jwithrow, Author at The Phoenician League

Is this the 8th Wonder of the World?

No lesser mind than the brilliant Albert Einstein thought this feature of money was the “8^th Wonder of the World”.

Loosely translated, what he said was…

“Those who don’t understand [it], pay… while those who DO understand [it], earn.

He was talking about compounding – the magic bullet when it comes to investing.

Now, I don’t know if Einstein actually said compound interest was the 8^th Wonder of the World. There are questions about that. But you know, it doesn’t matter.

Because the point still applies. If you figure out how to earn a compounding rate of return on your money… you win.

Over time, you not only collect a return on your original investment…

You also collect a return on the money you’ve already earned. That’s how a small stake in the right asset can go like this:

You’re being robbed RIGHT NOW… [There’s still time to fix this]

In 2022, something big happened to our money… and almost no one has noticed. The Age of Paper Wealth came to an abrupt end.

Interest rates bottomed and started heading up again for the first time in 40 years… all while government and private debt exploded to unpayable levels…

And inflation is now destroying what remains of the American Dream.

If you’ve tried to get a loan to buy a home or car recently, you know what I’m talking about…

Finance charges have more than doubled in the last few years – making it much harder for regular people to secure affordable financing.

Well here’s the truth about the US dollar and where we are headed…

Until 2022, cheap credit was everywhere. Now… it’s gone. And that’s not going to change.

If the Federal Reserve (the Fed) prints a bunch more money and drops rates, it will be the end of the dollar and the financial system as we know it.

If they keep rates high and drain excess liquidity – like they are doing now – we’re guaranteed to go through a recession. And we may even see a full-blown credit crisis if Congress can’t reel in spending.

How I discovered the fast track to financial freedom

When I graduated from Radford University with my degree in finance, I was a fresh-faced lad of 22, ready to take on the world – convinced I would do meaningful work.

Not long after, the 2008 global financial crisis hit and I was right where I felt I needed to be… the Loss Mitigation department at Wells Fargo.

I was in the right place alright. But for all the wrong reasons. Let me explain…

Loss Mitigation is a code word for “we are the guys at the bank whose job it is to modify mortgage paperwork so Wells Fargo could show the government what a fine and noble job they were doing”.

I probably don’t have to tell you this was pure theatre. The only thing being mitigated was reputational damage.

I quickly understood that my real task was to satisfy government bureaucrats at various agencies by fiddling with paperwork to make it look like we were helping…

In reality, all I was doing was making sure my employer would have a profitable quarter… while almost four million families had lost their homes!

Needless to say, that didn’t sit right with me. In fact, I started having real trouble respecting the guy in the mirror. So, I walked.

And then, the most amazing thing happened…

America at the crossroads…

For generations, succeeding in America was simple…

Go to school—> get good grades—> go to college—> get a good job.

If you followed this plan and worked hard, a middle-class lifestyle was easy to achieve.

And those more ambitious could start a business with almost no regulatory obstacles. Opportunity was everywhere.

Not anymore…

Because the American Dream that inspired millions of immigrants to leave their homeland and create a new life in the US… is fading into history.

Today, many colleges load up students with debt and fill their heads with destructive ideas—the kind of ideas that prevent success in the real world.

Meanwhile, the bureaucracy in Washington churns out endless regulations – strangling small business success. Many entrepreneurs from a generation ago would be hard-pressed to recreate their same success today.

And to top it off, reckless government spending and money printing are driving up the cost of living for everyone.

Just look at this data on consumer price inflation:

A financial storm is brewing… [Do this to prepare]

What role does money play in society? If you’re like most people, you’ll answer something like:

For transacting commerce. Or…
As a means of saving.

These are good answers… I give you my money, and you give me a product or service. Or I could save some portion of my money to use later.

Both are vital functions of money in any society. But money plays another role most people have never considered…

Money is also a communications system.

Prices for goods and services act like signals in a massive economy like ours. This price system is the most sophisticated “machine” ever built.

The prices of goods and services communicate information about the supply and demand of scarce resources to billions of individuals in real time all over the world.

When the price of something goes up, that’s a signal that it has become more scarce relative to demand – which prompts entrepreneurs and business owners to create more supply or offer alternatives to meet demand.

When the price of something goes down, that’s a signal that the item is abundant compared to consumer demand – leading firms to produce less of it… until the price rises again.

This price-signaling system allows millions to coordinate their productive efforts across time and space. It’s what Scottish philosopher, Adam Smith, called the “invisible hand”.

This is how individuals can make decisions based on self-interest – driving economic growth for all.

When the price system is left alone, labor and scarce resources can be allocated to their highest and best use.

Why am I telling you this? Because there is a problem…

What to do when trust is broken…

“Your dollar is a promise, a pact of trust,” President Nixon once assured the nation. “It will hold its value, come what may.”

The date was August 15, 1971. The day the world’s financial landscape was forever altered.

Nixon had just closed the “gold window”, a system that allowed foreign countries to exchange their US dollars for physical gold. This had been a cornerstone of the global monetary system for nearly 30 years.

The essence of this system was trust. But not in the US dollar. In gold.

If the United States started to print money excessively, the rest of the world could exchange their dollars for gold. That’s what the gold window was for.

The narrative behind Nixon’s “gold shock” is complex, but the aftermath is starkly clear…

Since Nixon’s decision, the US has created over $8 trillion out of thin air. This naturally diluted the purchasing power of each circulating dollar.

This is evident in the rising consumer prices we are all grappling with today.

But there’s another, less visible story unfolding. This chart reveals the truth:

The Fed Can’t Outrun This Economic Law

As regular readers know, my thesis is simple. The Age of Paper Wealth is over. This chart tells the story:

Here we can see the S&P 500 and the 10-year Treasury rate going back to 1980. The S&P 500 is the black line. And the 10-year Treasury rate is the blue line.

We’re using the S&P 500 as a proxy for US stock prices. And we’re using the 10-year Treasury as a proxy for interest rates. This chart makes it perfectly clear that the two are inversely correlated.

Interest rates started falling in 1982, and they fell consistently for the next 40 years. Meanwhile, US stocks consistently went up in value over that same time period.

But everything reversed in 2022. Rates started going up, and stock prices started to fall. We can see those moves clearly marked by the red arrows on the chart above.

So the period from 1982 to 2022 will go down in history as the Age of Paper Wealth.

And here’s the thing—what happened from 1982 to 2022 was not normal. Nor was it organic.

Instead, it was all driven by the debasement of our money.

Why the Fed Put Is Dead

Everything’s been on a tear this year.

Bitcoin’s up about 153% year to date. The S&P 500 is up roughly 20%. And gold has gained 13%. It’s now trading at all-time highs in all currencies.

These moves all occurred as the 10-year Treasury rate rose nearly 70 basis points – from 3.53% to start the year to 4.22% today.

This doesn’t make a lot of sense according to what’s become conventional wisdom over the past few decades. The market has come to expect assets like Bitcoin, stocks, and gold to fall in value when rates rise. So what gives?

Well, there’s been a lot of speculation that the Federal Reserve (the Fed) is going to turn around and begin easing again next year. In fact, the futures market is projecting a 45% chance that Fed Chairman Jerome Powell will cut the Fed’s target interest rate at his March 2024 meeting.

It’s not going to happen.

Clearly a large portion of the market still hasn’t accepted the core thesis that I’ve been presenting in these pages. The Age of Paper Wealth is over.

Ancient Secrets and Black Friday

I’ve got a bone to pick with Black Friday. And Cyber Monday. And Giving Tuesday…

I spent this past week wading through all the marketing emails that hit my inbox. I bet you did too.

Black Friday early sales… day-of sales… last chance sales… I lost count of how many there were. Then there was Cyber Monday. And all the emails for something called Giving Tuesday. I hadn’t even heard of that one before.

Of course, I don’t have any problem with these emails. I understand. I send out four emails every week myself.

But here’s the thing – the whole concept underlying Black Friday is a problem. That’s because it perpetuates the most common misconception we have around money.

It’s the consumerist view. The idea that the whole point of making money is to spend it on stuff. And then if we can make “good money”, we can buy even nicer stuff.

So many people view money in this way.

And as a result, they live their life on a treadmill. Constantly working for money… buying stuff… and working for more money.

I think it’s time we flipped the script.

Why it’s gotten tough out there…

“Your dollar will be worth just as much tomorrow as it is today,” President Nixon proclaimed on television with a straight face.

“The effect of this action, in other words, will be to stabilize the dollar.”

The date was August 15, 1971. President Nixon just announced that he was closing what was known as the “gold window”. This was the system through which foreign countries could redeem US dollars for physical gold upon demand.

The gold window was a fixture of the Bretton Woods System of 1944. That was the international agreement which established the US dollar as the world’s reserve currency.

What we’re talking about here is trust. The idea was that if the United States started printing too much money, the rest of the world could trade their dollars in for gold.

After all, nobody wants to hold a currency that somebody else can create from nothing anytime they want.

The story behind Nixon’s “gold shock” is very nuanced. But what followed isn’t…