söndag 14 december 2014

How to protect yourself from politicians' machinations for rising house and oil prices

Do you remember the good old days when low prices were good for you? That was fun.

Cheap oil and cheap houses are good for you. Simple as that. Period.

- but for some reason politicians want higher oil prices, house prices, food prices, bond prices... higher anything, really, except for gold prices.

Since politicians can't permanently affect the real world, they create (exacerbate) cycles of rising and falling prices to get at least half the time with rising prices, often more since the corrections tend to be more abrupt than the upward moves.

How can you protect yourself against these cycles, and against the nonsensical propaganda that falling prices is bad and that politicians are needed to create booms and protect you?

Lower prices are better than higher prices. Duh..
(does anybody but Janet Yellen really believe differently)

1. Cheap oil is good for you, just as cheap food, cheap furniture and cheap housing. The cheaper things you need or want are, the better for you. You'll have more money over for other things after taking care of the basics. It really is that simple, a child can understand it.
2. Problems arise if you have borrowed to buy a house you can't afford, or speculated in oil futures or oil related stocks (in particular with borrowed money or on margin) before too high prices correct
3. Newcomers and outsiders benefit (and smart investors too) from falls in oil prices and house prices (and all other prices as well, such as computers or mobile phones)
4. If markets are manipulated, making prices rise above their intrinsic value, and people speculate in further increasing prices, losses arise for both speculators and lenders when prices normalize or undershoot. The process is inherently sound, as well as beneficial for all (smart) outsiders who managed to withstand the siren calls from politicians, friends, neighbors and brokers. The correction and normalization is what is good, the overspeculation and leverage-financed boom is what is bad. Not the other way around. Everybody can understand that intuitively, even if they currently want their loan financed assets to appreciate (no matter how bad it will prove in the long run)
5. Yes, even lower stock prices are good for you - you can buy more of your favorite stock; you'll get the same dividends per share and thus more total income. However, if you want to quit the stock market or make a trade you would want temporarily higher prices - but that's egotistical and short term thinking. Ceteris paribus, lower prices are always better.
6. Worried about a crash? The sooner a bubble bursts the less violent the correction. Hope for a correction as soon as possible, before leverage and malinvestment have time to build up and fester. Unfortunately the world is already deep in debt, and extremely far out on the branch that is about to be sawed off. However, it won't get better by venturing even further out before it snaps.

Just a note for clarification: in a free market, low prices signal more efficient production of the good in relation to the level of demand. Higher prices signal less efficient production, scarcity or high demand.

The best for you is of course, if things you need or want are in low demand and abundant while production is efficient. The cheaper the better. Just imagine a world where a house costs a dollar, a car a dollar, food for a month a dollar etc. That would be heaven. If on the other hand a house cost a billion dollars, an ordinary car a million dollars and food 1000 dollars per day...

Politicians live in Bizarro land, where expensive is good
-not too surprising since they don't have to worry about petty things like income, costs etc.

In Bizarro world some smarty-pants academics who sniffed one too many tubes of glue, think that falling prices make people postpone their purchases - and that that would be bad in some way.

First, postponing a purchase means more savings, more room for investment, less consumption of goods (and thus less consumption of resources).

Second, people don't postpone purchases of things they need. They might, however, postpone speculative buying of assets they don't need. Quite the contrary to postponing, people can be lured into "investments" or too early purchases, based on unsound momentum (that was produced by cheerleading, too low interest rates or other kinds of subsidies).

Politicians love volatility, malinvestments and trouble

Governments love business cycles, since the leaders look good when things race toward the peak, thanks to government intervention, and leaders look needed in downturns since people think it was politicians that created growth to start with and are the only ones capable of doing it again. hence, politicians want as low interest rates as possible, as much speculative buying as possible, no postponed consumption, no savings etc.

Politicians want maximum speed ahead at all times, and after the inevitable crash "that noone could predict...no-oh-ohhh" they are ready to wield their mighty weapons of budget deficits, food coupons, student and car loans, zero interest rates and money printing to pander to voters.

It's politicians who want higher house prices to sustain lending, borrowing and consumption (and inflation that leads to higher tax income). It is also they who want higher oil prices, to sustain the shale gas industry, to sustain oil based borrowing (>500bn USD oil bonds in the last few years e.g.).

Politicians love wasted resources and malinvestments, because it makes them look useful and important while pumping up the boom ("oh, how good it is to have leaders that know which industries to pamper"), and eventually appear benevolent, when they pretend to mop up after the bust of which they were the primary culprits. According to Hanlon's Razor (or Goethe's Principle) perhaps some of them actually aren't evil, just stupid... The damage is still real though.

Inoculate yourself from the inflationist propaganda and authority-induced cycles

Think for yourself - you know lower prices are better prices
Be honest (maybe you speculated on a house, a car or studies (loans), but don't let that affect your thinking. If you ever want a bigger house, you'd still want lower prices rather than higher)
Game the cycle (take a step back from the daily grind and observe the recurring cyclical patterns. Then take advantage of others' ignorance. Study. Wait. Pounce)
Vote for less government intervention (it won't change anything now, but maybe in a hundred years)
Invest outside the box. Investing is not only about the stock market. There are lots of other asset classes. Not least there are lots of other regions (countries), not to mention actually investing, i.e. starting a business. The worst choices you can do in investing is: a) be home-centric for no reason, b) invest in stocks only for no reason, c) use leverage for no reason, d) always be buying unless you are prepared for and count on major corrections
Wait, wait, wait - Waiting truly is the hardest part. Dare to look stupid now to avoid looking stupid afterward. Nobody needs to speculate to get by, or speculate to get rich. And not everybody can speculate to get rich. Learning skills and doing productive work on the other hand is always useful. Focus on building value and then go for it when an opportunity manifests itself.
Low prices, low valuations are the foundations for all good investments (One of the ten legendary investors I mentioned the other day, Jeremy Grantham at GMO, famously said: "You don’t get rewarded for taking risk; you get rewarded for buying cheap assets", and James Montier at the same firm: "Buy when an asset is cheap, and sell when an asset gets expensive.... Valuation is the primary determinant of long-term returns". John Hussman keeps reiterating the same message, week after week. Some of the best investors of all time repeat time and time again "cheap is good" so perhaps you should heed their advice. However, it's not easy and you have to a) understand what 'cheap' is as well as b) be patient)

Game the system, but be aware of the risks

By all means, game the system, game the politicians. Predict their irresponsible moves and try to take advantage of them. You can't change their ways, you can't raise them, teach them or punish them and you shouldn't try. But you don't have to drink their proffered beverage either. Always try to look outside the current half cycle and be prepared for the next one, the mirror image.

Sure, be my guest, run with the herd if you want. It's easy, comfortable, feels safe and might well be right for quite a while, but at least try to be the first one to panic. Watch out for cliffs, for predators, for extreme sentiment and valuations - and sometimes dare to stand aside for a while.

You never have to rush to get rich




2 kommentarer:

  1. Hello,

    Could you make a list what podcasts are you listening too? I am always interested to find good podcast for new information.

    Here is my list: (they are on youtube)
    -Joe Rogan Experience
    -Freedomain Radio
    - luimarco
    - MinutePhysics

    1. Hi. Thanks for the list. I'll check out MinutePhysics. I like the MinuteNNN youtube channels but never thought to check for podcasts

      I listen to

      NPR Ted Radio Hour (I think it's the best podcast that exist)
      Brain Science
      60-second science
      Science Talk
      60 minutes