Category: Individual & Economic Liberty

Only Gold Lowers Risk, Compared To All Other Financial Assets

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Gold clamps credit and counterparty risk down to zero!

When reviewing the benefits of owning gold, one of the factors consistently at the forefront is the fact that gold has no counterparty risk. Counterparty risk is the risk incurred by having one or more other entities (counterparties) involved in a party’s transaction, such that they may be unable to fulfil their financial obligations to the party.

In fact, gold is risk-free in terms of credit and counterparty risk. It’s a concept that is thrown around a lot in the gold community, but few actually know what it means. Although it seems obvious once you understand it, the implications are very serious. Let’s first look at counterparty risk as it relates to gold because this is the most simple example, and then we will compare this to other asset classes or forms of financial wealth.

Gold is… well, Gold!

Gold bars

Gold is the only financial asset with no counterparty or credit risk

Gold is a very dense precious metal that has a physical composition that makes it ‘gold’. If you own an ounce of gold, it is yours, just like you own a pencil. Once you own a piece of gold, nobody else has a claim on it. You probably traded something for it, or bought it with cash. But once you own it, that person with whom you traded no longer owns the gold, has control over it, and will likely forget about it.

This of course may seem all too obvious, but the power of this simple observation will become clear as we compare gold to other financial assets.

EVERY Other Financial Asset Class Has A Counterparty

For example, consider corporate bonds. If you purchase a bond from a company, you own that bond and have rights to it. However, that bond is not just recorded on your personal balance sheet as an asset, it is also concurrently on the balance sheet of the company that issued it, and it is recorded as a liability on their books.

A holder of a bond is not just an owner of the bond, but has entered into a contractual agreement with the bond issuer. Counterparty risk is the risk that the entity on the other side of the contract will not fulfill their obligations; in this case, the risk that they will not repay the bond when it is due or make the required interest payments to you, the holder.

What about government bonds, which are considered risk-free? Government bonds are usually considered risk-free because governments have the power to tax their citizens to make their bond payment obligations. Unfortunately, there are limits to this, just ask Puerto Rico.

Governments that control their own money supply are considered to be even safer, because they can just print money to cover any bond repayment shortfalls. Yet this does not remove the counterparty risk. Holders of bonds will be repaid, but Out Of Stockwith devalued currency.

What about money in banks, such as simple checking and savings accounts? Surely there is no counterparty risk here, as the money is there to be withdrawn at any time, right?

Money deposited in a bank is an asset on your personal balance sheet. But for the bank, it is recorded as a liability, because the bank must be ready to redeem any request for that money, at any time you want to withdraw it.

When a large number of customers want to withdraw their money simultaneously – known as a bank run and usually the result of panic – the bank’s reserves may not be able to cover the withdrawal amounts and the depositors’ money is at risk. Yes, there is FDIC insurance, but this is just another counterparty, and the FDIC in turn receives its money from the U.S. Treasury: another counterparty to add to the list. Furthermore, ask anyone in Cyprus who experienced a ‘bail-in’ if they still believe their deposits are completely safe in a bank!

Finally, what about cold hard cash, withdrawn and stuffed under a mattress? Isn’t this exactly the same as storing an ounce of gold? No. The Federal Reserve issues those notes, hence the words Federal Reserve Note at the top of each the bill. Therefore, the Federal Reserve Notes that are outstanding and in circulation are a line item recorded on the Federal Reserve’s balance sheet as a liability.

Since you cannot redeem a dollar for anything but another dollar, the counterparty risk is that the currency may fail completely or at least be devalued, something we have certainly witnessed consistently over the past hundred years.

Many people believe gold is a very risky financial asset when compared to traditional vehicles like stocks, bonds, savings accounts and even physical cash. Yet all of these possess counterparty risk, while outright ownership of gold has absolutely no counterparty risk. If protection against turbulent financial conditions is one of your goals, gold is the only financial asset in your portfolio that will not carry this very real and significant risk. 

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Millennialisms

piggy-bank-850607_960_720Everyone loves to hate millennials these days. They are characterized as being lazy, entitled and self-absorbed. As is sometimes the case, those stereotypes might have some sort of basis in reality, but as is almost always the case, that’s not the whole story. Laziness, entitlement and narcissism aren’t all that millennials are good for. According to some recent studies, they’re also pretty good at saving. Maybe even better than their elders.

The percentage of millennials saving more than 6% of their income has increased substantially from last year. Not only that, it has surpassed the percentage of people in the 30-49 age range saving more than 6% of their income. Many have attributed these saving habits to the fact that millennials had to watch older generations struggle through an economic recession, as they were growing up. Keeping a healthy savings account is a precaution they can take against the economic troubles that their parents and grandparents faced.

Trumps Shocking Clarity on Healthcare Reform

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Frankly, I am no fan of Donald Trump, let alone any of the other candidates from either party. But having served in healthcare industry leadership capacities early in my professional career, I have to admit to being absolutely floored by Trump’s health reform plan. What I found shocking about it is that from top to bottom, it makes so much sense.

Let’s be honest, the Affordable Care Act (aka Obamacare) has been a disastrous nightmare even to the scores of people who were originally rabid supporters. While a noble attempt at reform, many would agree that it has fallen short of even the most limited expectations. I will, however, give this landmark piece of legislation credit for fueling some much-needed debate about the plight of our broken healthcare system.

As many prognosticators originally predicted, Obamacare is on a course of implosion amid soaring costs, technology snafus, patient access barriers, high premiums and deductibles and lackluster consumer choices. The only beneficiaries of this are hospitals and pharmaceutical companies, to the tune of tens of millions of dollars.

Recently, I decided to take a look at Trump’s campaign website, albeit reluctantly and was stunned by his level-headed solutions to the current healthcare quagmire. Here are some of the key elements of what he is proposing, as well as my commentary on each of them:

Free Market Driven: Noted Harvard Professor Michael Porter penned a wonderful book a number of years ago, extolling the virtues of free market healthcare. Sadly, it fell on the deaf ears of our statist political system. Undeniably, free market competition has consistently delivered positive returns in terms of lower business costs while increasing quality outcomes. And, health care which is rapidly approaching one-quarter of our GDP, is BIG business.  Unlike the other candidates, Trump gets that.

Economic Freedom and Choice: Trump is very clear in his intention to abolish the Obamacare individual mandate if elected, a point upon which I strongly agree with hi. To me, restricting choice among consumers is simply un-American, because no one should be forced to purchase insurance. Free markets open the doors to the affordable, high-quality plans that consumers are clamoring for.  If the airline industry can figure this out – Southwest Airlines low fares and quality service have revolutionized this market – then the health care industry can too.

As an aside, I recently witnessed a moderately injured person get forced by police and paramedics into an ambulance ride to a local hospital. Despite his pleas to the contrary, there was some arcane law which mandated he had to go. Of course, he loudly proclaimed that he was without  health insurance due to the expense and that he would be a burden on society. No dice. He was physically lifted into the ambulance, and off he went.

The “Laissez Faire” Tao of Hayek

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Recently, I’ve become fascinated with the work of the Austrian/British economist Friedrich Hayek. In particular, I’m intrigued with how his views are closely aligned with a passion of mine, Taoist philosophy.

Hayek is the most prominent 20th century champion of a concept known as Spontaneous Order – the theory that systems, such as economic markets, naturally self-correct and function most efficiently when not meddled with. This essence is captured in the French term laissez faire which means ‘allowing things to take their own course without interference.’

Hayek went on to suggest that complex systems are best created not through design, planning or force, but via synergies facilitated among micro-elements that operate in accordance with a set of basic principles or rules. According to Hayek, this market-based spontaneous order allows things like prices to ebb and flow unencumbered through the process of supply and demand. This natural rhythm is the true essence of how the world works, when left alone.

Just the other day, I was reflecting on how these views can be applied to the art of governing. Amid all the rancor in the U.S. surrounding this election year, there appears to be little in the way of acknowledgment among our political candidates of the virtue of self-restraint. I would argue that good government requires a healthy dose of laissez faire restraint to allowing issues to naturally resolve themselves, a technique that has stood the test of time.

Contrary to the belief of many, Hayek concurred that certain structures and rules were necessary to enforce agreements and resolve disputes. He believed that the foundational patterns and order of a civil society naturally emerge when we, the actors, play by the rules. Furthermore, he argued that these rules, which give rise to structural markets, are not due to government planning but rather they ensue from a somewhat mysterious socio-cultural evolution that naturally brings the pieces together into a whole. In the end, Hayek and his counterpart, Adam Smith, supported this concept of spontaneous order not as a means of opposition to the government, but to argue against intrusively meddling with the economy.

#BeResponsible: Networking Challenge

Waiter Serving Food To Customers At Table In CafeThere are SO many ways to network in your city or town. Websites are all over the place helping individuals, companies, and groups find like-minded friends and colleagues to expand their network and overall spice for life!

I’ve made a list of a few options when looking for a meet-up of like-minded folks in your area.

Try out:

  • Meetup.com: This is the number one place to find all the topics/interests you can dream of! Have a passion for small, white, fluffy dogs? There’s a meet-up for that! Love underground techno music, yep other people do too, and want to meet you! Want to talk to other entrepreneurs to learn about the struggles of starting a small business? They are probably your neighbors! Sign up. You won’t regret it.
  • Reddit.com: Either you Reddit or you don’t, but I promise, once you start you can’t stop. Most towns have their own ‘sub-Reddit’. A place where you can bitch about parking violations, how people drive, and the dogs who poop in your yard. It’s also a place to find like-minded people and start a conversation!
  • Eventbrite.com: This gives you a chance to browse the latest posted events in your area and get tickets! You can also use this site if you want to start your own networking event! (pro tip: offer free food to get your first round of new comers!)
  • Facebook.com: This goes without saying. Type whatever interest, hobby, or profession that interests you in the top search bar along with your city/town and surely you’ll come up with some active groups in your area. If you don’t, maybe it’s time to build an online community to find more like-minded people!

Perhaps you use another tool? Please share your expertise in the comments section and we’ll add it to the list!

Now onto the challenge:

From now until the last day of February (29 days this year! #leapyear), try and attend ONE meetup. Check one out, expand your network. While you’re there, take a picture and post it to your Instagram. Seriously…so much reward for rewarding yourself. #BeResponsible means to grow in success in 2016. Use this challenge to take a step in the right direction.

Questions about how to find the right meet up? Ideas or tips for other networkers? Let us know: support@anthemvault.com. Best of luck and don’t forget to submit your photo to the challenge!

Is Housing a Good Investment?

Broken Picket Fence ResizeA recent Vox article has renewed the old adage that ‘housing is a good investment.’ While the author makes some salient points, this statement in general can lead some people into a trap.

Is a House an Investment or Consumption Good?

The author admits home values don’t increase much more than inflation on average, but then he tries to explain how they are still a good investment because if you own a home you can live there rent-free, which is “like a de facto dividend.” Let’s stop right there for a second.

It is a little odd to consider residing in your home as ‘paying you a dividend’ simply because you don’t have to pay rent. If I buy a car with cash, I don’t really consider the car ‘paying me a dividend’ because I do not have to rent or lease one. Yet there is a grain of truth here to untangle.

First, we need to start with a proper definition of the word investment. An investment is an asset purchased with the expectation of creating wealth, either in the form of generating income or appreciating in value. Therefore, it is not purchased for the purpose of consuming it today.

Houses are very much a consumer good, because we use them for shelter and derive a consumption benefit from them. Furthermore, the actual housing structure degrades with time and wear-and-tear, much like a car. Roofs leak, furnaces need to be replaced, and appliances break.

However, there is some truth to housing being an investment because a house is not just the physical brick and mortar structure, but also the land and property rights, which usually do not depreciate and tend to keep up with inflation.