I’m interested in Macro economics. I’ve moved away from thinking about markets in determinate terms and more toward thinking of markets in behavioral terms. Deterministic markets are the ones upon which FIRE meme’s are built. Save 25x, leverage to greater than 4% return live off that for 30 years… Burma Shave. Save 25 x, leverage to 8% live 45 years… Burma Shave. The meme absolutely relies on a robust growing GDP over decades. In my research I stumbled across a S&P 500 return calculator. The Calculator calculates S&P returns bot nominal (without inflation factored) and real (with inflation factored) for a selectable time period.

S&P 500 return inflation adjusted since Dec 1999 (peak of the .com bubble aka beginning of tech wreck)

So the S&P over the last 21 years has returned 4.789% real. Slightly greater than the 4% leverage on a 30 year retirement, Winner Winner Chicken Dinner right? What if you’re leveraged for 45 years?

I next calculated from Oct 2007 (peak of the housing bubble) to Apr 2021 in real terms:

So in the last 14 years the S%P has returned 7.806% real. Oh Baby Oh Baby what’s the problem? We be reelin’ in the dough, stowin’ away the thyme!

The government controls money in 3 ways.

- Taxation
- Inflation
- Debasement

Most of the period between 2007 and today was under a relaxed Tax regimen. Inflation is important to a government because a non inflating economy is one that is contracting. Inflating economies encourage money spending, which boost GDP BUT money spending does not mean value expansion. A $5 loaf of bread is the same “value” as a 50 cent loaf. It provides your family equivalent # of calories. Inflation makes you want to buy that bread today before it goes to $6, and another unit of bread sold is + for GDP (which is in the toilet). Inflation taxes saving. Deflation OTOH causes saving. The 50 cent loaf may go to 40 cents so you wait till the last second to buy it hoping to save a dime. Deflation encourages saving and taxes spending.

Yea Yea Econ 101 right? What about debasement? Debasement is not inflation. It’s something separate. Ever wonder how the market could go back up so quickly while the economy was in the tank? The answer is debasement. The answer is in our reported numbers we missed a variable. Debasement is a divisor. I’m a Real Vision subscriber and was watching a video by Raul Pal and saw these charts:

This is a chart of the “dollar”. It’s essentially flat with a mean about .96 cents. The “dollar” is a ratio against other fiat currencies What that means everybody is debasing so relatively speaking against the world the dollar is stable and range bound. Bonds are similar. If interest goes too high say 2% the FED will force curve controls because the debt is so massive it can’t be refinanced at 3%, If rates go lower the government will simply print more money and turn it into debt so bonds are range bound and real rates are between basically zero and negative. IMHO bonds are dead as an investment. If you hold 40% bonds, your 40% is loosing money on a real basis. The government wants you to spend money. If you won’t buy bread, they will make it so your savings yield negative on a real basis. This means you loan them $100 and they send you $95 instead of $105 back in return. You effective get your pocket picked, which in some sense is spending money on a P&L sheet. Cash is the same or even worse.

So what about stocks?

This is a chart of the S&P 500 divided by the size of the FED balance sheet (FBS). The value of the FED balance sheet is the missing denominator. Since 2008 the FED has expanded the balance sheet and the ratio has essentially remained constant. You “think” the S&P is growing at 7.806% but in fact your 7.806% is being equally debased by the debt expansion (programs like QE and free money). If you aren’t making any money (flat curve) and you’re yanking 4%/yr out you’re going down. Gold/FBS is flat. Real Estate/FBS is flat. Commodities/FBS is flat. 2 asset classes have + growth crypto and QQQ.

Debasement represents a risk not counted in the FIRE meme. Inflation is barely counted as is SOR. The market is not roaring if the right hand giveth and the left taketh away. I own Q’s and I own crypto and I own cash. Using Q’s and crypto and cash you can balance the risk to give you net + growth. I also own creative destruction. I’m 69 and have at most 15 years left so my desire to “invest” is limited. I need enough money to deliver me into the grave and then leave my wife enough to carry her through. I’ve paid all my taxes on my fortune and hold my risk assets in Roth accounts except for a single IRA of about 400K which I treat as an annuity. I do owe taxes on crypto but I’m deep enough that it’s mostly LTCG. so as best I can I’ve minimized my tax relationship with ol’ Sammy. So that covers taxes. I own Q’s and crypto which covers debasement. I can’t see a case for inflation with 16M unemployed, technology, globalization and the fact the FBS is debasing at the rate of growth and geezers like me are retiring, in fact everybody is retiring. The baby boomer motor is broken. I read an article the help wanted signs are out but no one is responding. When rent is free and checks come in the mail not much incentive to show up to push the pencil or load the truck.

My analysis may be completely wrong, but you gotta ask yourself why are Gates and Buffet selling stock? Both subscribe to buy low, sell high. If they are selling….

Addendum: I was asked a Q how BTC covers debasement, a picture is worth a thousand words:

Compare this curve to the one above which compares the S&P to the FBS. Remember the chart graphs a ratio (actually the first derivative) of X/FBS where X is the asset class in question. The denominators are the same. This graph therefore gives you a relative way to judge rate of change of various assets. When X/FBS = 0 there is no growth. When X/FBS is – there is loss. When X/FBS is + there is growth and BTC/FBS shows not just growth but exponential growth. This is why a tiny bit of BTC covers a lot of debasement.

Hi Gasem. Curious how exactly owning Q’s and crypto is covering debasement. Thanks.

Derek

I added an addendum above which includes a graph of BTC/FBS so just compare the graph of BTC/FBS and S&P/FBS