Tuesday, December 26, 2017

Money - my year-end (nearly endless) post

There is only enough mined gold in this world that it can fill a single stadium (large, small, medium size?). More precisely, it fills an Olympic swimming pool of 50x25x2 meters or 2500m3, so more likely a very small stadium. Everyday we lose a bit due to industrial use and misplacement of jewelry, etc.  We also adding to our gold stack through mining and typically that costs a fair bit of money. All-in costs of adding 1 oz of gold is around U.S. $900. The costs fluctuate because of the efficiency of the gold mining industry.  Thus gold is scarce and we, humanity, have accepted gold (and silver) as a form of money.  The good news is that nobody has the power to dilute the replacement value of this currency.
But in the end when everything is said and done, gold represents an IOU that is accepted throughout the world now and for more than 5000 years.  There are measurements to so-called determine the lasting value of gold such as: a good gentleman’s suite made in the 17th century could be bought for 1 ounce of gold and today you still buy a good Harry Rosen suite for 1 ounce of gold. That is in my books a lot of B.S. Because, in the 1600s it may have taken a taylor (including assistants) many days to make that one suite while Harry Rosen has it made in a factory of robots in a matter of hours or maybe just minutes. Also, the cost and type of materials that were used to make that suite are likely quite different.
The same with eggs or cars. The work involved to make an egg 100 years ago is probably a lot more than today (although probably not for the chicken but then we have today a lot more chickens than 100 years ago). Is a chicken from 100 years ago worth more or less than today?  Quite a ludicrous question, something only an economist could come up with. And cars...? Do you think that a Ford T was worth more than a Lamborghini today?  Really, that is comparing apples and oranges.
Even measuring value in our most basic currency is going to be difficult. Is an hours’ human labor today worth more than it was 100 years ago? Ehh is that including vacation pay and employment insurance? What about statutory holidays? Pension contributions?  Anyone knows the real answer?   I guess, an hour of my life might be a good currency but what if I am suicidal?  What if I don’t want to work for any price? I guess, you could express 1 hour of my waking life in terms of what the average human on this planet is willing to do in 1 hour of its life.  But is one hours’ work of digging a hole with a broken shovel worth as much as one hour of work on your teeth by a dentist?  A good dentist I mean.
Money is quite difficult to value in any term. It is much more a consensus valuation, a general judgement by society how much it values someone’s contribution to somebody else or to society in general or better to someone who is willing to pay.  I guess it is kind of ironic that hundreds of years ago Van Gogh lived in considerable poverty, certainly according to today’s standard while his paintings right now are worth millions if not hundreds of millions.
So really, money is the value of someone’s labor based on supply and demand. This value is quite fleeting and we could maybe better express it in terms of cost of living for the average human being of average age in Africa?  Ehmm, better within the country where you live, say Canada.  But even that is kind of arbitrary because the costs of living vary as well, even when measured in terms of a basic set of products required to live. We adjust this group of consumer product over time according to the consumer price index which is probably measured differently here in Canada than say in the U.S. Even Calgary has a different rate of inflation than say Vancouver or Edmonton.
In fact, the value of any form of currency is quite fleeting and elusive. I guess, if many accept that the value of 1 good quality male suite equals that of 1 ounce of gold that may not be so bad until men are no longer wearing suites. Well, we could price it in terms of turbans or skirts; even Scotsmen wear skirts!
Basically, setting minimum wages and altering rules regarding employment as is about to happen in Alberta and Ontario is kind of useless. Because if the wages of the least valued labor skills are raised what will higher skilled labor wage earners do?  Really, what Premier Notley right now is doing is truly smoke and mirrors in the total scheme of things. But if our lower skilled workers no longer can work for a similar price than those in our neighboring provinces or in the U.S. we will lose competitiveness. The same is also true for raising taxes when our neighbor to the South is reducing taxes. Alberta has always been known as a competitive province but now the current government is busy destroying that and…  overall it won’t make things better or worse for low skilled labor relative to other Alberta workers.  But it will make things worse for all of us in Alberta when competing with labor and products made in other areas. But I digress once again. We’re talking money.
Fiat money like the Canadian Dollar or the U.S. dollar are even more elusive to value. When a government prints money out of thin air, basically it reduces the value of its products and services compared to areas with other currencies and with gold. If the Canadian dollar falls we must do more work to maintain our purchasing power. In other words, printing money is just another form of taxation. Of course, if other jurisdictions also print money then they lower the costs of their services and products as well and then the whole exercise was for naught. We call that competition. And not a healthy form of competition either because we lower the purchasing power of our citizens. If we compete in terms of innovation or productivity, then we tend to improve our overall prosperity. We get more product (and services) for less purchasing power.
You know, in the end it is all about purchasing power and not about money. How much more and how much a better lifestyle can we lead in return for our purchasing power. If you look therefor on the level of the individual, you may ask how much do you need to lead a comfortable life?  And how much purchasing power do you need to earn and own to lead such a life?  How much time do you need to spend on a golf course to be happy?  How often do you have to dabble in a swimming pool to get bored? Really, there is a limit regarding the purchasing power or financial resources required to lead a good life. Beyond that your financial resources are a means to execute projects that you feel are beneficial not only to yourself but also to society. If you do something that society does not consider worthwhile you lose your financial resources. I mean over the long term. You could start a very useful business, but you may make a loss during start-up. That doesn’t mean what you do is not useful to society. But if you go broke over time, then what you do may be very useful to yourself but not to society.
If you become richer because of your activities then society is in fact endorsing what you are doing. This is of course a general observation, because stealing or cheating may make you rich as well, although typically not over the long term – people catch on. True wealth is built by adhering not only to the law but also adhering to integrity and humane behavior.  There are not many people that are rich and can stand seeing misery around them. That is why it is easier for many people to buy products of child labor made far away, say in Africa, rather than buying a product from a store on the corner where people are abused. There is a balance though, often it is considered inappropriate to interfere in other areas and wagging the finger of self-righteous indignation and moralize about how others in different circumstance should live. That is something our own prime minister is currently doing with the NAFTA negotiations or with a free trade deal with China.  There is a balance and if you, I mean young Trudeau, gets consistently the cold shoulder, you know that he is tipping the balance too far towards 'social justice'.
It is not wrong to have rich and less rich people. This is about choice and some people can be perfectly happy with less money and with more family or less work than someone who wants to improve the world on a larger scale. We, as society, though, must decide where poverty is not a matter of choice or what level of misery is acceptable due to bad choices made. By society, I do not necessarily mean government, it may well be your community. In fact, in my books, the larger the number of people are involved, the more rule based and less humane things become. Policies and laws don’t make us decent and humane. Yes there have to be some general rules and standards but there is a limit to how much can be legislated and how much is a matter of human decency. That is the continuous argument between left and right (if you want to term it that way); how much should government interfere in our lives? It, ultimately, determines how many are interested in working hard and being accountable for their own actions and choices, and how many are interested in being taking care of by the community. It is the balance between self-accountability and self-entitlement. This already starts at home. Who is keeping the house clean?  Just Mom and Dad or are the kids also helping as much as they can?  How many rules at home versus how much choice and consequence?  Problem is that parents may not see the impact of how they run their household until years after the kids have left the nest. These are definite parallel patterns with investing and saving.
Whether it is on the scale of a single household or that of the state. The patterns are similar. When we have a government of self-entitlement where the population seems to work for overpaid civil servants and politicians that have lost touch with society, things will get nasty. When we have overpaid senior managers in our corporations who are not aligned in interest with their shareholders and employees then their corporations are in trouble.  Is it justified that a guy like ex-CEO of General Electric Jeff Immelt traveled across the world with two private jets (one as backup)? Is the man so valuable to this world that the use such resources is justified? Not even the Shah of Iran, who had a toilet made of gold in his private jet when he was disposed, traveled in two jets.  Are Jeff Immelt and similar CEOs truly justified to such excessive compensation or is this a matter of misaligned interests between the corporate owners and the care-takers of these companies?
Warren Buffett and Bill Gates have accumulated more wealth than 99.999999999% of us. Yet they are considered excellent allocators of resources. They know that they can’t take their wealth with them at the end of their lives. They created on their own and together foundations that are managed for the good of society. Now you may dispute how they allocate these resources but when you look at today’s governments we don’t see a lot of responsible allocation either. But here we see two extremes – the balance between individual allocation and government allocation.  At this point in time I am happy with the individual allocations but governments with their deep swamp critters have definitely crossed the line of what is desirable.
That is how I see money. Gold and other precious metals, real assets that are used to make our lives better and the temporary storage of wealth in the form of fiat money that is manipulated by those out of control governments. And in protest against that manipulation we see now the rise of cryptocurrencies which are nothing but IOUs by individuals that are kept track off using block chain technology. Unfortunately, Bitcoin and other cryptos are too speculative and volatile right now to be used as true currency. Who can pay for eggs with bitcoin? Tomorrow those eggs may be 25% more expensive or cheaper! And the validation software and costs of ‘mining’ is too expensive and cumbersome for daily transactions as many dream. Maybe the blockchain technology will survive. It has many advantages and there may be a place for it in our economy. But right now, it is nothing but a speculative bubble even more so than the exuberance and speculation on the electric car. It’s icon company Tesla as a stock is valued more than the world’s largest car manufacturers; manufactures who produce many millions of cars including electric cars (EVs).  Tesla is obviously a bubble waiting to burst but just like with Bitcoin the saying goes that irrational bubbles tend to outlive the solvency of those who bet against it.   How close were the speculators against the U.S. housing bubble in 2007 to massive losses or even bankruptcy?  Now we declare these speculators heroes of daring and vision. We even make movies about them such as ‘The Big Short’. But what is more foolish the ones who drove the bubble higher and higher or those who risked so much in their bet against the trend?
As long as people show confidence in their respective fiat currencies these currencies will keep functioning. Most realize that if they stop supporting their currencies then their economies likely end up in chaos. They are held hostages by irresponsible governments increasing debt and printing endless money. Let’s pray we can reign in those spending maniacs. Already it is unlikely that they will ever repay the debts these political maniacs created. It is not only the greying of the world population (demographics) and automation that put a lid on economic growth; even more so it is the servicing of our debts that will have future generations pay the price in subdued growth. Growth inhibited by interest payments. The more we must pay in interest the less is available for spending on our real societal needs. And who will pay for the unavoidable losses: the politicians and their groupies from the swamp? Not likely. The rich? Are they still investing in government debt at zero or negative interest?  Not likely. My bet is government pension funds; teacher pension funds and many other pension funds will be the biggest losers. And who will be there to bail those mismanaged pension institutions out? Oh, and don't forget Central Banks - talking about a Ponzi scheme! 
Conventional thinking is that a properly diversified paper security portfolio includes around 40% in fixed income often comprised mostly of government debt. But today, I consider that form of diversification irresponsible. On the day of reckoning the value of such a fixed income portfolio may disappear like snow under the sun. Private debt is not much better. But what would happen to the stock market which is so much smaller than the credit markets?  In the short term the stock market is not so much a weighing machine but rather a voting machine and as such the day that your fixed income portfolio smelts as snow, the stock market won’t do a lot better. That is why I have been building a portfolio of physical assets.  Assets that are useful even in a severely damaged society with failed currencies. Let’s hope such a day never comes and that we vote out of office these parasitic politicians and those sycophant swamp creatures before it is too late.

No comments:

Post a Comment