When I last wrote, I concluded with a comment on the high level of
activity and energy here in my adopted hometown of Cafayate.
And never is it busier than during the annual Serenata, a festival
celebrating the folkloric music of the region. While the estimates vary
depending on whom you speak to, about 20,000 additional people stream into
town from all over the region, approximately tripling the town's usual head
count.
Bursting to the seams, almost literally, the pueblo's simple streets
become a continuous parade of festival-goers, more often than not packed
seven to eight to a car with happy songs pouring out of all windows.
Likewise, buses chug by with full bands assembled in the aisles,
enthusiastically singing and playing a variety of instruments, including
large drums.
Large families, old gauchos, hippies (or at least that's what they
used to be called), and sundry teens and twenty-somethings all come together
for three nights of lively music and good times.
And, boy, do
they have a good time. The music goes on all night, with the whole affair
ending in a crescendo at 8:00 am on a Sunday morning. Even though the house
we are currently staying at in town is located on the opposite side of town
from the walled-in festival grounds, and the walls of the house are thick, as
the sun rose Sunday, we could hear what sounded like every person in town
singing in harmony at the top of their lungs. Because, give or take a few,
that's pretty much what was going on.
(Note that the photo shown here is taken not as the sun begins to set,
but just after sunrise.)
I attended the Friday night performances as part of a small group
guided by a local coca-chewing, cigar-chomping cardiologist friend of mine
and ended up dragging myself home around 4 am. As a consequence of my uncharacteristically late-night
adventure, I was finally able to answer a question I have wondered about ever
since I've started to come down here.
Namely, why do the Argentines
party all night at every opportunity… doesn't it get boring in the wee hours?
Well, I can now report that they do it because it's a lot of fun, and no, it
doesn't get boring in the wee hours – it just gets more fun!
In our case, we parked
ourselves in a small café set up inside the festival grounds and talked,
laughed, drank too much, ate costillas
de cerdo, snapped pictures and soaked in the energy of the crowd.
And, of course, enjoyed the music on a world-class sound system with a new
group every 30 minutes – the best of the genre, as far as I can tell.
One of the noticeable things
about the crowd, and about Argentina in general, is that despite the wide
range of ages and life stages, the crowd is almost completely homogenous, the
result of the Argentine immigrants of yesteryear making a concerted effort at
wiping out the natives and, for the most part, succeeding. In addition,
unlike Brazil, the country never adopted slavery (other than around the
fringes).
Now, some may take this
comment as politically incorrect, but in my view, the rush to embrace
multiculturalism in so many countries over the last century has a decidedly
negative side that is absent here in the Argentine.
That's
not to say that there aren't a lot of cultures represented in the mix, quite
the opposite. Rather, it is that the Argentine immigrants – Italians,
Germans, English, Irish, French, Basques, etc. – wholeheartedly embraced and
integrated into the local culture. Naturally, there are still remnants of
their heritage visible in the architecture, the food, the (Italian-style)
politics – but there are few places in the world where the concept of a
cultural melting pot has been more successful.
Thus, even though the
surprisingly well-organized festival was crowded with merry-makers and, as
the night progressed, drunk merry-makers, there was zero friction within the
members of the crowd.
Quite the opposite: the
festival-goers in their multitude positively radiate goodwill to mankind,
hugging, joining arms and singing to the heavens (when not tossing
flour and some sort of powdered coloring in each other's hair).
It's the concept of community
at its best.
And that, dear reader, brings
me in a circuitous manner to my actual topic for the day…
Comments on Community
Moving to a small
wine-producing town in the Argentine has resulted in any number of positive
changes in my life.
For starters, my stress level
has plummeted. Whereas before the move I periodically found myself getting
unnecessarily agitated by relatively mundane things, nowadays almost nothing
bothers me. That this reduction of stress has occurred against the backdrop
of finishing the building of our house – a hassle anywhere in the world – is
no small thing.
And there's no question I'm
happier. In fact, hardly a day goes by that I don't have to restrain myself
from giving a happy little skip while walking down the street (and sometimes
I even give in to the urge).
I've lost ten pounds, improved
my golf game and have a much more active social life. In addition, despite
all the activity hereabouts, I have found time to work on short stories, a
genre of writing that I particularly enjoy.
I eat better, exercise more
and drink fine wine for a fraction of the cost I'd pay back in the States.
Importantly, I also pay next to no attention to the latest "big
news" pumped out by the Western media. It just doesn't matter.
One result of living here that
was entirely unexpected was a personal awakening to the nature and importance
of community.
In Vermont, I was largely
disconnected from the community – in no small part thanks to my preference
for next to no government interference in my life, a preference that runs
contrary to the prevailing philosophy of most folks thereabouts who believe
in the notion that the more government, the better.
Somewhat paradoxically, in the
Argentine outback, there is next to no debate about the role of the
government. The paradox arises because the Argentine government is a paradigm
of misguided policies. But because everyone knows it is inept and its actions
counterproductive, unlike in the US, there's no one to rise to the
government's defense.
While back in the States,
Obama, Biden, et al. enjoy a lofty role in the media, here no one pays any
more attention to officialdom than is absolutely necessary. They are
universally viewed as the clowns down in Buenos Aires whose every dictate and
mandate is, like in a game, a minor annoyance to be dodged at every turn.
Underscoring
the point, the other day I made a passing comment on the government's latest
blunder to my good friend Pelado, the owner of the café next door. To which
he smiled and remarked, "David, is the sun not shining? Is the food or
wine not good? Is life not tranquilo?
So, what's the problem?"
Hard to argue the point, not
that I'd want to.
But I drift from my main
theme, namely my awakening to the idea of being part of a larger community.
You see, living in a community
that broadly shares similar views – in other words, a community that lacks
the cultural and political friction that so dominates American life – has
encouraged me to interact with my fellow community members on a far more
nuanced and interesting level.
That's not to say every
interaction has been entirely pleasant – how could they be when dealing with
the complexities inherent in human nature?
Naturally, the Argentines are
completely in sync with the local culture, and so our interactions are free
to revolve entirely around living the vida
bueno. And I can say without reservation that the Argentines have
been universally pleasant, helpful and otherwise warmly welcoming.
The challenges, and where much
of my personal growth has come from over the last four months or so, come
from my interactions with certain members of the fast-growing international
community in La Estancia de Cafayate where our new house is just today
being completed.
In my view, it is not a matter
of people being right or wrong, but rather how well certain people are able
to adapt to a different culture. Having lived in Argentina before – and gone
through some of the inevitable frustrations in transitioning into a new
culture – my wife and I knew exactly what to expect on moving here.
As a result, when the
bureaucrat down at the local government office charged with handing out
license plates tells me they will be ready on Monday, then on Monday tells me
it will be Thursday, then on Thursday tells me it will be next Tuesday, I
smile and thank them for their time, secure in the knowledge that one of
these days, the license plates will actually appear.
In the interim, it's all to
the good that no one hassles me in the slightest for driving around town in a
truck with no license plates, a trick you couldn't pull off in the US for
more than about 100 yards before being pulled over.
It is understandable, however,
that someone without previous experience with living in a laid-back culture
such as this, a culture where time is almost entirely relative, can find the
transition frustrating. Also understandable is that certain personality
types, on becoming frustrated, will complain at what seems to be every
opportunity.
At first, I found myself
getting annoyed at the handful of negative apples in the community. But that
was before coming to accept as entirely normal and natural that, confronted
with the same scenario, people within any community will respond differently,
but in ways entirely within the range of possible human reactions. Some will
laugh, some will cry, some will tend to anger.
The point I am slowly grinding
towards is that for the first time in years, maybe ever, I have become
completely invested in a community. In this case, a group of individuals
living within the same geographical proximity and each of us with our
individual character traits, some strong, some weak.
In contrast to Vermont, where
I increasingly isolated myself from my socialist neighbors, here I am
actually engaged and excited about working in concert to keep this community
strong and moving forward.
This revelation was like waking
up one morning in a completely different world, a world with different rules
of engagement that need to be learned in order to survive and thrive. While I
am still learning the baby steps of being part of a community, in my mind,
the lessons learned so far include…
- Be
positive. No one likes to be around
negative people. Rather than constantly complain about things, try to
find constructive solutions.
- Listen.
We have started having community meetings every two weeks so that any of
the issues that inevitably arise in a community can be aired and the
appropriate actions taken. The meetings have quickly evolved into what I
view as upbeat and positive working sessions.
- Be
helpful. The members of the community
are very good with this point, bringing each other vegetables from their
gardens, picking up things for others when traveling to the big city,
lending furniture if someone needs some, etc.
- Be
tolerant. Not everyone is going
to see things the same way as you. Be respectful of the views of others.
It's not always necessary to prove that your point of view is more
correct than that of others (even if it is!).
- Be
yourself. Don't try to impress others
or to shape your views so you'll fit in. Communities are made richer by
including interesting people who march to their own drummer… provided
you don't drum outside their doors into the wee hours. (Unless you are
an Argentine, who don't seem to be discomfited by loud banging noises at
any hour of the day.)
- Have
fun together. Every week, and sometimes it
seems every day, there are all sorts of opportunities to have fun
together. Hikes, horseback riding, golf, dinners out, wine tastings,
local festivals, the weekly craft group, special events… there are
nearly endless opportunities to reach out and engage with other members
of the community in fun and interesting ways that help cement
relationships and promote goodwill.
There's more, but those seem
to me to be the basics.
I have come to the conclusion
that pretty much every community is the same – and that they are all living,
breathing organisms. That organism can be healthy and happy, it can have good
days and bad, it can become dysfunctional and even dangerous (the disturbing article I
recently reprinted on the war in Bosnia provides a good example of the
latter).
The difference in the mindset
of the community will depend on a number of the factors, most wrapped up in
the complexities of human nature. While those complexities make it close to
impossible to guess what will happen next, from my personal observations, for
a community to thrive, it requires real commitment from its members.
That has probably been the
biggest revelation in all of this. That a community needs everyone – or at
least a solid core – to work together in good faith to keep it moving in a
positive direction.
This awakening to the idea of
being a part of a community of people has caused me to reflect on how the
same dynamic operates on a bigger population.
The Government of the People Is Just People
Many people, myself included,
like to refer to the "government" as if it was a separate entity (typically
made up of some sort of lower life form). In reality, it's just a group of
people. Sure, many in that group may have an aberrant psychology that draws
them into a career of professional meddling, but they are people just the
same.
In essence, the individuals
making up the government of a nation-state are comparable to the board of
directors of a homeowners' association. If operating properly, then that HOA
board listens to the concerns of the broader community and implements
constructive solutions that do no harm in the process.
On the other hand, when the
people in a government become collectively dysfunctional – when, for
instance, they overstep their authority to meddle in the economy for
philosophical reasons, or to favor a certain constituency without regard to
the unintended consequences – it will inevitably lead to an economic train
wreck and otherwise cause havoc within the community.
Imagine, if you will, a
community of 100 people where a small cadre of, say, five people held
complete power – even over life and death – and who became unhesitant in
abusing it for personal or philosophical purposes. In such a set-up, the
possible outcomes are as varied as they are worrying.
Well, in countries around the
globe, that very set-up, but on a larger scale, now exists. Thus you can have
a European Union where rules are passed requiring Portuguese fishermen to
burn their boats, or an American president decides it is acceptable to use
drones to regularly assassinate people on the other side of the world,
collateral damage be damned.
In the case of the latter,
Obama is just another human with his own particular subset of the same good
and bad character traits found across the human spectrum. The only difference
is that those character traits are amplified by the amount of power he has
been given.
Importantly, there is one
character trait – self-interest – that invariably informs every human action.
It's easy to understand why
self-interest trumps everything else: Over the millennia humans lacking a
healthy sense of self-interest were soon deleted from the gene pool.
In a smaller, well-functioning
community, self-interest might be expressed by people complaining about
workers leaving garbage by the side of the road, which, in addition to being
unsightly, may reduce property values. As the people in charge of the
homeowners' association share that interest, and furthermore don't want to be
subjected to complaints down at the clubhouse, they will take steps to fix
the problem.
In
a dysfunctional nation-state, however, self-interest among the population
often leads to demands for an extra measure of slop from the public trough,
or for concessions and regulations so that a business may gain a leg up on
would-be competitors. (In the latter category, I love the long licensing
process and rigorous testing demanded of want-to-be hair dressers in most US
states.)
Attuned to every opportunity
to suck up to the voters, and attract or retain contributors, it is entirely
to be expected that the politicians will respond to these requests from the
community, even to the extent of printing up hundreds of billions of currency
units to spread around, whatever the consequences may be.
Furthermore, when squeezed to
take some sort of
action to curb the money printing/spend-a-thon, it is entirely natural that
they will firmly resist, trotting out all manner of threatening or
heartrending worst-case scenarios for why the cuts shouldn't be made.
And so it is that the logical
and pressing need to address a fundamental problem facing the world –
excessive government debt being made worse with each passing day by
historically unprecedented levels of deficit spending – is set aside in favor
of political expediency.
By ignoring the consequences,
the leadership dooms the community to an epic failure.
Some Conclusions
In the case of a small
community, the leadership has to face the community members on a daily basis.
That results in a certain social restraint against really bad decisions.
In the nation-state, however,
the leadership is so far removed – isolated even – from the community that it
feels no personal inconvenience from bad decision-making. Of course, a
democracy is designed to incorporate a mechanism – the voting booth – for punishing
bad decisions.
In reality, however, this
aspect of the system has been entirely gamed thanks to the money printing
just mentioned. Carrying the vote is as simple as deploying those currency
units to serve the self-interests of a sufficient number of people come
election day.
Importantly, however, the
money printing can't void fundamental reality. And the fundamental reality is
that the money printing is just making the truly dangerous fiscal and
monetary situation much worse. As a consequence, the failure of what has
become a deeply dysfunctional community is inevitable.
Earlier I mentioned that for
the first time in my life, I feel invested in my community. That's because as
the Argentines like to say, I have come to the conclusion that this is "Mi lugar" – my
place. Simply, it has everything I feel is essential to living an extremely
high quality of life, far outweighing the negatives of life in a rural town
far from anywhere (which I tend to find amusing, as opposed to the US, where
the negatives seem increasingly dangerous to me).
That said, with my newfound
appreciation of community, I understand that many Americans feel the larger
community they belong to is worth trying to save. And so they diligently show
up every voting day and in between attend rallies for a return to some sort
of fiscal, political, military sanity.
Unfortunately, they are in the
minority compared to those who view the government as a near-magical
organization able to suspend fundamental reality and solve every problem by
passing yet more legislation and by printing up pallets of fresh currency
units – all for the purpose of providing the community with a life unfettered
with financial worries.
Making matters worse, this
mindless majority is unwilling to roll up its sleeves and actually do the
hard work necessary for a healthy community to persist. Instead, it looks to
the productive few to keep their shoulders hard against the grindstone, then
turn over the bulk of the fruits of their labor to the state to redistribute.
This is not a formula for
success but for failure. And, unless something dramatic changes, fail it
will.
Personally, I am more
convinced than ever that the decision to move to this small town, and to be
part of this community, was the best possible move I could have made for me
and my family. I know this place, or off-the-beaten-track places like it,
won't suit everyone. Regardless, I think it's important to pause for a moment
to assess the health of your community. If it is failing, and you are
powerless to stop that from happening, spending time casting about for more
vigorous climes might not be such a bad idea.
And the money printing is only
one way in which the dysfunctional leaders undermine their communities.
Another is manipulating interest rates.
On that front, Casey Research
Chief Economist Bud Conrad has been watching the credit markets and provided
this update on interest rates that makes for a good background for the more
detailed analysis he provides in this month's edition of The Casey Report.
The Bond Bubble Is About to Burst
By Bud Conrad
It is my contention that the
70-year debt supercycle has come to an end.
To put the current financial
situation in perspective, here's a long-term history of the debt-to-GDP
ratio, which reached a record high at the beginning of the current crisis. It
was a dramatic change in 2009, unlike anything since the aftermath of the Great
Depression.
(Click on image to enlarge)
The highest the debt-to-GDP
ratio had previously been for the United States was 301% at the bottom of the
depression in 1933 when GDP collapsed and debt was high. The level became
unsustainable in 2009, despite low interest rates. Weak borrowers were
signing up to finance houses that they thought would increase in price
forever. The point of the chart is that this downturn is different from all
the recessions since World War II.
Total market debt includes
debt of the federal government, state governments, households, business,
financial institutions, and to foreigners. The components of the above total
debt are shown below, so you can see which ones are stabilizing and which may
be approaching unsustainable levels.
Looking forward, the most
important problem is that the federal government has inserted itself into the
economy with huge deficits to try to combat the slowing of the private
sector. As you can see, private-sector borrowing has not increased, even as
federal government deficits have ballooned to unprecedented levels. In
essence, we are building our recovery on government debt.
(Click on image to enlarge)
The clear driver of this
extreme expansion of government debt that I call a "Bond Bubble" is
the Federal Reserve's flooding of markets with liquidity to drive rates to
zero. The chart below shows a projection what will happen to the Fed's
balance sheet as it continues to distort the rate to zero by extending its
monthly purchases of $40 billion of mortgage-backed securities (MBS) and $45
billion of Treasuries out to 2016:
(Click on image to enlarge)
It is my contention that the
actions of the Fed, which were started to counter the credit crisis of 2008
with four programs of quantitative easing, have brought us the incredibly low
interest rates (aka, the Bond Bubble) we have today. By purchasing so many
credit assets, the Fed is driving the price of bonds higher, and thus
interest rates much lower, than they would otherwise be.
The black line in the chart
above is the 10-year Treasury rate – you can see that it drops with each of
the big balance sheet expansions. The resulting asset bubbles in stocks and
housing are a direct result of the monetary creation by the Fed.
The growth in Fed purchases
will likely continue so that the low rates of the Bond Bubble don't collapse.
But the effects of the Fed's economic stimulus decline with each new
injection of money.
There will come a time when
the Fed announces a new program of balance sheet expansion by asset purchases
that will cause the interest rate to rise because of fears of inflation from
money creation, rather than fall as the Fed desires. At that point, we'll
know the Fed's power to manipulate the economy has dissipated.
Just How Low Can Interest Rates Go?
The chart of 10-year
Treasuries below shows that the current level of 2% is lower than it has ever
been, except for a brief low of 1.5% last fall (blue line). It is the lowest
in 240 years. This is happening in spite of government deficits expanding at
a trillion dollars per year as far as the eye can see. We are at the bottom
of a 32-year bull market in bonds (drop in rate).
To get a view of how extreme
today's rate is, I added the red line, which is 100 divided by the interest
rate. It shows a rise as rates fall and makes the bubble of low rates more
obvious – which is currently higher than ever.
(Click on image to enlarge)
The point is that these
extremely low rates are unprecedented, even when looking back to the last
Great Depression. They could spring back a long way.
The low rates induced by the
Fed are transmitted to many other market rates, as shown in the following
charts. These charts need little comment, except that all of them confirm the
simultaneous movement to many-decade lows.
(Click on image to enlarge)
During the credit crisis, junk
bonds were the worst performers as investors feared they would lose their
money in default. Rates rose on BBB corporate debt as well. At the same time,
government debt became the safe haven, and as people moved to the safe haven,
they drove the price of Treasuries up and their interest rate down. The
premium has gone out of the lower-rated markets, with rates even lower than
before this crisis started. It's not that risk has disappeared: I think it is
more likely that the flood of excess money is chasing any kind of return it
can find, and that is driving rates to record-low levels.
(Click on image to enlarge)
Inflation spiked dramatically
in the 1973 and 1979 oil crises. More recently, official government numbers
haven't shown wild inflation. Prices for energy, food and domestic services –
like medical care and education – have had big jumps. But thanks to cheap
foreign manufacturing, we are able to import goods at attractive prices, so overall
inflation doesn't reflect the extreme money creation by the Fed. Wage growth
is nonexistent, largely due to foreign competition and high unemployment from
offshoring manufacturing.
The forces of inflation can
easily overcome a weak economy to destroy a currency: this has happened in
countries like Zimbabwe, Argentina or Yugoslavia. Once things get out of
hand, it is hard to say whether it is the weak economy that causes the
government spending and further deficit destruction of the currency, or the reverse.
But that doesn't matter once people lose confidence in the government and its
paper issuance.
The chart below shows
government numbers for inflation that seem awfully low compared to what most
people experience. The erratic behavior of commodities is likely to continue,
so I think prices will continue to rise.
(Click on image to enlarge)
But even using these
conservative government numbers, when we subtract the inflation from the
interest rate to show the real return to an investor, we get negative
numbers. This, too, is unsustainable.
A Look at Interest Rates Worldwide
I've written extensively in
previous articles about central bank expansion, but it's worth reminding
ourselves that excessive money creation is not just a US phenomenon but a
worldwide experiment. Once this feeds back on itself as ordinary people
recognize the destruction of the fiat currency systems, we can expect
inflation on a worldwide basis. The similar decline in interest rates in
Germany and Japan is the result of their central bank interventions to
support their economies by driving rates lower.
(Click on image to enlarge)
The chart below, which shows
the interest rates of 187 countries, has some underlying patterns. At first
blush it just looks like spaghetti, but if you step back, you can see that
rates were rising into 1980. Then many fell until the recent crisis, after
which new deviations appear. In Europe, rates went both ways: up for the
PIIGS and down for the safe havens like Germany.
(Click on image to enlarge)
And here is a simplification
of the above by just averaging the numbers to a single line in which you can
see an imprecise confirmation that, despite wide variability, there is an
underlying pattern in world markets.
(Click on image to enlarge)
The above six charts confirm
that rates of all kinds are at 50-year record lows.
Debt and Interest Rates Suggest Higher Rates Are Possible
The chart below shows the
comparison of Greece's growing debt (in blue) and the resulting rise in
interest rate. You can see that as Greece's debt to GDP rose above 100%, the
interest rate rose toward 20%. Lenders lost confidence in the ability of the
Greek government to actually pay back its debt.
(Click on image to enlarge)
In contrast, the stronger
countries have been able to accommodate their government debt increase and
still maintain moderate interest rates. The United States is shown in the
following chart. Central banks have aided the government in managing to keep
rates low despite big deficits, by buying the debt. Balance sheets of the
world's central banks are growing rapidly to support government deficits
while forcing rates to low levels. It is a bubble.
(Click on image to enlarge)
When you buy Treasury bonds,
you are putting your fate in the hands of the government, expecting it to
give back your purchasing power and a reasonable amount of interest to you,
in return for the use of your money. Should you trust these authorities with
your money? I believe we are headed for a serious loss of confidence in the
value of the dollar, which will be accompanied by a burst of the Bond Bubble.
This Ponzi scheme is getting
ready to explode.
Read More in My Article in The
Casey Report
There are few more important
aspects of today's economic situation than just the popping of the interest
rate bubble. In the current edition of The
Casey Report, I present my latest proprietary research, including
nine charts that every investor should see.
You can take a three-month
trial of The Casey Report,
which also allows you to view the complete archives featuring in-depth
reports on the best ways to invest in the current markets. It comes with a
100% money-back guarantee – if you are not thoroughly impressed, simply
cancel for a full refund. Click here for details and to sign up for your risk-free
trial today.
Friday Funnies
Financial Planning
Dan was a single guy living at
home with his father and working in the family business.
When he found out he was going
to inherit a fortune when his sickly father died, he decided he needed to
find a wife with whom to share his fortune.
One evening, at an investment
meeting, he spotted the most beautiful woman he had ever seen. Her natural
beauty took his breath away.
"I may look like just an
ordinary guy," he said to her, "but in just a few years, my father
will die and I will inherit $200 million."
Impressed, the woman asked for
his business card and three days later, she became his stepmother.
Women are so much better at
financial planning than men.
Sex Survey – the
Results Are In!
It has been determined that
the most frequently used sexual position for older married couples is the
doggie position.
The husband sits up and begs.
The wife rolls over and plays
dead.
And Finally…
If you want to hear more from
Bud Conrad, he recently appeared on the Creating
Wealth radio program with Jason Hartman. Bud's comments begin at
26:40 minutes into the show.
Here's the link.
As a final aside, yesterday,
four days after the Serenata,
sitting at my desk overlooking the street in town, I glanced up to see a
truck slowly driving by… followed by a large trailer with open bars
containing five full-grown Bengal tigers. And that was followed immediately
by another truck pulling a cage full of African lions.
Talk about unexpected scenes!
Guess the circus is coming to town.
And with that, I will sign off
for the week by thanking you for reading and for being a subscriber to a
Casey Research service.
David Galland
Managing Director
Casey Research
