Signs that you're wealthy

It’s easy to feel like you’re behind when your social media feeds are filled with friends taking lavish vacations and buying new cars. But your financial fitness may be better than you realize — even if your wallet isn’t bulging.

Contrary to how it may seem on the surface, being wealthy isn’t always signified by the stuff you have, the size of your home, or the label on your jeans. True financial freedom is harder to spot.

Once you stop focusing on traditional markers of wealth, you begin to see how rich you really are. Here are a few signs that you’re well-off that you’re probably overlooking.

1.  You save money

With 61% of Americans living paycheck to paycheck, the ability to save a few bucks each week puts you ahead of most people. 

If you consistently keep more cash in your wallet with every paycheck, you’re increasing the distance between you and disaster, and you're well on your way to financial security.

2.  You invest

Your money can work harder for you than you ever can for it. By investing, you’re putting those dollars to work, gathering interest and appreciation. 

Deciding to start investing in stocks and bonds is how many millionaires achieve their wealth, though some invest in a business (their own or those of others) to generate income as well.

3.  You live comfortably below your means

Ironically, contentment with your income and the ability to live within it is another sign of being well off. This liberates you from the constant need to earn and spend more. 

By spending less than you earn, you’ll ensure your wealth is long-lasting and won’t be threatened by the next economic downturn.

4.  You can buy the things you want, even if you have to save

The one-percenters have an easy time forking out for a boat or a vacation to Paris, no question about it. But if you can afford the same luxuries after a few years of mindful spending and careful saving, you’re still enjoying the same level of luxury, if not as often.

5.  You can afford to retire on time

Sadly, one in five Americans believe they’ll never be able to retire. If you’re on track to retire in your 60s (or retire early), you’re one of the lucky ones. The ability to stop working and enjoy your golden years is truly enviable.

6.  You can consider other things besides money in decision-making

Those with means can consider convenience, sustainability, style, and other factors when making purchases, not just the price. 

It’s odd, but when it’s not all about the money, that’s when you’re in the money. If money isn’t the only driver behind your decisions, you likely have plenty of it.

7.  You spend on things that give you back time

Whether it’s a housecleaner, a landscaper to mow your yard, or even a dishwasher, the fact that you can invest in products and services that aren’t necessities but save you time makes you an affluent person.

Unlike money, no person alive can ever get more than 24 hours in a day. Rich people know that time is a more precious resource than money, and they spend both accordingly.

8.  You’re not being pulled down by debt

Americans paid nearly $164 billion in credit card interest and fees in 2022. 

If you’ve managed to pay off any debts you’ve had, you’re at least richer than the average person. That excludes student loans, car notes, and other debt. Wealthy folks know the value of collecting interest, not paying it.

9.  You invest in yourself

Your library of knowledge is one of the most productive investments you can make, though it doesn’t come cheap. You're certainly well off if you can afford the money and time for good books, courses, seminars, and other learning materials.

10.  Your net worth is increasing

Where you’re going is arguably more important than where you’ve been. If your net worth — the difference between the value of the assets you own and the liabilities you owe — is positive and growing, you’re on the right path.

11.  You’re able to look past the price

If you can buy things with quality and price of ownership in mind (rather than getting the cheapest item that fits the bill because it’s all you can afford), that’s a sign you’re financially well off.

It’s sad and ironic that those with more money tend to get better bargains because they can make larger one-time purchases to get bulk deals or buy quality products that last.

12.  You have peace of mind

Knowing you and your loved ones are covered with life, health, home, and auto insurance in case disaster strikes allows you to sleep better at night. 

Insurance can protect you from a black swan event, wiping out the wealth you’ve worked hard to build.

13.  You have a strong network

Another non-monetary indicator of wealth is in the people around you. If you have a strong network of friends and family to check in on you and help you during hard times, then you are wealthy.

14.  You share time and money with others

Perhaps the most significant sign of wealth is the ability to give it away. Giving money to a church, charity, non-profit, or other worthy cause brings meaning and purpose behind having it in the first place. And since time is money, volunteering your time counts, too.

15.  You partake in activities that have meaning to you

One of life’s most lavish luxuries is spending time on things that bring you joy. 

Whether you step up your travel game, enjoy woodworking, write music, or help at a soup kitchen, having the time and money to pursue things other than money is a subtle sign of affluence.

Bottom line

Saving, investing, giving a little money to charity, and enjoying a few of life’s pleasures are all signs of financial fitness.

Those things aren’t easily detectable via labels and Instagram photos, but they are some of the best things money can buy.

inflation is high

[12/13/22] Inflation up 0.1% from October to November (7.1% year-over-year)

[8/3/22] Gasoline prices drop for 50 straight days

[7/13/22] Inflation continued to surge as the consumer price index rose by 9.1% in June compared to last year. It was an increase of 1.3% from May. Economists expected inflation to increase by 1.1% from May to June and top out at 8.8% for the last 12 months. It is the fastest increase in inflation since 1981.

According to the latest data from the Bureau of Labor Statistics, the biggest driver of inflation was energy prices, which rose by 7.5% from May and have jumped by 41.6% over the past 12 months. While the cost of gasoline has been dropping since reaching record highs, it was still up by 11.2% from May to June.

The price of food was also higher, rising by an average of 1% last month. In addition, the cost of shelter was 0.6% higher, and the average cost of rent increased by 0.8%, the largest monthly increase since 1986.

[6/20/22] Clyburn blames inept Trump administration coronavirus response for inflation 

[6/10/22] Inflation rate highest in 40 years

[4/12/22] U.S. consumer price increases quickened in March, underscoring ongoing inflationary pressures as supply chain disruptions and shortages lingered across the economy.

The Bureau of Labor Statistics' (BLS) Consumer Price Index (CPI) rose 8.5% in March compared to the same month last year, according to the latest report released Tuesday. That marked the fastest rise since December 1981. This followed a 7.9% annual increase in February. Heading into the report, consensus economists were looking for an 8.4% jump for March, according to Bloomberg data. 

On a month-over-month basis, prices rose 1.2% in March following a 0.8% monthly rise in February. 

Some of the biggest contributors to the latest increase in inflation were food, shelter and gasoline, according to the BLS. In fact, the index tracking gas prices surged to rise 18.3% month-on-month in March, comprising more than half of the total monthly increase in CPI. In February, gasoline had posted a 6.6% monthly increase.

But even excluding more volatile food and energy prices, the CPI also posted a marked move higher in March. The core CPI jumped 6.5% in March over last year, accelerating from a 6.4% increase in February and representing the fastest increase since August 1982.

A number of other major categories also contributed to the March increase in CPI, however. Shelter prices rose 0.5% month-on-month in March and by 5.0% over last year, representing the biggest annual rise since May 1991. Airline fares also soared by 10.7% on a monthly basis and by nearly 24% over last year, as rising fuel costs and increased demand for travel pushed ticket prices still higher. 

Headline consumer price increases have accelerated on an annual basis for seven consecutive months now. Imbalances between supply and demand have persisted, especially in labor — with job openings still far outpacing new hires — and in commodities amid Russia's ongoing war in Ukraine. Many of these costs have been passed on continuously to the consumer.

With definitive signs of a peak yet to be seen in inflation, members of the Federal Reserve have escalated their rhetoric on using monetary policy tools to bring down fast-rising prices. Last week, Fed Governor Lael Brainard said that bringing down inflation was "our most important task," while San Francisco Fed President Mary Daly said that high inflation was "as harmful as not having a job."

Meanwhile, the Federal Reserve's March meeting minutes suggested that "many participants ... would have preferred a 50 basis point increase" in benchmark interest rates, with the larger-than-typical rate hike serving as an aggressive move toward raising borrowing costs and bringing down demand.

The Federal Reserve is set to convene for a policy-setting meeting May 3 and 4. 

Jay Powell wants you to lose money

Seeking to quell inflation, the Federal Reserve has raised its benchmark interest rate from near zero to above 3% in record time. And at its most recent meeting, on Sept. 21, the central bank projected it would add an additional one and a half percentage points in the coming months—promptly sending markets into a nosedive.

We’ve officially entered a very different financial climate, where prudent investors may want to reassess where they put their money. The Fed’s principal policy lever is interest rates; when they go up, the value of future cash flows goes down—hurting assets from stocks and bonds to housing and many currencies. So when Fed Chair Jerome Powell tells you he wants to reduce inflation by raising rates (aka tightening), he’s telling you the central bank needs investors to lose money. The goal is for those losses to seep into the rest of the economy when capital investment and consumption decline, slowing growth, demand, and—ultimately—inflation.

To understand how we got here, you have to go back to the 2008 financial crisis, when the Fed was doing exactly the opposite. The central bank felt forced to take rates to zero to alleviate the distress indebted households and companies were feeling. Lower rates meant smaller interest payments for debtors seeking to repair their balance sheets. In 2008, household debt topped 97% of gross domestic product; today, it’s about 75%, the lowest in 20 years.

For savers, though, high-interest accounts that once yielded 5% interest suddenly paid 1%. The annual return on $50,000 in savings fell to $500 from $2,500, forcing people who relied on interest as a principal source of income to rethink their strategy. That usually meant turning to riskier assets, so money poured into stocks, pushing the S&P 500 index up sevenfold from its post-crisis nadir to its peak in January.

With the Fed funds rate near zero, ordinary savings accounts paid minimal interest, spurring some to quip that “cash is trash.” This mantra seeded the psychology that fueled crypto assets and meme stocks, even as it created a windfall for the economy, allowing companies from Amazon.com to General Motors to Marriott to boost capital investment. Sure, some of that was foolhardy. Australia’s BHP Billiton, for example, poured $20 billion into US shale oil projects early in the 2010s. That paid off when crude rose to more than $100 a barrel, but it looked less wise when oil fell below $30. By 2017, BHP was taking billions in writedowns on those investments as shale oil flooded the market.

By that time, the US economy was back on track. With unemployment sinking to 4.3%, cheap money had served its purpose, and the Fed slowly began raising rates. It soon found the economy was still too weak to handle them, so it reversed course in 2019. Then it had to try other stimulative measures in 2020 to reduce damage done by the coronavirus pandemic.

Now the economy can handle higher interest rates—and with inflation above 8% for the first time in four decades, the Fed desperately wants to apply them. In fact, it’s rushing to make up for lost time. As a result, investors are quickly discovering that cash is no longer trash—it’s an important asset class that provides a haven. Imagine if, next summer, your bank were to offer 5% interest on a three-year certificate of deposit. Would you take the sure thing?

Many Americans will, showing just how quickly the psychology of investing has changed. If the slowing economy lowers inflation to more acceptable levels, a host of investment opportunities will look better. Treasury yields and investment-grade bond yields are rising now. At some point soon, interest rates will top out, and the returns from those less risky options will look enticing.

This change in psychology won’t be limited to safe assets. Wall Street is in the midst of a bear market: The S&P 500 this year is down more than 20%, and the Nasdaq 100’s decline has topped 30%. Those returns won’t get much better with interest rates rising, the economy slowing, and corporate earnings taking a hit. So investors have already begun to withdraw money from stocks, with equity mutual funds registering 32 straight weeks of outflows, according to the Investment Company Institute.

They won’t come out and say it, but when members of the Fed’s Board of Governors see this reaction, they’re probably pleased. Capitulation makes their job easier. The quicker asset prices react to the tightening of conditions, the faster inflation will fall. But after the slowdown induced by higher interest rates, the selloff will end and inflation will decline. We’ll be in a new investing regime for the first time in more than a decade. Now is the time to prepare.

-- ByEdward Harrison, September 28, 2022

what the Volcker era teaches us now

When inflation soared 40 years ago, people with patience came out fine.

The cost of living is sky-high, and Jerome H. Powell, the chair of the Federal Reserve, says that battling it is his highest priority. He has raised interest rates to damp down inflation, which hit its highest point in 40 years. Financial markets don’t know quite how to react.

Something similar happened the last time inflation was out of control. Paul A. Volcker was the Fed chair then. He wrung inflation out of the economy, but at a great cost — hurling the nation into not just one recession, but two. Unemployment soared, stocks fell repeatedly, interest rates oscillated and, for a while, bonds looked shaky, too.

It’s worth looking at his era for guidance. 

First, because it had multiple, severe downturns, the Volcker era was disastrous for anyone who traded actively and bet wrong on the direction of the markets. Short-term trading is especially dangerous when the market’s currents are opaque and treacherously strong, as they were back then and may be now.

But, second, the Volcker era was wonderful for those with the patience and resources to ride it out. While Mr. Volcker’s stern treatment of the economy was deliberately disruptive, it ushered in awesome bull markets, in both stocks and bonds.

When Mr. Volcker became Fed chair in 1979, inflation was running above 11 percent annually, and the unemployment rate was almost 6 percent. A bull market in stocks had started in 1974 and it continued months more, even though the Volcker Fed had begun to tighten monetary policy.

On Saturday, Oct. 6, 1979, Mr. Volcker announced that, “No longer would the Federal Reserve set interest rates to guide policy,” Jeremy J. Siegel, the University of Pennsylvania economist, wrote in the book “Stocks for the Long Run.” “Instead, it would exercise control over the supply of money without regard to interest rate movements.”

By reducing the money supply, and letting short-term interest rates float, the Fed was, effectively, letting rates spiral upward.

“Stocks went into a tailspin, falling almost 8 percent on record volume in the 2½ days following the announcement,” Professor Siegel wrote. “Stockholders shuddered at the prospect of sharply higher interest rates that would be necessary to tame inflation.”

By March 1980, the Fed funds rate was an astonishing 17 percent, compared with just 2.5 percent today. It would exceed 19 percent the following year.

The economy slowed so much that it fell into a recession from January through July 1980.

But it wasn’t until Nov. 28, 1980, that a bear market in stocks began.

The S& P 500 lost more than 27 percent during a miserable 20-month period that ended in August 1982. If you were on the wrong side of that move, you lost a ton of money. The second Volcker recession began in July 1981 and lasted until November 1982.

If you hung in during the entire Volcker era, you experienced turmoil but went on to enormous gains in both stocks and bonds. From the day Mr. Volcker took office until the day he left in 1987, shares in the Vanguard S& P 500 stock index fund — the first lowcost broad index fund available to ordinary investors — would have gained 215 percent, according to FactSet data.

An index of the broad bond market, now known as the Bloomberg U.S. Aggregate, would have gained 143 percent in that period. And on the day Mr. Volcker started as Fed chair, the 30-year U.S. Treasury bond provided a yield of more than 9 percent — a guaranteed doubling of your money every eight years, if you had just held onto it. Even better, you could have bought a Treasury bond in September 1981 that paid a guaranteed 15.19 percent for 30 years.

There were big ups and downs in shorter stretches. They scared me away from stocks for a while.

What we’ve been experiencing over the last year is frightening, too. It’s not clear whether the July rally in the stock market was more like an early sucker’s rally in the Volcker era (leading to a recession and bear market) or like the second big rally — the one that became a great bull market. Or, perhaps, it’s another variation.

No one knows. But remember that those long-term bets on stocks and bonds paid off, even in that era of market turmoil.

- Jeff Sommer, New York Times (via Honolulu Star-Advertiser, 8/14/22)

Kevin Roose explains Cryptocurrency

Until fairly recently, if you lived anywhere other than San Francisco, it was possible to go days or even weeks without hearing about cryptocurrency.

Now, suddenly, it’s inescapable. Look one way, and there are Matt Damon and Larry David doing ads for crypto start-ups. Swivel your head — oh, hey, it’s the mayors of Miami and New York City, arguing over who loves Bitcoin more. Two N.B.A. arenas are now named after crypto companies, and it seems as if every corporate marketing team in America has jumped on the NFT — or nonfungible token — bandwagon. (Can I interest you in one of Pepsi’s new “Mic Drop” genesis NFTs? Or maybe something from Applebee’s “Metaverse Meals” NFT collection, inspired by the restaurant chain’s “iconic” menu items?)

Crypto! For years, it seemed like the kind of fleeting tech trend most people could safely ignore, like hoverboards or Google Glass. But its power, both economic and cultural, has become too big to overlook. Twenty percent of American adults, and 36 percent of millennials, own cryptocurrency, according to a recent Morning Consult survey. Coinbase, the crypto trading app, has landed on top of the App Store’s top charts at least twice in the past year. Today, the crypto market is valued at around $1.75 trillion — roughly the size of Google. And in Silicon Valley, engineers and executives are bolting from cushy jobs in droves to join the crypto gold rush.

As it’s gone mainstream, crypto has inspired an unusually polarized discourse. Its biggest fans think it’s saving the world, while its biggest skeptics are convinced it’s all a scam — an environment-killing speculative bubble orchestrated by grifters and sold to greedy dupes, which will probably crash the economy when it bursts.

I’ve been writing about crypto for nearly a decade, a period in which my own views have whipsawed between extreme skepticism and cautious optimism. These days, I usually describe myself as a crypto moderate, although I admit that may be a cop-out.

I agree with the skeptics that much of the crypto market consists of overvalued, overhyped and possibly fraudulent assets, and I am unmoved by the most utopian sentiments shared by pro-crypto zealots (such as the claim by Jack Dorsey, the former Twitter chief, that Bitcoin will usher in world peace).

But as I’ve experimented more with crypto — including accidentally selling an NFT for more than $500,000 in a charity auction last year — I’ve come to accept that it isn’t all a cynical money-grab, and that there are things of actual substance being built. I’ve also learned, in my career as a tech journalist, that when so much money, energy and talent flows toward a new thing, it’s generally a good idea to pay attention, regardless of your views on the thing itself.

My strongest-held belief about crypto, though, is that it is terribly explained.

Recently, I spent several months reading everything I could about crypto. But I found that most beginner’s guides took the form of boring podcasts, thinly researched YouTube videos and blog posts written by hopelessly biased investors. Many anti-crypto takes, on the other hand, were undercut by inaccuracies and outdated arguments, such as the assertion that crypto is good for criminals, notwithstanding the growing evidence that crypto’s traceable ledgers make it a poor fit for illicit activity.

What I couldn’t find was a sober, dispassionate explanation of what crypto actually is — how it works, who it’s for, what’s at stake, where the battle lines are drawn — along with answers to some of the most common questions it raises.

This guide — a mega-F.A.Q., really — is an attempt to fix that. In it, I’ll explain the basic concepts as clearly as I can, doing my best to answer the questions a curious but open-minded skeptic might pose.

Crypto boosters will likely quibble with my explanations, while dug-in opponents may find them too generous. That’s OK. My goal is not to convince you that crypto is good or bad, that it should be outlawed or celebrated, or that investing in it will make you rich or bankrupt you. It is simply to demystify things a bit. And if you want to go deeper, each section has a list of reading suggestions at the end.

CRYPTO WILL BE TRANSFORMATIVE

Understanding crypto now — especially if you’re naturally skeptical — is important for a few reasons.

The first is that crypto wealth and ideology is going to be a transformative force in our society in the coming years.

You’ve heard about the overnight Dogecoin millionaires and Lamborghini-driving Bitcoin bros. But that’s not the half of it. The crypto boom has generated vast new fortunes at a clip we’ve never seen before — the closest comparison is probably the discovery of oil in the Middle East — and has turned its biggest winners into some of the richest people in the world, essentially overnight. Some riches could vanish if the market crashes, but enough has already been cashed out to ensure that crypto’s influence will linger for decades.

Crypto’s madcap, meme-crazed online culture can make it seem frivolous and shallow. It’s not. Cryptocurrencies, even the jokey ones, are part of a robust, well-funded ideological movement that has serious implications for our political and economic future. Bitcoin, which emerged out of the ashes of the 2008 financial crisis, first caught on among libertarians and anti-establishment activists who saw it as the cornerstone of a new, incorruptible monetary system. Since then, other crypto realms have fashioned similarly lofty goals, like building a decentralized, largely unregulated version of Wall Street on the blockchain.

We are already starting to see a swell of crypto money headed toward the U.S. political system. Crypto entrepreneurs are donating millions of dollars to candidates and causes, and lobbying firms have fanned out across the country to win support for pro-crypto legislation. In the coming years, crypto moguls will bankroll the campaigns of crypto-friendly candidates, or run for office themselves. Some will peddle influence in the familiar ways — forming super PACs, funding think tanks, etc. — while others will try to escape partisan gridlock altogether. (Crypto millionaires are already buying up land in the South Pacific to build their own blockchain utopias.)

Crypto is poised to soon become one of a handful of true wedge issues, with politicians all over the world forced to pick a side. Some countries, like El Salvador — whose crypto-loving president, Nayib Bukele, recently announced the development of a “Bitcoin City” at the base of a volcano — will go full crypto. Other governments may decide that crypto is a threat to their sovereignty and crack down, as China did when it outlawed cryptocurrency trading last year. The divide between the world’s pro-crypto and no-crypto zones could end up being at least as big as the divide between the Chinese internet and the American one, and maybe even more consequential.

In America, we have already seen how crypto can scramble the usual partisan allegiances. Former President Donald J. Trump and Senator Elizabeth Warren, the Democrat from Massachusetts, are united in crypto skepticism, for example, while Senator Ted Cruz, Republican from Texas, is in the same bullish camp as Senator Ron Wyden, the Democrat from Oregon. We have also seen what can happen when the crypto community feels politically threatened, as happened last summer, when crypto groups rallied to oppose a crypto-related provision in President Biden’s infrastructure bill.

What I’m saying, I guess, is that despite the goofy veneer, crypto is not just another weird internet phenomenon. It’s an organized technological movement, armed with powerful tools and hordes of wealthy true believers, whose goal is nothing less than a total economic and political revolution.

CRYPTO COULD BE DESTRUCTIVE

The second reason to pay attention to crypto is that understanding it now is the best way to ensure it doesn’t become a destructive force later.

In the early 2010s, the most common knock on social media apps like Facebook and Twitter was that they just wouldn’t work as businesses. Pundits predicted that users would eventually tire of their friends’ vacation photos, that advertisers would flee and that the whole social media industry would collapse. The theory wasn’t so much that social media was dangerous or bad; just that it was boring and corny, a hype-driven fad that would disappear as quickly as it had arrived.

What nobody was asking back then — at least not loudly — were questions like: What if social media is actually insanely successful? What kind of regulations would need to exist in a world where Facebook and Twitter were the dominant communication platforms? How should tech companies with billions of users weigh the trade-offs between free speech and safety? What product features could prevent online hate and misinformation from cascading into offline violence?

By the middle of the decade, when it was clear that these were urgent questions, it was too late. The platform mechanics and ad-based business models were already baked in, and skeptics — who might have steered these apps in a better direction, if they’d taken them more seriously from the start — were stuck trying to contain the damage.

Are we making the same mistake with crypto today? It’s possible. No one knows yet whether crypto will or won’t “work,” in the grandest sense. (Anyone who claims they do is selling something.) But there is real money and energy in it, and many tech veterans I’ve spoken to tell me that today’s crypto scene feels, to them, like 2010 all over again — with tech disrupting money this time, instead of media.

If they’re wrong, they’re wrong. But if they’re right — even partly — the best time to start paying attention is now, before the paths are set and the problems are intractable.

The third reason to study up on crypto is that it can be genuinely fun to learn about.

Sure, a lot of it is dumb, shady or self-refuting. But if you can look past the carnival barkers and parse the convoluted jargon, you’ll find a bottomless well of weird, interesting and thought-provoking projects. The crypto agenda is so huge and multidisciplinary — drawing together elements of economics, engineering, philosophy, law, art, energy policy and more — that it offers lots of footholds for beginners. Want to discuss the influence of Austrian economics in Bitcoin development? There’s probably a Discord server for that. Want to join a DAO that invests in NFTs, or play a video game that pays you in crypto tokens for winning? Dive right in.

CRYPTO IS A GENERATIONAL SKELETON KEY

Mind you, I am not suggesting that the crypto world is diverse, in the demographic sense. Surveys have suggested that high-earning white men make up a large share of crypto owners, and libertarians with dog-eared copies of “Atlas Shrugged” are likely overrepresented among crypto millionaires. But it’s not an intellectual monolith. There are right-wing Bitcoin maximalists who believe that crypto will liberate them from government tyranny; left-wing Ethereum fans who want to overthrow the big banks; and speculators with no ideological attachments who just want to turn a profit and get out. These communities fight with one another constantly, and many have wildly different ideas about what crypto should be. It makes for fascinating study, especially with a bit of emotional distance.

And if you do learn some crypto basics, you might find that a whole world opens up to you. You’ll understand why Jimmy Fallon and Steph Curry are changing their Twitter avatars to cartoon apes, and why Elon Musk, the richest man in the world, spent a decent chunk of last year tweeting about a digital currency named after a dog. Strange words and phrases you encounter on the internet — rug pulls, flippenings, “gm” — will become familiar, and eventually, headlines like “NFT Collector Sells People’s Fursonas for $100K In Right-Click Mindset War” won’t make you wonder if you’re losing your grip on reality.

Crypto can also be a kind of generational skeleton key — maybe the single fastest way to freshen your cultural awareness and decipher the beliefs and actions of today’s young people. And just as knowing a little about New Age mysticism and psychedelics would help someone trying to make sense of youth culture in the 1960s, knowing some crypto basics can help someone perplexed by emerging attitudes about money and power feel more grounded.

Again, I don’t really care whether you emerge from these explainers as a true believer, a devoted skeptic or something in between. Participate or abstain as you wish! All I’m after is understanding — and possibly, a little relief from the question that has consumed my social and professional life for the past several years:

“So … can I ask you a question about crypto?”

Let’s start from the beginning: What is crypto?

A decade or two ago, the word was generally used as shorthand for cryptography. But in recent years, it’s been more closely associated with cryptocurrencies. These days, “crypto” usually refers to the entire universe of technologies that involve blockchains — the distributed ledger systems that power digital currencies like Bitcoin, but also serve as the base layer of technology for things like NFTs, web3 applications and DeFi trading protocols.

Ah yes, blockchains. Can you remind me, without going into too much technical detail, what they are?

At a very basic level, blockchains are shared databases that store and verify information in a cryptographically secure way.

You can think of a blockchain like a Google spreadsheet, except that instead of being hosted on Google’s servers, blockchains are maintained by a network of computers all over the world. These computers (sometimes called miners or validators) are responsible for storing their own copies of the database, adding and verifying new entries, and securing the database against hackers.

So blockchains are … fancy Google spreadsheets?

Sort of! But there are at least three important conceptual differences.

First, a blockchain is decentralized. It doesn’t need a company like Google overseeing it. All of that work is done by the computers on the network, using what’s called a consensus mechanism — basically, a complicated algorithm that allows them to agree on what’s in a database without the need for a neutral referee. This makes blockchains more secure than traditional record-keeping systems, proponents believe, since no single person or company can take down the blockchain or alter its contents, and anyone trying to hack or change the records in the ledger would need to break into many computers simultaneously.

The second major feature of blockchains is that they’re typically public and open source, meaning that unlike a Google spreadsheet, anyone can inspect a public blockchain’s code or see a record of any transaction. (There are private blockchains, but they’re less important than the public ones.)

Third, blockchains are typically append-only and permanent, meaning that unlike with a Google spreadsheet, data that’s added to a blockchain typically can’t be deleted or changed after the fact.

Got it. So blockchains are public, permanent databases that nobody owns?

You’re getting it!

Now remind me: How are blockchains related to cryptocurrencies?

Blockchains didn’t really exist until 2009, when a pseudonymous programmer named Satoshi Nakamoto released the technical documentation for Bitcoin, the first-ever cryptocurrency.

Bitcoin used a blockchain to keep track of transactions. That was notable because, for the first time, it allowed people to send and receive money over the internet without needing to involve a central authority, such as a bank or an app like PayPal or Venmo.

Many blockchains still perform cryptocurrency transactions, and there are now roughly 10,000 different cryptocurrencies in existence, according to CoinMarketCap. But many blockchains can be used to store other kinds of information, too — including NFTs, bits of self-executing code known as smart contracts and full-fledged apps — without the need for a central authority.

OK, but can we back up a second? Weren’t tech people telling us, years ago, that crypto was a new and exciting form of money? And yet, nobody I know pays their rent or buys groceries in Bitcoin. So were those people just … wrong?

Good question. It’s true that today, hardly anyone pays for things in cryptocurrency. In part, that’s because most merchants still don’t accept crypto payments, and hefty transaction fees can make it impractical to spend small amounts of cryptocurrency on daily living expenses. It’s also because the value of popular cryptocurrencies like Bitcoin and Ether has historically gone up, making it somewhat risky to use them for offline purchases. (The counterexamples are usually cited with pity, like the guy who, in 2010, bought two Papa John’s pizzas using Bitcoin that was worth about $40 at the time, but would be worth roughly $400 million today.)

It’s also true that the value of cryptocurrencies has grown enormously since the early Bitcoin days, despite them not being most people’s daily spending money.

Part of that growth is speculation — people buying crypto assets in hopes of selling them for more later on. Part of it is because the blockchains that have emerged since Bitcoin, like Ethereum and Solana, have expanded what can be done with this technology.

And some crypto fans believe that the prices of cryptocurrencies like Bitcoin will eventually stabilize, which could make them more useful as a means of payment.

What are the actual uses of crypto, beyond financial speculation?

Right now, many of the successful applications for crypto technology are in finance or finance-adjacent fields. For example, people are using crypto to send cross-border remittances to family members abroad and Wall Street banks using blockchains to settle foreign transactions.

The crypto boom has also led to an explosion of experiments outside of financial services. There are crypto social clubs, crypto video games, crypto restaurants and even crypto-powered wireless networks.

These non-financial uses are still fairly limited. But crypto fans often make the case that the technology is still young, and that it took the internet decades to mature into what it is today. Investors are pouring billions of dollars into crypto start-ups because they think that someday, blockchains will be used for all kinds of things: storing medical records, tracking streaming music rights, even hosting new social media platforms. And the crypto ecosystem is attracting tons of developers — an auspicious sign for any new technology.

I’ve heard people calling crypto a pyramid scheme or a Ponzi scheme. What do they mean?

Some critics believe that cryptocurrency markets are fundamentally fraudulent, either because early investors get rich at the expense of late investors (a pyramid scheme), or because crypto projects lure in unsuspecting investors with promises of safe returns, then collapse once new money stops coming in (a Ponzi scheme).

There are certainly plenty of examples of pyramid and Ponzi schemes within crypto. They include OneCoin, a fraudulent crypto operation that stole $4 billion from investors from 2014 to 2019; and Virgil Sigma Fund, a $90 million crypto hedge fund run by a 24-year-old investor who pleaded guilty to securities fraud and was sentenced to seven and a half years in prison.

But these cases aren’t usually what critics are talking about. They’re generally arguing that crypto itself is an exploitative scheme, with no real-world value.

And are they right?

Well, let’s try to understand the case they’re making.

Unlike buying stock in, say, Apple, a purchase that (theoretically, at least) reflects a belief that Apple’s underlying business is healthy, buying a cryptocurrency is more like betting on the success of an idea, they say. If people believe in Bitcoin, they buy, and Bitcoin prices go up. If people stop believing in Bitcoin, they sell, and Bitcoin prices go down.

Crypto owners, then, have a rational incentive to convince other people to buy. And if you don’t think that cryptocurrency technology is inherently valuable, you might conclude that the entire thing resembles a pyramid scheme, in which you primarily make money by recruiting others to join.

I’m sensing a “but” coming on.

But! Even though there are scams and frauds within crypto, and crypto investors are certainly fond of trying to recruit other people to buy in, many investors will tell you that they are going in with their eyes wide open.

They believe that crypto technology is inherently valuable, and that the ability to store information and value on a decentralized blockchain will be attractive to all kinds of people and businesses in the future. They would tell you they’re betting on crypto the product, not crypto the idea — which, on some level, isn’t all that different from buying Apple stock because you think the next iPhone is going to be popular.

Matt Huang, a prominent investor, spoke for many crypto fans when he said on Twitter: “Crypto may look like a speculative casino from the outside. But that distracts many from the deeper truth: the casino is a trojan horse with a new financial system hidden inside.”

You can argue with that position, or dispute how much this “new financial system” is actually worth. But crypto investors clearly believe it’s worth something.

Is crypto regulated?

Only slightly. In the United States, certain centralized crypto exchanges, such as Coinbase, are required to register as money transmitters and follow laws like the Bank Secrecy Act, which requires them to collect certain information about their customers. Some countries have passed more stringent regulations, and others, like China, have banned cryptocurrency trading entirely.

But compared with the traditional financial system, crypto is very lightly regulated. There are few rules governing crypto assets like “stablecoins” — coins whose value is pegged to government-backed currencies — or even clear guidance from the Internal Revenue Service about how certain crypto investments should be taxed. And certain areas of crypto, like DeFi (decentralized finance), are almost completely unregulated.

Partly, that’s because it’s still early, and making new rules takes time. But it’s also a property of blockchain technology itself, much of which was designed to be hard for governments to control.

This question comes from the (apparently crypto-curious) rapper Cardi B: Is crypto going to replace the dollar?

Sorry, Cardi. The dollar is the world’s reserve currency, and dislodging it would be a huge, costly project that isn’t likely to happen any time soon. (To give just one small example of the enormity of the task: every financial contract that is denominated in dollars would have to be re-denominated in Bitcoin or Ether or some other cryptocurrency.)

There are also technical hurdles crypto needs to overcome if it’s ever going to displace government-issued currency. Today, the most popular blockchains — Bitcoin and Ethereum — are slow and inefficient compared with traditional payment networks. (The Ethereum blockchain, for example, can process only about 15 transactions per second, whereas Visa says it can process thousands of credit card transactions per second.)

And, of course, for a cryptocurrency like Bitcoin to replace the dollar, you’d need to convince billions of people to use a currency whose value fluctuates wildly, that isn’t backed by a government and that often can’t be retrieved if it’s stolen.

What kind of people are investing in crypto? Is it all — to quote a recent “Curb Your Enthusiasm” episode — “nerds and Nazis”?

It’s hard to say who’s investing in crypto, especially since a lot of activity takes place anonymously or under pseudonyms. But some surveys and studies have suggested that crypto is still dominated by affluent white men.

Gemini, a cryptocurrency exchange, estimated in a recent report that women made up only 26 percent of crypto investors. The average crypto owner, the group found, was a 38-year-old man making approximately $111,000 a year.

But crypto ownership does appear to be diversifying. A 2021 Pew Research Center survey found that Asian, Black and Latino adults were more likely to have used crypto than white adults. Crypto adoption is also growing outside the United States, and some studies have suggested that crypto adoption is growing fastest in countries like Vietnam, India and Pakistan.

My colleague, Tressie McMillan Cottom, has made the case that crypto — because it relies on permanent, irrefutable records of ownership of digital goods and currencies — is particularly attractive to people from marginalized groups, who may have had their property unjustly taken from them in the past.

“If I live in a community where the police absolutely use eminent domain to claim my private property and I cannot do anything about it,” she wrote, “that sense of everyday powerlessness would make the promise of blockchain sound pretty good.”

That said, some recent studies have also found that a small number of people own the vast majority of crypto wealth — so it’s not necessarily an egalitarian paradise.

And what about extremists? Are they into crypto?

Some are. Because you can buy and sell cryptocurrency without using your name or having a bank account, crypto in its early days was a natural fit for people who had reasons to avoid the traditional financial system. They included criminals, tax evaders and people buying and selling illicit goods. They also included political dissidents and extremists, some of whom had been kicked off more mainstream payment services like PayPal and Patreon.

As a result of their well-timed entry into the crypto market, some extremists have gotten rich. A recent investigation by the Southern Poverty Law Center found that several prominent white supremacists have made hundreds of thousands or millions of dollars by investing in crypto.

Of course, there are millions of crypto owners, the vast majority of whom are not white supremacists. And the same properties of anonymity and censorship-resistance that make crypto useful to white supremacists might also make it attractive to, say, Afghan citizens fleeing the Taliban. So labeling the entire crypto movement an extremist group would be overkill. Regardless, it’s safe to say that crypto has become attractive to all kinds of people who would rather not deal (or can’t legally deal) with a traditional bank.

Another criticism I’ve heard is that crypto is bad for the environment. Is that true?

This is a real can of worms — and one of the most frequent objections to crypto.

Let’s start with what we know for sure. It’s true that most crypto activity today takes place on blockchains that require large amounts of energy to store and verify transactions. These networks use a “proof-of-work” consensus mechanism — a process that has been compared to a global guessing game, played by computers all competing to solve cryptographic puzzles in order to add new information to the database and earn a reward in return. Solving these puzzles requires powerful computers, which in turn use lots of energy.

The Bitcoin blockchain, for example, uses an estimated 200 terawatt-hours of energy per year, according to Digiconomist, a website that tracks crypto energy usage. That’s comparable to the annual energy consumption of Thailand. And Bitcoin’s associated carbon emissions have been estimated at roughly 100 megatons per year, which is comparable to the carbon footprint of the Czech Republic.

Holy moly! How do crypto fans justify that kind of environmental impact?

Crypto advocates often quibble with these statistics. They also argue that:

• Our existing financial system also uses a lot of energy, between powering millions of bank branches, A.T.M.s that sit idle for most of the day, gold mines and other energy-intensive infrastructure.

• Many crypto-mining computers are already powered by renewable energy sources, or by energy that would otherwise be wasted.

• Most newer blockchains are built using consensus mechanisms that require much less energy than proof-of-work. (Ethereum, for example, is scheduled to switch to a new type of consensus mechanism called proof-of-stake sometime in 2022, which could reduce its energy usage by as much as 99.5 percent.)

And are those arguments valid?

Partly. It’s true that most newer blockchains are designed in a way that requires considerably less energy than Bitcoin, and that Ethereum’s switch to a proof-of-stake consensus mechanism will greatly shrink its environmental footprint, if and when it happens.

But it’s also a bit convenient to steer attention away from Bitcoin, which is still the most valuable cryptocurrency in the world. Bitcoin’s energy needs aren’t expected to fall significantly anytime soon. And even if every Bitcoin miner ran entirely on renewable energy — which, to be clear, isn’t the case — there would still be an environmental cost associated with maintaining the blockchain.

All told, it’s clear that crypto as we know it today has a significant environmental impact, but it’s hard to measure exactly how significant. Many frequently cited statistics come from industry groups, and it’s hard to find trustworthy, independent data and analysis.

But few crypto fans would dispute that blockchains consume substantially more energy than a traditional, centralized database would — just as 100 refrigerators use more energy than one refrigerator. They just argue that crypto’s environmental impact will shrink over time, and that the benefits of decentralization are worth the costs.

Got it. And those benefits, again, are …

Some crypto proponents will tell you that the biggest benefit of decentralization is the ability to create currencies, apps and virtual economies that are resistant to censorship and top-down control. (Imagine a version of Facebook, they’ll say, in which Mark Zuckerberg couldn’t unilaterally decide to kick people off.)

Others will say that the biggest perk of decentralization is that it allows artists and creators to control their own economic destinies more directly by giving them a way (in the form of NFTs and other crypto assets) to bypass platform gatekeepers like YouTube and Spotify, and sell unique digital works directly to their fans.

Still others will say that crypto is most useful to people who don’t live in countries with stable currencies, or to dissident groups living under authoritarian regimes.

There are a million other hypothetical benefits of decentralization and crypto, some of which are realistic and some of which probably aren’t.

How do you actually use crypto? Is it like sending a payment over Paypal or Venmo?

It can be. The quickest way to get started using cryptocurrencies is to set up an account with a crypto exchange like Coinbase, which can link to your bank account and convert your U.S. dollars (or other government-issued currency) into cryptocurrency.

But many crypto users prefer setting up their own “wallets” — secure places to store the cryptographic keys that unlock their digital assets.

Once you’ve got some crypto in your wallet, the process can be pretty simple — just type in the recipient’s crypto wallet address, pay a transaction fee (if applicable), and wait for the payment to clear.

Other types of crypto transactions, like buying and selling NFTs, can be significantly more complicated, but the basic act of sending a payment to someone typically takes only a few minutes.

I’m ready to dive into the rest of your explainers. But first, I have one final question about crypto’s culture: Why is it so weird and insular?

This is maybe the question I get asked most about crypto. People see their friends, co-workers and relatives diving down the crypto rabbit hole and emerging days or weeks later with a new obsession, new internet friends, a bunch of new jargon and the seeming inability to talk about anything else. (There’s even a word for this — getting “cryptopilled.”) People who believe in crypto tend to really believe in it — to the point that they can appear to the outside world more like evangelists for a new religion than fans of a new technology.

I was a religion reporter once, and I don’t think the comparison is totally inapt. (It’s also not necessarily a bad thing: Plenty of people find meaning and community and intellectual stimulation in religion.) As people like the Bloomberg journalist Joe Weisenthal have pointed out, crypto has similar elements to an emerging religion: an enigmatic founder (the still-anonymous Satoshi Nakamoto), sacred texts (the Bitcoin white paper) and rituals and rites to mark yourself as a believer, such as tweeting “gm” (crypto speak for “good morning”) to your fellow believers, or photoshopping laser eyes onto your profile picture.

It’s fun to laugh at the (often cringeworthy) ways crypto fans try to entertain and inspire each other. But focusing too much on their behavior and customs might mean missing what’s genuinely novel — and, depending on where you sit, either exciting or dangerous — about the technology itself. Which is why, when my friends ask me how to talk to their cryptopilled relatives, I advise them to start by trying to understand what’s gotten them so excited in the first place.

inflation 2022

WASHINGTON (AP) — Last year, it was a nasty surprise. And it wasn’t supposed to last. But now, inflation has become an ongoing financial strain for millions of Americans filling up at the gas station, lined up at a grocery checkout lane, shopping for clothes, bargaining for a car or paying monthly rent.

For the 12 months ending in January, inflation amounted to 7.5% — the fastest year-over-year pace since 1982 — the Labor Department said Thursday. Even if you toss out volatile food and energy prices, so-called core inflation jumped 6% over the past year. That was also the sharpest such jump in four decades.

Consumers felt the price squeeze in everyday routines. Over the past year, prices rose 41% for used cars and trucks, 40% for gasoline, 18% for bacon, 14% for bedroom furniture, 11% for women’s dresses.

The Federal Reserve didn’t anticipate an inflation wave this severe or this persistent. In December 2020, the Fed’s policymakers had forecast that consumer inflation would stay below their 2% annual target and end 2021 at around 1.8%.

But after having been an economic afterthought for decades, high inflation reasserted itself last year with brutal speed. In February 2021, the government’s consumer price index was running just 1.7% ahead of its level a year earlier. From there, the year-over-year price increases accelerated steadily — 2.7% in March, 4.2% in April, 4.9% in May, 5.3% in June.

By October, the figure was 6.2%, by November 6.8%, by December 7.1%.

For months, Fed Chair Jerome Powell and others characterized higher consumer prices as merely a “transitory” problem — the result, mainly, of shipping delays and temporary shortages of supplies and workers as the economy rebounded from the pandemic recession much faster than anyone had anticipated.

Now, many economists expect consumer inflation to remain elevated well into this year, with demand outstripping supplies in numerous areas of the economy.

“Inflation remains the single largest near-term challenge to the economy,″ said Jim Baird, chief investment officer at Plante Moran Financial Advisors. “Although price pressures are expected to ease as the year progresses, inflation will remain above the Fed’s 2% target for some time to come.″

So the Fed has radically changed course. Last month, the central bank signaled that it will begin a series of rate hikes in March. By doing so, the Fed is moving away from the super-low rates that helped revive the economy from 2020′s devastating pandemic recession but that also helped fuel surging consumer prices.

WHAT’S CAUSED THE SPIKE IN INFLATION?

Good news — mostly. When the pandemic paralyzed the economy in the spring of 2020 and lockdowns kicked in, businesses closed or cut hours and consumers stayed home as a health precaution, employers slashed a breathtaking 22 million jobs. Economic output plunged at a record-shattering 31% annual rate in 2020′s April-June quarter.

Everyone braced for more misery. Companies cut investment and postponed restocking. A brutal recession ensued.

But instead of sinking into a prolonged downturn, the economy staged an unexpectedly rousing recovery, fueled by vast infusions of government aid and emergency intervention by the Fed, which slashed interest rates, among other things. By spring of last year, the rollout of vaccines had emboldened consumers to return to restaurants, bars, shops and airports.

Suddenly, businesses had to scramble to meet demand. They couldn’t hire fast enough to fill job openings — a near record 10.9 million in December — or buy enough supplies to meet customer orders. As business roared back, ports and freight yards couldn’t handle the traffic. Global supply chains became seized up.

With demand up and supplies down, costs rose. And companies found that they could pass along those higher costs in the form of higher prices to consumers, many of whom had managed to sock away a ton of savings during the pandemic.

But critics, including former Treasury Secretary Lawrence Summers, blamed in part President Joe Biden’s $1.9 trillion coronavirus relief package, with its $1,400 checks to most households, for overheating an economy that was already sizzling on its own.

The Fed and the federal government had feared an agonizingly slow recovery like the one that followed the Great Recession of 2007-2009.

HOW LONG WILL IT LAST?

Elevated consumer price inflation will likely endure as long as companies struggle to keep up with consumers’ demand for goods and services. A recovering job market — employers added a record 6.7 million jobs last year and tacked on 467,000 more in January — means that many Americans can continue to splurge on everything from lawn furniture to electronics.

Many economists foresee inflation staying well above the Fed’s 2% target this year. But relief from higher prices might be coming. Jammed-up supply chains are beginning to show some signs of improvement, at least in some industries. The Fed’s sharp pivot away from easy-money policies toward a more hawkish, anti-inflationary policy could slow the economy and reduce consumer demand. There will be no repeat of last year’s COVID relief checks from Washington.

Inflation itself is eating into household purchasing power and might force some consumers to shave back spending.

Omicron or other COVID’ variants could cloud the outlook, either by causing outbreaks that force factories and ports to close and disrupt supply chains even more or by keeping people home and reducing demand for goods.

“It’s not going to be an easy climb down,″ said Sarah House, senior economist at Wells Fargo. “We’re expecting CPI to still be roughly 4% at the end of this year. That’s still well above what the Fed would like it to be and, of course, well above what consumers are used to seeing.″

HOW ARE HIGHER PRICES AFFECTING CONSUMERS?

A strong job market is boosting wages, though not enough to compensate for higher prices. The Labor Department says that hourly earnings for all private-sector employees fell 1.7% last month from a year earlier after accounting for higher consumer prices. But there are exceptions: After-inflation wages were up more than 10% for hotel workers and more than 7% for restaurant and bar employees in December from a year earlier.

Partisan politics also colors the way Americans view the inflation threat. With a Democrat in the White House, Republicans were nearly three times as likely as Democrats (45% versus 16%) to say that inflation is having a negative effect last month on their personal finances, according to a University of Michigan survey.

***

This story has been updated to correct that U.S. economic output dropped at a 31% annual rate in 2020′s April-June quarter, not last year’s

Biden leading all presidents in stock market performance (so far)

So far, Joe Biden leads all U.S. Presidents in stock-market performance.

We’re in the early days, of course. Biden hasn’t served a full year yet. And the market slide on Nov. 26, if sustained, could change the numbers rapidly.

But through Nov. 26, the Standard & Poor’s 500 Index has advanced 20.74% under Biden (including dividends). Annualize that and you get a 24.84% rate of return.

Either the raw number or the annualized number would put Biden at the top of the charts. Preceding Biden, Bill Clinton was on top, at 17.49% per year. Barack Obama was second at 16.25% and Donald Trump third with 15.95%.

For these calculations I use the Standard & Poor’s 500 Total Return Index, measured from Inauguration Day to the last full day of a president’s term.

Some people say the starting point isn’t fair, since a new president influences policy and the public mood beginning on Election Day or even sooner.

But I think it’s the best method. After all, if an outgoing president invaded Cuba or imposed wage-and-price controls, that would move the markets, whether the new president agreed with the policy or not.

Presidential rankings

Here’s how Biden and the 15 previous presidents stack up, ranked by annualized stock market returns.

President       Cumulative Annualized

Joe Biden           20.74%   24.84%

Bill Clinton       263.72%   17.49%

Barack Obama       233.71%   16.25%

Donald Trump        80.76%   15.95%

Gerald Ford         42.53%   15.57%

Harry Truman       207.98%   15.56%

Dwight Eisenhower  217.15%   15.51%

Ronald Reagan      207.83%   15.08%

George H.W. Bush    73.13%   14.71%

Jimmy Carter        59.33%   12.40%

Franklin Roosevelt 300.95%   12.15%

Lyndon Johnson      73.17%   11.23%

John Kennedy        30.42%    9.82%

Richard Nixon       -3.50%   -0.64%

George W. Bush     -26.75%   -3.82%

Herbert Hoover     -77.09%  -30.82%

One conclusion that jumps out at you is Republicans and Democrats both have big winners and losers. The top three spots in the table are occupied by Democrats. But Democratic icon John Kennedy ranks near the bottom, as does Lyndon Johnson, architect of the Great Society programs.

Among Republicans, Donald Trump, Gerald Ford and Dwight Eisenhower have terrific numbers. But Richard Nixon, George W. Bush and Herbert Hoover bring up the rear – the only three with negative returns.

Studies by Ned Davis Research Inc. show that stocks have gained 7.98% per year under Democratic presidents, versus only 3.6% per year under Republican ones. However, inflation has been higher (4.22%) under Democrats than under Republicans (1.80%). So the inflation-adjusted gap is more modest.

Why it’s up

Why has Biden done so well, so far? Part of the answer is lucky timing. Scientists brought out a vaccine for Covid-19 shortly after he took office. That was a big plus for the markets.

Passage of an infrastructure bill also gave the stock market a shot in the arm. Spending on roads, bridges and internet superstructure should add to demand for many companies.

Biden’s polling numbers, however, hint that the market’s strength from January to November may not last. His approval rating lately has been near 43%, down from about 55% in the first days of his administration. Markets prefer strong presidents, regardless of party.

Looking ahead

Whether the market continues to perform well depends in part on unclogging the nation’s ports, combatting the current labor shortage and containing the latest variant of the coronavirus.

To tilt the odds in your favor, it may help to try to guess how Biden’s policies will affect the market in the next three years.

I believe Biden will continue to push vigorously for infrastructure spending, following up on passage of the recent infrastructure bill. Possible plays here include Sterling Construction Co. (STRL, Financial), Fluor Corp. (FLR, Financial) and Nucor Corp. (NUE, Financial).

He will, I believe, press for increasing access to health care, though nowhere near as fast as his party’s left wing wants. That bodes sell, I think, for pharmaceutical companies such as Merck & Co. Inc. (MRK, Financial) and Pfizer Inc. (PFE, Financial).

Biden’s reappointment of Jerome Powell as head of the Federal Reserve probably means that interest rates will rise, but slowly. That should help financial stocks, notably banks such as JPMorgan Chase & Co. (JPM, Financial) and Bank of America Corp. (BAC, Financial).

So far, Biden has continued Trump’s hard line on trade with China. Lately, JPMorgan has been writing that a thaw in the frosty U.S.-China trade relationship is less of a long shot than people think.

If they’re right, I think some beneficiaries could be agricultural commodity companies such as Archer Daniels Midland Co. (ADM, Financial), semiconductor makers like Apple Inc. (AAPL, Financial) and the big auto makers, including General Motors Co. (GM, Financial) and Ford Motor Co. (F, Financial).

-- John Dorfman is chairman of Dorfman Value Investments in Boston. His firm of clients may own or trade securities discussed in this column. He can be reached at jdorfman@dorfmanvalue.com.

If You’re so Smart, Why Aren’t You Rich?

The most successful people are not the most talented, just the luckiest, a new computer model of wealth creation confirms. Taking that into account can maximize return on many kinds of investment.

The distribution of wealth follows a well-known pattern sometimes called an 80:20 rule: 80 percent of the wealth is owned by 20 percent of the people. Indeed, a report last year concluded that just eight men had a total wealth equivalent to that of the world’s poorest 3.8 billion people.

This seems to occur in all societies at all scales. It is a well-studied pattern called a power law that crops up in a wide range of social phenomena. But the distribution of wealth is among the most controversial because of the issues it raises about fairness and merit. Why should so few people have so much wealth?

The conventional answer is that we live in a meritocracy in which people are rewarded for their talent, intelligence, effort, and so on. Over time, many people think, this translates into the wealth distribution that we observe, although a healthy dose of luck can play a role.

But there is a problem with this idea: while wealth distribution follows a power law, the distribution of human skills generally follows a normal distribution that is symmetric about an average value. For example, intelligence, as measured by IQ tests, follows this pattern. Average IQ is 100, but nobody has an IQ of 1,000 or 10,000.

The same is true of effort, as measured by hours worked. Some people work more hours than average and some work less, but nobody works a billion times more hours than anybody else.

And yet when it comes to the rewards for this work, some people do have billions of times more wealth than other people. What’s more, numerous studies have shown that the wealthiest people are generally not the most talented by other measures.

What factors, then, determine how individuals become wealthy? Could it be that chance plays a bigger role than anybody expected? And how can these factors, whatever they are, be exploited to make the world a better and fairer place?

We finally get an answer thanks to the work of Alessandro Pluchino at the University of Catania in Italy and a couple of colleagues. These guys have created a computer model of human talent and the way people use it to exploit opportunities in life. The model allows the team to study the role of chance in this process.

The results are something of an eye-opener. Their simulations accurately reproduce the wealth distribution in the real world. But the wealthiest individuals are not the most talented (although they must have a certain level of talent). They are the luckiest. And this has significant implications for the way societies can optimize the returns they get for investments in everything from business to science.

Pluchino and co’s model is straightforward. It consists of N people, each with a certain level of talent (skill, intelligence, ability, and so on). This talent is distributed normally around some average level, with some standard deviation. So some people are more talented than average and some are less so, but nobody is orders of magnitude more talented than anybody else.

This is the same kind of distribution seen for various human skills, or even characteristics like height or weight. Some people are taller or smaller than average, but nobody is the size of an ant or a skyscraper. Indeed, we are all quite similar.

The computer model charts each individual through a working life of 40 years. During this time, the individuals experience lucky events that they can exploit to increase their wealth if they are talented enough.

However, they also experience unlucky events that reduce their wealth. These events occur at random.

At the end of the 40 years, Pluchino and co rank the individuals by wealth and study the characteristics of the most successful. They also calculate the wealth distribution. They then repeat the simulation many times to check the robustness of the outcome.

When the team rank individuals by wealth, the distribution is exactly like that seen in real-world societies. “The ‘80-20’ rule is respected, since 80 percent of the population owns only 20 percent of the total capital, while the remaining 20 percent owns 80 percent of the same capital,” report Pluchino and co.

That may not be surprising or unfair if the wealthiest 20 percent turn out to be the most talented. But that isn’t what happens. The wealthiest individuals are typically not the most talented or anywhere near it. “The maximum success never coincides with the maximum talent, and vice-versa,” say the researchers.

So if not talent, what other factor causes this skewed wealth distribution? “Our simulation clearly shows that such a factor is just pure luck,” say Pluchino and co.

The team shows this by ranking individuals according to the number of lucky and unlucky events they experience throughout their 40-year careers. “It is evident that the most successful individuals are also the luckiest ones,” they say. “And the less successful individuals are also the unluckiest ones.”

That has significant implications for society. What is the most effective strategy for exploiting the role luck plays in success?

Pluchino and co study this from the point of view of science research funding, an issue clearly close to their hearts. Funding agencies the world over are interested in maximizing their return on investment in the scientific world. Indeed, the European Research Council recently invested $1.7 million in a program to study serendipity—the role of luck in scientific discovery—and how it can be exploited to improve funding outcomes.

***

I dunno.  Bezos, Gates, Zuckerberg, Musk, Buffett (and the like) aren't exactly dummies.  But they're lucky they live in America I guess.

The Law of Fashion

The great philosopher John Locke brilliantly captured the way the world works. Little did he know that he would also explain how the stock market works, even though it barely existed when he came up with his philosophy. The stock market is driven by “the law of fashion, civil law and divine law.”

Law of fashion

We have participated in the stock market since 1980 and we know quite a bit of the history of the prior decades. Each decade seems to have its own law of fashion. This means a “general precept established by public opinion.” It is the heart and soul of what John Kenneth Galbraith called “financial euphoria.” In the 1960s, the space race encouraged excitement about “Go-Go” growth companies. In the early 1970s, it was a group of 50 stocks (the Nifty-Fifty) which seemed to grow consistently and were rewarded in the marketplace of investors with highly fashionable price-to-earnings (P/E) multiples.

By 1981, stocks had done horribly as inflation soared and fashion surrounded businesses which benefitted from inflation. Five of the six largest cap companies were oil stocks and energy made up 29.5% of the S&P 500 Index. Oil, real estate and gold enjoyed the favor coming from the “law of fashion.”

In 1998-2000, the Dotcom Bubble controlled what was fashionable in the aftermath of the establishment of the internet, capping an amazing decade of success. Energy got back on its horse from 2000-2011, as the financial crisis boiled and China’s growth dominated what was popular.

The last decade (2011-2020) has been the FAANG Era (Facebook (FB, Financial), Amazon (AMZN, Financial), Apple (AAPL, Financial), Netflix (NFLX, Financial) and Google/Alphabet (GOOG, Financial)(GOOGL, Financial)), as the dominant tech companies have reasserted themselves in the stock market. This is under the general precept that nothing can go wrong with them and how dependent we have all become on their products.

Civil law

Occasionally, the U.S. government decides to get involved in the stock market via “civil law.” The Sherman Antitrust Act of 1890 broke up Standard Oil in the early 1900s, regulated the railroads and the telephone behemoth (AT&T (T, Financial)), sued IBM (IBM, Financial) in the 1960s, Microsoft (MSFT, Financial) in the 1990s and is preparing to go after Amazon, Google, Apple, Facebook and others. Here is the chart of IBM in the aftermath of running into “civil law” in 1969, when the Justice Department sued them and sought to break them up:

We have a rule when it comes to civil law in the stock market. When Senator Elizabeth Warren and Senator Josh Hawley agree on something, expect there to be civil law problems for the targets of their jointly held ire. Did I forget to mention Lina Khan, the head of the Federal Trade Commission, who is coming after the FAANG companies?

Divine law

To us at Smead Capital Management, there are some divine laws which govern the stock market over long time periods.

• Interest rates are like gravity to P/E ratios (Warren Buffett (Trades, Portfolio)).
• Euphoric episodes end badly (Galbraith).
• Cheap stocks outperform expensive stocks over long time periods (Benjamin Graham).
• Performance is enhanced by buying extreme pessimism (John Templeton).
• Every stock which goes up 10-fold had to double and quadruple first (Smead).
• Young people who buy stocks on borrowed money lose (Edwin Lefevre-"Reminisces of a Stock Market Operator").
• Most investors suffer stock market failure (Dalbar).

The goal of our work is to avoid getting stuck as fashion disappears. We have no urge for getting beat up by our companies suffering from civil law moving against them. We enjoy using these divine laws to run our portfolios. Thanks to John Locke, we hope to avoid stock market failure.

-- Smead Capital Management

give to the rich, give to the rich

(Bloomberg) -- Tax cuts for rich people breed inequality without providing much of a boon to anyone else, according to a study of the advanced world that could add to the case for the wealthy to bear more of the cost of the coronavirus pandemic.

The paper, by David Hope of the London School of Economics and Julian Limberg of King’s College London, found that such measures over the last 50 years only really benefited the individuals who were directly affected, and did little to promote jobs or growth.

“Policy makers shouldn’t worry that raising taxes on the rich to fund the financial costs of the pandemic will harm their economies,” Hope said in an interview.

That will be comforting news to U.K. Chancellor of the Exchequer Rishi Sunak, whose hopes of repairing the country’s virus-battered public finances may rest on his ability to increase taxes, possibly on capital gains -- a levy that might disproportionately impact higher-earning individuals.

It would also suggest the economy could weather a one-off 5% tax on wealth suggested for Britain last week by the Wealth Tax Commission, which would affect about 8 million residents.

The authors applied an analysis amalgamating a range of levies on income, capital and assets in 18 OECD countries, including the U.S. and U.K., over the past half century.

Their findings published Wednesday counter arguments, often made in the U.S., that policies which appear to disproportionately aid richer individuals eventually feed through to the rest of the economy. The timespan of the paper ends in 2015, but Hope says such an analysis would also apply to President Donald Trump’s tax cut enacted in 2017.

“Our research suggests such policies don’t deliver the sort of trickle-down effects that proponents have claimed,” Hope said.

Trump and the stock market

Trump is currently fourth (out of 14) when comparing his first term (so far) to presidents since 1932.  So far the market (SPX) has gained 58.0% since election day.

First is FDR at 137.2%.  Second is Eisenhower at 91.0%.  Third is Clinton at 70.1%.

There have been 25 terms since 1932.  Also topping Trump's 58.0% are Reagan's second term at 61.5% and Clinton's second term at 100.5%.  So Trump is currently sixth out of 25 terms.  Pretty good, but not the best.

Eyeballing the chart, I would say Clinton did that best at 70.1% and 100.5%.  And Bush (W) did the worst at -21.0% and -11.0%.  Bush was coming off the tech bubble in 2000 (Clinton's second term) and hit the financial crisis in 2008.

There were only two other negative terms: -35.0% (Roosevelt's second term) and -28.7% (Nixon's second term).

From the article,

As you can see, as of the close on Thursday (10/1) President Trump is solidly in 4th place overall versus every first-term president since 1932. At the last market top (9/2/20) he was in 4th place and has never been above 4th place when comparing him for the entire first term. He would need a gain of more than 12 percentage points over the next 32 days to move into 3rd place, and it would take a decline of more than 5 percentage points for him to fall to 5th place.

I notice that the chart uses Election Day to start counting.  I wonder how much of a difference it would make if they chose Inauguration Day as the starting point.  Especially since this year we likely won't even know the results on Electrion Day.

how is the market up?

Despite a global pandemic and double-digit unemployment in the United States, the S&P 500 stock index reached a new high yesterday.

We asked Andrew Ross Sorkin, a business columnist and founder of The Times’s DealBook newsletter, to help us understand how the market could be doing so well amid economic devastation.

As irrational as it might seem, here’s the way investors rationalize the bullish stock market to themselves (we’ll only find out whether they are right or wrong in the future):

1. The stock market is forward-looking: Investors are betting on what the world and the economy look like in 12 to 18 months from now, not what they look like today, tomorrow or this fall.

2. The big get bigger: Much of the stock market’s success has been the result of a run-up in value for a few big technology companies — including Apple, Amazon and Microsoft — that make up a large share of the index. And retailers like Walmart and Home Depot are growing in part because small businesses have closed, allowing the bigger companies to take even more market share.

3. Betting on a vaccine: Given the daily headlines about the potential for a vaccine, investors want to be invested in the market when the news comes that there is a genuine vaccine, on the assumption that it will send stocks even higher.

4. The only game in town: With the Federal Reserve planning to print money for the foreseeable future, investors don’t want to be in cash or bonds, which are steadily losing value. So where else can they put their money? The stock market has become a default.

5. Help from Washington: As dysfunctional as Congress has proved to be, investors are betting that Republicans and Democrats will find a way to keep plying the economy with stimulus. (Anecdotal stories suggest some Americans have even taken their $600 unemployment checks and invested them in the stock market.)

Of course, all of these rationalizations don’t take into account the possibility of a terrible second or third coronavirus wave, a delay in the discovery of a vaccine, a constitutional crisis come the election in November, runaway inflation, the prospect of higher taxes to pay for the stimulus, a more significant trade war with China, or the dozens of other risks that seem to be bubbling just below — and in some cases on — the surface.

In the meantime, happy trading!

-- New York Times, 8/19/20

economy forecast - 2024

The Morningstar US Market Index has come thundering back since its late March nadir and is now down merely 7% year to date, even as the coronavirus pandemic persists. While many investors are wondering if the market is exhibiting irrational exuberance, we think the rebound has been broadly warranted, as we forecast a strong long-run recovery in the U.S. economy. We expect U.S. GDP to drop 5.1% in 2020 but surge back in 2021 and experience further catch-up growth in following years. By 2024, we think U.S. GDP will recover to just 1% below our expectations before the pandemic.

a low yield story

this is not the first time that a low interest rate environment has led to a reach for yield. In the 1820s (yes, you read that right), interest rates on UK government bonds (consols) dropped significantly, and staid investors who used to be happy to live off of the coupons paid by those bonds were forced to take on more risk than they otherwise would have liked to.

In 1825, investors were so willing to suspend disbelief that a Scottish con man named Gregor MacGregor was able to sell over a billion dollars worth of bonds of a completely fictional Latin American country he called "Poyais." I would highly recommend reading the whole story, as it is a fascinating look into investor psychology as well as an entertaining tale in and of itself. This era was characterised by speculative manias and a flood of cheap credit.

Sound familiar? It seems like the more things change, the more they stay the same.

Another Great Depression?

Due to some dramatic elements, this period has been compared by many analysts to the Great Depression of the 1930s.

There are some similarities, including a scenario where a debt supercycle reaches its later stages.

However, there are also several key differences between now and then. Some better, some worse, but mainly just different.

fed cuts interest rates to near zero

(Bloomberg) -- The Federal Reserve swept into action on Sunday to save the U.S. economy from the fallout of the coronavirus, slashing its benchmark interest rate by a full percentage point to near zero and promising to boost its bond holdings by at least $700 billion.

In remarks underlining the sense of urgency, Fed Chairman Jerome Powell told a hastily assembled press briefing by telephone that the disruption to lives and businesses meant second quarter U.S. growth would probably be weak and it was hard to know how long the effects would last. That left a clear role for fiscal policy to help cushion the blow.

“The thing that fiscal policy, and really only fiscal policy can do, is reach out directly to affected industries, affected workers, and we’ve seen some of that so that’s an important job,” he said. “We do know that the virus will run its course and that the U.S. economy will resume a normal level of activity. In the meantime, the Fed will continue to use our tools to support the flow of credit.”

The Fed pulled out some of the biggest weapons in its arsenal. It’s key rate is now zero to 0.25%, matching the record low level it hit during the 2008 financial crisis and where it was held until December 2015.

The central bank also announced several other actions, including letting banks borrow from the discount window for as long as 90 days and reducing reserve requirement ratios to zero percent. In addition, it united with five other central banks to ensure dollars are available around the world via swap lines. Powell said that he did not think negative rates, which have been used in Europe and Japan, would be appropriate policy in the U.S.

President Donald Trump, who as recently as Saturday attacked the Fed for not lowering rates faster and further, quickly expressed support for the move.

Trump ‘Very Happy’

“It makes me very happy and I want to congratulate the Federal Reserve,” he said. “That’s a big step and I’m very happy they did it.”

Treasuries surged and U.S. equity futures tumbled at the start of another volatile week as investors responded to the rapidly escalating economic impact from the coronavirus and bet it will overwhelm the policy response. The Bank of Japan said it was bringing forward to Monday a meeting scheduled for later this week.

The Fed’s emergency action came as more and more evidence emerged that the U.S. economy is being hit hard by the virus. On Sunday alone, Ohio ordered all bars and restaurants closed indefinitely, Nike shuttered all its stores at least through March 27 and airlines announced drastic cuts to their international flight schedules. Businesses are instructing staff to work from home, and travel and entertainment are being particularly affected as people take steps to observe social distancing to avoid infection.

As the fallout spreads across the economy, the risk of a recession is mounting. Goldman Sachs slashed its GDP forecasts on Sunday. It’s now predicting zero growth in the first quarter and a 5% contraction in the second.

Powell, who said he planned to do some telecommuting himself to set a good work-from-home example, told reporters on the call that the rate decision Sunday is in lieu of the Fed’s regularly scheduled meeting this week, planned for Tuesday and Wednesday.

No Dot Plot

He also said that the quarterly forecasts that would have been released at that meeting had been scrapped in light of the current uncertainty caused by the virus and would probably next be updated in June.

With Sunday’s announcement, the Fed is firing some of the biggest guns in its arsenal, but economists say without a similar, forceful response from the government, the country’s record 11 year expansion could end in recession. Stocks have already tumbled into a bear market.

“The Fed had to make this move, and waiting would have been a grave mistake,” said Michael Darda, market strategist at MKM Partners. “The problem is there is a tsunami coming and the Fed is likely to be overwhelmed by it, and the markets know that.”

The Fed said it will keep interest rates near zero “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”

***

But what about your mortgage rate?