3.5.22

Inflation II

After “printing money”, the rise in prices isn’t as direct as many economists predict. It depends on the mechanism utilized and the utility attributed to it.

Since the fall of Lehman Brothers, and now because of the Covid, a spectacular increase of the popularly phrased “money printing” has been used. In reality, there aren’t more bills circulating, but it is rather the Federal Reserve (FED) and other central banks expanding their balance with the objective of deleveraging financial entities. The idea is that since that money doesn’t affect the balance of commercial banks, it hinders a rise in prices. This mechanism was reproduced year after year in the golden age of leverage. The recommendations of the Basel Accords seem to want to level the risk of the sector. These agreements were motivated by the Financial Stability Board (FSB) and the G20 upon observing how the 2008 crisis could have, among other causes, its origin in the excessive growth of the banks’ balance sheets and the leverage of the by-products.

Returning to the topic of measuring inflation, faced with the fragility of the official data and the necessity of having accurate figures, there are private entities that try to independently calculate the data of price increases. Some are very wellknown and respected such as Shadow Government Statistics (www.shadowstats.com). This company, created in 2004 by the prestigious economist John Williams, follows a non-manipulated American CPI. As we could have guessed, this one is different from the one presented by the authorities. Another good initiative, in what would be considered the Wild West of Argentina, comes from a group of economists that in 2007 wanted to start to provide alternative price indexes, www.inflacionverdadera.com. From that point on, their work evolved together with the Massachusetts Institute of Technology (MIT), creating The Billion Prices Project and, later on, PriceStats, www.pricestats.com.

The doubt that can arise regards whether you need to estimate the value of inflation to prepare for retirement. The terrible answer is: yes, but it’s very difficult to calculate. If you aren’t aware of the evolution of inflation, you could estimate the necessary money for future expenses and “bring them to the present” in a precise and reasonable way. The explanation of the expressions “bring to the future” or “bring to the present” are related to the equivalent financial concept.

Example:

With 500 euros today, Peter can buy a certain basket of goods at his supermarket. Supposing a homogeneous inflation of 3%, while omitting the possibility of depositing money in an interestbearing account, Peter would need 515 euros to be able to buy that same basket in a year. In this context, you can say that 500 euros today is financially equivalent to 515 euros in one year.

A similar reasoning can be made by adding the possibility of investing the original amount of money in risk-free assets. Another way to demonstrate the great interest that the inflation estimate has in the field of retirement is to know the deterioration of the initial assets over time (again, independent from the profitability obtainable from them).

It’s necessary to emphasize that inflation utilizes compound interest, and the increase in a year is “mounted” on the following year and so on. This process provokes a strong multiplier effect on the initial values. We should remember the famous quote by Albert Einstein: “Compound interest is the eighth wonder of the world. He who understands it, earns it, he who doesn’t, pays it.” Thus, this implies that a minimum deviation in the estimate of inflation can signify an abysmal difference in results over the years.

It will continue

15.4.22

Inflation I


The great enemy of “living off investments” is called inflation.

In the first place, it must be made clear for the purists that it has been stepped over the deeper digressions that differ between the Consumer Price Index (CPI) and inflation. The CPI is based on calculating the price of a basket of primary goods and watching its evolution in the future. This should serve as a comparison to know how much the cost of living has gone up. However, as it normally happens when there are political interests in the mix, the official CPI data isn’t consistent. To make the number seem less, in an almost generalized way, from time to time governments change the way they calculate it and the composition of the basket of goods. Taxes, leisure expenses and self-production aren’t usually included.

It’s curious, given that the CPI is a value that doesn’t have any intrinsic meaning and is only useful for the possibility of comparing it. Constantly changing the methodology doesn’t seem the most appropriate thing to do.

The logical chain that is camouflaged by inflation is the following:

1. In the quest to remain in power, leaders spend more than what they earn, thus generating debt.

2. Raising taxes to pay this debt is unpopular, so they resort to an “invisible” tax that consists of devaluing the money so that the debt is lower, although a simultaneous loss of citizens’ purchasing power comes with it.

It isn’t easy to realize this loss of purchasing power, because the basket used in the CPI isn’t always homogeneous and closed, such that governments can manipulate the data so that their citizens aren’t aware of the theft. Somehow many people think that inflation is like a drought or the ever-rising sun, a fact of nature. And perhaps that is true, because the lust for power is natural in human beings. Nevertheless, not by any means is it inevitable, given that it is a product of tangible and provoked economic actions. In general, inflation is understood as the continuous and sustained growth of price levels in an economy. The CPI would act as an added indicator.

The formal definition of inflation, however, can be more complex and depends on different schools of economic thought. The Austrian School considers inflation directly in its origin: the issue of paper money. That is, inflation is the increase of the money supply (once again, various definitions exist on what money supply is). From this point of view, it’s not possible to have a generalized growth in prices without issuing money. Obviously, there is a consumption of goods and a creation of new goods (with possible changes in productivity), but this variation is negligible against the issuance of money.

To sum up the concept in a simpler way: inflation is the increase of the money supply and the consequence is the hike in the prices of goods. This begs the highly topical question of whether it will always be true that, as long as the money supply increases, prices will necessarily go up.

It will continue…

29.3.22

How to calculate your freelance rate

We are going to go directly to the point, as we usually do here.

A) Should we charge by project, a monthly rate, a daily rate or per hour?

There is no good or bad answer. The main focus has to be, not how you want to get paid, but how your clients feel more comfortable.

If you clearly control the amount of work you are going to need for a project, billing for a full project makes sense. In general clients love to be able to anticipate their expenses and prepare a reasonably exact budget.

If you happen to work in several projects for the same company, and you feel you can adjust the number of hours as the projects are not time critical, negotiating a monthly rate could be a great idea. The client companies are expecting some kind of discount from the per-hour rate (around 30%).

We are not sure why someone will want to bill by days. We think it is more logical to bill by hours. There are some useful apps to track the working time, such as Clockify.

B) How much should we charge per hour?

Our rate is a reflection of our value to our clients compared to the value of the competitors. Again, our preferences don’t matter. There are some webs that recommend starting the calculation with our desired salary and then divide it by… Obviously, this is all wrong.

If we want to increase our hourly rate, we need to be more professional, faster and more experienced than our competitors.

Each day we see a shift from worked hours to value added to the project. The benefit of basing our rate on value is that it’s easier to start thinking about value-based pricing methods and transitioning away from trading time for money. Value-based pricing requires a huge change in mind-set. Even if we are thinking about our hourly rate as a reflection of value, it’s still tied to time. Some authors suggest to charge by week instead of hours to force the client into thinking about added value instead of worked hours.

In any case, the hourly rate will remain as the default method of pricing our work, so we just need to check the prices around: in the countries where we work, for our expertise, for our experience…, and try to find a fair value.

18.2.22

How to build a currency basket III? Benchmarks

To continue with our approach about building a currency basket, we will try to look for different benchmarks. Perhaps, you don´t know but this question is one of the most complicated nowadays. For instance, the Central Bank of China keeps the percentage of their reserves portfolio in secret (that would be a really good benchmark!).

So let´s start with our first option: the SDR (Special Drawing Rights) designed by the IMF. They held the following: USD 42%, EUR 31%, RMB 11%, JPY 8%, and GBP 8%. There is an interesting link about the concept of a new reserve currency here.

9.1.22

How to build a currency basket? II

In the first article, we predefined a fix number of currencies (AUD, CAD, CHF, USD, and GBP), and we calculated a reasonable portfolio to hedge against EUR. In this second article we want to determine why these currencies and why we started using 20% of each one when some of them behave approximately the same. For instance, AUD and CAD have a high correlation and if we use them separately we are overweighting their importance in our basket.

14.12.21

How to build a currency basket? I

Imagine our main currency is euros. We are paid in euros and we live in a euro country. But we don´t trust our currency that much, or we are not sure where we will live in a few years, or simply to diversify our portfolio, we want to create a currency basket. Problem: which currencies and in which percentage?

First of all, we don´t want to talk about the different tools to invest in a specific currency (funds, Forex account, foreign stocks...). Here we will only show an algorithm to build a reasonable currency exposure.

20.11.21

Euro/USD forecast…


The EURUSD closed on 2021.11.19 at 1.1285.

On the charts, an old support becomes a new resistance. The key level is marked by the red pen. It has bounced there, and the new way is down. Also the movement up is NOT supported by any momentum indicator.

If we had to bet, we would see the EURUSD lower than 1.1 and eventually crossing the parity. What we don’t consider is any big strengthening in the euro for many years.

24.10.21

Turkish lira, out of control

10 years ago, we just needed 2 liras to buy 1 euro, now we need 11. What is going on with Turkey?

The old Ottoman empire is gone, and we need to accept it. It has happened to others in the past. Just remember the Spanish empire covering America, Europe and Philippines…, and see Spain now. Or the British empire, still influential but losing pace every year.

Turkey has a powerful military and has been trying to be a key piece in the Middle Eastern political turmoil, supporting one or another. Perhaps it is time to focus on itself and start sending a modern, positive message of a business oriented country with a wonderful young generation.

The currency in most cases reflects the country´s situation, but to change the macro variables and the perception abroad takes time, and meanwhile, instead of lowering interest rates that only decreases the faith in the lira, a possible solution could be the creation of a currency board. It will protect the currency but it will limit the Government mobility.

With a currency board, the exchange rate and money supply is managed by an independent money authority, which more often than not, backs the domestic currency with a basket of different foreign currencies (ideally in a proportion similar to its trading).

It has been done more or less successfully in Bulgaria in 1997 (link).

20.9.21

Bank for International Settlements

The BIS is “the Central Bank of the Central Banks”. It is based in Basel with offices in Hong Kong and Mexico. Its goal is to create monetary and financial stability. Of course, they set up the rules for the comercial bank’s leverage.

But the purpose of this post is to draw your attention to the very interesting papers you can find in its web. You will have to separate the wheat from the chaff, but, in a sense, it will help you to better understand what is happening globally.

For instance, here you can find the Global Liquidity Indicators, or you can read the interesting Annual Report, or the Research Papers.

18.8.21

To test your kids…, and yourself!



It can be nice to remember the borders and capitals of all of these countries: Kazakhstan, Uzbekistan, Tajikistan, Kyrgyzstan, Turkmenistan… 

Also how the geography affects the economics of the countries. For instance, the Turkmenistan to India gas pipe (link), also known as TAPI.

12.5.21

The importance of owning some gold

PDM, Stichting Pensioenfonds DSM Nederland (DSM Nederland Pension Fund), manages the pensions of all companies affiliated to DSM Nederland B.V.

Recently, they have decided to open their array of investments and start reducing public bonds to buy property even gold. Very interesting link here.

As we have been saying for long time, gold doesn’t behave like the rest of investments and can hedge the risk and volatility of the stock market. You can check our PORTFOLIO on the right and you will see that is what we try to accomplish.

Owning some gold is like buying insurance for the rest of the portfolio.

7.3.21

Offices, office REITs?

In general, we love REITs. It is a very convenient way of owning real estate without the hassle of dealing with tenants. However, not all of them are the same. Here you have an old list of high dividend REITs.

With the rise of on-line shopping, we tried to avoid mall REITs. We felt many malls were built and only a few became successful. Besides malls, the Covid era has accentuated another global trend: working from home. This new reality we feel is likely to linger on.

When the pandemic wanes, do you think employees are going to return to the office?

Some financial firms are requesting their workers to return to the office as soon as possible. However, others such as Twitter, Spotity, Square... are going to let telework forever. We still don’t have enough data to value the effectiveness of the employees doing their job from home. We don’t even know if the intermediate managers are well prepared to assign specific tasks with adequate duration estimates. Probably, all of us have an opinion on the matter based on our own experiences.

That been said, the most probable outcome is going to be a hybrid model. Many big corporations (Microsoft, Maersk, etc...) have publicly announced they are willing to let employees combine work at home and at the office. There are even some office models with distributed workstations all over the cities. 

In any case, office space is going to suffer the consequences of more people zooming. There are REITs that only invest in offices. We never liked them. However most of the big REITs invest a big part of their capital in offices. It is up to you to decide if it is worth it.

Remember: before buying a REIT check the portfolio they own to have a clear idea of what you are buying.

27.12.20

Ripple, BTC and regulation


In the best moments for bitcoin, we see a big drop in another promising cryptocurrency, Ripple (link). Why is that? The American authorities are investigating if Ripple can be considered a security instead of a commodity like bitcoin. If that happens, it will be kicked out of the crypto exchanges and will lose its liquidity. Its value could be much lower in a few months, despite the initial potential. We wish them the best.

This has been a “notice to airman” to sell other alt currencies and focus on bitcoin (now its volume is about 70% of the market), but it should also be a warning to see the power the legislators have over cryptos. Some people think it could be a good time to sell half of the BTC position with nice gains...

8.12.20

I don’t really know

Paul Krugman recently wrote an article in The New York Times basically advocating for high levels of National debt: Learn to Stop Worrying and Love Debt. Besides the political bias, his point was governments have managed adequately high levels of debt and “nothing” bad has happened.

The Covid crisis is going to be solved creating money and giving it away. Honestly, we are just a humble group of thinkers and don’t have all the answers. However, when we are in doubt we choose two approaches:

1. Follow the big movements. For instance, in investments, before choosing a company, we choose the sector and the country. At the end, even without considering all factors, if the sector has a solid future, geographically the area is doing better than the rest and the price you pay is decent, the investment tends to be successful.

2. Follow common earthy laws. When we see that I receive money for asking a loan, or that I have to pay interest for giving a loan, we feel something is crooked and will not end happily.

When governments can create as much money as they need with no limitation and inflation is under control, and people still trust the currency, we feel we are buying time, but something is wrong.

It is true that the time we buy can be enough. First, the worst currencies won’t be able to survive and suffer tremendously. We are seeing it today, for instance with the Turkish lira or the South African rand. But eventually the good ones will start feeling the pain as well. It is funny that the moment in history in which “size matters”, some countries are trying to go in the other direction (Brexit, independence movements in Spain...).

Highlanders moment?

28.9.20

Delaying gratification

After meeting many people who have successfully retired before 50, I found one thing in common. It's not they were amazing investors, or very lucky. Their shared characteristic was they all were able to delay enjoyment.

Some people might think this is not a virtue, and they could be right. However, to become a young retiree you have to have it. One of them said that when he was a kid, instead of going to the playground or talking between classes, he prefered to advance his homework.

Delaying enjoyment is something that can be learnt by children. It will give them more freedom because those individuals who find it difficult to delay gratification will often find it intolerable to have to put off their enjoyment.

Deferred gratification is also related to impulse control. In fact, there is a link between addictive personality and the inability to delay gratification.

Besides, it can be used to increase motivation. For instance, people on a diet can have a day off to eat junk food if they have been compromised the days before.

Last, psychologists say it's better to seize the day, which probably is right, but, again, to retire young you have to have the capacity of "seizing the day" by thinking of the future. That is a double twist!