Make America Singapore Again?

Today, Roger Montejano has a post out on SonicScoop about the recording studios of Singapore. I found myself truly stunned looking at images of this city. This is not an uncommon experience.

These are countries that started as essentially impoverished just over 50 years ago, and now stand as some of the wealthiest, most creative, and most dynamic nations in the world. Some of the views in this story are truly amazing. Singapore looks like a city from the future. It strikes the eye as being a profoundly majestic place.

Like Hong Kong, Singapore is also an incredibly inclusive place, as well as being incredibly economically free. Though it has a culture that is clearly its own unique cosmopolitan blend, it takes in a diversity of people from around the world, of all sorts of ethnic groups and social and geographic backgrounds.

Believe it or not, but this is what America used to look like to the rest of the world, decades ago. At one point in the not-too-distant past, even Detroit was like a glistening jewel—one of the most incredible, diverse and enviable cities in human history.
Someday again maybe. There’s a lot we can learn from places like Hong Kong and Singapore. Once upon a time, they learned a lot from us.
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How to Fix Daylight Savings Time

Today, I want to a secret Sci-Fi fantasy of mine with you. It’s about Daylight Savings Time. And I can almost guarantee you that it will come true within 30 years, if not sooner.

Instead of dealing with setting the clocks back and forth by an hour twice a year, and dealing with all the annoyance (and increased human death toll) that comes along with it, just have the clocks adjust a little bit each day, automatically.

This is not hard. We have the technology. Adopting a more sensible time standard is easier than ever to do, thanks to cell phones, computers and digital clocks.

If you wanted to, you could even add a little digitally-controlled motor to your analog clocks, if you wanted to keep them. This would likely be an upgrade that would cost just a few bucks, as most analog clock motors come in standard sizes.

Since I’m super-ambitious, I’d recommend taking this even one step further for future generations: Use your own local time zone, which automatically adjusts your clocks every day based on solar noon in your area.

Then, simply use apps like Google Calendar to automatically offset meeting times whenever you have to propose a call or an in-person event with people in different local time zones.

If I want to schedule a call with someone who lives in a time zone that’s 15 mins west of me for instance, Google can easily offset that in my calendar, just as it does now. (And in the future, it could easily and automatically offset proposed times in my initial scheduling email as well.)

This is much closer to the way in which humans lived and understood time for countless thousands of years. Finally, we have a technology that can take the best aspects of the sundial and combine it with the best aspects of digital precision and communications technology.

In your own time zone, there’s nothing to worry about. In the event that you have to schedule calls or make trips out of town (which most people don’t do every day) it would be super easy to have your computer, phone or car adjust for these differences automatically. And you can always easily refer back to your home time zone as well for reference, perhaps even side-by-side if you like.

This is incredibly simple to do today. We have the technology. All we need is the imagination, the interest, and the will to live increasingly pleasant and sensible lives.

It won’t happen next year, but I’ll bet you it will start to happen within my lifetime.

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Stock Market Tension: Where are the fairly priced assets? Hiding in plain sight.

There are a lot of people who work in financial fields who have a hobby in music. It may be somewhat more rare to find the opposite: People who work in music who have a (reasonably lucrative) hobby in finance, but hey, I’m weird like that.

Lately, I’ve been finding more and more crossover in interest between the two, and each time there’s some tension in the US stock market, I see my inbox fill up with questions related to some of my recent posts—both from inside the music community and out. Here’s one from just this morning that I liked a lot:

Hi Justin,

I was reading some fairly recent posts of yours…and I have to echo your thoughts on stocks being overvalued. I was wondering if you had ideas for more fairly priced assets in this market.

I’m still indexing with Vanguard but for bond holdings [and] I’m tilting to short term [bonds] to protect against rate increases. Also diversifying with P2P lending.

Any other ideas?

YES. As good fortune would have it, I’ve found that there are many nations where the “CAPE ratio“—probably the most reliable metric for estimating long-term stock returns—suggests that their stock indexes are still fairly or even cheaply priced.

Last I checked, you could easily find cheaply or fairly priced stock indexes to buy in strong, respectable nations including Singapore, Hong Kong, Taiwan, South Korea, Austria, Spain, Portugal, Poland and several others.

With CAPE ratios in the neighborhood of 8-15, stock indexes in nations like these should be expected to return something like 7%-12% per year over a 10-year period, with less than average downside risk for stocks.

Compare this to US stocks, which would historically be expected to return something like 2%-4% over a 10-year period from at the current price level—with pretty significant downside risk in the near term.

With a big position in US stocks, you’d be likely to see near-term drops of 40% or more just to get back to “fair” valuation territory. And as we know, markets tend not to just “correct”, but to overcorrect, passing right through fair territory and into despondent undervaluation for reasonably long stretches of time.

(This would imply a drop in purchasing power of significantly more than 40% in the foreseeable future, and perhaps by as much as 50%-80%. While this may sound dramatic, it does happen repeatedly throughout history.)

Meanwhile, foreign stocks in nations such as Singapore, Hong Kong, Taiwan, South Korea, Austria, Spain, Portugal, Poland, Norway and others have already been beaten down to very attractive price levels for a variety of reasons. Therefore, it is easily plausible that they would drop by less than US stocks in a short-term deflationary market crash.

On the other side of the coin, since they have a lot farther up to go before reaching overvaluation. If we were to experience another leg of an inflationary asset price boom like in the 1970s or early 2000s, these same assets would likely go up much more than US stocks, as they have much more room to do so while still remaining a good deal.

It’s easy to check the stock market valuations of a variety of different nations for yourself. Here’s a screencap from Star Capital’s database that lists CAPE ratios and dividend yields by nation. You can play around with this interactive chart for yourself and sort it by CAPE ratio or dividend yield if you like:


As you can see, if you’re really aggressively value-oriented, you might consider some degree of long-term investment in exceptionally inexpensive foreign markets like Russia or Turkey or Brazil, but that isn’t even necessary when good deals can still be found in so many nations with even better track records.

What About Bonds?

Bonds, particularly government bonds, are now clearly in a bubble.

In so many nations around the world, once you consider the effects of inflation, you’d effectively have to pay them money just for the privilege of loaning them your cash.

In what world does that make sense?

We are mortal, meaning having a dollar today is preferable to having a dollar tomorrow. That is the whole reason interest rates exist.

Yet, our current situation is one in which “negative real interest rates” have become the norm. The concept is easy to understand, but bewildering to contemplate:

If you own a bond that pays a 2% return and inflation is running at 3%, you are guaranteed to lose money for holding that bond.

Yet, there are enough people are lining to buy them? This is what a bubble looks like, by one definition of the word.

(Though to be fair in investors, many of the “people” buying these bonds are the very governments issuing them, which is fairly perverse when you really think it through.)

What Can You Do About It?

Often, when aggressive speculators see such an unsustainable bubble, they look for ways to “short” that investment.

Basically, this means that they borrow that overvalued asset, sell it on the marketplace, and hope to buy the asset back and return it once its price has crashed. You’ve probably heard about the strategy by now. There was even a big movie about it lately.

But there’s a big problem with shorting government bonds, because the question remains: What are you going to short them in? When a speculator sells a borrowed bond, they have to hold something.

For instance, if you were to short Japanese yen-denominated bonds by trading them in for dollars, sure, that could make sense. Provided that Japan continues to print new yen faster than the U.S. prints new dollars, the dollars you’re holding should become more valuable than the yen.

This plan, of course, is contingent on central banks doing what you hope they will do, which seems risky and speculative to me—and quite a bit farther away from the sound principles of value investing than I am comfortable straying.

Shorting US government bonds to hold dollars would strike me as even more foolhardy still, because if things go bad for the US government’s ability to pay back those bonds, they can and will just print more dollars, if history is any guide.

Rather than go shorting bonds in any sector, my preference is to hold some bond alternatives, including commodities that are likely undervalued or at least fairly-priced compared to their historical norms.

Currently, that’s most of them—though I am particularly attracted to silver, platinum, palladium and base metals, the price of which seems especially hammered down relative to all other assets.

While I don’t expect another huge bull run in commodities like we saw in the early 2000s, I’d wager that they’d have more upside than US stocks in a very inflationary scenario and would drop by less than US stocks in a deflationary crash scenario.

At the same time, it is reasonable to suggest that in aggregate, they would hold their current values fairly well in the somewhat less likely event everything’s totally fine in the financial sector and we just have some slow growth and low levels of inflation.

What about higher yielding “junk” bonds and P2P lending? I’d suggest that current debt levels are way to high to feel comfortable with these investments.

If interest rates rise further, a lot of loans will fail. On the other hand, if governments around the world go into yet another round of “QE” (aka “modern money”) you’ll get all the interest and principal you were promised. It just won’t keep pace with inflation in the long term.

History’s Alternative to Bonds

The most direct and obvious alternative to holding (or shorting) bonds is to simply hold some gold.

I know, I know. “Barbarous relic” and all that. A few years ago, I was skeptical too.

The anti-gold crowd are right to say that holding gold seems like a silly thing to do in times of positive real interest rates, when you can get a real return over inflation by simply holding “safe” cash and bonds.

But holding some gold starts to seem like a no-brainer in times of negative real interest rates, when the carrying cost of gold drops below the carrying cost of cash in the bank and in bonds, both of which are guaranteed to lose you money when real interest rates are negative.

Even more cheaply-priced than gold right now are gold mining stocks, which were hammered down to some pretty incredible lows after people mistakenly thought that the Fed would be able to “normalize” policy years ago.

If you divide the price of gold mining stocks by the price of gold, you’ll see that sector is at practically all time lows by that metric, which I think is a relevant and important one.

Unless you think man’s urge to dig useful things out of the ground is going away sometime soon, I’d suggest that all-time lows can only last so long. At some point, a commodity sector can stay in liquidation so long before prices start to rise, assuming humans still value that commodity.

In turn, my holdings of gold mining stocks shot up by more than 100% earlier this year and continue to be up significantly even after a short-term decrease a week ago.

A Buying Opportunity?

In case anyone is interested, I’d suggest that the recent price drop in gold by a bit less than 10% was caused by short speculators dumping tons of gold when the Chinese—today’s biggest buyers of gold—had closed their markets for their national holidays.

This was a truly brilliant move for any speculator who wanted to short gold for the near-term and take advantage of that anomaly, and in hindsight, I wish I had though of it myself! (Even if I’m too much of a risk-averse value-minded investor to have actually done it.)

To me, this surprise price dip of $100 represented a welcome buying opportunity, as I had been considering suspending my monthly allocation toward gold as the price continued to climb higher and higher. (I probably have enough already. I wouldn’t recommend that anyone hold a majority of their assets in any single class.)

If you’d like to take advantage of the recent price dip, this can be done by buying some coins or bars, holding an ETF (I prefer SGOL, CEF, GDX and SGDJ to the overleveraged GLD fund) or my favorite method, opening a gold-backed, credit-card accessible savings account with Goldmoney.

Goldmoney accounts are backed 1:1 by gold that you own directly in a vault and legally, cannot be sold out from under you, even in bankruptcy.

It’s cheaper (and I’d argue, probably safer) than holding gold in either an ETF or a physical form, can facilitate low- and no-cost payments to peers and other businesses, and can be spent directly via a gold-backed MasterCard.

It’s an idea that sounded kooky to me at first, but the more and more I turn it around in my brain, the more I can’t help but admit that it makes a lot of sense, particularity in a negative real interest rate environment.

The Short Version

So that’s it:

Compared to US stocks and bonds, there are at least a dozen nations that offer attractive valuations for buy-and-hold index investors.

Many commodities seem fairly priced or under-priced, and holding a little sliver of those may not be a bad idea. (They’re also one of the only asset classes that are negatively correlated with stocks, meaning they tend to do well when stocks do badly.)

Some cash or “cash equivalents” like T-bills are probably useful to have in case of a near-term deflationary crash. People are creatures of habit and will likely run to cash in that scenario.

After that, some holding of gold will probably be more useful to have than some cash, as today’s central banks appear at the ready to simply print more money in case of crisis.

Just to be safe, it may be a good idea to hold some right now instead of waiting for them to go on sale in a short-tern deflationary crash, in case we skip that deflationary crash and go straight into further inflation, much like in the 1970s. (I think this is more likely, but it’s anyone’s guess.)

At the very least, one would likely be wise to avoid holding too much of the most bubbly and overvauled assets around: US stocks and bonds at their current prices.

There is evidence to suggest that even if you don’t find the best deals, simply avoiding what you can clearly identify as being the worst deals is likely to set you apart from the average investor.

Disclosure: I am a professional writer, mastering engineer and businessperson. I am not a professional financial consultant, and none of this should be construed as investment advice. It is my opinion and reasoning and representative of how I am handling my own investments. As always you should do your own research and consult with any of your own trusted tax or financial advisors.

Posted in Economics | Comments closed

Investing Strategies for Tumultuous Times

I get some great emails about the investing strategies I’ve talked about on this blog. Here’s one that came in just this morning.

Hi Justin,

I enjoy reading your blog and feel like you offer wonderful insights in posts like “The Independent Musician’s Guide to Not Going Broke” from 2013, and “How to Tell When Stocks Are Overpriced” from earlier this year.

But it seems like your views have changed over the years from the first post to the more recent ones.

Is the “set-it-and-forget-it” type investing not the thing to do in this day and age?

I’m a newbie investor and the thought of spending my own time and doing my own research and investing in commodities or international funds puts me off.

I don’t know enough about investing, so for the average Joe like me, what would you say is the best course of action? Is continuing to regularly contribute to my 401k & Roth IRA in index funds without thinking the wrong way to go about securing my retirement?

Thank you for your help!

I love this question.

First of all, remember that you’re talking to a music geek and a part-time econ nerd, not a professional financial advisor. So I always recommend getting a second opinion before changing your investing strategy too significantly.

But with that said, sure, I get it! You are talking to someone who thinks about this stuff more that he probably should, and who has been studying markets in detail for many years as something of a weird, but very gratifying—and reasonably lucrative–hobby.

I get that not everyone wants to spend that kind of time thinking about these things. Fortunately, the more I study investing, the more that I realize that the key takeaways are very, very simple indeed, and require almost no time at all to implement. Here’s the basic idea:

YES. IRAs and 401ks are a great vehicle for long-term investing, and it’s wise to contribute money that you don’t plan on touching for 10-30 years into one of these for all the tax advantages that they offer.

YES. Index investing and the buy-and-hold approach are great ways to get great returns over the long haul.

YES. You don’t have to think about investing all the time to get great returns, and adopting a strategy to “set it and forget it” for long periods is very smart move indeed.

BUT: Buying US stocks is not the only set-and-forget strategy you can take. And, when US stocks are overpriced there may be other, wiser, safer and more lucrative “set-it-and-forget-it” strategies to adopt instead.

Fortunately, these other strategies are just as simple and easy to undertake. If you want to invest as little as a handful of hours once every few months into researching even better deals for your current and future income, then you could have even better returns.

Of course, as a non-professional investor, the idea isn’t to follow every little market squiggle and research every single company in depth. The idea is not to make this into your “side hustle”.

The idea is still to develop a sensible, “set-it-and-forget-it” approach—but to adapt that approach once in a while as the world changes, and as some assets start to become overpriced, while others start to become underpriced.

What I’m Doing

I still stand by the long-proven investment strategies in “The Independent Musician’s Guide to Not Going Broke“, but with one important exception:

As great of an idea as it is to buy and hold stock indexes for the long-term, I do not recommend exclusively buying U.S. stocks when they are overpriced.

I mentioned this key idea in passing in that original article. But more recently, as U.S. stocks continue to become overpriced, I’ve felt it’s appropriate to get a bit more specific about exactly what I mean by that idea—and about how you can easily figure out what kinds of investments you might buy instead.

None of this, however, is not to say that you should necessarily sell the old U.S. stocks you bought—especially if you got them at a fair or low price to begin with!

If your time horizon for holding is “forever”, then continuing to hold stocks when they are expensive can certainly be justified.

(Just don’t freak out when their value drops in the short term if your time horizon for investing is not short term.)

But as far as buying new stocks and investments? That’s a different story.

When US stocks are overvalued, it just doesn’t make sense to me to buy more—so I buy other things instead. I simply have not seen any evidence to suggest that the mere passage of time can turn a bad deal into a good one.

Fortunately, finding better deals isn’t hard!

Finding “The Best Deal” may be difficult, but finding “Better Deals” is easy.

Fortunately, you don’t have to be some stock market obsessive to find better deals than the currently overpriced U.S. stock indexes.

As I write this, the “CAPE” or “Shiller PE” ratio for U.S. stocks. is around 26. (This is basically a long-term average of how many dollars you have to pay to get a share of $1 of earnings per year.)

As you can see for yourself, the CAPE ratio has never been this high except for the times shortly before the great stock market bubbles burts of 1929, 1999 and 2008.

The "CAPE" or "Shiller PE" ratio of the U.S. stock market. This is a 10-year average of price-to-earnings ratio for the entire S&P 500 index.

The “CAPE” or “Shiller PE” ratio of the U.S. stock market. This is a 10-year average of price-to-earnings ratio for the entire S&P 500 index.

Pretty chilling stuff, right? Holding your old U.S. stock indexes may make plenty of sense. But buying new ones? I’m skeptical, to say the least.

(Of course, I’m also skeptical that holding too many dollars is a good idea over the long term, for reasons that should be obvious to any investor.)

But my solution for this is simple:

When U.S. stock indexes are overpriced by the CAPE ratio, I simply look at the CAPE ratio of stock indexes in other countries that have decent prospects for the future, and see if they are in better shape.

Once I’ve identified which trustworthy countries seem reasonably or cheaply priced, I simply buy a diversified baskets of those markets. Done!

It’s actually pretty easy to quickly check the CAPE ratio of different foreign markets. I often go to Star Capital’s website, which has a handy, easily-sortable chart of P/E ratios, CAPE ratios and dividend yields by nation, updated quarterly.

In the U.S., I feel like any CAPE ratio under 15 is probably a fairly good deal, anything under 10 is a steal. Anything over 15 is higher than average, and anything over 20 is way to high for me to buy based on historical norms.

Since I think there is potentially a bit more risk in any individual smaller or emerging country, I might prefer to see those respective numbers a little bit lower than I would for the U.S. And, I prefer to buy diversified bundles of several countries at once.

So, I’m basically doing the traditional, buy-and-hold passive index investing approach, but taking a very small amount of time to look for good value within that strategy.

The Tools I Use

I also like to use Motif Investing to create my own custom, diversified baskets of indexes and buy them all in one go. I can buy a whole bundle of up to 30 stocks or ETFs this way for $9.99, so it’s a lot cheaper for this kind of thing than conventional brokers.

I can also check PE ratios and dividends yields there. And as mentioned, tools like Star Capital’s international ETF screener can give me quick insights into current CAPE ratios and other stats I can’t find on Motif.

(Disclaimer: I have no affiliation with Motif, other than just being a user, but it really has been a great tool for me. This is a referral link, so in case you like they idea, this will give you a free $100 to get started. If you fund an account with just $1,000, that’s like a guaranteed 10% return—even if you just buy a Motif consisting only of U.S. dollars or U.S. stocks! Most investors never consistently get a a return as high as 10%, so that’s pretty hard to pass up.)

Below are some of my results using this strategy on Motif’s platform.

Dollar values below are obscured for privacy, but you can easily see just how well these simple investments have done compared to the S&P 500. For a variety of reasons, I believe that these investments are safer than investing in U.S. stocks at the current time, as well.

My Results With Value-Based Index Investing

Emerging and Free Markets

Above is my “Emerging and Free Markets” Motif, which returned 12.1% since late September, compared to 8.25% for the S&P 500. That’s an out-performance of almost 50% in less than a year.

On top of this, the dividend returns are more than double that of the S&P. And, since these stocks are at lower valuations already, they are likely to drop by less in the event of a market downturn. These are all benefits of “buying low”.

This was one of my first ever baskets using Motif, and the first one using this strategy. It was also an extremely lazy investment.

All I did was buy indexes from countries that had low CAPE ratios and had dropped in price in recent months or weeks. All of this was easy to check between a chart of international CAPE ratios and Motif’s built-in tools.

This took very little homework. Only about a half hour, plus a very good framework for understanding what investing is really about.

Developing World

My “Developing World” Motif is an even more aggressive version of this strategy. It has returned 16.3% in the past 6 months alone, compared to 2.1% for the S&P 500.

It focuses a little less on already-developed markets, and a bit more on great deals among the fastest growing nations with the best long-term prospects for growth.

Instead of taking just under a half hour, it took just over a half hour, and a bit more guts. But I still consider it a far more conservative and less-risky investment than buying U.S. stocks at their current valuations.

Again, the dividend payouts are more than double that of the S&P 500 and the future prospects from this level are brighter.

Again, these stocks were bought when they were already hammered down to a very low level, so there is far less downside risk than with US stock indexes at their current price levels.

Precious Metals

Above is the real stunner of the batch. Check out that “return to date”.

I created my own customized version of Motif’s basic “Precious Metals” basket in October when the gold price was headed near a bottom. I really started piling into it in December when the gold price hit as low as $1050. This turned out to be its 52-week low.

This Motif is up 115% in about 8 months compared to 5.83% for the S&P 500.

That’s about 20X out-performance on what clearly seemed to be a very low-downside risk compared to the S&P 500 at its current price.

Some people would think that this kind of thing is a more reckless investment than buying the S&P 500. I disagree.

I say it’s far lower risk from a long-term perspective than owning the S&P 500 because the gold price and gold stocks were dramatically lower than they likely should have been, while the S&P 500 is dramatically higher than its norms.

Buying things that are more expensive than they ought to be is reckless investing. Buying things that are undervalued and holding them til they’re not—while collecting good dividends along the way is bother smarter and safer investing.

How To Do It

I can’t promise you will have results that are as good these if you want to try making your own Motifs, but I am not exaggerating on how little time I actually spent putting them together.

I probably spent around 30 minutes on each, and most of that was just hemming and hawing over what is probably inconsequential minutia.

To inform these choices, I just used the very simple strategy and tools outlined above, and kept some mental notes about different countries I’d hear about in the news. Which ones are continuing to do better? Which ones have been starting to do worse?

I have to add that I do read books and get excited about watching videos from my favorite economists and market commentators whenever they come out, but I really can distill all I’ve learned, and this whole strategy down to a few very basic ideas:

  1. Buy things that are undervalued and avoid buying things that are overvalued.
  2. Seek to get paid for owning, rather than selling, your investments.
  3. Once you’ve identified what the better and worse deals are, “set it and forget it”. Largely ignore the day-to-day squiggles of the market.
  4. Revisit your strategy once every season to see if it’s the best place to keep on putting your money. If not, put your new money toward new things.
  5. If any of your investments get really overvalued, consider selling them and buying undervalued assets. This step is not necessary if you have a long-term time horizon, good dividend payouts, and prefer a strict buy-and-hold approach.

That’s it.

Because I follow this approach, I was smart enough to buy into indexes of countries like Singapore, Hong Kong, Australia, Norway and several others after their value had gotten hammered into the ground by questionable expectations of Federal Reserve rate hikes in the future.

Later, I started seeing potentially great value in parts of Eastern Europe and the EU such as Poland, Hungary, Turkey, Spain, Norway and Austria, as well as developing markets Brazil, Chile, Vietnam and Singapore.  Again, I didn’t have to do much. I just looked at international CAPE ratios, filtered out seemingly great deals in any countries that made me nervous, and made myself some Motifs.

This turned out to be a good idea in both cases, as the value of these markets have gone up significantly since their lows. But even more importantly, they paid a dividend much higher than US stocks in the meantime, and would have been a good deal even if their price dropped further.

In the first case, I got a 12% return, meaning I did 50% better than the S&P’s 8% return in the same time period and collected more than twice the dividends while I was waiting, all in about 8 months. In the second case, I got a 16% return compared to the S&P’s 2% return I got about 600% better performance than the S&P, all within about 6 months—While collecting more than double the dividend payout.

When you put some money into a basked of international indexes, will all of them pan out to be great deals? Well, the point of diversification is that they don’t all have to be. But overall, I trust the long-term prospects of buying underpriced indexes more than the prospects of overpriced ones.

Commodities, Precious Metals and Better Banks

Yes, I have also been diversifying a bit into undervalued commodities like silver and oil among others.

This has been a good strategy, as I started buying into silver around $14, oil around $29 and gold around $1050 very recently, and they are all up pretty considerably since then. Last I checked they were around $19, $49 and $1330, and I’d expect them to go significantly higher over the next few years, rather than lower.

Though I own some of these in the form of ETFs, commodity indexes and related stocks, I also have taken to holding a bit of gold in what is essentially a gold-backed savings account from BitGold. I can even spend this gold anytime I like, using a pre-paid MasterCard. It’s certainly cheaper than buying gold ETFs or physical bullion in small quantities, and arguably, safer than either as well.

I also believe it’s a better alternative to contemporary banking accounts, which give you a rate of interest that is, in many or most cases, lower than the rate of inflation. Then, they take anywhere from 80% to practically 98% of your deposited money and lend it out, often in bad investments.

Even if the major banks do stay solvent through another financial crisis (which seems unlikely) you’re still guaranteed to lose money with them, right now. That’s just what happens when the interest rate you are getting is effectively negative after you account for inflation.

I still think that the idea of buying a holding stock indexes for the long term is a very good idea. I just think that buying things that are on sale is a better deal thank unthinkingly buying anything, no matter how expensive it may get.

Again, I can’t tell you what to do, and I wouldn’t recommend taking this as investment advice, just as one man’s example. But I hope it helps to detail my own strategy and reasoning a bit better.

Disclaimer: This is one man’s opinion and research, and should not be construed as investment advice. As always, be sure to seek other voices, do your own research, and seek out trusted professionals if desired.

Posted in Economics | Comments closed

A Few Thoughts on Brexit. (And Why Not to Fear It.)

The EU started with great intentions, as a free trade zone meant foster cooperation and connectedness within Europe.

Over time, it has become the opposite: A giant bureaucratic regulatory boondoggle that helps some Europeans at the expense of others. As bureaucracies often do, it helps those closest to power while harming those furthest from it, all in the name of serving them.

If we are interested in well being for all, it’s important to have free trade between nations, as great European thinkers like Smith and Bastiat understood years ago. Many of those in the “Remain” camp, who wished to stay in the EU, understood this too, and they should be given credit for it.

But those same great thinkers also understood that centralization of power often presents greater risks to truly free cooperation between people that it may bestow. De-centralization is the way of the 21st century. From the Magna Carta to Abolition and beyond it is indeed, the way of the civilized world.

This is probably the beginning of the end for the EU as we now know it. And the vote split in the same way that interest did in the US in 1776: Roughly 1/3 for revolution, 1/3 for loyalty to the old crumbling powers, and 1/3 who couldn’t be bothered.

Change is always scary, but history has a way of sorting these things out for the better.

Improvement from here, is not guaranteed, of course. It requires action and discussion and thought. But it’s hard to get much of the latter when we jump to vilify those on the other side of the issue.

Those of us outside Britain have no business telling the British what to do as long as they are not harming others. The best we can do is listen, and then lend our thoughts. As always, it’s important to do the former before the latter.

Posted in Economics, Philosophy | Tagged | Comments closed

Get Used to Negotiation. It is an Everyday Event.

I sometimes hear complaints about the role of negotiation in setting salaries and pay. The claim is that “negotiation skills” can give some people an “unfair” advantage over others.

This claim sounds plausible at first, but on a deeper inspection, it falls quickly apart. This is because it assumes that negotiating is not an important job skill to have in a business. And it assumes that rewarding negotiation is somehow irrelevant to most jobs. Nothing could be further from the truth.

Almost every major interaction in business—and in life—is a negotiation in some sense or another. And this is a good thing. The alternative to negotiation is either non-cooperation or forced cooperation, and negotiation is far preferable to either.

At the most obvious level: If you can’t negotiate with your boss when your own self-interest is on the line, how could that boss ever expect you to negotiate effectively with a client on his or her firm’s behalf?

But this isn’t something that matters only for salespeople and dealmakers. It matters for everyone.

If you’re a graphic designer or a computer program with many requests from many clients or departments, how do you prioritize some requests over others? How do you make your colleagues or clients feel they’re being treated right when you have to prioritize around them? How do you work with them to figure out which requests are urgent and which aren’t? And when there is a difference of opinion, how do you agree about which direction to go?

Even a barista negotiates, both with customers and co-workers, in some fashion or another every day of the week. They may not be haggling about prices, but that’s not all that negotiation means. Negotiations happen in every family and  in every relationship. Even choosing what to have for dinner or where to put the toothbrushes is a form of negotiation.

Ultimately, I think this may be one of those words that scares people simply because they don’t realize what it means. Let’s fix that:

Negotiation means that you are trying to find an arrangement that works better for everyone than the available alternatives.

Negotiation creates wealth and creates value by finding ways to make everyone better off than they would be otherwise.

Negotiation is far preferable to the other major methods of deciding what to do, which include:

A) Not getting what you want,
B) Not figuring out what other people want or would be happily willing accept, and
C) Ordering people around.

Negotiation is a civilized alternative to dictates, and negotiation is a civilized alternative to force. Negotiation is an essential life and business skill and one that should be rewarded and encouraged. So if you’re afraid of it, work on it. Realize that you already do it every day.

Without rewarding good negotiation, how are we supposed to get more of it, and less of those other, less desirable methods of deciding what to do?

So if the idea of “negotiation” scares you, it’s time to change your mind. You may not be able to haggle every price, but that’s not what “negotiating” really means. It doesn’t necessarily have anything to do with money.

Negotiation doesn’t mean getting the most for yourself—or the least for everyone else. It means finding ways and places to agree. It means figuring out what you can give and what others can give as well. It means figuring out how to work with others to make the most out of life.

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On Adaptability and Figuring Out Why You’re Alive

I was saddened to hear that over the weekend, musician Keith Emerson of Emerson, Lake and Palmer shot himself.

He was 71 years old and had become depressed that nerve damage to his hand was preventing of him from performing to the high virtuosic standard to which he and his fans had become accustomed.

Specialization of course, can be a beautiful thing, and Emerson’s specialization brought joy and extra meaning to the lives of many.

But although specialization can be a beautiful thing, having an overly-narrow perception of one’s own value as a human being is not.

Emerson could have—even at 71—adapted. He could have trusted in himself to do that: To recognize that he may have more than one value to offer the world, just as he would likely have encouraged others to do.

I was very sad to hear about Emerson’s death; about his choice to die rather than showing himself and others that we all have more than one narrow value to offer the world. I wish he could have seen this in himself. He will be missed.

One of the very scary things about artists is that they are often likely to wrap up their identity too closely with what they do. But you are not your job. You are not even your art. These things are an expression of yourself and of your values, but they are not your self on their own.

Today, I was oddly encouraged to read this very beautiful post by now-former mastering engineer Justin Bonnema on why he is leaving the music industry. Bonnema is far younger than Emerson was, and he did not face a newfound physical limitation, so perhaps it was easier for him to recognize that he has more than one value to offer the world.

But this is not an argument that what Emerson did was best. It is an argument that if you are to discover that you have more than one narrow value to offer the world, it is best to start doing so right now. Ideally, when you are younger and healthier, and long before you wake up one morning and find that you need to figure out what else you can offer the world, and fast.

Ultimately, your value to the world, and your identity, is far greater than any one noun. I would like to encourage you to discover that.

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Free Speech Matters. Even for People We Disagree With.

When you have free and open debate, even of bad ideas, the best and truest ideas tend to win out over time. Not every time and in every moment, but by and large. As humans, we are all reasoning animals, albeit very imperfect ones.

But when you shut down and shut out bad ideas—rather than respond to them with better counter-arguments—they only fester and grow in the darkness. Free speech matters. Even (and perhaps especially) for those people we disagree with.
Posted in Peace and Freedom, Philosophy | Comments closed

The Interplay Between Giving and Getting (What Say’s Law Really Means)

If you want to get something, the best question you can ask is: “What can I give?”

Once you have determined what you can give, you would be right to ask yourself: “Does anybody want it?”

If the answer is “No”, then it may be wise to ask yourself whether you know what “giving” really means.

The first stumbling block here lies in determining whether or not other people really want what you have to give. One of the best ways to find out is to ask them what they would be willing to give up for it.

If it turns out that another person would be willing to give something up for what you have to give, then you have two choices. You can either:

1) Decide to give it to them freely anyway, for nothing in return.

2) Accept what they have to give.

If you do the former, then you are being charitable—you are giving a gift. If you do the latter, then you are making an exchange. Though there are indeed many cases in which giving gifts is noble, there are other cases in which making exchanges may be nobler still.

At the root of it, exchange can be even more powerful than the giving of gifts because it increases the amount of giving in the world: In an upwardly-spiraling chain of events, each act of reciprocal giving inspires another, and another, and another and another still, all the way up to the point that someone stops giving.

Fortunately, there are so many wonderful ways of reciprocally giving. Even saving and investing—which are often sadly misclassified as “hoarding”—are themselves forms of giving: When you “save”, in the literal sense of the word, you are planning to give something much bigger in the future. And when you “invest”, you are giving someone your savings to use, right now, even offering to bear much or all of the risk of loss as well.

And so, the chain of giving does not stop when people begin to save, or “hoard”. The chain of giving only stops when people stop offering to give things that others would be willing to give for.

This is one of many reasons why it is crucial to find out whether or not you are really giving something to begin with. This is why it is important to recognize that whenever you are “giving” something for which others would give up nothing of their own accord, it is right to question whether you are “giving” them anything at all.

This is the underlying logic of “markets”, those world-turning systems of reciprocal giving. This particular dynamic is known to economists as “Say’s Law“—named after Jean-Baptiste Say, who was born in 1767, and lived through times of great change in this arena.

Say’s Law is often summarized as: “Supply creates its own demand.” But this summary is a bit nebulous without some context, and so I found myself taking quite a while to understand what it really means.

What it meant to Jean-Baptiste Say is that when a shoemaker makes shoes, he has created both a supply and the ability to demand. He can only demand apples from the applefarmer because he has made a supply of shoes that he can offer to her. He can only get because he gives.

Those words, “supply” and “demand” sound very clinical to modern ears. “Getting” and “giving” speak closer to the heart, while meaning the same thing to the brain. And they even better explain what is really going on.

Only because he has created shoes does the shoemaker have something to give. And to find out if he is really “giving”, to determine if others really want them, to discover if he is really doing good for his fellow women and men, he must ask them what in the world they would be willing to give themselves.

When the woman who keeps the apple orchard demonstrates that the shoes are worth more to her than her 100th bushel of apples, she has demonstrated that the shoes are indeed worth making. By accepting the apples in exchange, the shoemaker demonstrates that the apples are worth the growing.

This is what lies under the hood of every free exchange. We can abstract this out by using money or credit or by selling time or labor. But this, ultimately, is all that commerce is: Commerce is the art of giving, and of asking others what they are willing to give.

When it is done right, a lot of “getting” may come from commerce as well. But, as Jean-Baptiste Say noted back at the turn of the 18th century, the giving comes first. It is “supply” or “giving” that creates “demand” or “getting”.

At the time, the idea was revolutionary. I’d like to say that now, we take this idea for granted. But I think that is the opposite of the truth. I think that many of us go through our entire lives without ever truly grasping the power and implications of this very simple, very peaceful, and very beautiful idea.

So: When you want to get something, first ask what you can give.

And: To find out whether or not you’re truly giving at all, one of the most sure and honest ways available is to ask others what they are willing to give in turn.

The more we are generous—and the more we hold each other accountable in this way—the better we all will all tend to do.

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How to Tell When Stocks are Overpriced (It’s Easier Than You May Think)

In “The Independent Musician’s Guide to Not Going Broke“, I made a strong case for what is now the conventional wisdom in finance: That putting away a good chunk of money every month into broad stock market index funds is one of the safest, surest and simplest ways to build wealth over long periods of time.

However, I also made a very important caveat: That when stocks are cheap, you’d be smart to buy more of them, and that when stocks are very expensive, you’d be smart to buy fewer of them—and purchase other things instead. I’ve been writing a lot about that lately.

Recently, I found myself in a conversation with a person who took the idea of index investing much too far: “You can’t know when stocks are expensive!” he said. “People said they were expensive when the Dow was 3,000 and at 10,000! It’s at 17,000 now. The market goes up over time. Buy now and the market could be 100,000 in 10 years!”

While this kind of statement has some grains of truth, it also reveals some tremendous flaws in thinking. It’s hard to blame this gentleman of course, as this is what the mainstream financial media tries to teach us whenever it can: “Buy, buy, buy, buy, no matter the price! No price is too high! Stocks will always go up over time!”

Naturally, the financial media of today has a vested interest in selling that kind of irrational nonsense. But the reality is that it is indeed extremely easy to tell whether stock markets are cheap or expensive, once you know what to look for. In a moment, I’ll show you clearly, and in simple detail.

First, it’s important to recognize that successful stock investing has next to nothing with the price of stocks going “up” over time. I know this sounds counter-intuitive to many, because it’s the opposite of how they were trained to think. But if you look more closely, you’ll soon realize that stocks don’t actually go “up” over time. They go pretty much sideways, in the grand scheme of things.

Let’s take a look at what I mean. First, a recent chart of S&P 500:

Sure, it looks like the stock market is going “up” over time. But it’s not, really. At least not by nearly that much.

A large part of what you’re seeing is not stocks becoming worth more but rather, dollars becoming worth less. This is a concept known as “inflation”. And once we start to adjust this chart for inflation, we start to see a very different picture:

inflation adjusted sp500

“Inflation Adjusted” S&P 500 Index from

This time, we’re zooming out even farther, going all the way back before 1880. Notice that, right now in 2016, stocks are actually still lower in price than they were way back in 1999 and 2000.

This means that the stock market has still not yet recovered in real terms from the great tech bubble. (Excluding the incredibly small amount of dividends you may or may not have earned when buying at those inflated prices.)

But even this chart isn’t quite good enough, because it doesn’t actually track “inflation” at all. What it tracks is “an increase in consumer prices, as measured by the U.S. administration.”

The administration of course, has something of a vested interest in making this figure appear as low as possible, so that that folks don’t get too ornery. And so, there’s a lot of black magic and questionable accounting that goes into creating the “official” figure.

Inflation, more rationally defined, simply means “an increase in the money supply.” So to get a look at what the stock market is really doing, it is best to compare it against something that is relatively more fixed in supply and usefulness than a dollar bill is.

If you were to instead track the stock market in terms of barrels of oil, or ounces of gold, or tonnes of wheat, you start to get a very different picture indeed. Here’s that very same index again, this time, priced in gold ounces:

The S&P 500, priced in ounces of gold.

The S&P 500, priced in ounces of gold.

Very interesting. Where has that “upward” movement gone? Is it really there at all?

But even this chart isn’t quite ideal either. I’m not certain that gold is the absolute best measuring stick for a stock price. What’s truly important to recognize is what the real value of a stock is to begin with.

When you’re buying stocks, you’re buying two things:

1) A share in the “earnings” of a real company. (How much money the company makes after expenses.)
2) A share of the “assets” it owns. (How much all of the stuff and money it owns is worth.)

That’s it. Deep down, that’s all there is to buy.

Sure, you’re also making your best guess about whether these two things are likely to increase or decrease in the foreseeable future. But ultimately, that’s about the size of it.

Simply put: The more stocks cost compared to their earnings and assets, the more “expensive” they are. And the data shows that when it comes to stock indexes, the further above the average real price that you purchase stocks at, the further below the average your real returns are likely be.

Let’s look at this in action. Here is the price of stocks once again, this time compared to their past 10 years of earnings. This is known as the “CAPE” or “Schiller” price/earnings ratio, and it is very predictive of future returns:


The price of stocks compared to an average of the price/earnings ratio over the past 10 years. The average is about 16. Just before the market started tanking this year, it had ballooned to almost 30. This can be seen as nearly 2x overpriced compared to the average.

One of the first questions to ask when you are thinking about buying stocks is “how many dollars do I have to pay for a dollar of earnings”?

The long-run average is somewhere in the neighborhood of $15 or $16 in price for $1 of earnings. Right before the market started tanking in January of 2016, that ratio had ballooned to nearly $30 for every $1 of earnings. That’s almost double the long term average. And it’s very close to where we were right before the Great Recession.

By this metric, you can confidently say that either the price of stocks (or the value of the dollar) would have to drop by about 40% to return to a more “average” valuation. Though it’s worth noting of course, that markets almost always tend to overshoot the mark.

For some context, a “price to earnings ratio” of 15 means that it will take you 15 years to earn back your initial purchase price. Roughly speaking, this translates to an effective implied interest rate of around 6% or 7% per year. This is an “average” long-term return for stocks.

A PE ratio of 10 means that it will take you 10 years to earn back your investment. This is an implied interest rate of roughly 10%, and is a bit better than average for stocks.

A PE ratio of 30 however, implies that it will take you 30 years to earn back your original investment. This implies an interest rate of just a bit over 3%. For all the downside risk there is in stocks, it is hard to see this as anything but a terrible deal.

We can see the same kind of thing happen when we look at price compared to “earnings yield“, which essentially means “how much cash the company earns for you every year, just for you owning the stock”:

S&P 500 Earnings Yield. This is the past year of earnings divided by index price.

S&P 500 Earnings Yield. This is the past year of earnings divided by index price.

As you may notice, this is very close to the lowest levels we tend to see.

The average here is close to 7.5%, and we’re currently around 4.5% today, which once again means that stocks would have to drop by 40% to return to average territory.

If history is any guide however, stocks don’t tend to drop back to average. They tend to drop right through it, and often straight through the floor—passing only briefly through the average—and then proceeding to find a dejected rock bottom, going into severe undervaluation for some time, before slowly climbing back up to average, and eventually beyond, over the course of many years.

This means that as likely as it is that stocks will drop by 40%, it is even more likely still that they will drop by more than 40%. How much? I don’t know—possibly 45% or 50% or 60% or 80%. It’s anybody’s guess, really. But it’s also worth recognizing that this drop could be hidden somewhat, due to another important factor: Money printing.

Naturally, people tend to get pretty upset upon realizing that their retirement accounts and home values are built on a house of cards. (I can hear some people grinding their teeth right now and trying to rationalize these numbers away.) And so, governments do what they can to try and ameliorate this effect. If the past 45 years of history serves as any guide, they will tend to do this by effectively “printing money”.

In practice, although there is a significant pressure for stock prices to drop by 40% or more and return to fairer valuations, this “drop” could just as easily be accomplished by devaluing the dollar, thereby masking the drop in real prices.

Through this method, you could easily have stock prices drop by only 20% or so and the dollar devalue by 20% or so, and that way, the people don’t get quite as angry in the short term. Or, you could even have the dollar get devalued by 40% or so over a number of years, while the price of stocks remain in place—at least nominally. This is more or less what happened during the long “silent crash” of the heavily inflationary 1970s.

While this “solution” of printing more money in order to inflate asset prices does lead people to be a bit less acutely angry in the short run, it tends to make them stew with anger in the longer run. This approach brews inequality and loss of opportunity, masked by an illusory “wealth effect”, felt almost exclusively by those at the “top” of society.

This kind of thing leads to phenomenon like “Donald Trump” and “Bernie Sanders”. In hindsight, a bit of short term pain in the form of falling asset prices may very well be preferable to the alternative of a lot of long-term pain under the rule of a divisive and authoritarian strongman of any stripe.

So in short, of course you can know when stocks are expensive. You can look at their price compared to their earnings. You can look at their price compared to their assets, also known as their “book value”.  You can look at their price compared to their dividend yield, which is how much you get paid simply for owning a stock.

It’s really not that complicated, especially when we’re talking straight index fund investing: All other things being equal, if you pay more for earnings and retained assets, then you tend get lower yields than if you pay less for them.

You can—quite easily—look at historic averages for these figures to help see where we are in the business cycle for stocks. Look at their price compared to earnings, to book value, or the price to “dividend yield”. Compare the price of stocks to other hard assets like commodities and real estate. Compare the likely return on a stock purchase to the likely return on an education. (And I mean a real education. Not the kind you tend to get in most schools.)

In the world of investing, this should be considered very basic stuff. The idea that a person can’t tell when stocks are overvalued is simply absurd. If you really believe that, it only means that you don’t yet understand how stocks are meant to be valued, and would probably be wise to learn the basics before you consider going and putting all of your money into them.

As always, I cannot give you investment advice, but I can tell you what I am doing: I do own some US stocks that were bought back when they were more fairly valued. I have sold some and kept others. I also also own some undervalued commodities, as well as some foreign stocks that still have more attractive valuations.

Posted in Economics | Comments closed
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