11 Insights from Man vs Money – Everyday Economics Explained by Stewart Cowley
Stewart Cowley’s book Man vs. Money is written with the hopes that readers will learn and get interested in subjects regarding money.
I read it in 2 days, and I learned some pretty interesting things.
I’m going to share with you 11 insights from the book!
#1 Insight – Economic Theories Explained with A Dog, Cat, Winnie-The-Pooh and a Bearded Guy
If you didn’t take economics in school or have no idea about the subject, he summarizes the major economic theories as follow with a dog, cat, Winnie-The-Pooh and a bearded guy:
A Dog (classical economics) – If Governments and labor unions stays out of the way, Supply and Demand will take care of everything. Prices will adjust so that they will be higher when demand is high, and lower when demand is low. Economics is naturally balanced when left alone.
Cat (neo-classical economics) – Everyone is a rational business person out to make money, and so if we government and labor unions stay out of it, everything will balance out as it should naturally.
Winnie-The-Pooh (John Maynard Kynes) – people and money are irrational, and need Governments to equalize and promote interconnectedness between nations.
The Bearded Guy (Karl Marx) – property owners and the rich would destroy themselves be getting into too much debt, and since the workers weren’t getting paid enough, they also get into too much debt. So workers should unite and take over the factories and lands.
#2 Insight – GDP (Gross Domestic Product) is Important in the U.S. and Rejected in China
The U.S. spends a lot of time calculating the impossible, how much total goods and services we sell in a year.
We call this GDP or Gross National Product.
China doesn’t use GDP because it’s impossible to calculate exactly.
The U.S. does it’s best to calculate it and then figure out how the country is doing. Then they create policies around it.
The problem is selling lots of stuff doesn’t tell you about how this is affecting the environment, or if people are happy.
#3 Insight – Bonds Are Not Safe (Unless You Hold Them To Maturity)
BONDS
The bond market is much bigger than the stock market and is based on government debt. We lend the government money and they promise to pay it back with interest in a bond.
The bond market in the U.S. increased 50% ($15 Trillion) in the 6 years following the financial crisis of 2008. This was because interest rates were slashed to zero, and bonds, even though they didn’t pay much (2%?), paid more than savings accounts.
There is a mathematical formula governing bond prices, which if you really want to see it you can google –
When interest rates (yield) go up, the price of a bond goes down.
When interest rates (yield) go down, the price of bonds go up.
By interest rate, we mean the one set by the Federal Reserve and reflected in savings accounts (not bond interest rates).
So, if you just hold a bond and cash it out when it matures, this doesn’t really affect you (you get the money you put in and all the interest). This is also reflected in another rule of bonds from their mathematics –
The longer the maturity of a bond, the more its price moves when yields change
(The shorter the maturity of a bond, the less its price moves when yields change)
However, if you (or if your investment advisor or mutual fund manager) are buying and selling bonds in you portfolio (like if you have a Target Date retirement fund or something similar), then if interest rates keep going up, bond prices will fall in value. So if you bought a lot of bonds during the financial crisis, then in the event of financial recovery and higher interest rates, you will be losing a lot of money if you sell them instead of waiting for them to mature.
Not only that, the fall will be more for the low interest bonds bought in the years following 2008, because the math of bonds indicate –
The lower the yield (of the bond) the larger the price movement when yields change.
See this example –
30 Year Bond Yielding 2%
If interest rates rise to 4%, then the price of a $100 bond would drop to $65, that’s a loss of 35%
30 Year Bond Yielding 5%
If the interest rates rise to 7%, then the price of a $100 bond would drop to $75, that’s a loss of 25%
In summary, if you don’t own any, and interest rates go up, maybe you will get great deals in bonds (if the market keeps functioning) YAY!
If you bought a lot of bonds during the financial crisis at low rates and need to sell them instead of cashing them out when they mature, (like if you are cashing out a target date fund), then you might lose a lot of the money you invested.
#4 Insight – Banks Might Grow Too Big To Bail Out
Apparently the United Kingdom’s banks are 4 and a half times the size of the country’s GDP.
The U.S. banking system is smaller than the country’s GDP.
However, if banks continue to grow, and they make mistakes like AIG or Lehman Brothers, then the government may not be able to back deposits or bail them out.
Then your money in the bank will be worthless.
#5 Insight – Day Trading is too Hard For People because of Computers
The first time I got into trading, I dabbled in day trading.
After a few months I realized that it was like gambling and stopped.
Cowley explains why day trading is pretty much impossible for us normal people.
It’s because computers and all of their orders are trading much faster than people, and creating market conditions that are also unpredictable.
#6 Insight – Bitcoin is More of a Commodity than a Currency (For Now…)
When I started buying bitcoin, it was not to do transactions, it was because the value keeps going up, and I wanted to have some.
I was buying it like it was gold.
That’s what it means for Bitcoin to be more of a commodity than a currency.
It’s also taxed that way, making it very inconvenient to use in the U.S.
In the future however, we might be using more virtual currency like Bitcoin in our day to day spending.
#7 Insight – Governments Go Bust Because They Owe More Money Than They Can Pay Back
Argentina did it in 1989, their currency lost value (they printed more of it to pay their debts), and the prices of things rose so high the country became poor in a day.
#8 Insight – Developing Nations are in Debt and Emerging Nations Have Cash
The U.S. has debt, and it’s citizens have credit card debt.
Did you know China has $4 Trillion in Cash surplus?
It makes sense. The citizens like to buy things cash.
Russia, India and Brazil have more than $350 Billion each in cash.
#9 Insight – Quantitative Easing (QE) is The Government Printing More Money And Giving It To The Rich
QUANTITATIVE EASING (QE)
QE is a fancy term that means governments print more money to buy their own bonds and stocks and other financial assets.
They have the ability to do this because they are not on a gold (or other valuable asset) standard, and can now make money whenever they want.
They choose to print more money because it’s supposed to help the economy. For instance if the stock market crashes, and housing prices plummet, and then people spend less money, then there’s less customers going to buy things and the economy shrinks…in this case, they might decide to print money to buy stocks and bonds to boost their value (someone’s buying!).
Apparently in the short run it does work, but in the long run, no one knows what will happen. Japan has been doing this a long time and they own most of their own bonds (they owe money to themselves). Hence, there is not much of a bond market in Japan anymore.
What are the long term implications?
Cowley says that by buying your own bonds and stock in top companies, you are automatically making the rich richer. This is not helpful for healthy competition and organic economic growth.
He believes that this is why high educated workers now are not getting paid much and that the standard of living of the majority of Americans is declining (jobs with bachelor’s degrees or higher received 10% less pay when comparing 2000 and 2010).
So how can we even have money that’s not really backed by any real asset anyway?
Well, Bitcoin is completely arbitrary money not based on anything (no country, no valuable asset), and it was worth $11,000 last week!?!
Obviously, in the short term, you can have value to currencies that are backed by nothing…
Maybe Bitcoin will be worthless 20 years from now…
All I know is that if you print more money while you are playing Monopoly or Cash Flow or any other board game, you are cheating.
I guess that’s why people protested when we got off the gold standard.
Well, at least now we understand what QE means, and if the economy busts over currency value then we will have an idea why.
#10 Insight – Most of the Money In The World Is In Derivatives
DERIVATIVES
Derivatives are contracts, and most of the money in the world is in the derivatives market.
Some estimate it is about $1.2 quadrillion ($1.2 thousand trillion). Which is a little over 5 times bigger than the next largest market of bonds (global debt) at $200 trillion, and the next largest market of stocks at $70 trillion.
Most of us average humans do not know what derivatives are.
Cowley does a nice job of explaining some examples.
*****Forward Contracts – you exchange US dollars now for Yen 3 months from now. Because you would make interest on your US dollars if you keep them for 3 months, and because the seller would make interest on their Yen if they held onto it for 3 months, you adjust the rate of the exchange by the interest you would have made on both sides of the deal. The deal is set now, however, as the price of yen and US dollars moves by the 3 month deadline, the deal becomes more or less valuable to one side.
Forward contracts are the basis of the foreign exchange market.
*****Futures – Instead of contracts regarding currency, you do anything else. Let’s say you are a chocolate company, and you want to make sure the price of cacao beans doesn’t get too expensive for you as you take a bunch of new clients and promise to produce chocolate for the next few years for them at a certain price. You can do a futures contract where you pay to get a guarantee that if cacao beans rise above a certain amount by a future date, that you will get to buy them at a lower set price that you determine when making the contract. If the price doesn’t go up to that set price, then the sellers of the guarantee keep the upfront fee you paid for the futures contracts (it’s like insurance on the price of cacao beans).
You can do futures on anything. They are less flexible than forwards, as there are predetermined dates that futures contracts expire, and you have to do them in increments (for example, by the $100,000).
You can also put as little as 14% down to cover the contract, and not all of the money to cover the deal.
This creates the opportunity to make huge gains and also take huge losses.
*****Options – Options are financial instruments that are derivatives or based on underlying securities such as stocks. An options contract offers the buyer the opportunity to buy or sell—depending on the type of contract they hold—the underlying asset.
I understand first hand that leverage can make good money and also lose a lot of money very quickly.
#11 Insight – Compound Interest Explained
Did you know that compound interest is this complicated formula?
I can’t even write it in this blog because is has a to the power function in it.
How is anyone supposed to understand that?
We all know Einstein said it was important, and we know in our brains that it’s supposed to make us rich (if at the current 2% interest rate we leave $5,000 will make us $272K in 200 years!), and make us poor in a few years if we have too much credit card debt!
I learned about the credit card debt first hand.
That interest piles up fast and it takes a while to pay it all off.
I will never do that again.
So, compound interest would make us rich if we got that 14% interest rate in our savings accounts…yes!
Seriously, google compound interest and check out that formula…I mean what is that?!?
Conclusion
This book was informative, and taught me a lot of the mechanics of money.
I had no idea about the size of the derivatives or the bond market.
I also did not understand QE at all!
I hope you got a lot out of these insights!