Beware the Politics of Debt, Inflation, and Gold

You don’t have to spend very much time poking around the financial side of the internet before you run into an internet economist.  You probably know the guy (and it’s usually a guy).  He’s very eager to point out that:

  • The US is running a massive federal budget deficit, and as a result has accumulated an even more massive national debt.
  • The US will eventually be unable to pay that debt via taxation, and will thus have to print money to pay it.
  • This printing of money will cause massive inflation eventually turning to Weimar Republic style hyperinflation.
  • If you want to protect your assets in this environment, you should buy gold because gold is real (as opposed to fiat) money that can’t be printed.  So while everyone else is being inflated away, you’ll be safe and secure.

You’ll see a few variations on this argument.  For example, the advanced internet economist might suggest to you that holding gold is not enough – it must be physical gold  in your personal possession (as opposed to gold in someone else’s vault, gold futures, gold miner stocks, or a gold ETF).  The reasoning here is that physical gold in your possession presumably can’t be easily confiscated or otherwise regulated by the government.  Either that, or the internet is full of would-be Scrooge McDucks.

Now, don’t get me wrong.  McDuck aside this argument is chocked full of indisputable facts and sound economic reasoning.  It seems like it ought to be right.  There’s only one problem: 1985 just called, and they want their bullet points back. Continue reading

A Speculative Alternative To Investing Part 3: Grabbing The Easy Money

( Part 1, Part 2)

In part two, we looked at stock market inefficiencies and how the Shiller PE allows us to spot them.  Now that we know there’s inefficiency, the question becomes how to grab some of that cash for ourselves.  In other words, we need to figure out how to be a contrarian and profit from the hordes of people consistently mis-pricing the S&P.

The only problem here is that actually taking a contrary position, in the right way, at the right time, is not easy.  Everyone thinks they’re a contrarian, but by definition only a few people actually are.   It’s not immediately obvious how best to go about it, so I’m going to suggest some options, look at their pros and cons, and then finally settle on one of the components of our speculative portfolio. Continue reading

A Speculative Alternative To Investing Part 2: A Theoretical Foundation Based on Valuation

(Part 1)

If we’re going to achieve the relatively dramatic speculative goals laid out in part 1 of this series, it’s going to be essential to find financial instruments which are incorrectly priced and for which we can thus predict future price movement.  But before we can do that, we need a solid understanding of the source of those pricing mistakes and how to detect them.

Thankfully, this is not a place where we have to re-invent the wheel. Continue reading