If you use X (formerly Twitter) and you follow the economic trends, it is mostly doom and gloom there. Some would say it has always been doom and gloom, but this time the argument for doom and gloom is very sound. I believe there is a big economic change coming but I cannot put a timeline on it. It could be in a few days and it could be in 25 years. But when it happens, it will change the world. Let me explain.

Kicking the Can Down the Road

The whole world is pegged to the US economy. And the US is borrowing at a level unheard of. Not only is the national debt at an all-time high, the government is borrowing more.

The revenue the government generates is no longer able to pay for the interest payment. They have to borrow for that now. If a company is caught doing that today, they will get jail time. So, who is borrowing the US all this money?

In recent history, the Federal Reserve has been the one funding the government. The Federal Reserve doesn't have money. They don't need to. They can print money. But there is a drawback...

When the Fed prints, more money goes into circulation within the economy. If that doesn't lead to productivity growth, it leads to inflation. This is the lesson 2020 taught us.

One of the core mandates of the Fed is to keep inflation at 2%. But the Fed does not have the instrument to do that. The Fed can only do one thing - increase or reduce the supply of money.

And right now, they are trying to reduce the supply of money. Interestingly, the primary way this is done is to increase the cost of credit for individuals and businesses. Businesses need credit to function. But governments don't.

Who Pays?

I wish I could get the whole world to understand this. The government made an error and businesses (and individuals) are paying for it. There is no way for the government to be held accountable for its economic policy blunders.

After a few years, those politicians will retire and get full benefits for the rest of their lives. But the people will be left with the mess they created.

Take the auto workers strike as an example. The same president pushing the green agenda on auto companies forcing them into the production of cars that have no strong demand, is joining the workers on strike to demand higher pay from their employers. Can't people see the contradiction?

I feel sorry for the CEOs of those companies. Even though they have their side of guilt, the situation is likely going to end up in at least one of those companies going bankrupt. It is fast heading into a lose-lose situation.

Unfortunately, politicians will head in the most favourable direction to win elections. And it is not making the economic situation better. After 5 months of strike, Hollywood writers are back at work with a 5% pay rise. Other unions are on the sidelines watching. Some have already joined in too (in Las Vegas).

The point here is that the real economy (on the street) is fracturing. If I were running a hedge fund right now, I would invest in logistics to give me raw data on the real economy. I would not depend on the official numbers from the government. Why?

You can’t protect your money if you don't know where it is. There are many who think they are investing in real estate but their money is really in banking (if you peel away all the masks).

This is key to any investor. Know where your money is.

What VS Why

As an investor, what is happening is more important than why it is happening. I care about why because I have to share insights with you and many others. But from a profit maximization perspective, what is happening matters more.

There can be a million whys. And sometimes, we get the why wrong. So, don't get bogged up about the why, except if you are a strategist, policymaker, or in finance media.

All you need to know is what is happening and make sure it is in your favour. I read a mantra of a day trader recently that says, "Cut losses quickly, ride profits longer". Many have lost a lot of money because they had convictions on a wrong notion.

Conviction is something you need to have as an entrepreneur, not as an investor. As an investor, you are cautious because things can change for the stupidest reasons.

I'm not telling you to follow the day trader mantra. I do not recommend day trading because it is too risky. I recommend following the economic cycle. Take profits the moment it feels too good to be true. Whether the argument is sound or not, take profit. Take profits but give allowance for more upside.

I believe in investing for dividends. So, I don't see a reason to be cutting losses. Remember, only play the game you can understand. If it is too complex for you to understand, you are likely to get robbed.

If you are in doubt, hold your position. Only invest in business you have confidence in. I have confidence in private equity and that's where I mostly play.

Good Cashflow

If the business doesn't have good cashflow, that is a red flag. Big tech is getting a lot of money right now because they have strong cashflow. When times get tough, people go back down to fundamentals.

A good business has to have more money coming in than going out. This is the basics. If there is more money going out than coming in, then the business is not profitable.

Unprofitable businesses can be tolerated in bull cycles, especially if it is in a sector with a lot of hype. They often call them growth stocks (as opposed to say, dividend stocks).

But when the tide turns, it is a bloodbath for many of those companies. Instacart went public recently and if you ask me, I'd say that the company wasn't supposed to go public. It should be been acquired or rebranded into an ecosystem (before going public). I just feel sorry for those who don't know what they are doing on the stock market.

Conclusion

The US is trillions in debt and it is growing. Now, they have to borrow money to pay the interest on their debts. Yet, no one is looking at that as having an effect on inflation. One day, the can will be too big to kick down the road and I wonder what will happen that day.

Pay attention to what is happening over the why. The what has more value in the instant over the why. Don't play a game you don't understand. If you are in doubt, hold your position.

Investing for dividends makes a lot more sense. Businesses with good cashflow continue to thrive.

Stay rich.

P.S. Read my post where I explained the tool to hedge equities without bonds