Financial Unorthodoxy E-Book

Andreas Niederwieser

• Herausgeber: tredition
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 219

Veröffentlichungsjahr: 2023

Beschreibung

»Your financial acumen can help reprivatize our economies and have you become a force for good – no matter the scale.« Personal sovereignty and independent thought are indispensable conditions for prosperity. They require knowledge and determination on the part of the individual. Financial Unorthodoxy seeks to provide you with the information needed to realize your potential as an autonomous actor in matters of finance and applied economics. We will explore fundamental topics such as the purpose of money, the relationship of fiat money and credit, the collusion of banks and governments as well as the tenets and markers of real wealth. Since free choice demands an understanding of the options provided, you will learn about different asset classes, investment approaches, diversification, performance measures, market mechanics and the basics of stock market analysis. This book contains a mix of widely accepted theory and an interpretation of facts, which some may view as unorthodox. It constitutes a rejection of the most common commercial wisdom and intends to equip you with a set of skills that enriches your decision making.

Leseprobe

Andreas Niederwieser

Financial Unorthodoxy

Practicable Views on Money, Banking and Investing

Copyright: © 2023 Andreas Niederwieser, Graz, Austria

[email protected]

Publisher: tredition GmbH, An der Strusbek 10,

22926 Ahrensburg

Softcover 978-3-347-99685-4

Hardcover 978-3-347-99686-1

E-Book 978-3-347-99687-8

All rights reserved. No part of this publication may be reproduced, translated, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the publisher and author.

Inhalt

Cover

Titelblatt

Urheberrechte

Preface

Money, Wealth and Reality

1. Money and Banking

A brief History of Money

The Fiat System

Government Overreach and Inflation

CBDC: A Brave New Currency?

2. Wealth and Growth

Investments

Real Returns

Real Wealth and Real Responsibility

3. Risk and Reward

Asset Classes

4. Monetary Metals

The Monetary Qualities of Gold and Silver

Gold Supply

Pricing Mechanism

Investment Thesis

Investment Vehicles and Risks

5. Bank Deposits

Unsecured Loans

Investment Thesis

Risk and Reward

6. Bonds and Money Market Funds

Debt Instrument

Investment Thesis

Investment Vehicles

Risk and Reward

7. Individual Stock Portfolio

Public Companies

The Life of a Share

The Price of a Share

Investment Thesis

Risk and Reward

8. Derivatives

Stock Options

Black Scholes and the Greeks

Investment Thesis

Risk and Reward

9. Exchange Traded Funds

Basket of Assets

Types of ETFs

Investment Thesis

Risk and Reward

10. Commodities

Fundamentals of Society

Investment Vehicles

Investment Thesis

Risk and Reward

11. Bitcoin

Blockchain Technology

Investment Vehicles

Investment Thesis

Risk and Reward

12. Other Financial Investments

Real Estate

Venture Capital and Private Equity

Hedge Funds and Managed Money

Financial Insurance Products

Foreign Exchange

Betting Markets

Art

Microloans

Investing Concepts

13. Mathematics for Finance: An Applicable Selection

Overview

Compounding

Variance and Correlation

Time Series

14. Performance

Risk-Adjusted Return

Indicators

Benchmarks

A Closer Look

A Word of Caution

15. Diversification

Theory

Reality

16. Asset Price Drivers

Price versus Value

Economic Realities

Monetary Policy

Fiscal and Government Policy

Geopolitics, Public Health and Nature

Expectations and Sentiment

17. Macroeconomic Data

Overview

GDP

Employment

Money Supply, Monetary Policy and Banking System Data

Indices and Surveys

Alternatives

Equity Investing

18. Investment Approaches

Overview

Value Investing

Dividend Investing

Short Selling

Trading

Algorithmic Trading

Margin Trading

19. Fundamental Analysis

Overview

Income Statement

Balance Sheet

Cashflow Statement

Creative Accounting

Price Multiples

Valuation Methods

20. Technical Analysis

Overview

Candles

Indicators

21. Market Mechanics

US Markets and the US Dollar

Orderbook

Options and Synthetic Shares

ORTH and OTC

Index ETFs

Insider Trading

Institutional Rebalancing

Practical Considerations

22. Choosing a Broker

Fees, Commission and Spread

Tax Processing

Availability of Products

Counterparty Risk

Software and Service

Margin and Rates

23. Taxes

24. Psychology and Deceit

Fear and Greed

Tribalism

Mainstream Media

Mainstream Analysts

ESG

CEOs and Earnings Calls

Techno-Ponzi

Backtests and Infinite Gains

Physical Reality

Hubris

25. Dubious Advice and Mantras

The Market is Efficient

Time in the Markets beats Timing the Markets

Index Investing: The Holy Grail of Retirement Saving

It’s a Great Company

Stocksplits or Buybacks are Bullish

Dividends are Wasteful

Your Money in the Bank is Safe

Closing Thoughts

About me

Financial Unorthodoxy

Cover

Titelblatt

Urheberrechte

Preface

Preface

About me

Financial Unorthodoxy

Cover

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Preface

Financial Unorthodoxy is a passion project, spawned by a combination of personal circumstances and a concomitant perception of peculiar developments in recent years. As I witnessed my views on finance irreconcilably diverge from a consensus opinion, I felt increasingly compelled to consolidate them in writing. The resulting text is meant to concisely convey a fundament, upon which informed financial decisions can be based, and a worldview, which hopefully emboldens you to critically evaluate the orthodox dogma.

We shall start out by exploring the monetary system and reviewing some conceptual points about wealth and risk. Building upon an understanding of the fundamental units of account, I will subsequently present a variety of investment vehicles and contextualize their properties. The third part of this book, Investing Concepts, should impart a rudimentary toolkit for navigating the world of financial decisions. Finally, we will focus on stock market investing as it covers critical skills that apply to many areas in finance, rounded off by a few practical considerations regarding a variety of related topics.

This book blends facts and views rather nonchalantly in an attempt to exceed the sterile recitation of that which is readily available. As you progress throughout it, the chapters tend to decrease in significance, while they increase in practicability. In the footnotes you may find additional information, clarifications or general commentary. The contents of this book are designed with an international readership in mind. As a consequence, further study of your local reality is recommended.

At its core, Financial Unorthodoxy consists of an entirely unscientific enumeration of various financial concepts, which together will form a largely self-contained body of thought. This book will not touch upon any particular investment strategies, as that would contradict its principles. Instead, I wish to present you with the knowledge and interpretations you may use to arrive at your own conclusions. Managing one’s wealth is a highly personalized and private task. The increasing centralization of investment philosophies is, in my view, not only detrimental to one’s personal prosperity, but also to the living standards of large portions of society. I would like to see competence returned to the individual and I hope this book may contribute toward that goal.

Money, Wealth and Reality

1. Money and Banking

A brief History of Money

The impetus for money is a desire to justly exchange something of value with other members of society. The original, yet comparatively inefficient, practices of bartering evolved into a monetary system as certain items used in trade became universally interchangeable representations of value in the economy. Any such item must simultaneously serve as a medium of exchange, a unit of account and a store of value. These attributes enable a monetary object to confer upon its holder the benefits of transferring the labor of the present to consumption in the future. They allow for a streamlined allocation of resources and a shared understanding of value among cultures.

Throughout history different objects were used as money. Societies will naturally tend towards usage of the optimal monetary object given their environment and technology, whether it be rare shells on their island or fancy crystals in their rivers. As early as 5000 years ago, gold and silver had established themselves as the predominant objects used in trade. The metal based monetary system was first formalized in the 7th century BC through the mintage of coins of various denominations in the Mediterranean1.

The first banknote was printed only in the 17th century AD2 and represented a paper claim to the denominated weight in gold or silver, stored with the issuer of the promissory note. Merchants were incentivized to exchange their precious metal coins for banknotes as these streamlined trading transactions3. However, the paper money system exposed the holder of the banknote to the counterparty risks associated with the prudence of the bank, who promised that it possessed the metals for which it had underwritten these notes.

The Fiat System

The concept of fiat4 money, upon which the modern financial system rests, was finalized during the socalled Bretton Woods II agreement in 1971. Therein, the United States decided to depeg its currency, the US Dollar, from gold for good. Today, neither the Euro, the Yen, the Pound Sterling5 nor any other major currency is backed by anything, but the debt which it represents, the governments which require its usage and the militaries which enforce any such rule. The fiat money system allows for the unlimited expansion of the money supply through the fractional reserve banking system and direct central bank interventions.

Banks have a license to create money by taking in deposits and lending against them, subject to a reserve requirement. That is, for every unit of money that a bank customer deposits, the bank can lend out roughly 1/reserve requirement6 units. The money, which the bank lends out, had not existed prior to the initialization of this accounting transaction. The recipient of the newly created currency, say the seller of an apartment, thus receives somebody else’s debt and calls it his money. The money supply grows through the creation of debt and prices in the economy adjust accordingly.

Central banks can create new currency as they please, by buying assets on the open market withfreshly printed money. Additionally, they have direct control of the risk-free interest rate, a lower bound upon which most risk assets are priced. This interest rate in turn alters the demand for credit and thereby the rate of growth of the money supply. A low interest rate environment stimulates demand for loans as they become relatively cheap, consequently increasing asset prices and the amount of money in circulation.

Should you desire to exchange your money at your respective central bank today, they would simply return that note back to you. The long-term value proposition of any such currency is meager and can be visualized by comparing the purchasing power of a unit in the past, with that of one today, against any good or service of your choosing. Any acquisition will require a larger quantity of money as time progresses and this is in spite of efficiency gains, which will have driven real prices down. Fiat currencies are debt-instruments and calling them money is rather misleading, but, for the sake of readability, I shall continue to refer to them as such.

Government Overreach and Inflation

Inflation is classically defined as an increase in the quantity of money. Inflation is a government policy! Its consequences are felt when prices rise and the currency holders’ purchasing power decreases. This direct result of inflationary policies is usually estimated via consumer price indices which aim to measure the rise in prices of consumer goods, or equivalently, the loss of value of the currency as a result of its dilution.

An increase in the money supply in a fiat-based system is caused by bank lending and central bank printing, commonly executed through the purchase of various types of debt instruments. Inflating the currency allows governments to spend excessively and to centralize the economy without taxing its citizens outright. Inflation harms savers in particular, who will lose wealth in real terms when the rate of price increases exceeds the return on their savings. The consequences of this fact are dire: frugality and investment are sacrificed for reckless consumption and stunted growth.

The common scheme deployed by governments involves central banks, which are governed by unelected officials, buying government debt with freshly printed money. This happens all over the world, yet Japan is the poster child of such policies. The Bank of Japan owns more than half of all of Japan’s federal debt in 2023. The private banks, which are regulated by their respective central banks, are happy to oblige, because they retain the right to levy a special tax through their own money creation privileges: They enjoy the benefits of leveraging the spread of the interest rates paid to their depositors versus that which they demand for loans of their debtors. The public accepts this for it is either unaware or benefiting7.

The excessive creation of money destabilizes the economy. It distorts money’s function as a unit of account and a store of value. It leads to social unrest when people start to notice its impact in the form of price increases. An inflationary policy used to finance fiscal deficits allows governments to crowd out the private sector, centralize power, interfere with markets and increasingly encroach on financial liberties. Paper and digital money get debased by excessive creation and die when people wake up to that reality. Every currency of this nature has eventually suffered such a fate. In fact, given the relatively recent invention8 of the fractional-reserve, fiat system, we are currently running the most unhinged experiment of this kind to date.

Most central banks officially target a 2% annual inflation rate as measured by a consumer price index of their own design. We should expect any index of this sort to approach the lower bound of what one may reasonably consider the increase in prices to be for an average consumer, since the government is incentivized to maximize the opacity of their theft9. Yet this rate, which remains undisputed as appropriate by central bankers and many experts, will half your purchasing power in only about 35 years. In fact, this loss is expedited by chronic underestimation of the actual price level growth, which for most developed countries will run closer to 5% per year.

Some economists argue that inflation is desirable and even necessary because it stimulates the economy and incentivizes spending. In a constant money supply economy, prices would fall as technology improves for the same level of demand. Put differently, as we get better at producing goods, prices will go down if an increase in the supply of money does not offset it. Given this scenario, some experts claim that people would stop spending in hopes of even lower prices in the future. This conjecture requires the belief that people would delay essential consumption indefinitely and that they prefer consumption over investment as a principle – a view which I do not share. Deflation, or the reduction in debt outstanding, is dangerous to our financial system primarily because of the toppled pyramid10 of leveraged fiatclaims, that is in need of exponentially11 expanding credit to sustain itself.

Central banks’ QE12 money-printing policies, alongside interest rate controls, which purposefully seek to distort and suppress free market functions, are a man-made disease which nibbles away at the fabric of a free, hopeful and fair society. It is also not new, albeit the availability of tools to steal from the frugal has never been more copious. The Roman Empire, for instance, inflated its currency by continuously decreasing the precious metals content of its coins throughout its later days. If only they had known, that the modern people would come to be appeased by no content at all – at least for a while.

CBDC: A Brave New Currency?

Central Bank Digital Currencies are the money of our dystopian future. Every major central bank is currently developing this improved currency system, which promises increased efficiency, lower costs and better transparency. Nigeria, with its eNaira, has been the first major country to release a CBDC, with the eEuro and eUSD likely to follow in the coming years. While some of the arguments for their introduction may hold true, they pose a significant risk to our liberties, as I see it.

Firstly, these currencies will not merely be a digital13 version of the existing one, but really an entirely new monetary system. Therein lies one of the main appeals for governments: the CBDC may reset the debt system. Some contrarian analysts expect that the CBDCs will be introduced in times of severe crisis, hailed as the new anchor of the system and distributed generously among the poor to increase adoption. They may then set a limit of the amount of money you will be able to transfer from the old currency, say the Euro, to the new one, the eEuro. Transfers of large quantities of cash between the currencies may remain gated at first and entirely abolished later on. As time passes the value of the old currency depreciates and so too will the liabilities of governments, who are debtors in the old, but not the new system. Thus, a debt reset has been achieved and the creditors as well as cash holders fitted the bill – a beautiful solution in the eyes of many governments, which are already on an entirely unsustainable fiscal path.

Secondly, as time goes on, CBDCs can be used to serve the appetite of an increasingly authoritarian political mindset. In essence, the only functional difference between your digital money today and a CBDC of tomorrow is that the CBDC is under direct control and supervision of your respective central bank. That means, that they could conceivably set negative interest rates, individualized interest rates, they could make your money timeout so that you are required to spend it within a certain time limit, they could bar you from buying certain products, which they do not want you to own or from shopping at certain locations that they may deem too inefficient. Such restrictions may be the result of an already observable trend towards increasingly restrictive, ideologically driven policies, such as those relating to climate or public health. In short, CBDCs are akin to social credit systems and we should resist them if we can.

The introduction of the more sinister, restrictive properties of CBDCs will likely be gradual. The infrastructure will be in place to permit such incisions. Unfortunately, general public attitudes do not strike me as particularly oppositional, so we should anticipate their eventual implementation. This currency system is a tool of control and I assume that we are not positioned to fend it off, as too many people depend on the state for support or survival14. I do believe that, if this system is established, the old currency devalued and cash eradicated we will see a black market that transacts in gold and silver among other valuables. In a CBDC system, for instance, there would be no room for untaxed, illicit labor or private, anonymous gifts.

I am not overly optimistic about our odds of avoiding the introduction of CBDCs in the coming years, however, I have hope that we will eventually overcome them. If this plays out anything like I describe, it should prove a poor strategy to hold large quantities of currency, debt instruments and ideologically despised assets before the transition. Valuables and skills that allow participation in a potential blackmarket economy might prove essential.

1 The legal adoption of money changes little about its effective utility.

2 This is true for Europe, the first paper money existed in China already in the 11th century.

3 Banknotes did not require weighing with calibrated scales, were lighter to transport and more precise.

4 The latin term fiat loosely translates to let it be done, which is an expression of authoritative intent. In the context of currencies, it implies that the money has value because the state says it does.

5 Read: one pound of silver pennies.

6 Assuming the requirement denotes a value in the interval (0,1] such as 0.14. Other definitions may also be in use.

7 Direct dependencies on the state such as public pensions, social security schemes or government employment may be a key contributor alongside perhaps a lack of awareness.

8 One could say that a ledger system used in trade is similar to a fractional reserve system, however, this is a deal struck based on trust between two, private parties, not the state and its dependent citizens.

9 This holds true even in practical terms as many governments offer debt instruments and pension payments which are linked to these price indices, thus directly decreasing their costs by understating them.

10 Refer to Exter’s Pyramid.

11 Refer to a long-term chart of USD M2 or a money supply metric of your currency.

12 Read: Quantitative Easing, which is a euphemism for market manipulation and money printing.

13 We evidently already use digital money and the real innovation of this system is the Central Bank (CB) part and not the Digital Currency (DC) one. Monetary policy will be executed directly in your savings account rather than through the manipulation of interest rates and open market money printing. This in theory makes banks obsolete, but I am sure they will find a purpose in the assessment of credit worthiness for them after some consolidation.

14 Many (western) countries sport government spending levels that exceed 50% of their yearly economic output as measured by GDP.

2. Wealth and Growth

Investments

Any investment is characterized by the investor’s willingness to defer momentary consumption in hopes of increasing his capacity to consume through the success of the investment, while risking some or all of the means deployed. An investment of capital or labor is the source of real economic growth, which raises the living standard for society at large.

There are countless actions one could consider an investment, even in everyday life. In this book, however, I will only examine such cases where cashequivalent assets are being allocated to commonly available investment vehicles. This stricter scope makes it easier to see that the viability of any investment depends, at the very least, on your preference for consumption now versus later, your outlook on the cost of consumption in the future, the expected return on your investment and its volatility, its liquidity and duration as well as risks associated with the investment vehicle, the macro environment and the relative outperformance of alternatives. We shall explore many of these variables as they apply to the various asset classes in the coming chapters.

Real Returns

A real return on your investment portfolio is one, where the return of your portfolio over your lifetime will have exceeded the average weighted price increase of your total realized consumption. On a more wieldy, yearly basis you want your return to be greater than the rate of inflation as approximated by the growth of your personal spending costs or alternatively, a consumer price index. If you continuously achieve this, you might be getting wealthier. Might?

Tail-risks are the crux of your lifetime wealth journey. There are many general risks of life such as war, social and political turmoil, personal health problems or natural disasters. Among the financial threats are currency collapse, liquidity or solvency crises, institutional failures and an unfavorable reorganization of the financial and/or monetary system. As unlikely as they may be, their consequences can be dire, for they tend to accompany social and moral dereliction. Throughout this book I will present assets that one may use to hedge against perceived risks. A balance needs to be struck between insuring that which you already have and risking capital for outsized, real returns.

Real Wealth and Real Responsibility