With the rapid rise in value of the crypto market to more US$500 billion as of December 2017, many are calling cryptocurrencies a bubble simply by looking at the chart that shows prices rising substantially. However, it is important to understand that a bubble cannot be determined with reference to a steep rise in price. Rather, there is a bubble if the price is greater than the intrinsic value of the asset, and cryptos, I will argue, do have very high potential intrinsic value.
Many people tell me that they love their job, so they don’t want to save up any money. They are happy to spend everything they earn.
When I started working, I noticed that many people had this attitude. They said they loved working and they envisaged themselves working for the rest of their lives. With this carefree attitude, they took on mortgages, got married, and had multiple children. They assumed that their salary would be there forever, so they behaved as if this were the case.
Then the organization I worked for announced that, due to the 2009 global financial crisis, there would be job cuts. A spill and fill was performed and about 40% of people lost their jobs, and many of the people who lost jobs had huge mortgage debts and multiple children.
I don’t know what happened to everyone who got fired. Many of them were old, which makes it less likely for them to find another job. Some were able to get other jobs, but they mainly just grabbed onto whatever they could find because they were desperate for some income to feed their children and pay for whatever obligations they had.
I remember when I started working. I was enthusiastic and passionate. I had just finished university and was entering the workforce for the first time. I thought I would work forever as well.
After the restructure, I realized then that even thought I started off loving my job, the downturn in the economy forced management to fire people, and the working environment became toxic as a result.
Things change, and you must be prepared for change.
Your circumstances today will not necessarily apply tomorrow. The only constant is change.
This is why having money saved up is important. If you have enough money saved up, you can live off your investments forever and never need to worry about working. This is why you must live off dividends.
It was after this painful incident that I realized that I needed to save up and invest. About six years later, I am still working at this organization, and the horrors of the past have been forgotten, and people are once again telling me that everything is fine, the economy is great, that I should get a mortgage, buy a sports car, etc.
But I know from experience that things can change quickly.
This is why you must save money. You must be prepared for change.
The recent volatility in stock markets has gotten me worried. Everyone keeps telling me to relax because “economic fundamentals are sound,” but when I ask them to explain how this is true, it’s revealed that they don’t really know what they’re talking about. It seems that most people just hope for the best and rationalize away bad news.
The Chinese stock market is certainly wobbly. Some say the Chinese economy is very healthy. After all, they have low debt and a massive foreign exchange reserve. They are the biggest lender nation in the world with the USA the biggest creditor nation. However, we don’t really know much about the true size of China’s debt because there is significant activity in the underground economy that is not transparent, and I’m not too confident in official figures provided by the Chinese government. Of course, China has been manufacturing products from t-shirts to smartphones, but the government has in recent years been intervening in the economy to prop up the stock and property markets. It’s uncertain whether these distortions can be held together by the government or whether the market will eventually strike back.
America has resorted to printing money, which has resulted in surges in the stock and bond markets. However, unemployment is still high and wage growth is low. Printing money doesn’t seem to have done anything other than make the holders of stocks and bonds wealthy (these are mostly wealthy people anyway).
In Australia, our economy used to be dominated by two sectors: the banks and the miners. The miners dug resources from the ground and shipped them to China. China makes goods and ships them to US consumer who buys these goods.
But the American consumer (or consumers from any other developed country) is not buying as much as they did before the GFC. This means China is slowing down, the price of resources is dropping, and the mining sector in Australia is getting crushed. We only have the banks left, and how do they make money? The balance sheets of Australian banks is mostly in loans to consumers who buy real estate. Real estate prices have been going up thanks to profits from mining. In other words, banks do well because house prices have been sustained by profits from the resources sector. Now that mining is dead, what will sustain us? Where are our strong fundamentals? House prices only go up with people buy houses, but to buy houses you need to make money in the first place. You can’t make money from houses without putting money into it in the first place.
Many who have bought stocks have made great wealth from quantitative easing, but now that tears are emerging in a bubbling world economy held together by printed money, it’s time to look at investing in gold.
Gold tends to shoot up significantly when stocks tumble, and when stocks go down, gold tends to go sideways or go up anyway, so there doesn’t seem to be any downside to investing in gold.
Personally, I will be buying this shiny metal from now on.