If there is one political topic that has been very quiet lately, it’s Modern Monetary Theory. In the wake of the pandemic and the political divisiveness that tinged much of the 2020 presidential election, grievance politics championed a new economic model that said we can have whatever we want. Free healthcare, infrastructure and a federal jobs guarantee for every citizen. Don’t worry about the price tag, it’s proponents said, what we spend doesn’t matter I’m the new world of big spending and low inflation.
Due to the actions of the Fed, an experiment that played out almost 45 years ago is being repeated in modern times. With inflation of 7% annually taking hold and the stock market going sideways, this generation is getting a painful lesson in how damaging poor Fed policy can be. Despite headlines for a shortage of workers and the great resignation, the reality is that most people are still working (unemployment is at 3.6% currently) and their salaries are not keeping up with the cost of living.
Inequality has been the focus of much of the political dialogue in recent years but in the situation, inflation is only likely to make this worse. The wealthy are already more likely to be highly skilled and this means they have more pricing power in their jobs than those taking lower skilled wages. With wealth also comes greater financial sophistication and this often means the ability to take advantage of inflation.
Inflation hurts the owners of fixed rate debt and helps the borrowers by making it cheaper to pay back loans. For example the 10 year treasury note was recently yielding 1.8% annually. If inflation were 4% over the next 10 years then the return after inflation turns out to be -2.2%. This is referred to as the real return or return after inflation. While the holder of the bond lost in real terms, the issuer of the bond (in this case the US government) gets the benefit that they only paid about 98 cents on the dollar back in real terms.
I’m my own life, I knew that there was a risk of this happening when rates were cut so quickly and QE initiated during the pandemic so in order to partially protect myself, I refinanced my mortgages into long term fixed rate loans. These types of loans would benefit me if inflation was higher than the interest rate and so far this is what’s happening. Yet it’s only a partial win.
During inflationary times it can be difficult to find a perfect hedge. Commodities may rise in value but they are volatile. Businesses that are capital intensive may suffer. For example a company that leases construction equipment may lend out a bulldozer with a 5% interest rate but again they are like a bond holder, if inflation averages 6% over the life of the loan there is a loss.
Less capital intensive industries such as those in tech, can benefit from this environment, they don’t have much equipment, they rely on their brand, their software and their people.
On the flip side, inflation may come back down in the medium term. This is what some economists and investors are betting. It may be one reason why the 30 year mortgage rate is back up around 4.7%. Still low by historical standards and definitely not as high as annual inflation numbers which are more recent. In this scenario, capital intensive businesses and bond holders will benefit as their returns rise.
It just becomes another reason to be diversified in the long term. I hold mortgages and equity in property which helps in more inflationary times. I hold equity across different asset classes and I still maintain a small exposure to bonds, even though they have had one of their worsts years on record.
Is it sexier and more sensational if I were to go all in and bet my life that the next 5 years will see higher inflation than the experts predict? Yes, but the consequences of being wrong could potentially be devastating. If another housing downturn were to happen I would be dangerously exposed to the market. Remaining diversified is more boring in the short term but in the long term still gives a great result. The question it makes me ask is why aren’t people more focused on a strategy that gives them great results with much less risk?
Lessons From Bitcoin
I recently watched Trust No One: The Hunt for the Crypto King on Netflix. If you plan to see it, then stop reading here because the ending is relevant to my point.
The story is a documentary that follows investors that used one of the largest crypto exchanges in Canada called Quadriga CX which was founded by a man named Gerald Cotten. A few Investors who utilized the exchange are interviewed and one in particular, a software engineer, shares actual numbers of what he invested and the story behind his money.
He shares that he initially borrowed to invest into crypto and when the market experienced a crash in price in 2018 that he was forced to sell his San Francisco apartment to pay off the loans he took out to buy crypto. His remains from this debacle were $400,000 which he then wanted to convert to his native currency of Canadian dollars. He used Quadriga to do this, thinking he could avoid bank fees but once his money was in he was never able to get it out to convert it to Canadian dollars.
A few months later it was reported that the founder had died in India and was the only individual with all the passcodes to access the funds on the platform.
The documentary follows Telegram and other messaging forum theories including an investigation by the Globe and Mail, a large and respected Canadian newspaper, but in the end an investigation by Ontario securities regulators found the answer: apparently the founder Mr. Cotten was using the funds on the platform to himself gamble on other crypto exchanges and his own trades went terrible. He had in reality lost much of the money and was just keeping a Ponzi scheme going. His death just preempted it’s exposure.
Circling back to the software engineer, he was reflective on what drove him and Mr. Cotten at the time. He believes they were both driven by greed, by short termism and wanting even more, faster. Yet even when Mr, Cotten had many millions available, he wanted even more.
The story of Mr. Cotten stealing wasn’t new. We don’t know what drove him to start acting this way with people’s money but we do know it was wrong and we have seen cases like this before, the mysterious death just added to the fascination. Yet the story of the software engineer and his reflection intrigued me as well.
He has a skill in high demand that is very well paying yet he talked about how he wasn’t happy doing the work. He planned to use much of the 400k he lost to take some time off and reflect after 8 years as an engineer. The irony is that if he were a little more patient, he likely would have been able to take the time off and switched careers to something he enjoyed more, but the desire to have more faster blew up in his face.
Long Term Greedy
The story of the Crypto King made me reflect on short term greed. It made me reflect on something I had heard recently. The other day, I was listening to a podcast where the controversial psychologist Jordan Peterson was a guest. Mr. Peterson has spoken on a number of different topics on contemporary life and in this one he discussed how we treat each other.
If you take a cold strategic approach to your life and career as what will benefit you the best in the long run, he argued that you would actually come to the opposite conclusion of what many people do: that you should treat people kindly. The rationale for this is that these people could be in a position to help you and give you things in return later on.
Yet in corporate culture and business in general, we see the opposite of this type of behavior. Much of what we see in people’s actions can be attributed to short term greed. You may have experienced it yourself in the office, the colleague who stabs you in the back or throws you under the pervertían bus to make themselves look better and get promoted. The colleague who treats people differently based on their title or their perceived status.
Yet Peterson’s point was that people who act in this way do so at their long term expense. They alienate those around them and usually leave the company or make others leave. If they manage to be financially successful, their relationships often struggle. Steve Jobs and Jeff Bezos are perceived as wildly successful yet have paid huge emotional and financial tolls for not prioritizing their familial relationships.
Some people don’t take the cold approach to treat others kindly, they just are that way naturally or it makes them feel good. Yet Peterson’s point is that those that are short term greedy, be it in relationships or money, are doing themselves a disservice by not reflecting more on their actions.
If short term greed is your guide, you may want to ask yourself what’s driving it. Impulse is what drives us to do things in the short term that isn’t in our long term interest. Maybe those that are short term greedy never learned to control their impulses or master them. More darkly, maybe they don’t have faith in themselves for the future. Or maybe pure irrational emotion is driving them. For example many people feel a sense of coldness or entitlement in their daily lives because they were treated poorly at some time. They live their lives as prisoners to their bad experiences, doomed to repeat them towards others in a never ending cycle of revenge.
In the end, it may seem counterintuitive but good habits, good human habits towards others, not just financial habits, can have lasting effects for the hood in the long term. In this way, being greedy can be good for everyone. It’s worth thinking about for us all.
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