Of Dollars and Currencies
Why money isn't money and how the average investor always gets killed in the markets
We live in interesting times. A while back, I wrote about the possibility of the Fed raising rates, "Will the Fed Raise Rates, and What Will It Mean For You?" At the time, many people disagreed that the Fed would raise rates. They were wrong. The Fed did so last week in a unanimous decision based on a growing job market and an increased inflation.
In the article I wrote back in August, I wrote about an example of the possible outcomes from a rate hike given by "The Wall Street Journal's" Spencer Jakab. He wrote, "…a recent paper co-authored by a Fed economist warned of the possibility of 'run-like behavior' in such funds when rates eventually rise." The "such funds" were "funds owning stocks or bonds offering at least a little bit of yield."
Bye, buy bonds
I also wrote about how the average investor always gets hurt in times like these because they do not know how to read the signs of the times. The rich, on the other hand, know how to read them and move their money accordingly. As Jakab predicted back in August, the bond market is getting wasted after the Fed announcement.
As Min Zeng and Christopher Whittall write for "Morningstar," "Between the election day and this past Wednesday, the global bond selloff has wiped out $1.45 trillion in market value from the Bloomberg Barclays Global Treasury index, which tracks government bonds in both developed and developing countries…The Fed announced Wednesday afternoon it is raising short-term interest rates for the second time since 2006. While the decision is widely expected, what spooked bond investors is that the Fed had previously projected three rate increases for 2017, compared with two from its September policy meeting. Higher interest rates from the central bank tend to shrink the value of outstanding bonds."
Translation: a lot of average investors are getting decimated.
It's a good time to write a reminder on something that can change the way you look at the world of money.
Money is no longer money
Most people think of dollars as money, but the reality is that it is not. An amusing way of looking at this is to realize you can buy $10,000 in cash from The US Bureau of Engraving and Printing for only $45. The catch is that they're shredded.
More seriously, since Nixon took the dollar off the gold standard in 1971, it is no longer money. Before 1971, there was a relationship between a dollar and how much gold was backing that dollar in the US treasury. After 1971, that dollar was not backed by anything other than the full faith and credit of the United States government.
Dollars as currencies
Today, the dollar is a currency. It can go up and down in value depending on how other currencies are performing and based on many economic conditions. It is tied to nothing and can move in either direction very quickly. And right now, the dollar is rising and expected to continue doing so.
So, what does it mean that the dollar is a currency? I find it helpful to talk about electrical currencies. An electric currency carries electricity from one place to another. In order to survive, a currency must be moving. Once it stops, it dies.
Similarly, the dollar as a currency is simply a vehicle to move wealth from one area to another. For instance, smart investors who saw the rout in the bond marketing coming most likely moved their wealth from bonds to another sector that stood to benefit from higher interest rates and a rising dollar.
The secret to building wealth
And that is the secret the rich know about building wealth. You can never get comfortable and you can never park your wealth and forget about it. You must always be learning and always be moving your wealth to where it will grow. Once you see that area is in danger of falling, you look at the trends, determine the next area of growth in the economy, and move your money there.
An example of this is Ken McElroy and I investing in apartment buildings during the high point of the great recession. Though it was difficult to get people to move their wealth into these investments (the fear made them want to sit on their cash), the smart people saw a ripe opportunity to pick up cash-flowing properties at rock-bottom prices. Seven years later, we're selling those investments at multiples of what we paid for them, and all the while we enjoyed positive cash flow from their operations.
Increase your financial intelligence, continually
Of course, this takes a high level of financial intelligence. It means reading about money, how it works, and what is happening to it in the global economy-on a daily basis.
As an investor and entrepreneur, I never rest on my laurels. Like an athlete, I'm always in training. In fact, if I don't keep training, when it comes time to take the playing field, I stand a significant chance of getting injured or getting beat.
As we head into the New Year, now is that time to make your own resolution to start a financial training regimen that you can commit to day in and out. By doing so, you'll be able to grow into the rich mindset that sets excellent investors apart from average ones…and have a much more secure financial future.