A few months ago, I sat across from a woman, Natalia, who I had negotiated a deal and was signing her side of the paperwork diligently with intense focus. “Where are you from?” I asked, as her accent sounded as if she was from an Eastern part of the world.
The Soviet Un … well, it’s Russia now,” she reluctantly laughed as she answered.
“Oh wow, that’s awesome,” I started. “The Allies would have never won World War II had it not been for Russia. Russians took the major pain in fighting against the Nazis and it’s sad that they get little credit for it.”
Natalia stopped writing immediately and her assiduous attention to the paper work immediately changed into a stunned look as she leaned back in her chair. “I’ve never met an American who knew that.” I could see the truth written in her facial expression; she immediately began sharing details about her family and her grandfather who had survived World War II. He had lived through World War II – a war which annihilated the lives of over 10 million Russian young men. He had also lived through the Soviet Era, known for its oppression and famines, and managed to survive the harsh Siberian winters. He was over 100 now. Natalia then said something fascinating, “My grandfather actually lost both of his eyes and one of his arms during World War II.” I showed surprise and she continued, “Yeah, he’s still living today and he’s made it all this time without both of his eyes and one of his arms. Sometimes, when I think life is hard, I close both of my eyes, put one arm behind my back, and try to do things for a few minutes.” She laughed and slowly smiled, “It helps remind me that I have nothing to complain about.”
What a beautiful story.
You live a great life and you live in a great time to be alive. As Thomas Sowell points out all the time, we live richer lives than the Roman Emporers, who had the most power for their time. We can cook food in a microwave and have it ready in seconds. We can use virtual reality to experience a vacation in a land we’ve never traveled. We can print items that it took years to manufacture at one point with 3D printing. The Roman Emporers had none of this; even both of my grandfathers grew up in a time where if they wanted to travel to another close city, it would take all day – and maybe longer – even though a modern trip might only take two or three hours.
Knowing that we live in a great reality does not mean that we deny that dark times are growing around us, especially economically dark times. It does mean appreciating the wealth we continue to have, while preparing for what lies ahead of us. We didn’t write this book to promote hopelessness or to convince you to adopt an I’ve lost mindset – both of which are ubiquitous in books today. We wrote this short book to show you solutions to the future problems so that you can choose the route you want to go. If you’re unaware of the future problems, we’ll briefly explain it, but we don’t want to spend a lot of time covering this, as most people already know and have heard hundreds of times.
Negative real returns have existed in the past, though negative rates, or NIRP – an acronym that stands for Negative Interest Rate Policy, is new. In reality, NIRP explicitly reveals a negative return to investors without a disguised cover, like the below example. In the past, a negative return looked like the following:
7% annual return (bond), 8% annual inflation, -1% real return
In other words, if a bond yield on a 10 year treasury note paid below the amount of inflation, an investor would receive a negative return. The same is true if the investor’s overall stock returns were also less than inflation – though in this case financial advisers generally assume this doesn’t happen. There are several other ways to enforce negative rates, such as helicopter money, which are designed to push up the price of certain items, such as homes, while increasing income below the level of these prices. These policies – while not directly negative – are ultimately designed to take money from the average person and pass an invisible tax. The recent healthcare law in the United States – the affordable healthcare act – is a direct example of this; it was intentionally designed to tax producers more so that the government paid less on bankruptcies in the industry. In general, these type of negative returns are never discussed in media and seldom noticed, but it’s important to note that they do exist.
With some negative returns that are as clear as daylight, we see the following in parts of the world:
-1% annual return, 4.3% inflation, -5.3% real return
The -1% return represents a bond yield of negative interest rates. The above inflation measurement is from FinTekNeeks, a personal finance site we write. We measure inflation using a combination of techniques, one of which the past Federal Reserve under Paul Volcker used (ie: including asset bubbles along with prices of goods). For instance, when the price of homes rise, most people who own homes think “Great!” even though what they’re seeing is asset price inflation. The effect of this has been obvious: by pricing out a large demographic of Americans, the result of this is that they’ve lowered expectations and this has impacted other areas of the economy. In other words, your home might be rising in value, but other things aren’t. This is just an example of how we look at inflation differently than the current Federal Reserve and it shows a picture of negative returns.
People around the world are purchasing bonds that are paying a negative return on the bond themselves; two recent examples this past year were bonds from Switzerland and Germany, and these were hardly the only two places. Combine the negative return with inflation and what we see is a significant decline in people’s standard of living, which has led many people to frustration even if they don’t know why they’re frustrated. Without spending time explaining all details of this, what we’re seeing globally is people becoming poorer without clear understanding of what’s causing it and with more options to receive a real return being limited. We set out to write this action-oriented book to show you how you could get positive returns in a negative rate environment.
In this book, you will learn:
We also cut the fat from this book by honing in on the actions that will make the difference in your success. Some of you may have heard of the 80-20 rule, which is that most results happen from 20% of the actions we take, not the other 80%. Rather than fill a book with stories, which you may not relate to or understand, we highlight the actions to take with winning techniques for each of those actions that will help you obtain results faster. Again, we stress that you should avoid trying everything at first as it spreads your focus thin, but as you master one area, you can move into other areas and it will be easy for you to see how the lessons you learned in one challenge are similar to the lessons you’ll learn in another challenge (integrated learning).