How Many Million Do You Need?

 Way back in 1970, I had a summer job which largely consisted of managing state vehicle inspections. One day a fellow came in with his late model car and he breezed thru in a few minutes as his car did not need anything. I affixed the inspection sticker on his windshield, and he paid. He asked what my plans were, and I told him that I was majoring in economics in college and planned to go in to either finance or marketing. He smiled and said he was retired. I mentioned that he looked quite young. He laughed and said that had made and saved a million dollars in construction and decided to quit.

He went on to add that he lived fairly simply, and that he was content. As I look back, I realize that he was a quite unusual man. 

Now, having a million dollars has lost a lot of luster since 1970. Today, estimates are that the average American family has a net worth of $1.1 million but the super-rich pull up the average considerably. The median (50th percentile) US household has a net worth projected to be $193,000 (Federal Reserve estimate) as I type.

Today, the media is often focused on tech oligarchs who appear to have outsized economic and political influence. To me, they are nothing new. The “Robber Barons” of the 19th century had similar power and connections and an even greater share of total U.S. wealth than today’s billionaires. 

Over the years, I have often been annoyed by fabulously rich people saying that running up a huge net worth is a mean of keeping score. That tends to be with newfound wealth. They like to compare themselves to others. A truism, for sure, is the oft told comment that “old money whispers.” 

As a kid in New England, I noticed that the real generational money often drove old station wagons and wore nice clothes that may have been a bit old. Ostentatious displays were a no-no.

So, does money bring happiness? Not necessarily. Although, it does give people flexibility and reduces stress during hard times. The Zen answer often quoted is that a person is rich if “he rejoices in his portion.”

The great Ben Franklin wrote, “He does not possess wealth that ties it to possessions.” The Buddhist definition is “the greatest wealth is contentment.” 

When I first saw the Buddhist statement, I immediately thought of my acquaintance from the 1970 car inspection. The crusty construction foreman who became a builder would have dismissed the comment, but he escaped the rat race and was content with modest affluence. 

My favorite story about how much is enough involves two accomplished American novelists. Both Joseph Heller and Kurt Vonnegut were invited to a party at a very wealthy man’s summer cottage. Scanning the surroundings Vonnegut allegedly said to Heller, “Joe, does it bother you that our host makes more in one day than all your years of royalties from CATCH-22? 

Heller responded, “No, because I have something that he will never have.”

“What’s that”, asked Vonnegut. “Enough.”

If you would like to contact Don Cole directly, you can email him at doncolemedia@gmail.com or leave a message on the blog.

The Next Financial Crisis

 Over the years, I have subscribed to a number of investment advisory services. Some were fairly good and many were not worth the money. One I have kept for 35 years. When I cancel one of the dogs, it appears that the dropped newsletter sells my name, address, and e-mail to another advisory service. I understand why they do it. Both my e-mail and my conventional mailboxes fill up with solicitations.

In recent months, the forecasts are getting increasingly shrill from those who wish me to subscribe to their service. I confess that I am more confused than ever about financial markets but do not see many of these “advisers” having a steady hand on the goings on in the marketplace.

There is a sense of urgency that I have never seen in my 47 years of subscribing. Now, I understand some of it. Right now, markets seem heading toward a bubble. The PE Ratio, the CAPE ratio, and the Market Cap/GDP statistic are all near all time highs. A thinking person has to wonder if there will be a reversion to the mean. Also, treasury debt sits at $36 trillion with a certain increase in the new administration, and social security, medicare/medicaid commitments plus FDIC insurance guarantees total somewhere between $100-200 trillion in unfunded liabilities.

Here are some of the forecasts that I have received in an effort to lure me into plunking down $300-1500 per year for an analysts wisdom. I paraphrase a bit:

1) The US dollar is toast--Well, for the foreseeable future it is still functioning as the world’s reserve currency and will likely do so for the rest of my life. One painful truth is that all fiat currencies die. Sometimes the death is so gradual that people do not see it. For example, why is the British pound referred to as “the pound sterling.” For years, that is exactly what it was. It was a receipt of sorts for 16 ounces of silver. With silver hovering at $30 per ounce today, that would mean the original pound sterling if it held its purchasing power would be $480. Today, the pound is worth US $1.25. So, while the pound sterling exists as a name, it is a far cry from what it purchased 200 + years ago.

To put it in perspective, several MR readers have told me that they are fans of early 19th century author Jane Austen (aka Janettes). In some of her novels such as MANSFIELD PARK, PRIDE & PREJUDICE, AND EMMA young ladies were often pursuing well heeled bachelors with an income of 10,000 pounds per year. They were rich! Take $30 x 16 x 10,000 and you get today’s equivalent of $4.8 million per year and remember those lucky lads did not pay personal income tax.

How about our almighty US dollar? If you go back to the 1913 creation of the Federal Reserve, the dollar has lost about 97-98% of its purchasing power. Yet, it remains the world’s reserve currency and many long term contracts are written in US dollars. It will very likely remain the reserve currency for some time as most nations are printing money as loosely as the US government is.

2) Silver will be selling for $600 an ounce in two years--This one amazes me. Not only did I see it in writing, but a fellow in my foursome in a golf tournament told me the same thing. He said that he was going to get rich on silver. I gently reminded him that for silver to move that high so quickly would mean that we would be experiencing a Weimar Republic style hyper-inflation that Germany suffered through in 1923. So, the nominal dollars that he received for his silver horde would have very little purchasing power. Also, I added that along the road to $600, millions of people around the world would sell their silver flatware and jewelry (particularly in India where people have hoarded it) and would dampen a sharp run-up in price. He told me that I did not get it. I smiled. A small holding in silver may make great sense in terms of diversification but it is unlikely to be a sure fire get rich quick scheme.

3) All cash will be banned within two weeks-- Has this writer never heard of the underground economy? Does he/she know how many people are unbanked? Cash will definitely be less a factor in our economy as time goes on but it will not disappear in a fortnight.

4) The stock market will fall 80% in 2025 just as it did in the 1929-1933 period. Anything can happen but this seems a bit much in a one year time frame. Yes, equities are high in the US markets these days but millions contribute to 401ks each payday and there are billions on the sidelines waiting for a correction. The market will fluctuate but this forecast appears to be way too extreme.

Am I a bit nervous about the state of markets? You bet. Do I believe that government(s) can avert another financial crisis? No, I do not.

My reason comes from a noted economist who developed a theory that is a bit counter-intuitive but, when you think about it, makes good sense. The man was Hyman Minsky and he was a professor at Washington University in St. Louis (his graduate work was done at the prestigious University of Chicago). Professor Minsky also understood banking and served as a director and consultant to the Mark Twain Bank in St. Louis.

His basic thesis is not via some mathematical formula or complicated set of equations. In clear English he laid out his opinions. Most observers feel that things are kept in check with tight regulation. Minsky did not argue that things do not get better with stronger guardrails after a crisis or strong downturn. He wrote that things get shaky when things are going well. Lenders get looser with the quality of their customers and start to take bigger chances in order to increase profits (witness what happened in 2008 with sub-prime mortgages). So crises are inevitable especially as human nature does not change and greed tends to blind many from danger.

Today, we have geo-political tensions, runaway federal debt, domestic political tensions and uncertainty, increasing credit card debt, fewer first time home buyers, possible inflationary tariffs, and a younger generation who may never do as well as their parents. Something in the system may break in my view. When? I have no idea. So, I ignore the screamers with their exaggerated headlines to get me to subscribe, and discount the talking heads on CNBC who only see blue skies ahead.

This is a time to be defensive in my view. You can bet some unpleasant surprises will hit us. No bell will ring to tell you that it is coming. 

If you wish to contact Don Cole directly, you may reach him at doncolemedia@gmail.com or leave a message on the blog.