the country, they can suddenly raise money. You need money to win an election! They can raise money from them, instead of doing what the Republicans have always done before, which was always raise money from the business lobbyists. Now it’s easier to get grass roots money and grass roots organizing. That’s the hopeful thing, that there can be a push. There’s money coming in based on what people believe in, and not just on people who stand to prophet from a specific policy.

Jason:
Yeah, that’s nice and hopefully technology will allow us to do that. Do you really think the problem is mostly the business of lobbying and the lobbyists?

Tim:
I mean, lobbying first of all, I should say, is a constitutionally protected right. We would never want a world in which nobody has the right to go and try to tell Congressmen either what they need or how they’re going to mess everything up or anything like that. On the other hand, the problem I see is not the lobbying, but the incentives that the lobbying industry creates for the people who are supposed to be our public servants. We call it the revolving door. The revolving door is where when you leave Congress, if you’ve served a couple of terms, you are guaranteed to be paid a ton of money – often $1 million – to be a lobbyist for special interests, and often for a firm that represents a handful of businesses. If you’re a top-level Congressional staffer, you might be making a decent salary of $140,000, but you’re raising kids, you’re in DC, it’s expensive. Lobbying firms come along and will hire you for half a million, and they go and they do that.

Then these lobbying firms have these guys who have direct access to their old bosses, or to their old underlings who are now the Chief of Staff. That gives them undue influence but again, go back to what their incentives were when they were on Capital Hill – it was to play ball with the special interests, it was to make sure not necessarily how they’re going to vote, but to schmooze and to listen to them and to be reasonable by their standards to make sure you’re going to get hired. That is the biggest thing rigging the game against hope for fairer stuff. These guys’ incentives – the staffers and the elected politicians – are to play ball with this revolving door system.

Jason:
And you have that too, going on within the Government agencies, of course. You have the auditor or examiner who works for the SEC, and then they go and they investigate a certain company – say it’s Goldman Sachs, for example – and somehow, a few years later, they seem to end up working for Goldman Sachs. To argue that there wasn’t some sort of subtle bribe there, if not an overt one like ‘Hey, we’ll hire you and quadruple your pay’. Can’t the Goldman Sachs guy sit across from them on the table and say ‘Hey, you’re really good at your job, maybe you should come to work for us some day’.

Tim:
That’s like Jack Abramoff, who went to jail for illegal lobbying practices – he used to tell a story like that. He said how he’d be trying to persuade some Congressman staffer to put in an earmark or something, and then one day they’d be socializing, not talking about work at all, and he said ‘By the way, I know you love working on the hill, your boss is a great guy and I know you’re good at what you do, but if you’re ever looking for a place, you’d fit in really well at our firm.’ Once he said that, he had them in the bag.

Jason:
This is just disgusting. I’m sure this happens at every level of the SEC, the FDA, the FAA, the FCC. This is unbelievable that this stuff is allowed to happen, right?

Tim:
Yup, but the problem is they try to regulate the lobbyists when the people who I think need the regulation are in Government. They’re the politicians and the staffers. We always talk about Big Brother, which is Government watching us. One of the terms people use in circles in Washington DC is Little Sister. We ought to be able to spy on them better. If a Congressman has a meeting with a lobbyist, we should know that basically right away. When the day is over, it should be posted as to who they met with so we can say ‘Why were you talking to JP Morgan?’ and he might be saying ‘You know what, we were talking to JP Morgan lobbyists because they were explaining how this one rule was crafted in a way that hurts everybody in the industry’, and the same with their campaign contributions. Politicians, just like I could go into my bank account and my wife could instantly see that I was spending money at Murphy’s Pub, we should be able to say ‘Why are you depositing money, Senator, from this check? What are they getting for that $3,000 contribution?’

Jason:
Think about it: why aren’t these meetings public record? When Congress meets, there’s a transcript, there are minutes. Why isn’t it that every communication with the lobbyists is recorded?

Tim:
Yeah.

Jason:
Why isn’t it available for the public to listen to?

Tim:
And even if they need the privacy – say I’m a company coming in and I say ‘Okay, let me tell you, we have a unique business model so there needs to be some privacy’. The nature of the discussion and the fact that it happened, I think, is certainly the public’s business.

Jason:
Yeah. Of course. Good stuff. Tim, just before you wrap up, do you want to talk about Obamanomics? That’s your other book – do you just have the two books?

Tim:
Yeah. So The Big Rip-Off and Obamanomics are the same thing. They’re the idea that big business and big Government are often allies. Big business benefits from and lobbies for big Government to the detriment of the consumer, the competitor and the tax payer. In Obamanomics what I did was I just took a look at Obama’s policy. In The Big Rip-Off I go back to the Whisky Rebellion and talk about Teddy Roosevelt and that sort of thing, but in Obamanomics I just point out how the drug industry wrote a huge portion of Obamacare and how the stimulus was Christmas for lobbyists here in DC. I wrote about how Obama was the one man who could have stopped the bank bail-out but he didn’t. One of his fundraisers was Warren Buffett, who invested millions in Goldman Sachs because he knew the bail-out was going to happen, and then he made lots off of it, and all these things. Not that Obama is worse than previous Presidents, but that Obama had promised to be different. He’d promised to freeze out the lobbyists and obviously did not. If the special interests had been winning as much under President Obama as they have under every previous President, which was obviously not what hope and change was supposed to be about.

Jason:
Yeah, no question about it. It’s just unbelievable. I just kind of wonder what’s going to become of our country. There are so many really positive things, and I think almost all of them revolve around technology and innovation, which is just awesome. In so many ways, Tim, we’re living in an amazing time. Maybe technology and mostly that related to communication will save us. You mentioned before how people can get together and you talked about SOPA and so forth, and as long as that’s really allowed to be this democratized, free, level playing field, maybe that will save us. When you look at it on the Government side and the big corporate side, I’m like ‘Wow’. The abuses that are happening are insane, and I tell you, I kind of think that during our natural lives we’re going to see a strong and serious succession movement. I have no idea if you have any thoughts about that, but it’s something to think about.

Tim:
I’m somebody who thinks that the United States is a pretty strong country and that things will proceed basically without major changes. I do think often that technological development will result in people being more able to live their lives in a lot of ways. That obviously can be cut the other way. Let’s say the power of technology is used in ways that infringe on our freedom, but a lot of it – even if the politicians and the bureaucrats want to force us into a funnel of uniformity, that will become part of it. When you look at things like Uber, when you look at things like people getting cell phones and not being tied down. All of a sudden, you see ‘Wait a second, we can make a lot of these regulations unneeded’. I think that my version of a succession movement we could get is that it’s not going to be a political one, but people are going to find it easier to live their own lives without dependence on the big businesses. We won’t be as dependent on duopolies or monopolies in a lot of businesses. I have friends – Nick Gillespie and Matt Welsh – who wrote a book about that. Maybe that’ll happen in politics, but often politics just adjusts to what the people are doing. Technology will be, in a lot of cases, a fairly liberating thing.

Jason:
Yeah. Technology does, in many ways, have the result of fragmenting marketplaces. On one hand, it gives big Government and big business a scalability advantage and it allows them to scale really quickly, but it also allows this fragmentation where there’s more consumer choice in many ways, and there’s more of the long-tail concept and more democratization, more start-ups. Let’s just keep a vibrant start-up business environment because that’s where all the innovation comes from.

Tim:
Yeah, and that’s always what matters most to me. If there’s innovation and experimentation allowed, then we’ll do well. If there’s not, then we get what we’ve had in the airline industry for decades, which is stagnation. As long as people are allowed to innovate and experiment, I think we’re going to be doing pretty well.

Jason:
Good stuff. Good thoughts. Tim Carney, thank you so much for joining us today. Give out your website, tell people where they can find out more about you.

Tim:
Yeah, www.WashingtonExaminer.com which is where I write, and my Fellowship is at the American Enterprise Institute, www.AEI.org.

Jason:
And of course, the books are on Amazon and all the usual places, right?

Tim:
Everywhere you can buy books online: The Big Rip-Off and Obamanomics.

Jason:
Alright. Tim Carney, keep up the good work.

Tim:
Thank you.

Outro:
The American Monetary Association is a non-profit venture, funded by the Jason Hartman Foundation, which is dedicated to educating people about the practical effects of monetary policy and government actions in inflation, deflation and personal freedom. Our goal is to help people prosper in the midst of uncertain economic times. This show is produced by the Jason Hartman Foundation, all rights reserved. For publication rights and media interviews, please visit www.HartmanMedia.com or email media@hartmanmedia.com. Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate professional if you require individualized advice. Opinions of guests are their own, and the host is acting on behalf of the Jason Hartman Foundation exclusively.

The Dollar: The World’s Go-To Currency

AMA12-19-14When your country’s facing economic turmoil, who you gonna call? For worried consumers around the globe, the obvious answer is the trusty US dollar. Just ask the Russians.

As Russia slides deeper into economic crisis, dollars are in high demand, followed by the euro. That leaves the country’s own currency, the ruble, far behind. As a recent article from Business Insider reports, the Russian economy has taken heavy hits lately thanks to unrest in Ukraine and the looming threat of sanctions imposed by an international community outraged by Russia’s handling of the crisis.

The ruble has taken a drastic fall in international markets in recent months, trading at 80 to 1 against the dollar and 100 to 1 against the euro. And that has Russians ranging from the humblest shop workers to well-off oil industry insiders scrambling to get hold of dollars any way they can.

Some are buying up dollars whenever possible. Others are withdrawing their money from local banks in dollars, depleting supplies and forcing banks to require pre-orders on dollar transactions. And while many banks are running short on dollars and euros, there’s no shortage of rubles on hand.

The situation in Russia mirrors similar events in other countries where national economic crises and debt-related collapses make the local currencies unstable and unreliable in international trading. Conditions like those make more stable foreign currencies much more desirable.

The recent financial crisis in Argentina sparked fears about the country’s economic stability, too. And the country’s bustling currency black markets were overrun with requests for dollars. Small countries in poorer areas of the world, too, turn to the dollar to boost international trade and foreign investments.

The same factors also drive offshore banking and investing, as people take steps to protect their assets from turmoil at home. Safeguarding assets from local economic crises is a leading reason for the surge of foreign investing in US real estate. Well-off foreigners from countries such as China and India see US property investments as secure places to protect savings and business assets.

The quest for a stable currency in a chaotic political and economic situation nearly always leads back to the dollar. The euro runs a close second in world demand, for much the same reason. Though it has a shorter history, the euro is the product of a stable economic union; most of those members have a track record of stable and peaceful governments and economies.

That search for an internationally viable currency that’s not tied to local banks has also fueled the popularity of the Bitcoin and other digital currencies in many parts of the world, particularly Latin America and Asia. Those cybercurrencies are generated and traded entirely online, without the backing of traditional banks. They’re recognized virtually everywhere and can be exchanged in a variety of online markets and even local businesses, which appeals to consumers who don’t trust their local currencies.

But those currencies have their own problems. Their value can fluctuate wildly in international trading and their use has been outlawed in some countries.

That leaves the dollar alone at the top of the world’s list of go-to currencies. The venerable greenback has taken its share of knocks in world trading in recent years, thanks o the massive housing collapse of 2008 and the economic struggles that followed. But its stability and security can’t be denied. Backed by a stable government and a solid central bank, the dollar dominates international trade and lending.

Dollar denominated debt drives borrowing and lending among nations, too. Many countries keep a reserve of foreign currency available for managing their debt. That’s another hedge against instability in the local currencies, which would make it impossible to manage those debts. And, as in Russia, the dollar is the primary currency of choice for those foreign reserves.

The dollar isn’t immune to shifts in the global economy – or to downturns at home. But in tough times, the US greenback is the world’s workhorse – a reliable alternative for investors and everyday consumers seeking security in an unstable world. (Top image:Flickr/SqueakyMarmot)

Source:

Holodny, Elena. “Russians Are Scrambling to Get Their Hands on US Dollars.” Business Insider. businssinsider.com. 16 Dec 2014.

Read more from The American Monetary Association:

AMA 101: Market Timing Beyond the Stock Market with Dan Egan

Looking Ahead: Another Financial Crisis?

The American Monetary Association Team

Final_AMA_Logo-150x1502

 

AMA 101 – Market Timing Beyond the Stock Market with Dan Egan

 

Inspired by an article from Business Insider, Jason Hartman invites Dan Egan of Betterment onto the show to expand upon the idea of market timing. While much of the focus is on Wall Street and how market timing works in the stock market, a lot of these ideas can be applied to real estate investing. They also discuss topics such as long- and short-term capital gain, high-frequency trading and how happy we are with our own achievements in absolute terms.

 
Key Takeaways
02.33 – Stock trading investments are all about assessing long and short-term achievements. Remember that the government views capital gain in terms of short or long-term.
04.03 – Dan Egan describes the ‘bid ask spread’, an economic term for the costs you never see a bill for.
07.20 – High-frequency trading might not be everything it’s cracked up to be. You have to compare the situations of the big traders with average Joe’s actions.
13.30 – Personal satisfaction is hugely important, but it’s always competing with our comparisons to the people around us.
15.20 – For more information about Dan Egan and his company, head to www.Betterment.com
15.28 – Jason Hartman discusses some of the various viewpoints on the inflation/deflation argument.

 
Mentioned in this episode
www.Betterment.com
Flash Boys by Michael Lewis

 

Tweetables

When it comes to stocks, the longer you invest, the higher the chance that you’ll win – and you can win big!

It’s logic; the more you trade, the more chance there is that you’ll get hit by high-frequency investors.

If you’re in a bull market, you’re not a genius, you’re just there along with everybody else.

Transcript

Introduction:
This show is produced by the Hartman Media Company. For more information and links to all our great podcasts, visit www.HartmanMedia.com

Welcome to the American Monetary Association’s podcast, where we explore how monetary policy impacts the real lives of real people, and the action steps necessary to preserve wealth and enhance one’s lifestyle.

Jason Hartman:
Welcome to the podcast for the American Monetary Association. This is your host, Jason Hartman, and this is a service of my private foundation, the Jason Hartman Foundation. Today, we have a great interview for you so I think you’ll enjoy it, and comment on our website or our blog post. We have a lot of resources there for you and you can find that at www.AmericanMonetaryAssociation.org, or the website for the Foundation, which is www.JasonHartmanFoundation.org. Thanks so much for listening and please visit our website and enjoy our extensive blog and other resources there.

Hey, it’s my pleasure to welcome Dan Egan to the show. He is Director of Investing at www.Betterment.com, and I became interested in his work when I read a Business Insider article about time in the market versus timing the market. Dan, welcome, how are you?

Dan Egan:
Very well, thank you very much for having me.

Jason:
Yeah, it’s good to have you. So where are you located?

Dan:
Betterment is located in the heart of Manhattan, right by Madison Square Park, in what we call Silicon Alley. That’s where a lot of the fintech start-ups in New York are based.

Jason:
Oh, you’re right in the middle. Good stuff. You’re in the belly of the beast of Wall Street there.

Dan:
Definitely.

Jason:
I liked this article that you wrote; the exact title escapes me. Let me see if I can find it here. It’s Investing is about time in the market, not market timing. I like that title. Tell us about the philosophy there.

Dan:
Sure. Think about the stock market and about investing as kind of a reverse casino. If you go to a casino, you know that the odds are in the house’s favor. If you play for a long time and if you play a lot of games, the house is going to win. The odds are that the house might get unlucky in a short period of time; if you go in and you just play roulette once, you might win. The house, in order to stay in business, basically has to win on average. They’re very good about doing that.

The stock market’s a little bit like that, but in reverse. Whereas with a casino, you’re pretty sure you’re going to lose in the long-run, but you might win in the short-run, the stock market’s the opposite. You’re the house. You’re the one who, because you bear short-term risk for the fact that other people might win a little bit in the short-term, you’re going to win in the long-run. The longer that you invest for, the longer that you play for and the more certain it becomes that you’re going to win and win big.

Jason:
So why would that be true? If you’re not winning in the short-term, why would you win in the long-term? The reason I ask, and I know this is part of it, is when you churn and you trade a lot, you lose money with commissions, but commissions in stock-trading are relatively low, compared to say, real estate, for example.

Dan:
I think there are a couple of reasons. Number 1 is commissions, that is very true. It’s important to remember that commissions have fallen relatively recently. A second thing is that people forget that if they do happen to lose, especially over a short period of time, you’re not just making money for yourself, but you’re making money for the government. They’re going to take a higher percentage of any short-term capital gain than they are of the long-term capital gain.

Jason:
Good points, so that’s where real estate really wins the game because you can trade it all your life tax-free if you do tax-deferred exchanges. The taxation will just kill you by being a trader. Yeah, good point. Okay.

Dan:
The other thing is that you start getting into transaction costs that you never actually see a bill for. One of these is what’s called the ‘bid ask spread’. It’s something which is just a transaction cost that exists naturally in the market. If you imagine that I have a share of stock A that I want to sell, and I think it’s worth about $101. The next person who’s most interested in buying a share of stock A thinks it’s worth about $99. Both of us are probably going to end up saying, ‘Okay, let’s split the difference. I’ll take $100 and you can take $99.’ When you think about that transaction, we both felt like we lost a little bit on it. The person buying it had to pay a little bit more than they really thought it was worth, and the person selling it had to pay a little bit less than they thought it was worth. You don’t notice it and you never get a bill for it because you just say ‘Well, I really want to get this transaction done, so let’s do it.’

However, think about it a little bit like a toll on a bridge. If you pay that toll once a year because you drive over the toll bridge once a year, it doesn’t matter. It’s going to be really minuscule. On the other hand, if you’re trading a lot and you’re going back and forth over that bridge multiple times per day, it’s going to add up to a lot. It’s going to be a significant amount over a long period of time. The ‘bid ask spread’ is what I view as a market tie, but you never get a bill for it. You never notice that you’ve actually been taking teeny, tiny hits every time you transact.

Jason:
Now, you probably saw Michael Lewis on 60 Minutes a few months ago, and I did a show about that episode. I also really enjoyed his book, Flash Boys, which I bet you’re familiar with – you’ve probably read it, actually. Is that bid ask spread a lot worse because of the high-frequency traders that are beating investors to the punch all the time?

Dan:
I’m going to say yes and no. I’m going to say yes at large – what they’re essentially doing is they’re trying to basically bid up the price by teeny, tiny little bits. I don’t think that they’re really doing anything that is socially useful; they’re not helping us find better ways to invest in different companies. However, I think it’s also important to be realistic about it. Again, this really matters depending on how much you trade. If you are a hedge-fund that runs an algorithmic strategy and is trying to beat the market all the time and therefore trading a lot, then you really hate high-frequency traders.
Betterment’s customers tend to be buy-and-hold investors, which basically means that high-frequency traders don’t get to get a cut of us very often. We’re just going to hold it; we’ll buy once and then sell 20 years later. We’re just not going over that bridge enough for it to be a worry for most of us. I think that’s true of a lot of investors – as long as you don’t trade a lot, you don’t open yourself up to getting just teeny, tiny bits of you bitten off.

Jason:
OKay, so that’s kind of like a yes and a no on that. Certainly, the high-frequency trading is a very profitable thing. They’re certainly beating investors to the punch and they’re making a lot of money doing it.

Dan:
Sometimes. You have to remember that we always tend to hear about successes in the media, but not necessarily the failures. I wonder, and I don’t have any stats on this, but you have to remember that a lot of these high-frequency trading firms get set up, they try and make money and they fail. I wonder what percentage of the profits in the profitable ones came from basically trading against the high-frequency traders who are a little bit slower or didn’t have much luck in the market. I don’t necessarily know that it’s just a redistribution from your normal Joe to these high-frequency traders because, again, normal Joes don’t trade that much. On the other hand, big algorithmic prop-trading desks do. I think this is a little bit of two professionals duking it out and the average person isn’t really involved in the fight.

Jason:
Interesting, okay. So what else goes on with the buy-and-hold method, versus the, we’ll call it ‘the flipping method’ or the ‘in-and-out timing the market’ method? I say that in the real estate game, the people who buy and hold their real estate just tend to have real wealth, and the people who flip and try and time the market have spending money. There’s a big difference. Spending money is great, but I’d rather have long-term, real wealth.

Dan:
Well, I’ll tell you, you also have more hair and less grey hair and more free time. One of the things that’s very true about any sort of more active thing is that it’s obviously going to take more time and it’s going to open you up to more occasions when you’re going to have made the wrong decision. You generally find that the market is a very deceptive environment. There’s a lot of noise in it, there’s a lot of randomness about things going up and down, so it’s very easy to get fooled into thinking that you have skill. An individual who sells out of GM and buys into X-On on a random day, and then the market goes up the next day – of course, both of those are going to go up and he’s just going to have paid attention the the X-On stock that he’s actually holding, rather than GM.

It’s very easy to get the impression, and this often happens during raging bull markets, and people think that they’re much better investors than they are because they’re mistaking a rise in the whole market for their specific skill at picking a given stock.

Jason:
Dan, I like to say, and I don’t think this is my quote, but I can’t think of who it came from – I remember saying it to my mother a good many years ago: Everybody’s a genius in a bull market.

Dan:
Yup, absolutely.

Jason:
We should look back to that old quote – “A rising tide floats all ships”. That’s not genius, it’s just being in the right place at the right time, and I always say I’d rather be lucky than good. We’re full of cliches here, aren’t we?

Dan:
I know, I’ve got plenty more to use.

Jason:
But they work, you know. They really do. They make sense.

Dan:
Wisdom comes from somewhere.

Jason:
Hey, that’s almost one! I’m not sure what I also wanted to ask you about this, but I think it is possible that people are just attracted to this. It’s like the gamblers’ mentality. It’s like they want to be engaged in it, and it’s almost like playing a video game. It’s as if with all these online trading platforms, Wall Street has really gamified the stock market, and that’s very attractive to people. Some people just love being engaged, it’s like they do it just for the pure activity of it. Kind of like the way they want to go play Blackjack or something.

Dan:
There’s a lot of ‘What could have happeneds’ in stock market investing, much like there is in gambling. It looks so apparently easy if you look back at 20 years of stock market history to say ‘Oh, if I’d just invested before it went up and I’d gotten out before it had gone down, I would be incredibly wealthy’. While that’s completely true, it’s like we don’t believe in how fundamentally noisy this stuff is. The number of times that an economic figure like unemployment or GDP will come out, and the market reacts exactly the opposite of the way that standard economic theory tells us it should. It’s about 50/50. I think that we have such a compulsion or a belief that you need to work very hard at this stuff in order for it to be really relatively successful.

One of the things I like to say is that just investing long-term is probably one of the best jobs you’ll ever get because the fewer days you come into work, the more you’re going to get paid in the long run. The more you come into work, the more you’re going to get docked because there’s just so many market frictions in trying to do work everyday. People seem to have a hard time saying ‘Oh, this is the best gig ever, I’m just going to not come into work; they keep coming into work and they keep getting docked.’

Jason:
Yeah, it’s true. For some reason, that gaming and gambling mentality really seems to hook a lot of people. It’s like they want to work more. They want to be engaged on it, it’s like a high. They get a high from this roller coaster ride. It’s an interesting psychology, it really is. I’m glad I’m not affected by it! Or at least not too much.

Dan:
One of the things you often find it that everybody wants to be above average, and obviously when it comes to investing, if you want to be above average, you have to go out and do something that makes you win. They’re actually done surveys looking at somebody who earns $50,000 in a neighborhood where most people earn $40,000, or it could be somebody who earns $90,000 in a neighborhood where most people earn $120,000. People actually focus a lot more on how they’ve done relative to other people, and that’s what drives their happiness and their satisfaction of an outcome more than how they’ve done just on an absolute scale and on how well they’re set up. That’s a very tricky thing to come to terms with – do you care about winning compared to your wife’s sister’s husband or do you care about just making sure that you’re more than meeting the bills and that you’ve got a good set-up for you and your family?

Jason:
Okay, good. What else do you want to say, just in general, about investments? Where do you think the economy’s going in the market, and what are your thoughts about inflation and deflation?

Dan:
I genuinely just think that it’s going to go up over the long-term. I don’t pay attention to a lot of the short-term noise because it can lead you so easily astray into thinking that something is certain to happen. In general, I think as long as the Fed continues to target 2% inflation and they continue to do what they’ve done in terms of trying to keep the economy a little bit perked up, everything’s going to be fine. Especially when you consider that you’re looking over the next minimum 10-year period.

Jason:
What do you think about the inflation risk, though?

Dan:
I genuinely have no idea. If you had told me 5 years ago that oil would be at beneath $80 a barrel today and that you could go and fill up your tank at $2.80 a gallon, I would never have believed you. Especially when energy plays so much of a big role in modern day numbers for inflation, I just have no idea.

Jason:
Very interesting, good stuff. Give out your website, if you would, Dan, and tell people where they can learn more about you.

Dan:
Definitely. We’d love it if you came and checked out www.Betterment.com, it’s a better, smarter investment.

Jason:
Good stuff. And when we talk about inflation, it harkens back – I remember when Peter Schiff was on CNBC and it was just slightly before the financial crisis when the Dow had bumped up against like 14,000. He was arguing about inflation, blah blah blah. It was the same argument you always hear from him, and I think it’s getting a little old, to tell you the truth. There’s definitely some truth to it, too, so I kind of take a middle ground on this.

One of the interesting things he said at that point – of course it’s different now because we’re at a much different point – was there’d been no real gains in stock values since the Great Depression. He said the only return had been dividends, that’s it, because adjusted for inflation, stocks are the same. That’s over like a 7 decade period! I’ll tell you my own comparison that I made – I remember when the Dow hit like 15,000 and everybody on CNBC was going crazy and all the advertisers and all the broker firms increased their budgets and so forth to attract more new customers. My analysis was that if you look 10 years back and you just left your money it, it would have to be a 15,800 for you to break even, and they were celebrating 15,000 like it was the biggest party of all time.

Dan:
Yup.

Jason:
People just don’t understand inflation well enough. The mainstream public just doesn’t get it. You’ve got to adjust all returns for inflation.

Dan:
Absolutely. I completely agree. It’s a very stealthy pickpocket from your wealth and again, like the bid ask spread, you never get a bill at the end of the year from your savings accountant saying ‘Yes, you got a half percent interest rate, but you’re actually down 1.5% in real terms’.

Jason:
Yeah, ‘Here’s your inflation bill’. Good point. Well good stuff. Any other closing thoughts you want to share?

Dan:
Definitely. I would just recommend anybody who gets involved in investing in the stock market – it’s a little bit of a roller coaster but just remember, the only people who get hurt on the roller coaster are the ones who jump off.

Jason:
That’s good, I like that. Good stuff. Dan Egan, thank you so much for joining us.

Dan:
My pleasure. Thank you very much for having me.

Outro:
The American Monetary Association is a non-profit venture, funded by the Jason Hartman Foundation, which is dedicated to educating people about the practical effects of monetary policy and government actions in inflation, deflation and personal freedom. Our goal is to help people prosper in the midst of uncertain economic times. This show is produced by the Jason Hartman Foundation, all rights reserved. For publication rights and media interviews, please visit www.HartmanMedia.com or email media@hartmanmedia.com. Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate professional if you require individualized advice. Opinions of guests are their own, and the host is acting on behalf of the Jason Hartman Foundation exclusively.

 

 

Looking Ahead: Another Financial Crisis?

AMA12-8-14As the US economy regains its feet after the massive financial collapse of 2008, economists are turning their gaze to the future: what will trigger the next major economic crisis – not just for the US, but also for the global economy as a whole? And a bigger question: can it be prevented?

To answer these questions, financial and economic experts are looking at repeating patterns in lending, borrowing and global banking. As a recent article from Business Insider points out, while those patterns suggest that circumstances are very different today than in i2008, that doesn’t necessarily mean that a crisis of a different kind won’t happen.

As Business Insider reports, economists from the Bank for International Settlements have identified key global trends that are likely to affect the world economy, for better or worse, in the coming years. Leading the list: a shift from bank lending to bond markets, and the growing effect of the stability of the dollar on the behavior of world markets.

The Bank for International Settlements has been called the “central bank of central banks.” Based in Basel, Switzerland, it acts as the center for central banks around the world. Its job is to ensure stability in the world’s banking systems, and it does this by managing a variety of transactions including distributing war reparations, making loans to struggling countries and managing gold and foreign currency exchanges.

The financial crash of 2008, which was caused largely by speculative lending without enough underlying capital, is still fresh in the memory of these regulators. And while lessons were learned from that catastrophe, other risks are emerging in today’s volatile marketplace.

One major change has to do with a gradual shift in credit growth from bank lending to capital markets. That wasn’t true in 2008 or the years leading up to it, when US banks both large and small extended credit to borrowers of all income levels, regardless of creditworthiness. As a result of that unbridled lending, millions of loans went bad, largely in the housing sector, leaving banks facing major losses.

Now, on the other hand, the corporate bond market is booming even as traditional bank lending retreats. In this new lending landscape, asset managers may hold the key to financial stability. Those assets include pension funds and other kinds of investments in bonds and other securities, so a credit crisis in that arena could spell trouble for small investors and retirees hoping for money to fund their golden years.

But more significant and far reaching is the role of the dollar in the overall stability of world currencies. Dollar denominated debt has vastly increased over the last few decades, and that means that fluctuations in global exchange rates could send ripples through markets around the world.

Dollar denominated debt is any debt measured in dollars. Even as values fluctuate in global trading, the dollar still reigns as the medium of international exchange thanks to its stability and high profile. That means that many countries, especially those with unstable monies, have to take out loans in foreign currencies.

Borrowing in foreign currencies has its own risks, if there aren’t sufficient reserves to back up the debt in case of a default. If a government can’t trade its own currency for the foreign currency it needs, it can face a collapse. So keeping a reserve of a stable foreign currency such as the dollar is a way to keep from falling into a severe debt default and domestic financial crisis.

When local currencies appreciate, countries are in a stronger position. When they fail, those countries are at risk for financial collapse, which sends ripples throughout the global markets. But when the dollar appreciates, institutions lending exclusively in local currencies feel a pinch and financial structures topple. That scenario played out in Latin America and Asia over the past few decades.

In the end, the perennial stability of the dollar is a key ingredient of world financial balance. That means that factors that affect the stability of the dollar market could play a major role in the global financial balance – and disruptions in that market could pitch not just the US but also the world economy into chaos.

For now, those considerations are merely speculation, based on observed trends. But economists warn that in a tightly connected world, events in one place can have an impact on events half a world or more away. And another financial collapse could come from completely unexpected events. But examining past and present trends makes it possible to speculate on the impact of the dollar on the world markets – and on pocketbooks at home. (Top image:Flickr/SqueakyMarmot)

Sources:

“Bank for International Settlements.” Investing Anwers. investinganswers.com. 8 Dec 2014

“Dollar Denominaed.” Muddy Water Macro. muddywatermacro.wustl..edu. 8 Dec 2014
.
Ferro, Shane. “This is What the Next Financial Crisis Might Look Like.” Business Insider. Businessinsider.com 5 Dec 2014

Read more from The American Monetary Association:

AMA 100: Manage Your Expectations with Christine Hassler

Shady Trading Bilk Small Investors

The Amerucab Monetary Association

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AMA 100 – Manage Your Expectations with Christine Hassler

 

Christine Hassler is a Gen Y and millennial expert. She believe millennials have the highest expectations and are often hit hardest when they face reality and realize it’s not as easy as it looks. She talks to Jason about how to manage your expectations better, why she loves millennials, and a little bit about her latest book entitled Expectation Hangover.

 

Key Takeaways:
3:15 – Christine talks a little bit about her book, Expectation Hangover, and who it is meant for.
6:10 – Christine says millennials are hard working employees. They learn quickly and think outside the box.
10:15 – You need to have a break up in order to grow. A break up leads to a break down, which actually then leads to a break through.
13:00 – Take a brief pause in your life to accept the on-rush of feelings you might have, once you’ve done that, then you can work on releasing them.
16:00 – Christine believes millennials will find a better solution for our current broken school system.
19:10 – Don’t base your happiness and self-worth on the result of your goal. If you fail, it will take you longer to bring yourself back up. Have goals, but distance yourself emotionally from them.
20:50 – Christine wants you to optimistic, but she also doesn’t want you to let yourself down for putting too much emotion in that optimism.

 

 

Tweetables:
I found when I coach people, a break up leads to a break down leads to a break through.

The time I spend between expectation hangovers gets longer and the time I spend suffering gets a lot shorter.

Millennials are incredibly innovative, they have a can-do attitude, and they think outside the box.

 

 
Mentioned In This Episode:

http://jasonhartmanfoundation.org/

http://youngwealth.com/

http://christinehassler.com/book-landing-page/

http://christinehassler.com/

 

 

Transcript

Jason Hartman

It’s my pleasure to welcome Christine Hassler to the show. Her latest book is entitled Expectation Hangover. She is also the author of 20 Something Manifesto: Quarter-Lifers Speak Out About Who They Are, What They Want, and How to Get It. So we’re gonna kind of dive in to this topic of the largest demographic cohort in American, if not world history, which is Generation Y, but she also talks more broadly and writes more broadly about a variety of topics. We’re going to focus, I think, on Generation Y. Christie, welcome, how are you today?

Christine Hassler:
I’m great. This is going to be a fun conversation.

Jason:
It certainly will, it always is. You’re coming to us today from Chicago, Illinois, I believe, right?

Christine:
I am. I don’t live here anymore. I went to college here and it’s a beautiful fall day and I’m enjoying in seeing a change in seasons.

Jason:
Yeah, I know you live in California now where I’m from and that’s one of the things I really don’t like California. You don’t get the nice change in seasons, which is kind of cool.

Christine:
Not so much.

Jason:
Well, so tell us a little bit about your latest book Expectation Hangover.

Christine:
Sure. Well, to write this book I had to have a lot of expectation hangovers. *Laughter*.

Jason:
*Laughter*.

Christine:
So, lettme define what a expectation hangover is. You’ve probably never heard of it because I made up the word.

Jason:
It’s a good title.

Christine:
Thank you and it’s rather intuitive. You can kind of guess what it means, but it’s when one of three or four things happen, either you don’t reach your plan, desire, result, expectations, things don’t turn out like you planned despite your meticulous planning and effort-ing and blood, sweat, and tears or things turned out like you plan; you get the outcome or the result, you achieve the goal, but you don’t have the feeling you thought you would.

It’s not as fulfilling as you thought or you’re not living up to your personal or professional expectations or life throws you an unexpected curve ball that’s unexpected and desirable. So, a variety of things happen similar to hangover symptoms but more serve, head is aching for all the thinking and trying to figure it out and if your uncertainty, spinning in confusion, there’s a sense of regret, we lack motivation, and we just want any quick fix to make ourselves feel better.

Jason:
Now, when you talk about expectation hangover, you’re not applying that to just millennials and Gen Y, right? Does this apply to everybody or are they suffering the biggest expectation hangover, maybe? *Laughter*. I’m not sure.

Christine:
Well, I think that..I’ll answer both question. First of all, any one who has ever been disappointed has had an expectation hangover, so the book is really for anyone who has been disappointed and is welling to do the work leverage it rather than be a victim of it. I think millennials or Gen Y are definitely feeling more of one because I think they were raised with the most grandiose expectations.

I think previous generations were sort of raised with the expectation that life can be hard and life is a struggle and kind of that more like glass half empty attitude, but that doesn’t opt someone out of disappointed. I mean, if you expectation disappointed, it’s probably going to happen too. I think millennials were raised with the you can be anything you want and you’re special and go to college and get a degree and you’re going to have the job of your dreams and they’re just facing so much disappointed because the life they were told they were going to have is in direct conflict with the life that they’re discovering.

Jason:
They’ve definitely been the most catered to generation in all of history. It is, if you will, for many a rude awakening. They seem to be dealing with it reasonably well. You know, I’m pretty impressed with Generation Y in a lot of ways. A lot of people like to say bad things about them. Over entitled, spoiled, etc, but gosh, they’re really bright, they’re independent thinkers, I love that they do not trust government and the establishment. I don’t think they should. I think with the technology, it’s just a amazing revolution that we’re going through. I mean, we are on the verge of so many amazing things. I think in the next 10 years they’re going to blow our minds and actually our expectations might be exceed in many ways.

Christine:
Yeah, it’s amazing kind of technology and it’s also a bit consciousness shift. I think people are waking up and discovering there’s so much more to life than the traditional checklist and people are doing the internal personal developmental work in addition to all the external goals and I speak a lot to corporations on millennials and bridging generational gaps. I kind of have my personal developmental spiritual side and then I have the corporate productivity side. I love being able to speak on both topics.

I always defend on Gen Y and millennials. I’m like look, of course there’s group of people that are certain young people who are going to be entitled or whatever, but you can’t let a few people, you know, throw off the reputation of an entire generation and I have found that if you really understand Gen Y and millennials and know how to manage them, they’re the best employees ever. They’re amazing learners, they’re incredibly innovative, they have a can-do attitude, they’re always available on their technology, and they think outside the box completely because they were not raised in a box.

I also think this generation, you know, older generation say, “Oh well, you have to pay your dues, you want instant gratification.” But, look at the world, the environment, the economy, the health care system this generation is inheriting. They’re going to have a lot to deal with, so I definitely think they’re going to be paying their dues, just in a different way.

Jason:
Yeah, don’t forget the student loan debt, which is absurd.

Christine:
Yes.

Jason:
Okay, so very interesting there. So, it’s interesting that you have this sort of two sides, if you will, that you really address. You address the spiritual side and you talked about this new consciousness, can you elaborate on that a little bit more?

Christine:
One of the things about Expectation Hangover in particular is it offers a tremendous transformation opportunity. See, we all sort of kind of are robots based on our story and our life. We all have certain ingrained belief systems, we all have things that happen to us that sort of create issues that we carry around. For change to occur and to really live in to our full potential, we have to upgrade ourselves emotional, mentally, behaviorally, and spiritually.

We can’t just sort of kind of have the same routine that we were raised with and keep doing the same thing over and over. We’re here to grow, we’re here to learn, and we’re here to really evolve our consciousness and it’s through struggle, it’s through difficulty that we have the biggest opportunity to do that. Any time we take on a challenging task, any time something happens in our life, we either can relate to it as why is this happening or this is so hard or we can look at that and go, “What am I learning?”

You know, what am I learning from this? How am I being given an opportunity to grow and dig deeper and maybe heal something emotionally or change my belief system or learn a more efficient, productive behavior. So, I don’t think..I don’t tell people there’s something wrong with them and they need to be constantly improving themselves, but I do think, just like our the phones, we have a consistent opportunity to upgrade ourselves and expand our mind and think differently and not think so much in terms of black and white, good, bad, right, wrong; judgmental, but to really have more of an open expansive mindset and understand that we’re co-creators.

Jason:
Very interesting. I love the co-creator philosophy. It’s very true. We’re not here to just let life happen to us. We are a co-creator and it’s our job to create the life we want and create the world we want, no question. It’s interesting, you know, you talk about the subtitle of your book, overcoming disappointment in work, love, and life. So, tell us about those areas. I know you just alluded to it, of course, but a little more, especially the love angle, I’m kind of wondering why you put that in.

Christine:
I think that’s, I mean, let’s face it like, we’re multi–dimensional beings. We have a work life, we have a love life, everyone wants all of it. I don’t know anyone who’s like, “Oh, I just want a job.” We all want love. I think one of the most painful things we go through is often in the relationship department, love department. I don’t just mean romantic. We love our friends, we love our family, and it’s often in the heartache that we really learn the most about ourselves.

What I found is that, you know, disappointment, it doesn’t matter what area of your life it happens in, it’s really hard. We’re not really given the tools to deal with it. I know for me, I’ve had disappointments in my career and in my love life, especially my romantic relationships, those were kind of the most awakening times for me. I found when I coach people, a break up leads to a break down leads to a break through.

Jason:
Yeah. Well, the old saying, “It’s better to have loved and loss than never to have loved at all.” So those are really good growth experiences, but it’s very hard to see them that way at the time, isn’t it?

Christine:
Oh totally, absolutely. You know, I remember I was going through a divorce and people were like, “Oh, there’s a reason for this and time heals.” It’s like, I don’t know the reason and I don’t really want to wait that long. So, you know, that was one of the things that inspired the book. It’s like, okay, I understand there is a given time where we’re going through the disappointment, but what can we do to move through it a little faster and a little more intention? So, we really are, like I said, leveraging it.

Jason:
Okay, what can we do? Tell us about some tips there.

Christine:
So, the first thing, the book is divided in three parts and the first part is about why we have expectations and why expectation hangovers happen; to teach us some major lessons that we’re all here to learn. Like, we don’t have complete control, our comfort zone is a trap, universe is not here to punish us, and it ain’t out there. We need fulfillment, joy, all those things we’re looking for aren’t found in external things, it’s really a inside job. So, disappointment reorientates us to move inside out rather outside in.

The treatment plan, which is the second part of the book, which is incredibly holistic because in my life and working with people, if you don’t work on the emotional, mental, behavioral, and spiritual level, you don’t fully have the breakthrough. So, the first thing is to accept your feelings about it. You know, we don’t like feelings, we’re not taught how to process feelings, we want to work through them or drink through them or eat through them or distract ourselves and not really feel and so that’s the first part. Just allow yourself to have your feelings about it.

In the book I teach you how to do that in a way where you release from and then recycle your feelings and you learn how to move into compassion for yourself instead of judgment, so our feelings don’t consume us and we don’t identity that with them, but we still honor them so we’re not carrying around all these unprocessed feelings that lead to illness, lead to depression, lead to stress, that lead to feeling like you’re constantly need to be moving or doing something so that’s a big part of it, especially for high achievers and people that are doing, they tend to suppress their feelings the most. So, if you relate to that, then definitely check this out. *Laughter*.

Jason:
No question about that. Very good points. So, this applies to anything in life, any kind of expectation hangover.

Christine:
Yes.

Jason:
It’s certainly not just about relationships. We have feelings about someone who took advantage of us in a business deal, you know, or didn’t keep a promise. I mean, gosh, it’s like if I had a nickel for every broken promise *Laughter*.

Christine:
I know, I know.

Jason:
Just crazy.

Christine:
You know there’s lots of stories about entrepreneurs and their first failure, being betrayed, illness, relationships, you know, the book is stories, it’s exercises, it’s guided processes, it’s definitely a work book. So, it’s not like sit down on a beach and drink a Pina Colada and read this. It’s definitely for people are like, “Alright, I’m ready to have some serious ah-has.”

Jason:
How can we release feelings? You talked about processing them and releasing them, you know, honoring them and not repeating them over and over. I think that’s what most of us do, we get into this trap where we’re upset about this thing over and over again.

Christine:
The biggest key and this is why people recycle feelings and not release them, is not to judge or analyze your feelings. See, what happens is, you’re having a feeling and you’re having a commentary at the same time. “Why am I feeling this way?”, “I don’t like this way.”, “I hate feeling so bad.”, “This is stupid.”, “I can’t believe I’m crying.”, “I’m weak.” Na, na, na, and that’s what perpetuates the feeling. So what we have to learn to do is feel our feelings with compassion, which is just like part of us are having the feeling and then another part of us is like, “It’s okay, just let it out.”

And in the book I teach tools, there’s one tool I teach called release writing where, you know, if you’re not good with just kind of emoting, you just start journaling, but it’s not journaling that you reflect on. It’s like free-form writing just a stream of consciousness, just go and let your emotions come up, and kind of turns into scribble because you’re writing so fast, then when you’re done you rip it up and you burn it, so it’s like purging. So, all of those things are really, really helpful ways to start to release your feelings.

Jason:
So, what do you think is in store for the Generation Y and their future? I mean, they’re, we talked in the beginning and just briefly mentioned how they’re saddled with this massive student loan debt and I think really, you know, this is even a conspiracy to create a whole generation of debt slaves, because as we’ve talked about on many prior episodes, the only type of loan debt that is not discharge-able in bankruptcy is student loan debt. So, literally there is no way out. I mean, these debts must be re-paid.

You know, I think that’s going to slow down the progress. Oddly nowadays, it really is questionable how necessary college is anymore. We’re in a world now where credentials don’t even really matter that much. Seeing old movies, reading old books through the years, it like used to be a big deal. If you called a restaurant and it was hard to get it and you said, “Oh this is Dr. Hartman.” You know, you’d get a great table.

Right now it’s like, “Who cares?” Which is kind of unfair in a way because people have worked a lot and paid a lot and scarafiiced a lot for these credentials and mostly I’m talking about college, but there are other credentials too. Now, it’s more a matter of, “What have you done lately?” You know, what is your track record?

Christine:
Yeah, I think so and I think, again, like, the millennials generation, all these student loans, they have..it’s a big burden. I definitely encourage people to hold it as a loan and not debt, because the more you say debt and debt and debt, the easier I’m just going to undermine everything we say. And, we don’t know, you know, there could be an amazing millennials right now, even one listening right now, who reforms this whole system. We have no idea what’s going to happen and how it’s going to be handled. Yeah, is college necessary? I don’t know that it is. I think every person has to decide that. Not everybody is a natural entrepreneur.

Jason:
I think college is a good deal at a reasonable price. If the government didn’t insure student loans, then there would be less money flowing into these universities and the price would drop. You know, the free market would control the price, but what’s happened, you know, the government has just inflated this bubble and these prices are insane for these colleges. Look, when my mom went to Berkeley in the 60′s, she worked her way through school. You could do that back then. Now that’s just unheard of, you can’t do that any more.

Christine:
Right, right.

Jason:
So that’s part of the problem.

Christine:
Yeah, yeah it is. You know, I just..for anyone out there who’s dealing with student loan right now, just know, one foot in front of the other right now and just know that it is an investment in you anyway that you can hold and just do your best to meet with some kind of financial expert or planning to manage it and get a program in place on how you’re going to pay it and, you know, I think it’s like, I do think it’s an issue that the millennials generation is going to change.

In order for things to change, they have to be bad. That applies to life. For most of us, things have to get bad before we really change. *Laughter*. I think we’re at the point where it’s like, “Oh, this is awful. This doesn’t work.” Something is definitely broken is with the system and this generation, I think, will fix it.

Jason:
I think that’s very possible. I mean, it’s really truly amazing the kind of innovations that are coming out of Generation Y.

Christine:
Totally.

Jason:
Just whole new ways of thinking that just didn’t occur to prior generations.

Christine:
Right, exactly.

Jason:
So that’s very, very exciting. Well, what other tips can you give to people in general and then anything specifically for Gen Y?

Christine:
Sure, well the last part of the book are like my quick fixes that work. So, we talked about a couple of strategies that don’t work. You know, the over drinking, over eating, distracting yourself, over working, all those kinds of thing. So, one of my favorites is don’t go to a Chinese restaurant when you are craving nachos.

Jason:
*Laughter*.

Christine:
*Laughter*. And what I mean by that is, manage your expectations of others. I think so often we really expect someone to give us something or be a certain way that’s just in your personality. They’re just not capable of and we just keep..because we love them or because they’re in our life or whatever, we just keep going back and getting disappointed after disappointed after disappointed, so really when you’re craving nachos ask yourself, “Okay, where can I go to get nachos?” I mean, I know that even if I bring the ingredients to a Chinese restaurant, they’re not going to be able to make them up. So, be mindful of managing your expectations.

The second thing I say is that, the way to reduce disappoint, reduce expectation hangovers, because here’s the thing, I’m not promising we’ll never be disappointed again; even as the author of this book I still have expectation hangovers. However, the time I spend between expectation hangovers gets longer and longer and the time I spend suffering when I have one gets shorter and short.

So, how I pursue my goals and how I coach people to pursue them is with high involvement and high intention, but low attachment. What I mean by that is, you take the steps, you have the intention, you have the vision, you do what you can, but you don’t make your happiness, your worthiness, your okay-ness, your safety, your security dependent on the result, so less is riding on it emotionally and mentally.

Jason:
Vey, very good point. That’s great. You know, it’s like, you know, what is the difference between attachment and expectation, I guess? If there is a difference.

Christine:
Not much. There’s really not much.

Jason:
Yeah, but what I am getting at here, Christine, is the idea of, look, there’s an old saying, “Expect the best, prepare for the worst.” Right. We want to be optimistic, we want to expect big things in our life, kind of sounds like you’re saying, “Well, don’t expect much.” Which, I know you’re not saying that. I just, it harped back to a debate I was having with a friend in highschool when literally I could not believe this, we were actually debating whether optimism was a good thing or not. He was saying, “Well, you know, if you’re optimistic, then you’re just going to be disappointed.” I kind of couldn’t believe that. *Laughter*. You have to have something to look forward to and to have a goal and create that future. Where’s the balance between this, I guess I’m saying or the distinction.

Christine:
See, to me, it’s more about how we want to feel. We expect these big things and we get really attached to the form and the way we want them to come. I think that’s awesome to be optimistic about our qualities and our values. Optimistic about, “Wow, look at all the amazing people and things I have in my life. I’m so excited about how I’m going to learn more about myself and feel more fulfilled and more confident.” That’s what really we have dominion over and be optimistic about who we are and what we’re going to create.

It’s more about self-acceptance and really accepting our life and gratitude for it and excitement for the future and optimistic about how we’re going to be pleasantly surprised as well, but not attaching everything on the grandiose vision. Like, “Oh my gosh, I’m going to sell my company for 10 million dollars by the time I’m 30.” Awesome vision, awesome goal, just don’t invest yourself emotionally in it so that if it does or doesn’t happen, your worthiness and your okay-ness is not dependent on it. Again, intention, visions, all that stuff is good. I’m definitely not saying be negative and expect the worst. I’m saying don’t expect anything as best you can.

Jason:
Right, yeah. Good. Excellent point. Well, give out your website and tell people where they can find the books.

Christine:
Sure, if you go to ExpectationHangover.com and get the book through, then you get all my free gifts. You get a couple of interviews, you get a 10-part video series, or you can just find the book on Amazon and then if you go to my site ChristineHassler.com that’s where you’ll find my blog and my other books and retreats you can come on me and all that kind of stuff.

Jason:
Good stuff. Well, Christine Hassler, thank you so much for joining us today.

Christine:
My pleasure. Thanks for having me.

Drug Lord or Hero: The Silk Road’s Founder Confounds Expectations

Dread Pirate RobertsThe Silk Road is dead.

That eclectic online marketplace for trafficking in illegal substances of every kind was raided and shut down in 2013 by the FBI and other federal agencies, who confiscated its multimillion dollar store of Bit coin.

But its mysterious founder, known online as Dread Pirate Roberts, continues to confound. This enigmatic figure broke new ground not only by creating a super private drug trafficking site using the anonymous digital currency Bitcoin – but also by his relentless championing of Internet freedoms and the right to personal privacy.

Who is Dread Pirate Roberts? The name is a tongue in cheek reference to a character in the cult favorite film, The Princess Bride. And federal authorities think they know. An American named Ross Ulbricht has been arrested as the man behind the Silk Road, with additional accusations of being a hit man and drug kingpin thrown in.

Ulbricht is expected to go on trial in January. One of the jobs facing the prosecution will be to prove that he is in fact the mysterious Dread Pirate Roberts in the first place, and that he actually did run the Silk Road. But whether or not Ulbricht is the Dread Pirate, that individual did – and probably still does – exist. And he used his illegal platform to say some pretty honorable things.

According to a recent piece from CaseyResearch, the Pirate not only opened his site to all and sundry, no questions asked, he also posted regular articles on the site about the value of this fragile thing called freedom of the internet. He even had a book club, and many loyal readers ad fans.

The odd situation of Dread Pirate Roberts points u the contradictions about freedom and personal privacy in this digital age. It also underscores the growing role played by anonymous digital currencies like the Bitcoin in keeping online transactions private.

The Bitcoin’s rise in popularity coincided with its much-publicized use on the Silk Road. Bitcoin and other similar digital currencies are stateless and bankless, and can be used anytime two parties in a transaction chose to do so. They’re virtually untraceable, not controlled by any government, and they were the ideal medium of exchange on the Silk Road, where users wanted to leave no trail.

That association with illegal activity tarnished the Bitcoin’s reputation and potentially contributed to the demise of other leading Bitcoin exchanges and moves by some countries to outlaw its use in government-backed financial exchanges. Still, the Bitcoin rolls on hailed by civil libertarians as a major step toward personal privacy and financial freedom worldwide.

In the writings of Dread Pirate Roberts, the Silk Road founder makes it clear that freedom of choice means just that – the freedom to engage in transactions of any kind anonymously and privately.

The purpose of the Silk Road, he says, was not to deliberately encourage worldwide drug trafficking, but to offer a place where people could exercise those freedoms without fear of scrutiny or pursuit. And Bitcoin was the logical choice for a currency that would support that privacy.

But the primary use of the Silk Road was to conduct highly illegal transactions of all kinds. Though most if its traffic involved drugs, there were speculations that other, darker deeds were concluded via the site as well. That included the murder for hire schemes Ross Ulbricht was eventually charged with.

The US government has defended its takedown of the Silk Road as a necessary step for the safely and welfare of people everywhere. The Silk Ford story was used to justify tightening up surveillance and tracking of online transaction of all kinds – and to demonstrate the dangers inherent in a non-regulated currency like the Bitcoin.

And those measures have worked, to some extent. No successor o the Silk Road has risen. And the Bitcoin, from its heady days of trading at prices hovering around $200, has slipped in world markets, retreating from some of its big gains of 2013.

But once let out, genies are notoriously reluctant to return to their bottles. The Silk Road story and the hunt for Dread Pirate Roberts points up the double-edged sword of Internet privacy and freedom to conduct personal business in whatever medium you choose.

Civil libertarians point out that those freedoms must be granted to everybody, not just a certain few, who are doing the kind of business we like. Otherwise the very concept has no value. For money watchers everywhere, Dread Pirate Roberts, whoever he may be, is watching your back – even if that thought isn’t comfortable to contemplate. (Top image:Flickr/BTCkeychain)

Source:
Rosenberg, Paul. “Druglord, Genius, or Saint? What Kind of Man is the Silk Road’s Dread Pirate Roberts?” A Free Man’s Tale. Casey Research. caseyresearch.com. 7 November 2014.

Read more from the American Monetary Association:

Shady Trading Bilks Small Investors

Is There a Bitcoin Backlash?

The American Monetary Association Team

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Shady Trading Bilks Small Investors

AMA11-14-14In the end, Secure Investment was neither. The popular currency trading site for small investors vanished in early 2014, never to return. It took more than $1 billion in users’ money with it, and the situation offers a graphic demonstration of how to spot a financial scam.

Secure Investment.com catered to smaller investors, making trading decisions for them with the promise of guaranteeing their principal. According to a recent report by Bloomberg Business, the site was once even more popular than the well-known currency trading platform Forex. The site was easy to use and offered individual investors a quick and simple way to track investments and see results.

At the height of its popularity, Secure Investment claimed that it had traded nearly $5 billion daily in over 140 countries for more than 100,000 investors at all levels of participation. Its website claimed to offer managed investing without all the hassle – and while its own reported numbers might be suspect, plenty of investors did sign up.

Most of them didn’t know, or perhaps didn’t care, that the company’s posted address was an office suite in Panama. But users who did a little digging found that out, and plenty more. And the red flags began to wave.

The company was willing to show its licenses only to users who had deposited at least $1000. Investors weren’t allowed to withdraw any of their funds until the end of the investment period – and while the numbers were posted for Secure Investment’s trading activity, individual investors couldn’t check their accuracy.

In an age of active social media, most businesses gather reviews from users, both positive and negative – and those reviews are generally easy to find. But not for Secure Investment. One user noted on a Forex forum that there were no complaints posted about the company. Nor were there any positive reviews. That doesn’t necessarily mean that everyone was satisfied, though. It could simply mean that there just weren’t that many users at all.

For users paying attention, the math in the claims made by Secure Investments didn’t add up either. And although the site was strewn with earnest video testimonials, most of those were performed by actors hired for the job.

All the pieces of the puzzle fell into place when, in early 2014, Secure Investment vanished. Bloomberg recounts the story of a British user whose experience was typical. When he and his wife decided to invest, they were asked to trade their pounds for dollars and wire them to banks in Australia and Cyprus.

Over the months that followed, they got reports of staggering gains to their accounts, posting a fourfold increase on their investment in less than a year. But when they decided to withdraw some of the money, they were met with stalling and obfuscation.

The system was down, said Secure Investment in an email. They apologized and begged for patience. The very next day, though, the whole site went offline, taking investors’ money along with it for an estimated $1 billion or more in losses. It hasn’t been heard of since.

The story of Secure Investment is typical of modern financial scamming. The company created a slick looking website that offered lots of carefully managed information with seemingly logical explanations for things like its constantly changing list of partner banks.

The company generated its own good publicity with scripted video testimonials delivered by actors paid as little as $4 for the job. It posted fake trading numbers on the site. It created its own network of “paper” companies and directed investors to send money to bank accounts owned by those companies – a tactic that laundered investor money and created a complex paper trail that hid the money from investigators.

That’s one of the reasons tracking down scammers like Secure Investment and bringing them to justice is a challenging task. The company had no real headquarters. Numbers and contact information were dead ends. The company only existed online, and the trails leading between it and the actual banks holding investor money are hard to navigate.

Will Secure Investment’s duped investors ever get their money back? Investigators acknowledge that it’s not likely when a company vanishes so completely and erases its entire footprint. In cases like that, victims are usually out of luck. The investors who trusted Secure Investment with their savings – many of whom are professionals with some experience in other forex trading – say that they trusted the company because of its slick look and the reputation it created for itself.

Secure Investment isn’t alone in the world of sophisticated financial scamming – a practice that’s becoming easier thanks to the Internet. And because it worked as well as it did for as long as it did, this company offers a number of lessons in spotting – and avoiding – frauds like this.

Prospective investors need t do their homework before handing over their money. The old adage, “if it looks too good to be true, it usually is,” applies here as it does in so many situations. Fraud experts point out that it’s essential to find out a company’s actual location and contact information – not just their website. And look for independent, third party reviews and experiences from previous users.

It’s important, too, to check a company’s claims against the performance of other legitimate trading companies – and track down the specifics on any banks you’re asked to use for deposits and other financial transactions.

Companies like Secure Investment can pose a real threat to the stability of international money markets – and destroy the lives of the small investors who have entrusted their savings to them. Those investors may never see their money. But their experiences –and the red flags they missed – serve as a warning for eager investors looking for big returns.  (Top image: Flickr/rieh)

Sources:

Bird, Mike. “A Popular Currency Trading Website Vanished Overnight and $1 Billion Disappeared With It.’ Business Insider. businessinsider.com. 13 Nov 2014
Evans, David. “Forex Investors May Face $1 Billion Loss As Trade Site Vanishes.” Bloomberg Business. Bloomberg.com 12 Nov 2014.

Read more from The American Monetary Association:

AMA 99: Learn About Warren Buffett with Lawrence Cunningham

Solar Energy: Changing the Balance of Power

The American Monetary Association Team

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AMA 99 – Learn About Warren Buffett with Lawrence Cunningham

Lawrence Cunningham has written dozens of books including the Berkshire Beyond Buffett: The Enduring Value of Values, which Amazon called “a hot new title”. He has also written books such as the AIG story as well as The Essays of Warren Buffett: Lessons for Corporate America. Lawrence loves to teach, read, write, and spend time with his family. He comes on to the show today to talk with Jason about his latest book, Berkshire Beyond Buffett, and share some insights into why Warren Buffett is an incredibly successful man.

 

Key Takeaways:
3:11 – Lawrence says if you sell a product that’s useful to your customer, you’ll develop a returning customer. It’s just a better business model than selling products no one wants.
7:30 – It turns out Warren Buffett got his values from Tom Murphy.
11:40 – When Lawrence interviewed CEOs for his book, there was a common theme among them – they trusted their staff and didn’t try to control everything.
14:45 – What are some of the myths about Buffett? Lawrence explains in this segment.
17:00 – Will Warren Buffett ever retire?
20:00 – Buffett’s greatest achievement is that he has built a company that will outlast him when he leaves the company.
22:45 – Jason asked if Buffett’s investments in wind and solar are a good idea and Lawrence think it is.
24:30 – Lawrence is excited for his upcoming Berkshire Beyond Buffett book tour.

 

 

Tweetables:
Treat your customers helpfully and carefully. Don’t try and make a deal today to sell them something that may not benefit them long term.

There are successful trust-based business models that are worth the look.

The government is giving tax credits to energy companies to invest in solar and wind.

 

Mentioned In This Episode:

http://berkshirebeyondbuffett.com/

 

 

Transcript

Jason Hartman:

Welcome to the podcast for the American Monetary Association. This is your host Jason Hartman and this is a service of my private foundation, the Jason Hartman Foundation. Today, we have a great interview for you so I think you’ll enjoy it and comment on our website or our blog post, we have a lot of resources there for you, you can find that at AmericanMonetaryAssociation.org or the website for the foundation which is JasonHartmanFoundation.org. Thanks so much for listening and please visit our website and enjoy our extensive blog and other resources there.

It’s my pleasure to welcome Lawrence A. Cunningham to the show. He is a professor who has done extensive research on Warren Buffet. He is with the Henry St George Tucker the 3rd research professor of law at George Washington university and author of a new book entitled Berkshire Beyond Buffett: The Enduring Value of Values. Lawrence, welcome, how are you?

Lawrence Cunningham:
I’m very well, thanks, thanks for having me.

Jason:
Good. I love the title of your book by the way. The Enduring Value of Values. I guess, the subtitle, that’s my favorite part. *Laughter*.

Lawrence:
Oh, thanks so much. It really captures the essence of the book.

Jason:
You know, it does. When we were talking a little bit before the show. I can’t wait to hear you make some parallels to investing in general or maybe even in life in general. I find people are always chasing the pot of gold at the end of the rainbow – they want it today, they don’t wanna wait. The concept of value of investing, I mean, it applies to everything. It applies to real estate certainty and other investments as well. Tell us the value of values.

Lawrence:
Yeah, the idea, I guess it’s best to encapsulate it in the golden rule, the idea of doing onto others as you want them onto you. It’s about doing well by doing good. So, treat your customers helpfully and carefully. Don’t just try and make a deal today to sell them something that will make you a profit that may not benefit from over the long term. If you sell them something that’s good for them, that will help them, something that they really want , they are likely to come back to you.

So, if you build a business that way, your long term gain will be substantially greater than if you were just chiseling for every nickle and dime you can get for whenever you can get it. So, that’s the broad idea of value of values.

At Berkshire Hathaway, what I do in the book is I look across all 50 of the most important operating subsidiaries. I found again and again is that motif characterizes all of these companies, whether it’s treating customers in a certain way, treating employees in a certain way; giving them trust, reposing autonomy in them. People make decisions where they are the best informed whether it’s on the shop floor, diary queen counter, in the sole manufacturing room, the carpet maker.

So, empowering people and giving them autonomy and so on enables them to do their best and that again pays off in the long run. Throughout all the companies that I’ve found these different intangible trades that are virtues that then pay off in economic gains. It’s a great way of doing business really. Certainly a theme of the value investing world, but it’s a lot more than just a margin of safety. It’s a lot more than buying something for a price below value. It’s really about the intangibles that pay off in the long term.

Jason:
I agree. It’s just a good old fashion idea. It’s simple, it works, and it’s great. You’ve prolonged 50 of the companies. How many are there total?

Lawrence:
It depends on how you count. There are, I think, just about 50. I mean, I captured all of the operating companies that are directly-owned subsidiaries of Berkshire. I left out 8 small insurance companies. I just treat them in the notes. So, essentially I treated all of the companies. Now, those 50, in turn, have any number of subsidiaries, 10, 50, 100, so you could add up all the different Berkshire entities there are 500 of them, but I think by looking at these 50 you basically cover the map. It was a coverage that enables in a treatment in a single book that reads well and gives people just as much as they probably want. No more, no less.

Jason:
Yeah, 50 is certainly a big number, so that’s enough. I want to ask you about some of the greatest myths about Mr. Buffett, but I’m also kind of curious about this, you know, where he got these values from this sort of long term value investing concept. Is it because he’s a midwest person? Is it, you know, he lives a pretty modest life except for the jet. *Laughter*. In defensible. He likes diet cherry coke and cheese burgers and lived in the same house for 30 years or something. It’s kind of crazy in a way.

Lawrence:
Yeah. I’m sure his personal heritage and circumstance and have a lot to do with the values he has alluded and embraced, but I don’t think it’s unique to his culture or geography. In fact, to the extend of some of these values are about management style and that certainly includes autonomy and long term outlook and a certain way of treating customers and that sort of thing. He told me, I was finishing up the research for the book, I asked him, “Who should I ask to write the foreword to the book?” and right away he said, “Tom Murphy.”

Tom Murphy is the fellow who built up Capital City, the big communications company, a lot of TV and radio stations around the country and he acquired ABC in 1984 for $3 billion dollars in a deal that Warren purchased 18% of. Tom ran that company through the late 90s when he sold it to Walt Disney. Warren said that Tom should write the foreword because, *Laughter*, this is what Warren said, “I have tried to emulate Tom Murphy. I’ve tried to put myself as a manager after Tom Murphy.”

So, I went and talked to Tom and he wrote the foreword and what I found was that these values that I had seen across all the Berkshire subsidiaries are the same kinds of values that Tom enstooled at ABC and even enstooled..they existed at Disney, especially managerial autonomy, decentralization, a sense of long term, a commitment to reputation, investment, and integrity.

It turns out Warren got these values, he personifies them at Berkshire, he got them from Tom Murphy. Tom is certainly an extraordinary manger, a legendary business man, but neither of these guys are the only people who have embraced these values or practiced them. That’s one of the things that’s great at Berkshire and about what I try to do in the book. It shows how these insights, how these basic attitudes or philosophies can be applied in a lot of different settings by pretty nearly everyone and it’s a great advantage.

Jason:
Yeah, they sure can. So, I’ve always wondered how involved is he in running these companies. I mean, there’s so many of them. Does he exert any control at all or is he really just an investor?

Lawrence:
No, his role is principally to shape the culture of the organization across all of these companies by example, by exhortation, and then, of course, to allocate the profits that each of the units generated. So, he does not involve himself in any of the operation details in any of the companies except if one of the CEOs asks him for input or advice.

They decide how much to charge, what inventory to use, the managers decide, and he stays out of that kind of operational decision, but he encourages all the mangers and all the people across the organization to embrace the kind of values that I’m talking about. The sense of the time horizon. He tells the CEO to think about their businesses in 50 year time horizons.

He tells them to think about operating your company as if it were the only asset that you and your family owned and you could never sell it. You have to have it forever. Once they take that attitude, they’re on their own to make the operational decisions, product decisions, the versification decisions, and everything else.

He doesn’t get involved in any of those kinds of..

Jason:
But, that’s just flies in the face our culture. It’s just so contrary to our culture nowadays and, you know, I talk to you about investors in general and my background in real estate investing and how I always tell people that, you know, that..I’ve just noticed over so many years that people who do the quick flips, they go for the quick profit, they have spending money, but the people who buy and hold seem to have the real wealth.

Lawrence:
It’s very contrary. So, we talked about the number of subsidiaries, my numbers are about 50, it might be 58 if you include those insurance subsidiaries. That’s the number of acquisitions that Berkshire has made since 1975 and they have never sold one of them. *Laughter*.

Jason:
*Laughter*. Wow, isn’t that amazing?

Lawrence:
YEAH!

Jason:
Buy it old strategy.

Lawrence:
It’s the opposite. There’s nothing wrong with KKR or Blackstone, but they’ve got a very different business model. Those are private equity firms that make acquisitions and then interfere pretty extensively in management to change a company and then sell it within 5 to 10 years.

Berkshire is the opposite. It buys something that doesn’t need fixing and hold forever. Now, that doesn’t mean all of these companies are perfect, exculpatory, or always profitable, some of them get into trouble and they face difficulties, but the deal that Berkshire has made them is that we will stand by you.

Come sick or thin, we’re not just going to invest in a subpar business because there’s been an economical upheaval in the industry or because they’re facing other kinds of adversity. We’re going to work and help get it repaired, get it fixed, bring it back to prosperity. It’s a very different attitude from the private equity market and I think it’s also a very different attitude from the tendency from so may mangers to exert hands on over somebody and control.

This is a model of decentralization and trust and autonomy and the thought is, if you give people that kind of latitude and express that kind of confidence in them, they will honor that, respect that, and preform better. I interviewed, one of the things I did for the book, I interviewed a lot of the CEOs from a lot of the subsidiaries to get their take and one reoccurring theme was how they..There was one great quote from a guy named Jim Weber, who is the CEO Brooks running shoe company. He’s been a senior manager for companies under a few different bosses over the years and he said, “In my career, I have never had so much freedom and yet felt so responsible.” So, it’s an unusual approach. It’s a very distinctive culture and it works! That’s one of the things I’m trying to get across in the book. Our tendency to over manage and pose controls may not always be the best way to organize a business or to run a company.

Jason:
Yeah, I certainly agree with you. However, and this is a sort of a big however, you gotta have the right people in place to be able to do that. A lot of it comes down to picking the right people or building the right people, building them into that, because certainly the Wall Street Journal of people who abuse the responsibilities everyday. *Laughter*.

Lawrence:
Yeah, it’s not error-free and Berkshire has not escaped that kind of problem. There have been CEOs that did not work out for this reason or that reason and ended up leaving. I talk about a few of those in the book, so it’s not a perfect system at all, but I go through in one section of the book in comparing this model and its benefits and its cost versus the more control orientated model and its benefits and costs.

Neither of the worlds are perfect, but one of the points I am trying to make in the book is that our preference, our sort of bias in favor of the control and command model may be stronger than it ought to be. There are successful-trust based cultures that are worth the look and worth considering.

Jason:
Well, you know, it’s interesting. When you look at that as a governmental model, I mean, that’s certainly true I would say, the command and control models exemplified in the former Soviet Union, North Korea, etc, etc. I mean, those obviously don’t work very well. *Laughter*.

Lawrence:
Right.

Jason:
And, in the freer countries people excel. Things happen. Just look at Singapore, the US, the former US, I’d say. *Laughter*. A little bit of my political sarcasm in there, but yeah, no question about it. Well, hey, I wanna move on from this topic. I mean, we certainly both agree on it. What are some of the greatest myths about Buffett?

Lawrence:
The biggest one is that I see in a media that he’s introduced all the time as the legendary investor, great investor, the one-of-a-kind investor, and I don’t take anything away from that. It’s true that over a long period of time managed to steadily out preform stock market indexes with the stock in his portfolio. So, there’s no question that he’s a great investor, but I think what’s lost in that kind of statement is his enormous success at the managerial level that he has assembled. This vast, verse congruent that is nevertheless held together by the same values…you know, pretty clear record of success. I think goes under appreciated.

The point of this book is to try and spotlight on that organizational talent, that managerial talent, so that we don’t remember him only as an investor, but also a builder of this organization. I think that’s important because investing is, in a sense, it dies with the man. I mean, if he owns a lot of Coca Cola, America Express, Gillette, Procter & Gamble. Well, there’s no organization there, so someone else will come to own those stocks of those large companies. Where as with Berkshire Hathaway, owning all of these organizations, these subsidiaries, the institution, and what it stands for can survive the man.

One small thing I’m doing with the book is trying to emphasize that part of his record. Not that he hasn’t been a terrific investor, no question about that, but to enlarge the account of his record..what I think is probably be the more important part and the more valuable for the rest of us to sort of learn from.

Jason:
That’s a good question, I mean, Warren is 83 years old now I believe and, you know, we look at Apple and Steve Jobs, it’s obviously a good comparison, probably, how is it going to be…after..I mean, is he ever going to retire or is he eventually going to kick the bucket?

Lawrence:
He’ll retire if he determines along with the board that he’s incapable of providing the leadership and decision making that he does, but my guess that, so far, his doctor gives him an excellent health check up mentally and physically and so far and hasn’t slow down a bit. I mean, there’s a very good chance that we’ll be having this conversation in 10 years or 15 or 20, but I don’t…

Jason:
Wow, that means 93, 98, 103 years old, really? Wow.

Lawrence:
It starts to get a little crazy, right? Nevertheless, everyone needs to plan for and anticipate it. I think the big difference between Buffett and Steve Jobs is that, you know, Steve is a creator, organizational builder. He created a couple of different organizations, really, but he was deeply involved in every operational detail – creativity, product, marketing, connections, right. He has fingers in everything, so he made himself nearly indispensable to Apple. I’m not saying….I think Tim Cook is doing a fine job.

There’s a school of thought that portrays that company as really taking a big tumble or moving sideways without Steve and if that’s true, it may be because he was integral to it. Where as with Buffett’s great insight, I think, was to make a company bigger than him and one factor is that he is not involve in any operation decision, so certainly the BNSF of Railway, Berkshire Hathaway energy, Fruit Of The Loom, the underwear company, the Shaw carpet company, they will all continue to operate just as they do now without him.

The next question is who will be available to provide the cultural cheerleading to keep the company wed to these values that I described and who will lead the capital allocation decision making and then address those thing. I got a whole chapter in the book explaining who would be responsible for what, but the big contrast with Steve Jobs and others, Henry Singleton at Teledyne back in the 70s and 80s was also a very hands-on manger, so those companies were so intertwined with the personality of those men that their passing really did cause a huge disruption.

This may be in the category of myth. I mean, so many people believe that Warren is so identified with and interchangeable with Berkshire that if you take him out the company goes and my point is that that’s really not the case. His achievement is having built something that will outlast him. It’ll obviously a little different because it depends who you have in that job and their style, but the ingredients are all there to succeed, to be prosperous, long after he’s gone.

Jason:
So, tell me about, you know, he’s investing billions of dollars in wind and solar. I sort of feel like he’s sort of pandering to the current administration, the Obama administration, you know, are those investments going to work? Still, the cost per kilowatt is so much higher.

Lawrence:
Yeah, it’s a great question. I had a couple of thought. One is that most opportunities are being taken at the Berkshire Hathaway Energy company level. That’s the Iowa based utility acquired in 2000. It used to be called Midamerican Energy until just this year. Greg Abel is the CEO of that company. He’s worked there for a very long time, I think 20 years, he’s a leader in the industry. You know, he spots a lot of different opportunities across the energy sector. He’s been in coal, in electricity grids, and across the United States, especially in the western United States and also in England. So, it’s a diversified energy platform.

The solar and wind asset, it’s true, Berkshire through Berkshire Hathaway Energy has already invested $15 billion in solar capacity in California wind fields and Wyoming and Buffett just this summer at an energy institute conference announced that they’re prepared invest another $15. It’s all through Greg Abel’s shop and Greg and his people are the ones that are saying, look, this is how we think we should allocate capital that we’ve generated here..an energy company that might be available from the other subsidiaries and Warren signs off on that.

So, the bet, the business proposition is one primarily designed by Greg Abel and his team and Warren signs off on it. My only guess is that those costs, they are high, they have to be managed, they have to be reduced, and one of the traits that I identify across most of these 50 Berkshire subsidiaries that I described in the book is a thriftiness, I call it a budget consciousness. These guys are really good at managing costs and minimizing costs and usually passing it through customers.

Another really good example of that is Gecko, the car insurance company, who’s advertising pitches about, you know, give us 15 minutes, we’ll save you a couple hundred dollars or something. They’re all about saving costs and the energy company too. So, it’s solar and wind, one of the big business challenges with those properties is to get those costs down. That’s right up Berkshire Hathaway’s ally. So, I think it’s a good bet.

It’s also true about your point of the Obama administration. I don’t know if it’s all politics, but the government is giving tax credits to energy companies to invest in solar and wind, so tax credits Berkshire Hathaway energy enjoys or can be used to offset profits at the other companies. There is clear government subsidy that the government is taking advantage of.

You know, from a policy standpoint it’s not a bad idea to try to move the country away from fossil fuels and towards these kinds of renewables. It’s a classic Berkshire operating play that is to take advantage of these kinds of incentives in the market place and through government subsidies to try and reduce costs and try to pass those savings on to the consumer. To me, it’s a perfect illustration of the kind of thing a lot of the Berkshire companies.

Jason:
Absolutely. Well, give out your new website, Larry, you’ve got a new website coming out for the book launch and tell people where they can find out more.

Lawrence:
Yes, it’s going to be BerkshireBeyondBuffett.com. So, that’s the title of the book. BerkshireBeyondBuffett.com is the website. My website designer is working on it this summer. It’ll be out probably around labor day. The book will be out October 21st and my publicist are all hard at work at designing a tour for the book too. We’re going to kick it off in New York on October 28th and on Washington DC on November 4th and then a dozen cities across the country.

One of the great things is that while many of the sites, I’ll give a traditional sort of solo author talk at many of the events. I’m going to be joined by local business people with a Berkshire connection; the heads, the CEOs of Berkshire subsidiaries or a member of the Berkshire board of directors and I’m really looking forward to that. That tour should be a lot of good fun.

Jason:
Good stuff, well Larry Cunningham, thank you so much for joining us.

Lawrence:
It’s a pleasure. Thank you so much, Jason.

 

Solar Energy: Changing the Balance of Power

AMA11-11-14The sun is rising on solar energy.

After a long stint on the fringes of the alternative energy movement, solar power is hitting the mainstream – and giving conventional utility providers a run for their money.

Solar energy was once the darling of the well off environmentally conscious homeowners who could afford to outfit their roofs with solar panel arrays, and off the grid activists who feared a malfunction of existing power grids.

But according o a new Bloomberg report, solar energy has achieved “grid parity” in the ten states that are responsible for producing 90 percent of US solar energy. Those states are led by the obvious choice, California but also including a surprising number of Eastern sources including New Jersey and Maryland. Here, solar has achieved parity in cost and availability with conventional utility supplied power.

Those states are not alone. New figures suggest that by 2016, solar energy is aiming to be as cheap – or cheaper- than conventional power in at least 47 of the 50 states. The rise of solar comes at a time when those traditional “in-grid” sources are raising costs, solar suppliers are offering packages that encourage middle and lower income homeowners to give it a try, and the government is offering a powerful (no pun intended) incentive in the form of a 30 percent tax credit.

That tax credit is set to expire in 2015, but it isn’t expected to vanish completely, so it will still help homeowners offset the cost of installing solar. What’s more, the emerging solar energy industry is creating jobs and encouraging the development of new technology with an eye to leading the energy industry for the long term.

And they may be right. The key difference between the solar industry and energy sourced from fossil fuels is that solar isn’t a resource. It’s a technology that continues to evolve and become cheaper and more accessible with time. The earth’s supply of solar energy won’t be depleted.

But fossil fuels are a resource – a finite one that will be depleted over time with no way to replenish supplies. The technology that makes these fuels accessible is limited too. And although interest in solar energy has typically peaked when gas, oil and coal prices are high, in recent years interest in solar has continued to rise regardless of the cost of those other fuels.

That rise in interest comes at a time when concerns about the environment are also at an all time high. Solar companies are taking advantage of the situation with more sophisticated marketing to a wider customer base and their own incentives, such as rebates, financing and cooperative arrangements.

All this has put conventional utility companies on the ropes. When solar energy was a pricy playtoy for well off eco-enthusiasts, no one paid much attention. But as solar power continues to steadily nibble away at the utilities’ customer base, these big energy providers are fighting back – and fighting dirty.

At issue of course is rising costs, but it’s also a question of relevance. As solar use increases, that means fewer users of power from the utility company. The company then has to raise its rates, which are then passed along to customers who don’t use solar – typically lower income households. And, utility company officials argue, reduced revenue means that the mainstream power grid could be in jeopardy.

To increase pressure on solar providers, utility officials in some of solar’s biggest markets, such as Arizona and California, have even sponsored ballot initiatives to change zoning laws and impose penalties for instilling solar panels on homes – effectively making it harder for consumers who want to make the switch to solar to do so.

Consumers are fighting back, though. In California, a group of solar companies joined with a number of physicians and environmentalists to form a coalition called CAUSE (Californians Against Utilities Stopping Solar Energy). CAUSE challenges the utility companies’ stranglehold on the power market on a number of fronts, claiming that solar is cleaner power that has benefits not just for the environment but also for consumers’ health, and that it’s ultimately more sustainable than conventional power sources.

The emergence of solar power has touched a number of consumer sectors. The demand for solar power has boosted the demand for materials and qualified builders. It’s also helped the housing market. Solar installations are a highly desirable feature that can boost a home’s saleability – and some home construction companies are offering solar options as a buyer incentive.

Solar power has come a long way in a very short time. Though it’s still a small percentage of the total power generated in the country, it has utility companies worried – and that may confirm its future as the leader in powering American lives.  (Top image: Flickr/evgeniydodorov)

Sources:
Randall, Tom. “While You Were Getting Worked Up About Oil Prices, This Just Happened to Solar.” The Grid. Bloomberg Business. bloomberg.com. 29 Oct 2014

“The Utility vs Solar Fight: Why? What’s At Stake?” Clean Technica. cleantechnica.com. 22 Aug 2013

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