Don’t Try to Beat the Market

I get upset whenever someone says they are going to “beat the market”. The market isn’t a video game. Outsmarting other people isn’t the goal.

Anyone who approaches the market with the intent of “beating” it has already lost. Sure, it’s possible to gain money on the stock market, and it is also possible to get more money than the next guy in the stock market. The same thing is true of gambling. Unless you view the market as merely a high-class casino, “beating the market” is one of the worst analogies.

If everyone lost all of their income, and you only lost half, would you be excited that you “beat the market”? What if you became rich by suckering everyone else out of their money? Is that something to be proud of? No, and those are two of the reasons why “beating the market” is a ridiculous goal.

The goal of investment in a market is to build value, period. If your goal is something else, you should get out, because you are not only likely to lose your shirt, you are likely to hurt others in the process.

The market is not a list of numbers, it is a list of companies. Buying a stock is not betting on a horse, it is investing in what a company does on a daily basis. The goal of an investment is to either (a) help capitalize an operation that you believe has future potential, or (b) provide early compensation for others who capitalized the operation earlier by purchasing for a fixed price a future revenue stream. If your goal is to just hang on until you find someone stupider than yourself to sell it to, then you are doing it wrong.

Now, by this notion, it might be that there are *no* companies worth investing in. That’s certainly a possibility. What then? I can see two clear choices: either (a) save your money (that’s what cash and precious metals are for), or (b) start your own company or help out someone who is not listed start theirs.

Your money has so much better uses than just to gamble it away. Instead, find a productive way to invest your money.

Our current economic debacle comes from having so many people focused on “playing the market” rather than actually creating value. Therefore, the gains are all fake. Because so many people “play the market” or “provide liquidity”, no one is “providing value”. This is what causes a market crash. Eventually, the market returns to the value. If no one is producing, then there is no value.

If value is being created, the actual numbers behind your wealth are much less important. Real capitalization is deflationary. Imagine this – let’s say you go to the store and buy 100 apples for $2 each. You now have $200 worth of apples, and you eat them all year. Now let’s say you buy an apple tree. Now you can, from now on, have $200 worth of apples without spending money. You might even wind up with enough to sell (which will lower the market price), or have such an abundance you give them away just to keep from having to clean them up!

All of these operations lower the value of your 100 apples. But do you care? Wouldn’t you rather have food in such abundance that you had to give it away rather than have to spend $200 each year? But for those who keep score with dollar signs, who want to do “better than you” rather than “well”, they would rather have apples become scarce, and their $200 worth of apples become worth $600. They would plow up an entire forest of apple trees to make their apples worth more. When they are starving in the street because they killed their own source of food, they will say, “I won – my assets are worth more dollars than anyone else’s”.

Which person in these stories was actually wealthier? The one with dollars, or the one with actual productive capital assets?

If you think you can successfully invest in the market, and in doing so improve the market itself, by all means be my guest. But if you want to play the market or beat the market, then for the good of yourself and others, please don’t.

The National Debt is on an Adjustable Rate Mortgage

Over the past few years, without anyone debating it or publicizing it, America’s national debt has been converted to an adjustable-rate mortgage. That’s right – the moment after ARM mortgages went belly-up, the treasury decided that they wanted to get in on the game. How does the national debt become financed with an adjustable-rate mortgage?

To answer this question, we have to ask, what is an adjustable rate mortgage and why is it a problem?

An adjustable-rate mortgage is one where the person receiving the loan gets a low interest rate, but the interest rate follows the market rate year-to-year. In a fixed rate loan, if your rate is 6%, it will be 6% until your loan is paid off. For an adjustable-rate mortgage, your rate might be 3%, but then next year it might be 8%, all depending on the interest rate in the markets. The problem with an ARM is that people get used to the low rates, and they forget to plan on what will happen if the rates go up. If the rates go up even a little bit, it catches them off guard and they can’t pay.

So how does the government do this with its debt?

Well, the government finances its debt on the open market. So, for instance, it might sell a treasury bond. The treasury decides whether that is going to be a 6-month, 1-year, 10-year, or 30-year bond. Traditionally, the treasury has financed the debt using primarily longer-term notes – 10 to 30 years. This means that if interest rates fluctuate, we have some time to deal with it before we need to refinance. It prevents a crisis from interest-rate swings.

Well, 10-year bonds yields are at about 2.5%/yr, but the 1-year bond is only 0.1%/yr. Therefore, to save money temporarily, the government over the last few years has rolled over half of its debt into short-term notes! This has helped the bottom line for the current years. The problem is that it means that we have $8 trillion in debt which has to be refinanced every year. Now, at the 1-year rate, $8 trillion costs $8 billion a year in interest payments. However, if the 1-year rate were to go up to any historically normal interest rate, the government deficit would shoot through the roof.

Let’s say the interest rate shot up to 4%. That is still considered low, historically. What would happen? It would cost the government $320 billion in new interest payments. That would increase the deficit by about 30%.

This is life on an adjustable rate mortgage.

Another Idea for Gold-Backed Money

If you have followed this site or my book for a while, you know that I am an advocate of returning to some semblance of commodity-backed currency. I mentioned that we actually could start trading in silver (and save a lot of money in taxes if we did).

Another idea is to create a standardized way to use gold and silver as collateral for loans. You see, many people own silver and gold, and (understandably) don’t want to spend any of it. However, it seems like a waste to spend so much time, effort, and money collecting silver and gold, but have it put to no purpose whatsoever.

One way that some people have found to put their gold and silver into use, without spending it, is to use it as collateral for a low-interest bank loan. That is, if you have $1,000 worth of silver, you can pledge it to the bank for an $800 loan at a very low interest rate. Then, as long as you pay back the money, you keep your silver, but if you fail to pay it back the bank keeps your silver. Thus, as long as you invest in a productive operation, you are able to use your silver and gold to increase your wealth, rather than have it sit doing nothing (which is Warren Buffet’s primary critique of precious metals).

So, what we could do is create a gold/silver depository. However, instead of just holding your money, you would also be issued a credit card that would be able to have ultra-low-interest credit up to 75% of your holdings. That works out well for the card holder, because they have a secure depository to hold their precious metals, and they can use them to make purchases. It works out well for the investors of the depository because they have guaranteed returns. If a creditor does not pay their monthly fee, you automatically get a payday in gold and silver. This creates two different vehicles for gold/silver investors. By using the facility, you can put your gold and silver into good use. By investing in the facility, you either get (a) a guaranteed small return if the borrower pays, or (b) discounted precious metals if they borrower does not pay – a win/win either way.

If the price of precious metals goes up, then you automatically get a larger credit line for borrowing, and deciding not to pay uses a smaller amount of silver or gold. Therefore, if you think the price of metals is going up, you can purchase something today, and pay for it with a lower value of silver tomorrow.

In addition, such a service could offer services for someone to audit their own silver lock box. It could have allocated vs unallocated accounts, and various other levels of service depending on your needs. Finally, the depository should exist within the state of the borrower, so that the borrower can come and view the holdings at any time.

This appears to have been tried once in 2010, but the site never got off the ground. I found several articles from March and April 2010 (all seem to be rewrites of the same press release), but nothing seemed to come of it. The website mentioned in those articles is now pointing to something else.

Critiques? Suggestions?

The Feds are Running Out of Options

In the last few years, the only real buyer of government bonds has been the federal reserve. Historically, the federal reserve was not even allowed to purchase government bonds. In addition, it certainly wouldn’t have been able to become the primary purchaser without quantitative easing. However, the federal reserve is planning on backing off of quantitative easing, and that spells trouble for the government, and they know it.

Two policy changes this year indicate that the federal government knows that it is in trouble. The first is the myRA account announced at the State of the Union speech. This is a special retirement account being sold to lower-income Americans that can only contain *one* investment type. You guessed it – government bonds. The goal of this program is not to help poor people get retirement accounts. The goal is to sucker the poorest Americans into financing the government’s debts. Why? Because we can’t find anyone else to do it.

The second policy change is the increase in the Social Security Administration to pursue old debts, and take the money from relatives of the debtor. In some cases, they are withholding tax returns from people because the social security administration overpaid a relative of theirs 30 years ago. So, not your debts, but a relative’s debts. And not a recent debt, but one 30 years ago. This means that as quantitative easing starts to fade, the federal government is going to start doing increasingly panicked measures to increase their cash, because they have run out of people to finance their borrowing.

No, just to point out, I think that removing quantitative easing is a good thing. The problem is that it will reveal just how poorly managed our country and our economy have been, and it will hurt bad. It’s a necessary step for healing, but the transition is going to be a ride that no one will ever forget.

Is Globalization the Best Thing Since Sliced Bread?

This article makes a stunning claim that globalization is the best thing society has going for us. I agree that free trade reduces poverty in general. I don’t mind some forms of globalism, but I’m not sure that it is unequivocally good. Free trade and globalization are both negative when done by immoral people, and I have trouble thinking that the present set of globalists are influencing societies for improved morality. Nonetheless, it is interesting information worth noting.

Another Reason for Workforce Participation to be Down

One number in the labor statistics department has conservatives all up in a wad – the workforce participation number. These are people who are not in the labor force. I am not an expert in labor statistics, but from a cursory reading of them (they are available here with an explanation here) does not give me alarm about this number.

The way that conservative pundits put it, an enormous number of people have found that the economy is so bad, that they have simply left the workforce – they have given up looking for work. There is, possibly, another interpretation. It might be that conservatives are winning in other areas.


Since the 1970s, the two-breadwinner family model has risen dramatically. However, conservatives have long been critical of this approach for a number of reasons, many of which are detailed in MicroSecession. In brief, having a second breadwinner doesn’t necessarily increase the productive output of the home, it just means that all the household endeavors went from unpaid to paid workers. For instance, if a wife stays home, she takes care of a lot of the housework, and might even mow the lawn. She takes care of the kids when they are home from school. If a wife, instead, works, all of these tasks must be taken care of in some manner – often times by hiring it out. So, you have a second income, but you must pay for cleaning services, yard services, and childcare services. So the second income doesn’t necessarily benefit the family, it just means that you have to pay taxes not only on the husband’s work, but also on the wife’s work.

So, my guess is that much of the reason that workforce participation numbers are down is because women have started taking a more active role in the home. In addition, a new conservative trend has many women heading in this direction in greater numbers – homeschooling.

What the homeschool movement has pointed out is that it is the responsibility of the parents to take charge of their children’s education. Outsourcing this to schools often isn’t cutting it. Therefore, many parents are making the decision to live on a tight budget during the child-rearing years so that the wife can stay home to educate the children.

As someone who is negative on the current economy, I don’t doubt that we have employment problems. Actually, even more than employment problems, we have income problems because the Federal Reserve is debasing our currency, and the federal government is making getting out of poverty bad business (i.e. when someone tries to get out of poverty, they actually lose money when they first begin to work, making starting the journey out nearly impossible).

However, I do think that some of the numbers reflect some amount of healing in society, even as our government is just as bad as ever.

Some Criticisms of George Gilder’s Knowledge and Power

I’ve been reading (actually listening to) George Gilder’s new book, Knowledge and Power, dealing with what he calls the “information theory of capitalism.” The book is, overall, fantastic. I heartily recommend it to anyone, and believe that Gilder provides both an excellent defense of capitalism as well as an excellent understanding of it. Hopefully soon I will write an overview, because it really is good. However, before I forget, I want to cover some of the places where I think Gilder is wrong. Gilder is an optimist. I like optimists. That’s actually one of the things about my book – it’s an optimistic prepare book. However, Gilder often goes beyond optimism to all-out rose-colored-glasses.
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Ranking the Best Options Forward on the US Debt

If you find yourself in a hole, stop diggingThe First Rule of Holes

The problem with the US Debt crisis is that it is hard to talk to people about what the options are without people getting confused. Here is a normal conversation:

Someone Else (SE): “We need to raise the debt ceiling to avoid a default”

Me: “I agree we need to avoid a default. That’s why we should cut spending drastically.”

SE: “Well, we can’t cut spending – they are all for critical services, so we need to increase the debt limit.”

Me: “I am against raising the debt limit”

SE: “What if we default?”

Me: “If that’s the only option, I’ll take it”

SE: “You just contradicted yourself.”

This sort of thing drives me crazy, so here I will lay out, in the order of preference, the various options on the debt default.
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