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Turmoil Ahead
A few weeks back I wrote about a split society. So far, the Great Unwinding has crushed a few over-leveraged companies, banks and persons but it has not fundamentally altered the behavior of my peers. Our balance sheets, took a hit, we trimmed wasteful habits, we all had a collective freak-out... ...then... nothing, really. It takes about three years for our collective memory about the "past" to shift. Do you remember the date of the sub-prime "shock"? August 2008 -- we are 18 months along our path with the New Normal. Ask yourself:
The questions above are important to consider - I have noticed that living in a low-return environment is changing the way I view capital and risk. In 2008, I came (uncomfortably) close to being wiped out by a mix of non-disclosure; excess leverage; and market forces. That had a profound short-term effect on me but the lessons feel like they are starting to fade. It's like I am being lulled back into a sense of inertia. What saved me was the observation (five years ago) that, while things were good, we were heading in a direction that might not be sustained. This expressed itself as discomfort rather than a prediction of some specific outcome, or time. I thought that I'd share what's making me uncomfortable right now: Leverage - given the magnitude of the over-leverage in the private sector (August 2008), I'm curious how our collective net debt position has shifted with the massive increase in central government spending since the sub-prime shock. Revenue - there are tens of millions of Americans not doing a whole lot right now (you can surf a range of employment charts here). Those folks aren't paying taxes, are limiting consumption and aren't on the productive side of the economy. Expenses - the cost to run our society is going up, not down. There has been no meaningful restructuring of our approach to government, or foreign wars. This isn't a case of right/left - government believes in government (and re-election). Congress reflects a lack of will (in the electorate) for a radical restructuring. Frankly, it makes sense, it is a rare group that initiates change absent a crisis. Do the conditions above remind you of anything:
To me, it looks like we have added material scale to where we were in August 2008. We bought time for things to improve but we didn't address the underlying causes of the crisis. Interestingly, I read a lot of concern about the US's economy but, traveling internationally, it is clear to me that America represents excellent value at current exchange rates. Labor, assets, productivity... all are excellent value in the US. Australia, in particular, seems 30-40% mis-priced. While there were some losers in the financial sector, you and I are paying a huge "transfer tax" to the stakeholders in the surviving financial institutions. How?
I don't think the folks at the tea-party rallies think as I've laid out. They just know that they are unemployed, lacking a productive outlet and told that's the way it is. I'm surprised that there isn't more unrest and resentment. Put in their shoes, I'd be seriously upset. In this environment, it pays to keep your head down if things are going well. How is this going to end up? I do, however, have the ability to review my family's position against the range of likely outcomes - I see inflation as much more likely than a restructuring of our society. Inflating is the least painful way out and, I suspect, the route we will go. If I am wrong and we deflate/restructure then that's going to be a tough run for many of us. However, it doesn't screw my personal position up that badly (relatively, we're all going to take pain). While inflation might be OK for the overleveraged parts of our society (consumers, corporations, governments), it would be lousy for my current position. I have made progress in addressing my exposure to inflation but I need to take a few more actions. Options that are on my mind:
It would be nice to have a positive real return on my portfolio - for the last 18 months, I have been managing my finances by cutting expenses, rather than seeking return. In addition to being wary of inflation, we should be prepared for a big increase in our taxes. I think taxes are going to go up, materially, at all levels of society (city/state/federal). I've been fond of the Die Broke strategy and recommend the book (linked). The areas that most resonate are: (a) work for yourself; and (b) don't plan on retiring - because you are unlikely to want to and probably can't afford it, anyhow. So my lifestyle hedge is:
To date, I have decided to keep Endurance Corner as a "micro" business, rather than shooting to achieve "small" business status. More thoughts on that in a future article. Be well,
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It's been a while since I wrote about personal finances. We completed our quarterly financial review this week so a number of topics are fresh in my mind.