STRATEGIC INVESTING MODULE 1 | INTRODUCTION: OPTIMIZING YOUR INVESTMENTS FOR SAFETY AND GROWTH
UNDERSTANDING THE TIMES
Understanding the times we are living in is critical to your financial success.
THE CYCLE OF DEMOCRACY
A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largess from the public treasury. From that moment on, the majority always votes for the candidates promising them the most benefits from the public treasury, with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship.The average age of the world's greatest civilizations has been 200 years. The United States became a nation in 1776. That means the U.S. is 241 years into the CYCLE OF DEMOCRACY!
Where is the United States in this cycle? We appear to be in the Apathy to Dependence stage.
WHAT HAPPENS NEXT?
A NATION LOSES ITS SOUL
•Citizens start demanding that the government takes care of them. They want free food, free health care & retirement income.
•If they don’t get it, they stop voting for politicians who will not give them what they want.
I CAN PROVE IT! In the next lesson we will look at the U.S. Federal Budget
THE U.S. FEDERAL BUDGET
ENTITLEMENTS AND MANDATORY PAYMENTS EQUAL 73% of ALL federal revenue.
When interest on the national debt is added to entitlements and mandatory payments, 82% OFF ALL FEDERAL REVENUE goes to fund entitlements, mandatory payments, and the interest on our debt.
THIS IS WITH SOME OF THE LOWEST INTEREST RATES IN THE HISTORY OUR AMERICA!This means that it is IMPOSSIBLE to balance the FEDERAL BUDGET unless ENTITLEMENTS are slashed, but politicians WILL NOT do this because cutting entitlements means LOSING VOTES!
THE ENTITLEMENT TIME BOMB
One of the scariest trends in the history of the world is to look at the fertility rate! Bear with me for a moment as I explain this. Once you see what I see, you will realize that the global economy cannot recover for at least a generation.
SUMMARY OF FERTILITY RATES
•For a society to GROW, a fertility rate needs to be GREATER than 2.0
•At 2.0, a society stays constant (i.e. when two parents die, they have replaced themselves with two kids)
•At less than 2.0, a society will SHRINK.
A fertility rate below 2.0 means the population is aging. There will be MORE people entering retirement years and receiving benefits without paying INTO the system, along with FEWER working age people because the society is SHRINKING. This is like a PONZI SCHEME! At some point the entire system will collapse from the weight of entitlement benefits as NOT ENOUGH people will be working to pay into the system to keep it afloat.
Even if policies were enacted to entice people to have as many kids as possible, things cannot be fixed for at least a generation!
Consider the following hypothetical example: What if a country came up with a new policy that said if you had five kids you don’t need to pay taxes anymore. WOW! Let’s say that the majority of the world took fertility medication and all of them had quintuplets. Unreasonable and unlikely. But let’s say it happened. . . It would still be 18 years before those kids entered the FULL TIME workforce and became productive members of society.
Even with that crazy example, the situation would not turn around for about two decades! The global economy does not have that much time before an entitlement time bomb explodes causing a hyper-inflationary recession of biblical proportions, as governments will either inflate their money supply or die. There is no other outcome.
This is not just the case in the United States, but in all countries. It is the ugly side of politics. Politicians will do almost anything to get votes.
GOVERNMENT GONE WILD!
When a government RUNS OUT OF MONEY, it starts doing CRAZY THINGS!
•It RAISES TAXES to increase revenue
•It INCREASES spending thinking that they can create economic growth by creating PUBLIC SECTOR jobs
There is a MAJOR PROBLEM with this. The END RESULT of this scenario is that the EXACT MECHANISM governments use to GENERATE REVENUE WILL DESTROY REVENUE and make things worse!
THE LAFFER CURVE
RECIPE FOR SUCCESS
A recipe for success to stimulate the economy is to decrease government spending and lower taxes.
RECIPE FOR FAILURE
A recipe for failure is to increase federal spending (which causes inflation), and raise taxes (this will not work as most of the world is living at the margin, just barely scraping by).
Raising taxes is the same as reducing take home income, and people will spend less, ultimately leading to less government revenue.
THE INTEREST RATE CYCLE
Interest rates are CYCLICAL. Throughout history they go from HIGH to LOW or LOW to HIGH on average every 28 YEARS!
WHAT HAPPENS WHEN INTEREST RATES RISE?
When Interest Rates RISE, the BOND MARKETS GET CRUSHED. Federal bonds, municipal bonds, corporate bonds. . . ALL BONDS! Since the 1940s, stocks have typically moved up with interest rates.
UNEMPLOYMENT IN TERMS PEOPLE CAN RELATE TO
EVERYONE IN OVER 20 STATES IS UNEMPLOYED!
SOME REALLY UGLY MATH!
•8.9 Million on Disability
•19.7 Million people on Unemployment*
•8.9 Million + 19.7 Million = almost 29 MILLION UNEMPLOYED
That’s the equivalent of every man, woman, and child in:Wyoming, Vermont, District of Columbia, North Dakota, South Dakota, Alaska, Delaware, Montana, Rhode Island, New Hampshire, Maine, Hawaii, Idaho, West Virginia, Nebraska, New Mexico, Nevada, Utah, Kansas, Arkansas.
WITHOUT A JOB!
ALSO, THE NUMBER OF PEOPLE NOT IN THE LABOR FORCE IS 91,000,000
STRONG DOLLAR VS. WEAK DOLLAR
America has had a strong dollar since the Clinton administration
•Foreign countries buying American good will pay a higher price
•Imports to America are cheaper
70% of everything American’s consume is imported—so we see deflation in prices (i.e. our dollar buys more). The inverse is also true---American good are MORE expensive overseas.
A strong dollar is one way to boost the rest of the world while bringing America down.
•Because we purchase more foreign goods
•When we do that we export jobs to other countries to build all the stuff we are buying.
A CLASH OF WORLDVIEWS
The Trump administration represents a paradigm shift in U.S. Dollar policy that has dominated US policy since the Clinton administration.Trump wants to ”make America great again!”
How does he want to accomplish this?
•Bring jobs back to America
•He doesn’t want Americans or anyone for that matter buying Chinese, Indian, Mexican or European goods. He wants everyone to buy American and in order to bring jobs back to America he needs to get the rest of the world buying our stuff.
Through a weak dollar policy! With this policy initiative imports will be more expensive and, and exports will be cheaper!
ECONOMIC POLICY FOLLOWS A WORLDVIEW
The world is becoming more globalized and citizens around the globe ALL WANT CHEAPER GOODS! When a country relies on IMPORTS, the best way to accomplish the objective of cheaper goods is through the the currency’s relative strength against other currencies.
WHAT COMES WITH A WEAK DOLLAR?
•Rising interest rates
These two go hand in hand. A weak dollar means fewer around the world want to invest in it. So, to entice investment in US treasuries, higher interest rates are required. The weaker US Dollar means prices will rise on imported goods and a shift in consumer behavior won’t happen quickly, thus inflation is coming!
HOW DO POLICY MAKERS SLOW DOWN INFLATION?
•By raising interest rates to slow down borrowing.
•When rates are higher and people are handcuffed by debt, they slow down their spending as their debt service increases.
•When they slow down their spending, businesses get hurt, stock valuations come down, people get laid off.
•So, the exact policy that will bring jobs back to America, create economic growth, and make America great again will create a symptomatic effect of cooling down the economy that it just heated up.
UNLESS. . . People get out of debt!
BREAKING DOWN THE TRENDS
•When people lose jobs they spend LESS money
•When more people are working, more people are spending
•When people spend less money, corporate revenues come DOWN
•When people spend more money, corporate revenues go UP
•When corporate revenues come down, corporate America LAYS OFF more people
•When corporate revenues go up, corporate America HIRES more peopleSo we end this slide where we started—when more people are working more people are spending, and the more people spend more employers will be hiring.
THE GLOBAL ECONOMY IS SICK
There is a leading economic indicator that I look at that tells an amazing story of global economic health.It is the BALTIC DRY INDEX (BDI)The Baltic dry index tells us that the world is experiencing an economic slowdown of cataclysmic proportions!The Baltic Dry Index measures the demand to move raw materials and precursors to production. It measures raw materials used in manufacturing, such as:COAL, STEEL, CEMENT, AND IRON OREWhen the index is performing well, it means the manufacturers of the WORLD (i.e. China), are needing materials to build stuff. When the index is down, it means manufacturers are not needing raw materials to build things because business is slowing down.
This is just downright HORRIBLE! The Baltic Dry Index is down 89% from it’s peak in May, 2008. This means we are in the midst of A GLOBAL ECONOMIC SLOWDOWN LIKE NOTHING WE HAVE EVER SEEN!
So far we have established that:
•We are loaded with a heavy debt burden
•Interest rates are GOING UP
•Inflation is GOING UP
•Taxes are GOING UP
•The world is ravaged by a massive ECONOMIC SLOWDOWN
There is no such thing as a bad investment (unless it is unethical or immoral). There is just bad timing for investments.
IMPLICATIONS OF THE PENDULUM SHIFT IN INTEREST RATES
Why are interest rates so important?
Because we are in debt up to our eyeballs at the:
•Not just in America, but GLOBALLY
Most of America is living hand-to-mouth, paycheck to paycheck, at at the margin. Increasing debt payments squeezes people at the margin the most.
LIFE AT THE MARGIN
What happens when your income doesn’t increase, but your DEBT payments do if you have absolutely no extra money left at the end of the month?
•You change your spending habits
•You sell stuff
•Dip into savings or investments because the “rainy day has arrived.”
•Corporate America becomes less profitable affecting stock prices
•When they become less profitable they lay people off and even fewer people are spending
•Sales tax revenues will decline
•Income tax revenues will decline
•Governments then start to consider drastic measures (bail in, bail out, or other austerity measures)
A BRIEF LOOK AT THE FOUR MAJOR INVESTMENT CATEGORIES AT THIS POINT IN THE MARKET CYCLE (WHAT DO WE KNOW?)
•Inflation is coming in a big way
•Interest rates are rising
•Global, national, corporate, state, municipal, and personal debt is at an all time high.
•People are already living at the margin—month to month. A day of reckoning is coming if their debt payments increase as they are already living like this with some of the lowest interest rates in history.
BOND MARKET: Not just DOWN, It will get CRUSHED!
GOLD AND SILVER: UP
STOCK MARKET: Initially UP, then DOWN
REAL ESTATE: Down
Alexander Tytler (1747-1813)