Not sure what the name of this post should be, but when you really think about it, money is being printed at all times (across the globe) which is removing capitalism. In a normal capitalistic country, failed companies would go bankrupt. These failed companies would then be purchased (the assets) and run by someone else. Instead, we’re printing money to keep zombie companies alive and giving them interest free loans so they can survive. We’re not here to debate if this is a good or bad idea (you can guess what we think from the prior sentences). Instead we have to focus on “what to do” as the future holds all of the value.
Money Printing: Hopefully we can agree on one thing, money printing won’t stop. If you have double digit unemployment and on top of that you have debt above revenue (Debt/GDP is around 3x) it means that you cannot turn off the printing press. If you do, all of the people with debt go under. This is a complete disaster for the current financial system so we should assume that every government wants to avoid mass default.
Now if we can agree that the government wants to “inflate away” the debt if they can, it means you need to get your money out of cash and into anything else that is scarce. When you take a 25,000 foot view of the world, we know that the supply of money is going to increase dramatically. If we open the economy tomorrow or in 2021 (who knows), it’s going to require a lot of money printing.
The second item here is that you have to ignore “near-term” potential in practically everything. Why? Near term changes don’t matter if the money printer is on. It means that all companies should be looked at in terms of 2023-2025. Interest rates are going to be 0 for the next 3 years (as already announced) so the real value of money will show up in three years (putting us into 2023 and beyond). Therefore instead of worrying about “cash flows” for the next couple of years, we have to worry about “who is actually going to be around” in 2023-2025? This is a big change in thinking and also explains why ultra-high technology firms are seeing significant increases in valuations/multiples (we recommend following Chamath Palihapitiya for a further explanation of this).
For those that want the “gist” you want to take all your cash and buy anything that is scarce/useful and anything extremely high tech that will be used in 3-5 years. The only cash you should have is enough for emergencies at this point since we’ve gone full crazy with the money printing.
Real Inflation Rates: Recently, Microstrategy (a technology company) bought a substantial amount of bitcoin with its balance sheet. The interview with the CEO Michael Saylor was quite informative. Funny enough, we think the most important concepts don’t even relate to bitcoin. Paraphrasing below:
“If you were a lawyer and made $500K a year and saved $50K in 10-years you’d have $500K in cash. While you’re still saving $50K a year, that would be an increase of just 10%. Meanwhile, the cost of education (for your kids) is going up 8% per year. So that $500K you have earns $0 in interest and now it buys 9 years of education instead of 10. In another couple of years it only buys 8 years of education instead of 10… and in another couple years… you get the point”
What he is saying here is that the cost of the things that are necessary to get ahead are growing way faster than the rate of printed inflation. So if you need a home? Well home prices in major cities (at the time) were increasing by much more than 1-2%. Education? Another item you want/need to get ahead is also increasing by more than 2% (closer to 6-9%).
We did some digging and came across an interesting website which makes intuitive sense to us. This is well known to most of you but in case you’ve never heard of it it’s called the Chapwood index (https://chapwoodindex.com/). While we would argue that the numbers are aggressive and should be discounted a bit, the real inflation rate is unlikely 1-2% and is much higher (probably closer to 6%).
How to Think About Money Now? It’s relatively simple now, if we know that money printing is going to continue (it has to) and we know that the government wants to create inflation… it means “money” is going to represent valuable assets in the future. If you have $50 in your pocket or one share of coca-cola stock, you’re better off being the guy with one share of coca-cola stock unless you absolutely need the physical cash for the purchase of basic needs (or you believe coca-cola is going out of business).
After reading quite a bit about global monetary policy the simple way to phrase it is you should look at your physical cash and say “This is worthless”. While it is an extreme view, the point is clear. Unless you’re using it to purchase productive assets there is no point in having money in your pocket or under a mattress or in a bank earning 0% (no different than parked under a mattress at 0%). Being responsible is no longer encouraged.
Here’s a new way to think about it. Assume you have $1,000 in your hand. Instead of saying you have $1,000, ask yourself how many shares of XYZ company you can buy. We have already outlined where we believe the future of tech is going (in our book Triangle Investing). Outside of that, make your own decisions and say “how any shares of this company can I buy”. Then go through all of your spending and start denominating everything in shares of companies.
Is your steak dinner with your girlfriend worth a full share of the S&P 500? Do you have 100 shares of S&P 500 in your checking account? 1,000 shares? 10,000 shares? Does this make sense if you know the amount of dollars printed is only going to go up? So on and so forth.
These are very big questions. Even if you want to be conservative, instead of saying “I need 2 years of cash in my hand” ask yourself “how many of my investments are already up 100%, 200% or even 300%?” Therefore, even if you needed to sell some of them for cash to pay for something, you’d unlikely lock in a loss. This will prevent you from being one of those strange people who have 5-10 years of cash earning 0% for long periods of time.
Flow of Money: With the knowledge that money printing will occur no matter what, your new flow of money should look like this: 1) absolute bare minimum to survive ~12 months without income and 2) every single cent after this needs to go straight into productive assets. Doesn’t matter what it is, anything that generates returns above 0% is good enough. Why? Well bonds are at nearly zero, interest on savings accounts are zero and more money is being printed! So this means if the money supply goes up by more than 1% or so, you’re losing money on that bond “investment” (Ie. your purchasing power went down).
Implications: For fun we’ll stick with the above being correct. All we need to agree on is that the government is going to be forced to print. If we can agree on that, it means that the next 4 years will see more inequality. The rich will get richer and the poor will get poorer either though inflation or through lack of asset ownership. Even if prices stay the same (for all goods) if the cost of assets (homes, education, etc.) all go up… the only winners are the rich.
With the main point out of the way, we can then move to secondary effects… which is that people will not be happy about it. The average person is not going to be okay with a massively increasing divide between the rich and poor. There are two ways to transfer that wealth through 1) taxation or 2) through a wealth transfer. Since wealth transfers are rarely seen as successful, an increase in taxes is more likely. Our best guess at this point would be an increase in property taxes since it is the most difficult to avoid.
Other ideas include: 1) a change in tax on dividend income, 2) a change in tax on stock issuance and 3) a change in tax on income. Generally speaking, the issue going forward *won’t* be an income issue. It will be an asset issue. This means that you have to find a way to tax people with a lot of wealth not people who are earning a lot of income.
By way of example the person who is worth $10M today and makes $100K a year as a junior college professor is the person you have to tax, not the person who is worth $250K and earns $300K a year. This is a much harder issue to solve so we’re sticking with various forms of “wealthy people” tax as the solution. PS if you’ve got an answer to a divide in rich and poor based on assets we’d love to hear it.
Conclusion: For now, it’s best to focus on the main items up front. Keeping your “value” out of cash and in items that will be used 3-4 years from now. Be it high tech stocks or various scarce assets. After a few years, we should see an increase in the proverbial divide “haves and have nots”. At that point it would be wise to find ways to hold valuable assets that are difficult to tax (a good example would be rare art).
Newer Readers: For those that are unfamiliar with our blog we have three high quality products in order: 1) Efficiency, 2) Triangle Investing and 3) Spending for Maximum Return. In order, you learn how to make a good amount of money (a million liquid within 10 years or so), how to correctly invest it and finally how we’d avoid blowing it all with intelligent spending and PED use to improve quality of life. We hold Q&As 1x a month for purchasers only.
Great post! And if you are at an early stage in life and don’t have any large sums of money, I guess the other end of the conclusion would be to never work for “savings” (besides a small buffer) and rather to work on increasing income potential.
Most of my peers (mid 20s, tech students, most with part time jobs) save up to buy tiny apartments (400-600 sqfeet) costing them equivalent of 6-8 years of income. They end up being forced to do so much menial work taking them nowhere because of their mortgage hanging above them.
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On another note: I am somewhat of a new reader and just purchased Efficiency, which I have enjoyed a lot. However I am confused by some of the premises.
On one hand, you should spend as much of your time as possible on building potential businesses which can generate your future income, but on the other hand there is a lot of talk about utilizing talents to enter high-end careers in Tech/Wall Street/Sales.
Aren’t developing side businesses for potential future income and grinding for a high-end career somewhat mutually exclusive? Did I miss something? To me it makes more sense to start to grind for side businesses after you are more comfortable in terms of your career – i.e so that you have a $100K income (which would require 2-3 years “experience”) to fall back on?
That is correct. If interest rates are near zero it’s a lot easier to create $10K a year in cash flow than generate $10K a year from passive bonds. isn’t even close really.
Both options are viable. What you should do will depend on how aggressive vs risk-averse you are, since your time is limited and you need to have a priority in mind.
To try and ELI5 the problem:
Companies are once again too big to fail. Government prints money to keep companies alive. More money in economy with the same number of products means higher product prices.
The solution needs to penalize hoarding.
Hoarded money is in real estate and stocks.
Increasing property tax in the US could work, but would need to happen at a large enough scale to prevent selling off the property and using 1031 to buy property in a lower property tax area with any capital gains tax deferred.
What about penalizing holding stocks long term? Maybe remove the benefit of long term capital gains tax. This should create more transactions, doesn’t affect the poor (they don’t have stocks), marginally affects the high cash flow active investors (they don’t necessarily hold longer than a year), and penalizes the buy-and-hold indefinitely types in the form of increased opportunity cost.
Yeah then you’re also creating a lot of strange incentives to offer no reward for long-term investment in new companies. Tough situation but we get what you’re trying to say.
Adam Townsend is convinced we’ll see VAT tax as in Europe etc, do you agree?
Not sure what he is saying we will look into it
VAT probably won’t solve this problem (inequality breeding resentment) – VAT gobbles a disproportionate % of low income pay especially here in the UK where you have quite high fuel taxes etc on top as part of the green agenda. (Not sure how US indirect tax applies.)
Assume this is why WSP has previously posted about luxury taxes which is effectively the same tax applied higher up the wealth scale?
An actual stated devaluation of the usd might help. Ala 1933, shoot for 30%.
Instead of slow inflation and money printing, it would increase salaries and decrease overall debt load v incomes. This would be good for young earners who have a pitiful share of the overall wealth and good for those stuck paying student loans.
It would also punish the people hoarding usd, which is rough, but goes to your goal of taxing wealth sitting around.
Great point!
My prediction which goes along with what you have said is very simple. Socialists cannot tell the difference between the upper middle class and the financial elite. So they are going to go after the upper middle class (doctors, lawyers, real estate agents, brick and mortar). Meanwhile massive corporations, shareholders, digital nomads, and other businesses set up offshore are going to be unaffected.
Crypto is probably the only chance that working class millennials have for retirement.
Interesting, will see if they can tell the difference between wealth and income soon enough.
I kinda get what you mean. It’s so hard to get a decent white collar job outside of tech/sales these days. It’s to the point that a lot of these “eat the rich” type people think that even 6 figures is a lot of money. Most people really do think that a doctor or a lawyer are successful people. Especially in America where it’s not too difficult to get a loan on a McMansion and a BMW. The upper middle class are rich if you are working class but they are poor if you are upper class.
It’s way too easy for the Democrats to raise taxes and target the low 7 figure net worth demographic who aren’t rich enough to do anything about it while massive corporations and corrupt politicians pay no taxes and continue to manipulate the stock market. A lot of people are leaving California right now but trust me, it’s mostly the working class.
Yep the top 10% are in the cross hairs, they are used as a buffer against the masses.
.01% are invisible to regular people. So the “eat the rich” target the top 5-10% in their cities. Sad as this is the tax paying, productive, hard working class.
Democrats will lock the top 5-10% in the pressure cooker, while offshore accounts, oligarchs, and financial elites keep doing what there doing.
at 25 with 300k I account 3x “death stares” today alone!
Be safe out their. If you rich lay low and only use wealth on girlss, never broke guys/friends. They will try to destroy you.
One last thought..
The top 9.5% have the jackboot coming in the next few years.
The financial elite will throw them under the bus. Their property/income taxes are going to explode and they will be blamed for everything.
This same productive class tax donkey class also has a BIG propensity to try and mimic the upper class. They lever up on nice cars/homes and most will get wiped out in the coming years, as the depression begins to compound.
Stack assets, lay low, act like your in the bottom 90% most of the time and you can buy all the top 10% assets for pennies on the dollar in the coming years.
Awesome Comment Jack.
Yes the .01% and financial elite use the upper middle class as a shield and buffer.
Regulars don’t see the financial elite, all they see is upper middle class/ top 5% in their city and they want to damage them and take what they have.
I hate the term “1%”.
The 1% are doctors, attorney, business owners at about 500k.
The .01% Annual income is $5.6million
“Equity is the new land. Shareholder is the new landowner.” – Naval, and hat tip to WPS for the retweet.
Chamath’s SPACs are an amazing way to DCA into forward-looking likely much higher alpha investments vs DCAing into the traditional indexes. IPOC is the next one for those who are interested in giving them a look. (IPOB recently announced as Opendoor.)
“Central banks have taken cash and bonds and they’ve made it a funding vehicle…” – Bob Prince @ Bridgewater. (And this was stated in Davos, well before COVID. Only accelerated since.)
https://www.youtube.com/watch?v=Gg_rOQF9Y4Q&feature=youtu.be&t=200
WPS embedded video with Bob…
https://wallstreetplayboys.com/the-divide-short-predictions-and-an-answer-to-the-inflation-question/
Bob a bit later…
https://www.youtube.com/watch?v=g_Zsyx82cF4
Agree. Putting in small amounts in each one. Chamath knows what he’s doing
The natural market forces are all deflationary. The biggest problem with the economy is that the government can’t convince people to take loans out at an increasing rate. Note: even not increasing the rate of lending is deflationary. Paying off or defaulting on debt is deflationary.
It’s natural market forces vs. the Fed and it’s not so clear to me which one will win. Why do you believe the Fed will win?
In your situation you should look at secondary investment implications. We never stated the Fed will win, we said they will print more dollars and inflate the supply of “free” money
I’ve been thinking this as well. The economy has been slowly shrinking, which is deflation. Globalization wage arb has been deflation. Now with the pandemic, lots of businesses have been forced to close. The fed is shoveling cash into a pit that they can’t fill fast enough.
So many decades have gone by with ever larger deficit spending. Yet we are still waiting for the damaging level of inflation everyone predicted. Isn’t it time to ask why and come up with a better explanation?
The future is national digital currencies. They are coming soon.
Google “digital yuan” or “digital euro” and see what I mean. It is quietly being worked on while we are all distracted by the pandemic. A war on cash is incoming.
The advice offered here is very sound. Buy hard assets in short supply.
Keep a small amount of cash for emergencies only. Preferrably under the mattress. Negative interest rates are a thing, as are accounts being frozen for flimsy reasons and the occasional power outage. There are almost no reasons to keep money in a bank account anymore.
Excellent article. A while back I took the advice in Triangle investing and started investing in cash flowing dividend stocks. KO, PG, CVX, MO etc. Seems like it might be wise to start looking at AMZN, MSFT, GOOG, with maybe a bit of BRK as a hedge against inflation.
Can’t believe I’m linking CNBC, but it Chamath so it’s worth it…
https://www.cnbc.com/2020/06/18/ex-facebook-vp-regulators-big-tech.html
Great article boys, thanks for posting. It really does seem silly to hang onto cash during a period of time where the purchasing power is getting hammered. Kind of reminds me of a narrative on the bitcoin bet – you’re not necessarily betting bitcoin will become more valuable, but that the dollar will become less valuable.
Very insightful thanks.
Do you think the above applies to Europe as well?
I’m seeing cost of contractors going up very quickly. Have quite a bit of rental real estate, trying to get big ticket items like Roofs done across the board.
Would you pay down mortgages? Granted money is cheap….
Don’t pay off mortgage.
First maximize the asset, then refinance.
Don’t forget the interest is a tax write off. (30-50% off the already historical low borrowing cost).
But this makes no sense.
Everything needed for creative production now costs $50 a month – 400mbps internet the bare minimum to access all websites and download large files in the GB range.
Companies don’t have offices anymore and even reduce salaries to give people more freedom.
Won’t everything just cost less at some point requiring less money printing, less govt loans, etc? Short term sure but long term who needs government money?
Looking at a few different pieces of data, it seems about 75% of poor households in the US have cable tv, air conditioning, a used car, a smart phone, and are twenty pounds overweight. A large percentage of them also have free or subsidized rent. So it appears they are incentivized to not build wealth via assets, or maybe not interested.
Great post. If money printing is infinite, what mechanism is there to keep companies from “not being around anymore” as they can keep borrowing money to sustain operation at 0 interest?
Does that printed money actually get circulated though?
Seems like only the big corps get the free funny money.
End of the day, the things that an average person needs to live aren’t going to get too expensive. Otherwise there’d be riots.
Though don’t see how there will be any upward pressure on wages for the average person. They are just going to get completely screwed.
Biden already talking about taxing 401k’s.
No need to post, just wanted to share some info up here in Canada from a few good friends in working in government. – On the upcoming taxation part of your post; the government is starting to explore/sell the idea of taxing your primary residence when you sell it after a certain period from purchase( to be active by 2023-24. Most people who have heard about it are just mad that they will have a hard time upgrading, but what most don’t grasp is that the highest valuation of residential real-estate in Canada is owned in majority by boomers who will be forced to downsize in the next 10 yrs. Combine this with an already overpriced market where majority of consumer wealth is forced into the market and the government cleans up.
Hi,
Long time reader here.
The blog recommends holding ~12 months living expenses as savings.
What do you think this number should be for businesses? How many months of typical expenses should an online business have?
Thanks a lot for your amazing content.
Property taxes in the United States are primarily local. Some states administer property tax and dictate statewide policy, in others it’s purely local. Property taxes are not generally used to redistribute wealth (unless you count taking money from the middle and upper middle classes and transferring it to public sector unions and politically-connected government contractors), but rather to fund local government (schools, police, courts, etc.). Local spending tends to mirror the local populace, with upscale areas spending a lot and poor areas spending less on optional public goods like swimming pools and parks. All local governments in the US spend a shit load on employee comp and benefits. Typically, you want redistribution done at the highest possible level of government (ie fed in US).There is no federal property tax.
Moving away from physical real estate, wealth taxes can be difficult to administer. See the history on state personal property taxes if interested. Wealth tax is not impossible but also not easy to do properly.
Whatever happens, always bet on the middle and upper middle class getting BTFO in 21st century America. These 2 groups will have the lowest fun:drudgery ratio.
“The only cash you should have is enough for emergencies at this point since we’ve gone full crazy with the money printing.”
What about your previous rule about having 50k lying around for the purpose of starting a biz? Is this 50k on top of this emergency money?
If you are doing that you’re already rich enough where $50K isnt a year of spending anyway…
This was one of your better economics articles. Thanks for providing really interesting content and the link to the Chapwood Index.
Great article guys, when you thinking about next q&a? I’ve got some q’s about this kind of thing I’d appreciate your opinion on.
Is the following a possible solution – change the tax system to micro tax financial transactions?
Advantages of a Flat Rate FTT (Financial Transaction Tax) October 2010 by:
Simon J. Thorpe, CNRS Research Director (DRCE), CerCo (CNRS-UT3), TMBI (Univ. Toulouse), BrainChip Inc
Amazing how what we’re worried about changes tune so quickly: https://wallstreetplayboys.com/preparing-for-bear-markets-chaos-opportunity/
Have you heard Steve Van Metre’s thesis? If yes why do you disagree with it? If not you should take a listen. He expects a big spike in the dollar with falling asset prices.
The inflation in education, healthcare and housing in the US is not a new phenomenon. They have been ongoing for the last 20 years. As it happens, neither of these items can be outsourced to a cheaper 3rd party.
Housing is the one item driven by the cost of money, set by the Fed.
With regards to ‘money printing’, the Fed cannot create money directly, only commercial banks can do that via credit issuance. Indeed you see credit issuance to companies with poor credit metrics and leverage levels increasing across the ratings spectrum. Loans to the individual are tightening through – it is the recent fiscal measures that are putting money directly in the pockets of the consumer.
A more nuanced view is that inflation is happening in pockets (see above) whereas deflation is taking place elsewhere (tech is deflationary). Granted, all of us need healthcare, education and housing so that part of the consumption basket is relatively inelastic.
Finally, if the value of fiat money becomes unstable (inflation), it is unlikely that valuations will stay high as CF will have to be discounted with more uncertainty. That is what happened in the 70ies. Look at Hershey for an example of a blue chip with pricing power – valuation cut in 2.
Scarce assets such as bitcoin and gold should hold their value = appreciate.
Look at Turkey where the currency is really the credit risk (high rates, high inflation, unstable currency value).
‘Outsourced to a cheaper 3rd party country’
Solution to the wealth gap:
A bear market with a 50% peak to trough fall will effectively reduce the divide. Anything that reduces the value of assets as rich have assets whereas poor don’t. —> the wealth gap was nicely reduced on March 19 when the markets bottomed.
Some may find this interpretation of where we are at currently in the stock market cycle interesting (first 10 minutes). https://www.youtube.com/watch?v=ccgQljg1kt4&t=1522s
He’s even plotted on google spreadsheets what he believes real stock market returns are taking in to account the real inflation rate: https://docs.google.com/spreadsheets/d/1cRYZmRJl7v_OkCdS6mEYQpt4LsBPAaviIhZgRLFJqxs/edit#gid=59
For those commenting about throwing doctors, lawyers, etc under the bus…
Why the Princes of Italy lost their states
In the next place, some one of them will be seen, either to have had the people hostile, or if he has had the people friendly, he has not known how to secure the nobles.
~Machiavelli
If you want a transfer of wealth example, look no further than Zimbabwe and South Africa. Wealth transfers at a grand scale where effectively 25% of companies needed to be owned by the poorer majority. Its painful and value destructive but the alternative is probably civil war.
You cannot exclude a poor majority from the economy, doing so leads to revolution. The US needs to address the wealth gap even if you think the poor are wealthy compared to other countries or doctors are not that rich etc. Its relative, and currently people are feeling they are poor and hence angry.
You may as well legislate to expropriation for portions of the stock market and redistribute some wealth, because otherwise people may just do it themselves.