Time to Hedge

Time could be running out on the “everything” bubble

First I would like to explain my lack of posting recently as it is not for a lack of topics or opinions. My older son just had fall break, and we used the time off as an opportunity to travel to Florida for several days. The 80-degree weather was a nice respite from the cold in the midwest and the kids had a blast as usual. The resort we stayed at was great, and we gutted out one day at Epcot since we already did Magic and Animal Kingdom back in February. We also closed on a property that we had owned for almost 14 years (love the “mobile” closes). It was bittersweet due to the memories of living there, rehabbing the property, fixing things, and tenant issues (lol). Recently a tenant moved to Arizona, and I decided that I didn’t want to manage from afar or hire a management company. In addition, the market in Grand Rapids has been very hot which manifested itself in competing bids on our property (basically a bidding war over list price). A nice problem to have I suppose.

I would like to think that we are selling at the top and that my instincts are prescient. Maybe, but things usually happen due to a confluence of events and the timing becomes coincidental when looking through a rearview mirror. In other words, luck plays a big part. Luck aside, I do have a sense of foreboding regarding the current social, political, and economic situation which influenced my decision to sell. Whether it is quantitative indicators that I follow, civil unrest throughout the world, or simply conversations I have with people every day, “things” just don’t feel right. Of course, I could argue that it has been that way for a while. With this mindset, selling the property was just one step, and I have also started layering in “hedges” to protect my assets. Translation: I am building hedged positions (short) in the equity markets. A hedge is different in that it is not a primary investment, but rather a bet to protect those investments. Call it insurance. If you want to play at home, I shorted the Nasdaq and will layer in more shorts next week. Yes, I am fighting the Fed and realize it may be fruitless, but my take is that the Fed’s omnipotence will come to an end soon. When that happens, look out below. Aside from monetary policy reaching its limits, I believe we are at a bifurcation point politically which could have profound implications on fiscal policy, and life in general. In short, we are becoming a banana republic and anything can happen.

Disclaimer: This is NOT Investment advice. I am just sharing my thoughts and what I am doing.

Smoke and Mirrors

Chicago’s Budget

Previously I had written about the importance of mobility as bankrupt municipalities attempt to grab more and more of your hard-earned income to fill exploding budget deficits. A perfect example of this is the City of Chicago, which just unveiled its budget to address an $838 million shortfall for fiscal year 2020. To help close the city’s deficit, mayor Lori Lightfoot proposes to save $337 million through various efficiencies, including but not limited to the implementation of zero-based budgeting and department mergers.

Unsurprisingly, $350 million of the deficit is to be paid through new taxes. Her plan calls for higher taxes on ridesharing and restaurant food and drink. She’s also called for other revenues, including a progressive real estate transfer tax and a Chicago casino that need the authorization of the state legislature. If the mayor doesn’t get these items, she has threatened a property tax increase even though the city is still absorbing a record $543MM increase from 2015.

Where things get murky is the remaining $200 million which is expected to come from what I call accounting gimmickry, or “smoke and mirrors”. This amount will come from refinancing $1.3B in bonds and taking 20 years of interest savings in 2020. Yes, you read that right, the city is front-loading interest savings as a one-time event to show that it has a balanced budget. A few comments about these shenanigans. One, given that it is a one-time event, you will have a $200 million hole in 2021 and beyond. Second, this is an accounting entry and not on a cash flow basis, which means the city is not really saving $200MM in cash next year. Lastly, the method of refinancing will be through the use of “securitized” bonds. What is a securitized bond, you might ask? It mandates a sale of assets (i.e. transfer of ownership) in the event of default, in this case, future tax revenue!

In a nutshell, the budget is comprised of legitimate cost-cutting ideas, tax increases, and shady accounting while risking future services that could be obtained from tax revenue. There is nothing about structural pension reform needed to tackle Chicago’s growing underfunded retirement liabilities. Meanwhile, public teachers are striking after rejecting what Mayor Lightfoot called the most lucrative offer ever for the Teacher’s Union.

My decision to live outside of Chicago and Illinois altogether is looking prescient by the day. I suspect things will get much worse before they get better.


Brexit negotiations?

One of my favorite classes while studying as an undergraduate was physical chemistry. This was notable since most people hated physical chemistry, otherwise known as “Pchem”. The main reason for this is that quantum mechanics taught in Pchem is at odds with everything you had been taught in physics for your entire life, often called Newtonian or classical physics. For example, in quantum mechanics, the movement and location of electrons are defined by “probability clouds”, meaning they might be somewhere or might not. Given this uncertainty, it is interesting that “chaos theory” is derived from classical physics. In recent years however physicists are drawing parallels with chaos theory and quantum mechanics. Said another way, you can find order in chaos and chaos in order. I have often asked myself that if you can’t predict the exact location and movement of the basic constituents of what makes up human beings, how can you predict or even control human behavior? Therefore I have long been a proponent of “natural law”, meaning things will occur as they will in nature, and ultimately tend to chaos and decentralization.

If you look at current events, the existing social and economic order is unraveling at lightning speed. Brexit negotiations, China/US trade tensions, Ukraine, Yellow vests in France, Catalonia, Syria troop withdrawal, impeachment inquiry, Hong Kong protests, the list goes on and on. I could write multi-page posts on any of these topics individually, but that wouldn’t serve justice to the overall theme without losing sight of the forest through the trees. The “forest”, if you will, is that we live on a planet with a fixed amount of resources with an ever-expanding population. These disagreements, battles, controversies or whatever you call them, are often about how to control and distribute those resources.

In Syria, for example, the mainstream media and many in Washington maintain that we are severing alliances, abandoning the Kurds, and empowering ISIS by removing 1000 troops from a base near the Syria and Turkey border. Is that really the case? I would urge people to repeatedly ask “why?” to find the root cause, otherwise known as the “five whys”. Once you do that, you discover it is about resources, trade, and power over such. The land in question is very rich in energy and agricultural resources, and the real concern is that Syria and Russia will gain influence by brokering a deal in the region. In addition, the land occupied by Turkey is considered very strategic for China and its “silk road” project linking European and Asian trade. Therefore “ISIS” is just a perpetual boogeyman that will never cease to exist.

Ukraine is important for similar reasons. Do you think the recent “controversies” that surround Ukraine are coincidental? No, not in the slightest. Ukraine happens to be rich in agriculture and natural gas, and of course it is important to be able to feed your citizens and keep them warm. The origin of the ongoing issues in Ukraine is when Ukraine decided not to join the Euro and coincidentally (or not), the EU has to buy energy resources from Russia. Coincidentally (or not), the most recent wave of McCarthyism seems to have started at about the same time, when the Russians “invaded” Ukraine, a country with a lot of Russians. In other words, Ukraine not joining the Euro was an unacceptable result for those that want resources and trade further consolidated within the Euro. As it stands, the EU maintains it cannot afford to pay the price for natural gas that Russia is asking. Hmmm.

Ask yourself similar questions about Brexit, or even Trump. For the power elite, it is about outcomes that meet pre-determined criteria, narratives, and world view. Every time it doesn’t happen in the prescribed or orderly way, all hell breaks loose. If you don’t align with those views, you are labeled radical, stupid, ignorant, racist, or worse…a Russian asset.

Expect chaos and unpredictability to reign. Any attempts to further consolidate power and trade will only serve to enhance instability.

Treasury Direct – Front run the Fed and QE4

Will QE ever end?

The Fed recently announced the restart of permanent open market operations or QE4, but amusingly said not to call it QE (quantitative easing). There is a question as to exactly what securities the Fed will be purchasing, but current speculation revolves around Treasury Bills to start. Whatever the case may be, the Fed will begin to expand its balance sheet again after a short stint of reducing it followed by leveling. What does this mean? For starters, it means the Fed is concerned about liquidity conditions in the market. “Liquidity” for our purpose means selling an asset for available short term cash without substantively affecting its price. In this case, the assets are US Treasury bills, notes, and bonds. When large banks are starved for cash, they are reluctant to buy other assets such as US Treasurys. Enter the Fed as the buyer of last resort, an entity that waves its magic wand to create digital ones and zeros to add to its balance sheet. It is kind of like a game of three-card Monte between the US Treasury, large banks, and the Fed.

Look for banks to get very stingy about the interest it pays to its customers. Of course, this is nothing new. One way banks make money is by “net interest margin”, where they lend out money at a higher interest then they pay on deposits. Below are examples of savings and CD rates for a large bank who will not be named.

Savings rates
CD rates

The savings rates are self-explanatory and laughable. I mean, 0.08% IF you have a relationship (other accounts or loans) on $100,000-$249,999? LOL. CD’s (certificates of deposit) are equally as miserable if not more so. Lock up your money for 3-5 months and we will give you a whopping 0.02% interest IF you have a relationship. A CD at 9-11 months is where things get interesting with an offered rate of 1.75% for an amount between $10,000-$99,999. Sounds great, right? Wrong, which brings us to the point of this post. Why invest with banks when you can invest directly with the Treasury at much better terms? For the moment I am ignoring “online” banks and credit unions that offer special promotional rates on small balances up to 10-15K (Beware of the fine print in such cases, AND the ability to get your money back in a liquidity crunch). What I am referring to is directly investing in US Treasury Bills, Notes, or Bonds via http://www.treasurydirect.gov.

Using the example of the 9-11 month CD at 1.73%, you can get a similar rate by investing in a 1 month T-bill!! Meaning you only have to tie up your money for 1 month instead of 9 months to get the same return. Additionally, you get the ultimate safety of investing directly in US securities, bypassing banks, and you get the buy the exact same thing the Fed will buy before the Fed buys it.

Recent Treasury Bill Rates, from 1 month to 1 year

Investing directly with the Treasury is quite simple and much less intimidating than one might think. First, set up an account profile and link a bank account. Then, click on “Buy Direct”.

You will then come to a screen with options in which you can invest. Treasurys, Savings bonds, and a Zero-Percent Certificate of Indebtedness (basically a checking account with the Treasury that pays no interest). In this case, we are selecting Treasury Bills which are short term securities with a term of 1 year or less.

I will not include all of the remaining screens, but from there you will be shown a list of upcoming auctions when you can buy, and confirm the amount of purchase. There is also an option to reinvest repeatedly after the term expires. For example, you can re-invest in 1-month bills automatically for 6 months or longer if you so desire.

The benefits of using Treasury Direct are numerous:

  • Bypass banks to get better rates and terms
  • Ultimate safety of the US Treasury
  • A zero-interest C of I option (will become very, very valuable if and when US banks start charging customers interest like in the EU)
  • Invest alongside the biggest financial institutions in the world

Comment or email with questions. Thank you and have a great day!

Wealth vs. Income

Another source of confusion amongst the media and the general population is equating income with wealth. This includes politicians, who often espouse rhetoric that defines “rich” as a family who makes above a certain income level. As we have discussed previously, when you go to a job to earn income, you are simply trading your time and energy for currency. The currency can then be saved, invested, or spent. Wealth refers to the total accumulated assets held by a person or household at a single point in time.

The mindset that income represents wealth has distilled down to normal transactions that occur in our lives. When you purchase a house, a realtor asks “What is your price range”? A home lender then wants to know your income to determine what debt payment you can afford. Disturbingly, people often want to know the maximum debt payment for which they qualify. Instead, they should be asking what they require in a house, i.e. the number of bedrooms, stories, acreage, amenities, etc. This backward thought process has also consumed vehicle purchases. It was recently reported that about a third of auto loans taken out on new vehicles in the first half of 2019 were for terms of 6 years or longer! In other words, people have decided to stretch out loan terms to have a payment they can “afford” to create the illusion of being wealthy by virtue of a nice car. Basically, one will still be making payments on a rapidly depreciating asset while they are making necessary maintenance repairs well after the warranty expires. In short, peak insanity.

We have an entire generation of people that have grown up with this mindset, and worse, think that it is normal and acceptable. It is not. The foundation of building wealth has been and will continue to be living within your means. What I describe above is the antithesis of that. Some questions to ponder when shopping for your next house or car. In the case of a house, can you make a 30-50% down payment instead of the normal 20% or less? Have you considered that the total cost of homeownership is 30-40% more than just your mortgage payment and taxes? When buying a car, have you considering buying used rather than new? Can you pay cash for the entire purchase? If the answer to any of the above questions is no, you may want to reconsider.

The 2-4 unit multifamily home

Not glamorous, but very effective

The 2-4 unit dwelling is one of my favorite topics to talk about. Boring on the surface, but yet very effective upon closer examination. To me, it is a cornerstone of building wealth, especially when you first start your adult life.

In a previous post, I talked about how currency is created by our fractional reserve banking system where banks only have to keep a small percentage of currency in reserve (i.e. a fraction as the name suggests) and can lend the rest out. When this happens over and over again, currency is “created” and demand increases for whatever is being borrowed against. In this case, it is homes, including apartment buildings. The government plays a role as well via loans created or backstopped by Fannie Mae and Freddie Mac, and also by fiscal policy.

Housing makes up about 40% of our costs, according to the CPI (consumer price index). There is much debate as to whether the CPI accurately reflects housing costs, however, under any scenario housing is a large expense for people. Further, the combination of fractional reserve banking and government involvement has created an “artificial” price for housing such that owning a home is out of reach for many Americans as shown below.

Housing bubble 2.0?
home prices versus real median income

How do we combat this? A 2-4 unit dwelling as the post headline would indicate. This type of property has many advantages. One, you can purchase as a primary residence which then falls under residential lending requirements. Residential housing requires a smaller down payment, from as little as 3% down to 20% or more if you desire. Commercial properties usually require a larger down payment AND have a higher interest rate associated with the loan. Two, the rental income obtained from the other units can offset the costs of owning the property, and in some cases create a surplus. This is known as “living for free”. Third, there is a great ROI (return on investment) or cash on cash return when combining one and two above. In other words, a small cash down payment of 3% to 20% which then reduces rent paid by you to zero or near zero. Fourth, the tax advantages that come along with purchasing as an owner-occupied investment. All the tools and supplies that you purchase, repairs that you make, vendors that you hire in the maintenance of the property are tax-deductible. The property can also be depreciated every year, which is an accounting expense but not a cash expense! In other words, one can hypothetically generate a positive cash flow however show an accounting loss!

To summarize, housing costs have skyrocketed in the US and have become unaffordable for many whether they rent or own. To mitigate this, I suggest to purchase a 2-4 unit multifamily dwelling rather than rent or buy a single-family home. The primary advantages of this strategy include:

  • Low down payment requirements
  • reduce or eliminate rent
  • tax advantages including depreciation
  • great cash on cash return

Another “hidden” benefit is that in owning a property such as this you have a great hedge against an increase in the supply of currency (inflation), both in cash flow and capital appreciation. In short, an outstanding investment, AND a place to live.

Money vs. Currency

Why am I working more for less?

One of the biggest sources of confusion amongst the general population is the difference between currency and money. This is in spite of people spending most of their adult lives trying to make money. In this endless pursuit, they often wonder why they are struggling to make ends meet, why they always seem to be on a hamster wheel. So, first, what is money?

“The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it.” – John Kenneth Galbraith

Money IS any tradeable asset with tangible value. Money is your house. Money is your car. Money is an investment property. It can also be a service, a piece of metal, water, or food. Money, is NOT, contrary to popular opinion, the dollars in your wallet or purse. Well, aside from your ability to burn it to start a fire or use it as paper to write down ideas. The dollars in your wallet are in fact, currency. Currency is used for convenience. For example, you can not carry your house around. Without money, i.e. assets, currency has near-zero value.

“There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.” – Vladimir Lenin, as quoted by John Maynard Keynes

In other words, people do not realize the importance of currency as a variable in their lives. A related misconception is the belief that inflation is rising prices. Incorrect. Rising prices are a symptom of inflation. Inflation is an increase in the supply of currency. What are prices, and why can they fluctuate so dramatically? Prices are the supply of currency divided by the total money supply (tangible assets). Therefore, PRICES = CURRENCY / MONEY. Who controls the increase and decrease in the supply of currency? The private Federal Reserve Corporation. How do they do that? Usually, they do it thru fractional reserve lending. Since the great financial crisis, however, the Federal Reserve’s ability to increase the currency supply through fractional reserve lending has been muted. Why? Lack of eligible, marginal borrowers. In other words, people are broke and already saturated with debt. The Fed still has one very eager borrower, however. The U.S. Government. More on that in another post. The Fed has also bypassed its lending mechanism by utilizing another method to increase the currency supply: manipulating the stock market to not let prices fall substantively. How do they do that? Via an increase in “reserves” held on behalf of some of the biggest banks in the world, known as the “primary dealers”. These reserves are then leveraged to produce the liquidity necessary for constant stock market manipulation.

There is a lot to unpack in what I stated above but the moral of the story is as follows. The Fed can influence PRICES dramatically by increasing (INFLATION) or decreasing (DEFLATION) the currency in circulation. These changes in the currency then increase or decrease claims or demand for tangible assets, i.e. MONEY. Further, the general public’s lack of knowledge regarding this process puts most people at a significant disadvantage economically.

Health Care – a hot mess

medical bills continue to be outrageous

It would be impossible to cover our country’s health care situation in one post, however, I have to start somewhere. Before the past decade, I recall having employer-based coverage with a modest deductible, let’s say $500 or $1000, that had an out pocket maximum of maybe $2500. Over the past 10 years, my coverage has evolved to a deductible of $2500 to $5000, an out of pocket maximum of $10,000, and with less coverage.

Today I present to you just another small fiasco in our health care system that has become a hot mess. Recently I scheduled an appointment with a doctor as we moved to a new area about a year ago. The objective of the appointment was a routine check-up and blood work. So I went in about a month ago, got the blood work, and everything was fine. Until I got the EOB, that is. Below is a snapshot that explains the services.

Are you serious?

The first shocker is the “list price” of the routine blood work. $1329 !! Are you serious? Of course this is the list price if you have insurance, however, they give you a big discount due to their contract with the insurance company. Seems collusive? I think so. At a minimum, it is not transparent and not based on supply and demand. The real joke, or not, depending on you look at it, came when I saw that one of the tests was not covered by insurance. I called the insurance company and asked what test is not covered. It turns out it was for Vitamin D.

Looking at the explanation codes at the bottom and the description, you find the following:

J0151 – An internal protocol, policy, guideline or rule has been used to process this service. If required, a copy will be provided free of charge by calling our Member Services Department.

So, I called member services and asked to get a copy of the guideline. After waiting on hold for 10 minutes, the CSR agreed that I could request a copy and she would send in the mail. I have yet to receive, but at best it will provide comic relief as to why myself and others continue to get ripped off.

When the final tally is added up, my routine visit looks like this:

  • Insurance pays $181.14 ($131.20 for visit and $40.94 for bloodwork)
  • I pay $339.15 which is applied to my $5000 in-network out of pocket limit

What does this look like to me? That the hospital and insurance companies are making huge money at the expense of the end-consumer. How? By non-transparent pricing convoluted by an agreement between the hospital and the insurance company. Also, the “non-profit” status of the hospital, meaning non-profit in name only. Someone, or some group affiliated with the hospital, is making big money.

Fortunately, I have saved for years, both in an HSA and in general, and paying a bill like this is a minor irritation for me. Is it sustainable for the broader population? I say unlikely. I predict that more and more people will seek out doctors that offer cash prices, or in the case of big expenses, engage in “medical tourism” by getting treatment in another country. It is already happening.

The Great Migration and importance of mobility

Florida had the highest level of net domestic migration last year

Decades of fiscal mismanagement at federal, state and local levels have created a debt nightmare that can only be solved by massive inflation, tax increases, structural reform or bankruptcy. Politicians have been reluctant to enact the structural reforms necessary to correct this trajectory, and instead, have “kicked the can” to future generations. People have woke up to this fact, and this can be seen in the states people are moving to and conversely where they are leaving.

As WSJ notes, Florida and other tax-friendly, pro-growth states have benefited greatly:

The eight fastest-growing states by population last year were located in the West or South (Nevada, Idaho, Utah, Arizona, Florida, Washington, Colorado and Texas). And what do you know? These states have also experienced rapid employment and GDP growth spurred by low tax rates and policies generally friendly to business and job creation. Nevada, Arizona, Texas, Washington, Utah, Florida and Colorado ranked among the eight states with the fastest job growth this past year, according to the Bureau of Labor Statistics. Nevada, Texas, Washington and Florida have no income tax.

Source: WSJ

On the other hand, people have been fleeing high tax states like Illinois, and it’s not due to cold weather:

Illinois’s population has declined by 157,000 over the past five years, which is equivalent to the mid-sized city of Rockford. According to research outfit Wirepoints, more than 114,000 residents left the state on net in 2018 and nearly 1.5 million people since 2000. Cold weather? While Illinois’s population has declined by 0.8% since 2010, Indiana’s has grown 3.1% and Wisconsin’s by 2.2%.


I can relate to this personally when we were faced with the prospect of relocating from Michigan last year. Driven by a desire to be closer to family and my wife’s job, the choice was between relocating to Illinois, either in Chicago and its neighboring suburbs or to Indiana. Living in Chicago proper would have provided a shorter commute for my wife and quick access to all of the amenities of the city, such as sporting events, restaurants, and museums. Chicago’s fiscal woes are well documented, however. The deciding factor was skyrocketing real estate taxes in Chicago and Illinois, with taxes roughly 3 to 3.5x that of a similar house in Indiana! Given the schools in the town we ended up choosing were excellent, and Chicago was a mere 30 minutes away, the decision was easy.

Therefore, when considering where to live it is paramount to understand the state and local fiscal situation as it could have a dramatic impact on your ability to keep the money you earn and ultimately, your long term freedom. This trend will only become more acute in the future.

The F.I.R.E movement – real or fantasy?

financial independence can cause one to jump

There has been a lot of online media coverage in recent years regarding the “F.I.R.E.” movement, which stands for “financial independence, retire early.” Basically the premise is to save 50-70% of your income and retire early in your 30’s or 40’s. Is this even possible? Well yes, but of course we need to dive a little deeper to understand what this movement represents.

In my view, the FIRE movement is a perfectly logical response to current times and the environment in which we live. Skyrocketing debt, lack of affordable housing, stagnant wages, and poor job security all play a part. You have repeatedly been told since youth that the proper path is to get a good education, work into your 60’s and then sail off into retirement. This is a fallacy, of course, and many young people today have figured it out. If I asked “what is more valuable to you, time today or time 20-30 years from now”, how would you respond? The fact is that the entire establishment wants you to believe that time in the future is more important. Why? Because they have a vested interest in keeping you working, likely for someone else, for all of your prime years. However is there any guarantee that you will be healthy in your 50’s, 60’s and beyond? Is there a guarantee you will even be alive? Of course not. Time, in fact, is all that we really have.

The other part of FIRE that is open to interpretation is what defines “retirement”. Is it laying on a beach somewhere sipping pina coladas? Owning a yacht or Ferrari? Do you have to be not working? No, No, and No. I contend retirement is simply doing what you want, on your own terms and when you feel like it. You could still be working, but at your own pace and not for someone else’s arbitrary deadline. So call it semi-retirement. In the end, it is dictating your schedule, not having someone else or an organization dictate it for you. This means more time with your family, hobbies, or simply sitting in your background and enjoying the weather.

My previous post started to lay a foundation on how to save money. It is not just saving more of what you earn, it is avoiding or reducing variable costs. This is just a kernel of thought however in the grand scheme of things. In a future post I will talk about one of my all time favorite ways to “beat the scam” and get ahead. The owner occupied 2-4 unit rental.