418: Rich Get Richer, Poor Get Poorer - Winners and Losers
The objective of this Special Report is to describe how regardless of which political party is in power, in developed nations, the rich continue to get richer and the poor continue to get poorer. In the next ten years, then middle class will continue to get hammered and reduce in size. There are two key options of investors and the ordinary folk. Either join the rich or descend into the poor. We will explain.
1. Socialist Policies: In general terms only, socialists or the left wing tend to prefer to tax the wealthy, give this to the poor, increase government and the public sector, print money using Keynesian monetary policies and increase regulation on business. This tends to drive up inflation, temporarily reduce unemployment for it then increases again and reduce private sector cost competitiveness. Many of the rich start investing overseas and some of the wealthiest will move overseas – become tax exiles. Overall the tax take eventually drops and deficits rise. To rob Peter (the rich) to pay Paul (the poor) is doomed to failure as has been demonstrated by the collapse of the Soviet Union, Cuba, North Korea and the like.
2. Conservative Policies: In general terms only, conservative or the right wing tend to prefer to reduce the tax of the wealthy to stimulate growth and jobs creation in free enterprise. This also increased motivation as it is worthwhile for the poorer people to seek work and add value to society. They prefer more of an Austrian School of economics – namely, no printing of money, currencies backed by gold reserves, a strong currency. They like to reduce the public sector and size of government – and release this talent into the private sector to generate wealth which then generates jobs and economic growth. It will also boost industrial competitiveness. The rich tend to move to such countries and start new business – investing in the country. There is less reason to become a tax exile. Overall the tax take increases as business grows and less tax avoidance takes place because of a fair and equitable tax system. The health and education services improve in efficiency – citizens get more for their money.
Can Make Money With Either: For investors, it really does not matter that much in western developed nations which type of governments are in power, because serious money can be made in either scenario. So don’t worry too much about the politics – to understand the trends the politics and policies will generate is the key. Then you can position yourself to capture value regardless of who is in power. Unless you prefer to focus on politics - then you might want to be a politician.
US Example - Social Model: Let’s give you an example. Currently in the USA there is a socialist leaning government, intent on big government, huge public sector, with massive $1.5 Trillion/annum deficit ($5 Trillion if you include unfunded liability payments) with a colossal $15.2 Trillion direct debt and $75 Trillion total debt of unfunded liabilities. Taxes are rising. Debts will rise. Predicting that President Obama will be re-elected seems a reasonable scenario - the most likely outcome - to work with - regardless of economic performance. It's likely dependance on the state is so high now, that the Democrats will be re-elected. So how can an investor make sure of high returns in this scenario – in the USA or UK?
Analysis: Firstly the analysis of what President Obama and his Administration will do:
· The Fed Chairman Ben Bernacke will be rewarded with another 5 years tenure
· The Fed will therefore continue to print money at an extraordinary pace because this will be the only way to make debt payments – by buying their own new debt/loans and using the proceeds to pay foreign investors the interest payments
· The dollar will continue to decline
· Inflation will rise because of the increasing money supply and declining dollar
· Bond auctions will fail and interest rates will rise to cater for increased risk of default as foreign governments desert the dollar
· Oil prices will rise sharply
· Inflation will rise further – food, import costs, everything
· Gold and silver prices will sky-rocket
· Savers will be destroyed as the dollar’s value as a fiat currency is destroyed
Position for Socialist Leaning Government for 5 Years: In such a scenario, one should get well out of US government bonds, treasuries, and cash, and get into gold, silver, oil and any physical asset class. As inflation takes off, real estate values could rise slightly but the value of the debt will quickly decline in real terms. Hence property will be a good inflation hedge – a real physical asset - something that can generates an income that rises with inflation. Artwork, wine, whisky and anything that can be bartered will keep its value, but the currency will be destroyed. Foreign exchange controls would likely be implemented to stop US citizens buying foreign currencies like the Canadian dollar. Hence it’s best to buy Canadian dollars before the implosion and keep them safely in a Canadian bank where they cannot be confiscated by the US government. The same is true for gold. For US citizens, it is best to buy physical gold and store in bullion vaults in London or Zurich – to avoid confiscation, since the US Fed and Government could make it illegal to hold gold. In the 1930s recall they forced people to sell their gold to the government and then fixed the price 40% higher a year later. Hence they firstly seized the gold then grabbed 40% of the value of the gold.
Oil Plays: Because oil prices would likely go ballistic in US dollar terms, then buy oil company stock is a good strategy. It is very unlikely oil company stock would be seized.
Inflation Destroys The Middle Class: The other thing to remember is, despite an incompetent Fed and a US government that has little knowledge or regard for business, they will still want to keep their elite friends in Wall Street happy. So the printed money is given at zero rate to the banks, who then hoard this cash and give a little to the most robust but hard pressed businesses and individuals at rates 5% higher than what the Fed gifts it to the banks for - at tax payers cost. The cash hoards are then used to speculate on oil, gold and silver – plus other risk tools – by the elite - to line the pockets of the investment bankers. The middle tier of Wall Street meanwhile give out positive messages about bonds, stocks and financial services so they can take high fees – but many of the wealthiest financiers – who have little regard for their client’s interests – know the whole economy will go pear shaped shortly. But just like they did in early 2008, they will say everything is fine and improving – but know a crash is close on the horizon. They will be the first to get their money off the table as the bubble goes pop. The same is true of the politicians – they want to get re-elected. So the crony elite stick together – and the feeding frenzy of printed money for good old fashioned speculation just before the election is maintained. But many of these financiers will be buying gold, silver and oil whilst they advise everyone to buy US bonds and stocks – and take fees on these - thereby propping things up before the election. Can you see how the rich get richer, the middle class get destroyed and the poor get poorer – even with a socialist government. Anyone with any savings – let’s say you are retired and have $100,000 cash saving – after a few years of receiving 0.5% saving rate, but having official inflation of 3% but real inflation of around 8-10% - when inflation drifts up to say 14% your savings will be destroyed – that $100,000 will decline to more like $30,000 in real value in about 5-7 years. So the bankers take the 4.5% over base rate at no risk, speculate and drive up commodities prices that then increase inflation for the poor and make savers get even more destroyed. When was the last time a country had negative real savings rates for years on end - crazy and danagerous. No wander oil prices are rising fast. Can you see that the inflation is destroying savings and asset values whilst destroying the government debts generated up to and then after the 2008 financial crash.
Bail Out Of Bad Banks: When the government stepped in to bail the banks out with tax-payers money and nationalised them, this was a hugely negative and socialist strategy – they saved all the failed banks and made them zombie banks. Then they increase regulation on the banking sector – further driving up borrowing costs. They printed money that then created inflation. But they kept bank rates at zero % to try and flush out money from savers and destroy savers value. This cheap money has now created a further bubble in the stock market as they rise to new highs and the bankers make record bonuses again or at least try and make these if they can get away with it. All the time it is the socialist government feeding money into the mix for the rich upper elite to make serious returns as normal hard working middle class people have to pay higher taxes and the poor continue to get poorer. Moving forwards, when the next recession begins soon, unemployment will rise and inflation will get out of control. At this time gold and silver will develop into a bubble as panic sets in and every man and his dog starts being gold and silver. There will be a run on currencies and this money will be spent investing in real money – gold and silver.
You Have Options: The point of the analysis is to highlight that every individual in the UK, US or mainland Europe – in developed western nations - has an option. They can either sit and watch this happen. Or position for this outcome. In blunt terms – do you want to be a winner or a loser. We are pretty sure that anyone having read this article to this point is in the “winner” category because they are motivated and want to improve their lot in life and that of their families. We thought it might help to describe the attributes of “winners” and “losers” – just to highlight how different these types of people actually are.
Winners – behaviours
Losers - behaviours Never makes excuses – takes responsibility
Blame others - does not take responsibility Does not rely on government and benefits
Makes excuses Reliant on oneself throughout life apart from as a child or old age
Relies on government and benefits Distrusts the government
Reliant on others throughout life Distrusts currencies
Trusts the government Does not keep money in cash and savings during periods of inflation and low interest rates
Trusts currencies Aims to invest as much as possible and takes managed risk
Keeps money in cash and savings during periods of inflation and low interest rates Never blames others if they lose money
Shies away from investing or taking any risk Does not accepts high taxes – avoids tax as much as is legal
Blames others if they lose money Believes keeping taxes down for the rich less generates jobs, wealth and this positively impacts everyone
Accepts high taxes as a fait a complete Believes a smaller government, smaller public sector and larger private sector will help them and everyone else in the long run
Believes taxing rich and giving hand-outs to the poor is the way forward Enjoys hard work whilst managing stress being motivated to succeed
Believes large government and public sector will help them Highly motivated to improve their life and those of their family and friends
Gets stressed out when hard work required Never argues unnecessarily
Lacks motivation to improve their life Honest with high levels of personal integrity
Argues unnecessarily Drinks alcohol occasionally in moderation, or not at all
Dishonest with low levels of personal integrity Gets plenty of exercise
Drinks alcohol all the time Eats high quality fresh food with plenty of vitamins
Eats junk food with almost no vitamins Not overweight or underweight - eats in disciplined manner
Is overweight or obese (or has eating disorder) due to lack of discipline in eating Has high self esteem
Has low self esteem Has long term partner or is married with family
Has no long term partner, is divorced Only resorts to legal battles in extreme cases
Resorts to legal battles over small things – paid for by the government/benefits No criminal record
Criminal record and/or has been to jail Clean driving license - never lost their license
No diving license, or if they have one, they have points on their driving license or have lost their license Faithful to their wife-partner and family
Cheat on their wife-partner and family Don't smoke (or smoke very little)
Smoke lots - or chain smokes Understands the value of gold and silver
Thinks that gold and silver is jewellery Understands economics, inflation and money printing and interest rates
Complains about rising prices but does not understand why Understand that gold is money and dollars are a fiat currency
Things dollars are real money and gold is a tradition Nice persona
Bully Smiles a lot - nice person
Never smiles - not a nice person No criminal record
Criminal record and/or has been to jail Never takes drugs - avoids drugs - says no to drugs
Takes drugs - seeks out drugs - says yes to drugs Understands that regardless of whether a socialist or conservative government is in power, the rich get richer and the poor get poorer
Thinks a socialist government will make the poor richer Proud of making serious money
Ashamed of making serious money Like to invest and save
Like to spend - no savings Think and talk about business and money regularly - understand what a business does and means
Never think about money or business - do not understand what a business does or means Action focussed - self reliant - keep to commitments
Avoid any actions - reliant on others - never keep to commitments Think time is money - efficiently use their time - always thinking of new ways to use their precious time
Never have enough time - inefficiently use their time - but get bored and cannot think of how to use their time Disciplined
Undisciplined Well educated, seeks good education
Uneducated, does not seek good education
In summary, if you follow the “winners” behaviours, you will maximise the chance of having a successful, fulfilling and long life. You will be far more likely to become rich – even beyond your wildest dreams.
Government Mis-Management: If you can then see what the government is doing around you and what is happening in the global economic environment – you will be able to position to maximise your returns and make sure you head towards the rich bracket, avoid getting snuffed out in the middle class bracket and stay well away from the poor bracket. On the whole, rich private sector individuals and investors show winning behaviours describe above. They may not have all of them – but practice the vast majority of them.
Your Behaviour Is Key: Beyond any doubt, it’s these behaviours that drive success rather than background, religion, gender, race, colour, creed, nationality or class. Just remember all US citizens (except Red Indians) are immigrants. They started out with nothing. Same in Australia. Many of the richest people in London are immigrants that started out with nothing in their native countries. Many of the most successful private sector investors were from humble backgrounds – examples: Steve Jobs, Alan Sugar, Bono, Paul McCartney, Richard Branson, Robert Kiyosaki, Warren Buffett.
Dollar Inflation Bubble: Just to put come prospective on how the US dollar money printing has destroyed purchasing power and created bubbles, consider this. The Dow in 1980 was 1000 - it is now 13000 - a thirteen fold increase. However, the US GDP has only reason 35% since then. In 1973, oil prices were $7/bbl. They are now $110/bbl. That's about the thirteen fold increase. The money supply since 1973 has risen 13 fold. The rise in the oil price can be entirely accounted for by the increase in the money supply and indirectly debt. So when you fill up your tank, think about the Fed's printed money and debt as the cause rather than OPEC, the Middle East or oil companies. In "real money" gold terms, oil has not really risen significantly since 1980. It is still 16 barrels of oil for one ounce of gold. Coincidently, that's the average oil usage per person per annum in developed nations. Hence your total individual oil bill per year is more or less constant at one ounce of gold, that's ~$1700.
Negative Interest Rates: Some gold sceptics claim that when US and UK interest rates rise, people will sell their gold and shift to cash - because gold do not give an interest rate, and cash does. Indeed, this phenomena was experienced end 1980 as Volker jacked up interest rates to kill inflation. But this time we believe it will be very different. Firstly, the size of the US debt is now so colossal that the Fed will never be able to increase interest rates above or close to inflation. They will also have to be lagging far behind. Because of this, we believe negative interest rates will remain as inflation increases. If interest rates are say 4% below inflation at this time, with inflation being 4.25%, then when inflation is 14%, we would expect interest rates at say 10% - or about the same distance behind inflation – 4%. The Fed will never be able to catch the tail of inflation when it eventually takes off. It would bankrupt the government, public sector entities and private sector companies plus individuals with debts. This is why we think when high inflation kicks in, panic will set in as people realise that there is no point keeping their cash-saving, and gold will skyrocket – people will shift even more from cash-savings-bonds and equities into gold. We would be highly surprised to see positive interest rates above inflation moving forwards – and the dollar will have to be “destroyed” – then re-set. With it, and just before this happens, gold prices will sky-rocket as panic sets in.
Bond Market Crisis: The US bond market has finally started to turn after a 32 year bull run culminating with yield dropping to 2% by end 2011. Bond rates rose to 3% last week. As bond prices rise, it makes it far more expensive for the US government to roll-over its direct $15.2 Trillion debts. It also puts stress on banks and businesses - banks resort to charging higher rates. If rates double from here to 6% - which in our view is very likely in the next 1-2 years, total annual US tax revenues will be needed to pay off debts. The Fed started Operation Twist last year as the effects of QE2 faded and this money printing episode failed. Twist is a form of back-door QE. We think the Fed will be forced to start QE3 in earnest soon to try and drive down bond prices once more. However, we think in the long term this is doomed to failure and could actually make matters worse. It is now the start of the popping of the bond market bubble that has developed over the last 32 years - it finally appears to have turned the corner. As this money is released - inflation will take off. Because of this, it will be far better to be in the paper equity market than the paper bond market, albeit physical gold, silver and mining/oil stocks are the most attractive hedge in our view along with high yielding property in areas of good employment.
The Big Collapse: For the next few years, it seems likely the US economy will be the big story as the dollar is debased, bond market bubble pops, inflation takes hold and the Fed creates big bubbles in oil, commodities and food prices around the world by printing gigantic qualities of dollars – at present considered the global reserve currency. As oil producers consider options to price their oil in different currencies – watch out for wars. Someone pointed out that shortly before the invasion of Iraq, Saddam Hussain announced the dollar would not be accepted for oil payments. The same is true of Libya before it was bombed. Now Iran announced payment for oil in gold. Will it happen to them as well? If OPEC or large economies refuse to be paid in dollars – it could be the tipping point for the US currency and precipitate it's crash in the next few years. To hedge against this crash, gold is the safest investment. Ultimately we believe the US dollar will fail based on economic fundamentals - and when it does, the standard of living in the US will drop 25-35% at least.
· a portfolio heavily weighted to gold, silver, property and oil is prudent
· a portfolio heavily weighted to US bonds, dollar cash and currency is very high risk and low reward - with significant chance of 50% to 100% losses
· although stocks will likely not keep pace with inflation, at least they will not be destroyed or confiscated – mining and oil stocks look the most attractive in our view
· expect gold and silver to eventually develop into a parabolic ballistic blow-off bubble when the dollar crashes in earnest
· social policies of the US government and Fed will accelerate the dollar demise and amplify and accelerate the gold and silver price explosion – cash/currency savings will be destroyed
We hope this Special Report has helped frame your investment ideas and highlights why the rich keep getting richer and the poor get poorer – as money printing and inflation help the rich and destroy the middle class whilst certainly not helping the poor in the medium-long term. If you have any comments, please contact us on firstname.lastname@example.org