Over the past five years, I’ve spent countless hours studying finance and investing through a handful of sources: The Wall Street Journal, Benjamin Graham’s The Intelligent Investor, documentaries, and dozens of blogs and online resources. After a while, I began to see trends and learn to anticipate market movements. While I can hardly say I have a crystal ball, I created a small portfolio of stocks in 2014 that have since returned 15% year-over-year. But given the growth in the S&P 500 since the crash in 2008, almost any idiot who put money into a reputable company could have shown similar profits. Still, I like to think I learned a few things about finance and trading (I also took a graduate course on Machine Learning and technical analysis for stock trading).
I’ve also kept an ear to the ground in my local economy. I observe the times of the year when the restaurant down my street is busy or quiet, and I notice how one restaurant slowly becomes less popular while another two doors down gains more business (people eat at cheaper restaurants when their discretionary income is low — this often happens around the Holidays and tax time). How long are the lines at Philz Coffee? Are people still buying $5 coffee? What is the price of fruit from the grocery store?
Lately, I’ve begun to worry about the economic health not just of the Bay Area, but of the United States as a whole. While the Bay Area may seem like a prosperous land of high-paying tech jobs, one must remember that the Bay Area can only survive as long as the American economy operates properly. Without regular agriculture shipments from farms around the USA, we would all starve. The landowner in the Midwest has less money on his balance sheet, yet is actually more insulated from financial disaster because he owns land. A $1M condo in San Francisco can’t produce food, while a $3000 acre of land in Idaho can grow corn, soybeans, wheat, etc. City dwellers are cash rich, but land poor. The word “mortgage” comes from Latin mort for “dead.” The French (who invented the word) recognized that certain properties –homes, office buildings, stores –were inherently “dead” because they produced limited value as they depreciated. Meanwhile, coveted farmland could produce value in perpetuity.
The 2008 Financial Crisis happened hardly a decade ago, and yet I am already observing signs of a second crisis. More pessimistic voices say a US crash is imminent, but I don’t think we need to run for the hills yet. The economy will likely glide downwards over several years. But the years of easy growth are long gone. The US Federal Reserve started to shed assets from its balance sheet in Q4 2017, and it has already raised interest rates a few times. Compounded with Trump’s bizarre isolationist trade policies, I worry that we are heading towards a drastic weakening of the dollar. Further, if the Fed is no longer interested in buying Treasuries, who will want to buy them? The Chinese?
As interest rates rise, bond prices fall. And as interest rates rise, money is more difficult to borrow. These effects ultimately hurt investment returns of bond-heavy funds (e.g. retirement accounts) and slow down economic activity.
Additionally, the US Government delivered us a tax cut. Normally, a tax cut might be a welcomed thing. More money in the hands of spenders and businesses means a more vibrant economy. But the Republicans failed to reduce Federal government spending! If anything, the Federal government has been borrowing more money –it raised the debt ceiling and added $300 billion to the budget in February 2018. How can you increase the budget but cut taxes? It is poor fiscal policy.
The economists in Washington are gambling on growth. The United States simply needs to grow (and grow fast) in order to meet debt obligations. So, if the economy doesn’t grow as quickly as anticipated, we will be in trouble later. The tax cut must create more growth than what the government loses in taxes… Or else we’ll never get out of the hole.
The United States is operating close to the edge –it has borrowed money to the hilt, and many of its “wealthiest” states are deeply in debt. California has more than $60 billion in unfunded pension liabilities and a costly High Speed Rail project which won’t be finished for another decade. A natural disaster, act of war, or even a sudden drop in agriculture productivity (remember the Dustbowl?) could send the economy into a tailspin. We’re in a very precarious place.
I’m not sure what any of this means for financial strategy. I recommend people continue to avoid debt, and consider obtaining more permanent forms of wealth. Ray Dalio recommends keeping about 7.5% of your net worth in gold if possible. While I think gold is not a real investment, it has served as a wealth preserver over the centuries. Neither stocks nor bonds are safe in the impending crunch, so I’m not sure what other investment vessels we can turn to.
I don’t believe cryptocurrency has achieved the trust necessary to hedge against a drop in the dollar or the US Economy. You need to “cash out” your cryptocurrency to buy most goods and services, and the global economy will suffer the same fate as the United States economy during a recession.
We all know that debt catches up to us eventually. Crushing debt is what encouraged the French to overthrow the Monarchy in the late 1700s, and the debt (which could not simply be written off) held down the newly formed French Republic for decades to come. Selfishly, I hope we can kick the can down the road just one more time –I only started working 5 years ago, so I haven’t had many years to work and save.
I believe we can learn a lot from the financial history of other countries. In particular, studying the monetary policy leading up to the French Revolution and the aftermath of the failed Assignat shows us how the collapse of a fiat currency can lead a country towards stronger central control (i.e. the rise of Napoleon). And in more recent history, Japan’s “Lost Decade” from 1991 to 2001 (or 2010, depending on who you ask) shows us the pain that a country must endure to reboot itself after decades of borrowing and over-leveraging of debt.
The financial outlook of the United States, in my mind, is uncertain. But we have weathered the storm before, and we will get through the next set of challenges. Only time will tell what those challenges will be.
San Francisco, CA