Wealth, and the only Bet that Matters

 

Bagholder’s father was a CPA. Some of his better clients were dealers in Chicago's “diamond district.” On weekends during tax season when Bag was a teen, he would travel downtown with his father to the offices of these jewelers, where his father worked on their taxes, while Bag stayed in the showroom learning about jewelry and diamonds. As a curious child with young eyes and a head for numbers, Bag soaked up every last drop of knowledge he could.  He put that to use in his early twenties, stumbling into a small chain of jewelry stores/pawnshops looking for work. Thanks to his contacts & diverse bed of knowledge, he was hired on the spot.

     Bag quickly formed a solid relationship with the company's owner (John), a relationship he still values today. What struck Bag as odd was the owner was an incredibly wise self-made man - with little or no education; in fact he could only read at maybe a third-grade level. On the other hand, Bag was as well read as any librarian. We’ve had many a philosophical discussion on the value of all the time spent reading. Bag would suggest he was blessed to have seen life through the eyes of thousands of protagonists in book after book. John would argue none of it was real, the only reality which mattered was your own life, and time was better spent there. With most of my life now in the rearview, suffice to say, we were both right.

   One of the areas where John excelled was in money management. He instilled in Bag two of the most powerful, life-changing lessons about money anyone could ask for. The first was to “live below your means.”  To him, it did not matter how much you made in a given year; you needed to live on less. The guy who makes 50k a year but lives on 45k is in much better shape financially than the guy who makes 200k but spends 250k. The second lesson was to take the extra money and put it to work, earning a 2nd income (in addition to your job). He would ask, “do you prefer one income or two?”.  Sage advice, indeed.

   One day, when walking over to a deli for lunch. John stopped, turned around, took two steps back, and bent over to pick up a penny off the ground. Bag asks, “why waste 10 seconds of our lives to pick up a penny? … if you do the math, it’s like 6 cents a minute, or $3.60 an hour, clearly not an economical use of our time”.  John responded, “it’s not about the $3.60; it’s about a respect for money and the belief that if you take care of the pennies, the dollars will manage themselves.”  That advice never sat right. As a child, and still today, Bag firmly believes if you focus on the dollars, and get those decisions right, the pennies do not matter.

  All of which brings us to the subject of today’s column; money management and growing wealth. When perusing the current investment landscape, many avenues are available for people to attempt to grow wealth.

1. There is the bond market for those with little appetite for risk. Plenty of diversified bond funds currently pay a relatively risk-free 2-4% per year.

  2. For those open to a little bit more risk, there are “value” stocks. These are real companies, with little risk to principle, paying steady dividends of 3-6% plus the potential for growth.

  3. Moving further up the risk ladder, there are “growth” stocks. Traditionally they have returned far more than value stocks, but come with a higher probability of loss of principle.

  4. Then there are those investing in Real estate, hoping to flip and/or rent out properties. Tying up capital and/or taking out a mortgage to secure properties comes with out-sized risk. Although done properly (easier said than done), it also comes with out-sized returns.

  5. At the top of the risk ladder, there is Crypto, NFT’s, or whatever the latest fad is, etc… Far and away the most risk, but also the most potential return.

   The interesting thing about these markets (Stock, Bond, Real Estate, and Crypto) is that success is measured in all of them using the same yardstick - The US dollar. Nobody ever stops to ask, what would happen to my investments if the US Dollar were to collapse? Many of you reading this are quick to proclaim that could never happen. Bagholder would ask you, in regards to a potential dollar collapse, have you observed what is looming on the horizon lately?

  We will get to that in a minute, but first, let’s begin with a bit of history as to why the dollar holds any value at all. Post world war 2, the US agreed to directly exchange the US dollar for a fixed amount of Gold.  Countries all over the world, then began shipping their gold to the US in exchange for dollars, because it is easier to both grow an economy and get a return on paper money than it is on gold. Besides, like most Ponzi scheme victims, these countries believed they could get their gold back anytime. After a couple decades of this system, along came the Vietnam war in which the US spent zillions of dollars, losing. Other countries (France in particular) looked around and rightly believed the USA was printing the dollars needed to finance the war. Consequently, one by one, other countries in the early 1970s, began calling their gold back home by sending their paper dollars back to the US.

  The dollars coming back to the US brought with it a flood of inflation and higher prices for everything, as anyone living through the 1970s can attest. It wasn’t long before the US president (Nixon) reneged on the USA’s promise to convert those dollars into gold. This should have been the end of the US dollar right there, if not for Henry Kissinger and one of the most savage political moves ever made. He went to Saudi Arabia (leader of the OPEC nations) and did what any respectable Mafia boss would do. He said, “you guys produce most of the world’s oil; we have the largest and most technologically advanced army on the planet; how about we protect you from foreign invaders (making sure the flow of oil is never interrupted) and in return you agree to ONLY sell oil in exchange for US dollars.” This was pure genius as well as the birth of the “petro-dollar.”

   This effectively stopped inflation dead in its tracks in the US by reversing the flow of dollars coming back to our shores. Other countries, who, previous to Kissinger’s move, were looking to get rid of the hot potato US dollar for anything they could, were now trying to get US dollars, needing them to buy oil. Once again, countries all over the globe were left exchanging their labor, goods, and services for US paper dollars. This is why the US is the only country on the planet that runs a trade deficit, year after year - for decades on end.

  Fast forward again to the early 2000s. Other countries looked around and again rightfully believed (just like in the early 70s) that they were giving away all their labor, goods, and services - for paper dollars - the US was simply printing as needed. The first world leader to stand up and say, “No more of this system, we are no longer going to exchange oil for dollars” was Saddam Hussein. It wasn’t long after that, the US found a pretext (terrorism) the masses could get behind, and made an example of Saddam, invading Iraq and killing him in the process.  About five years later, Muammer Ghadafi, leader of another big oil producer Libya, was undaunted by the Hussein example, and proclaimed Libya would no longer accept US dollars for oil. He was killed within weeks.

  The powers that be, here in the US, are well aware of the nightmare which awaits if the US dollar loses its “petro-dollar” status. Suddenly, all those dollars that for decades have been leaving our shores, heading to other countries so they could buy oil - will all be headed back here with nothing to do but bid up the price of anything they can get their hands on. It won’t be a flood of inflation like the 70s, where most goods & services were up 2x-5x over the decade. No, this time, it will be more like a tsunami, where prices (conservatively) rise 200x-500x. Yeah, that’s right, Bagholder is telling you that $2 loaf of bread you just bought will likely cost over $500 by the end of the decade.  Inflation in the US today is rearing its ugly head because the sentient among us are peering out at the horizon and recognizing the possibility the days of US Petro-dollar dominance are nearing an end.

  The evidence is everywhere you look. The list of nations joining the BRICs is growing by the day. Russia has openly stated, No more dollars for Oil. It is no coincidence we are now beating the drums of war against Russia. The US doesn’t give a damn about Ukraine, they are just the pretext. The thing is, Russia is not run by some 3rd rate dictator like Iraq & Libya, meaning defending the US dollar will be much more challenging this time. The recent uptick in inflation in the US is attributable to countries worldwide who are making their bets known by sending their paper dollars back here and repatriating their gold.  A strong argument can be made they are doing this because they prefer a currency that is directly exchangeable for gold - like - oh - the Chinese digital Yuan.

      So, while all you folks are deciding whether to buy that house on the corner to flip, that new growth stock you heard about on the news, or the latest crypto coin…know this, it really does not matter. Those are all penny decisions - and they mean nothing. The only bet that matters is the dollar bet. Will the US be able to maintain reserve currency status keeping the BRIC nations at bay, or will the BRIC nations band together and tell the US to take their almighty dollar and shove it?  Bagholder is betting the BRIC nations, who actually produce things the world needs and wants …. will win. After all, he who has the gold (and the BRICS do) makes the rules. This will usher in the much heard about “Great Reset.”  The bond market, stock market, and real estate market, all of which are at or near all-time highs, will be wiped out in one fell swoop as the US dollar collapses.

   Invest accordingly….. get the “dollar” bet right, and nothing else matters…..