Drowning In The Money River

This article explains how an unprecedented wave of investment capital made available by central banks has largely stayed in the hands of a select few at the expense of the rest of us.
In Part 2, which is available to enrolled members, we offer strategies for making smart, sustainable investments in this lopsided economic environment.
If you suspect society is unfair, that there's a different set of rules the rich live by, you're right.

I’ve had ample chance to witness first-hand evidence of this in my time working on Wall Street and in Silicon Valley. Simply put: our highly financialized economy is gamed to enrich those who run it, at the expense of everybody else.

How Central Banks Created a Money River

A recent experience really drove this home for me.

Having received my MBA from Stanford in the late 90s, I remain on several alumni discussion groups. Recently, a former classmate of mine, who now runs her own asset management firm, circulated her thoughts on how today’s graduating students could best access an on-ramp to the ‘money river’.

What’s the ‘money river’? Good question.

The money river is the huge tsunami of investment capital sloshing around the globe, birthed by the historically-unprecedented money printing conducted by the world’s central banks over the past decade. Since 2008, they’ve more than tripled their collective balance sheet:


The $13+ trillion in new thin-air money issued to achieve this is truly staggering. It's so large that the human brain really can't wrap around it. (For those who haven't seen it, watch our brief video How Much Is A Trillion? to better understand this.)

But suffice it to say, all that money has to go somewhere. And it first goes into the pockets of those with closest access to it, and of those who direct where it flows.

In the context of MBA graduates working in finance, accessing the ‘money river’ often follows this recipe:

  • Step 1: Get hired by a buy-side fund (asset management firm, hedge fund, etc)
  • Step 2: Make friends at other funds by investing part of your portfolio in their offerings
  • Step 3: Leave to create your own fund, which all your new buddies will invest part of their firms' portfolios in
  • Step 4: Collect a fat annual salary of 2% of assets under management (regardless of how your fund performs), plus 20% of any gains
Let's put a little math behind this, with real-world numbers based on another classmate of mine who followed this recipe. After graduating, he went to work for a prestigious private equity firm, spending nearly a decade there as a fund manager. He then left to start his own fund.

Since he had invested in scores of ventures and funds while working for the private equity firm, he had amassed plenty of industry insiders who knew they had to reciprocate when it came time for him to hang out his own shingle, because “that’s how the game is played”. You help me when I need it, and I’ll do the same for you.

Only a few weeks after announcing the formation of his new fund, he had raised $100 million for it. At his 2% management fee, that gave him an annual salary of $2 million no matter how the fund performed. And with the standard carried interest percentage, he had substantial additional upside of 20% of any profits the fund may take in the future.

Since forming this fund nearly ten years ago, the financial markets have been on a historic bull run, with hardly any corrections along the way. This is primarily due to the trillions in new money provided by the world’s central banks mentioned above. So, it’s little surprise that my former classmate’s fund now stands at over $1.1 billion in assets under management.

That’s now a $20 million annual management fee. Plus 20% on (conservatively estimating) hundreds of millions of gains made along the way.

Not bad work if you can get it.

Why the Money River Only Flows to the 1 %

It's a big club and you ain't in it.
~ George Carlin
But that's a big part of my point here. The 99% don't have a key past the velvet rope to access the money river.

Look, I don’t begrudge this guy his success. Well, maybe I do; but it’s not personal – I know him well enough to say that for certain he’s extremely smart, bold and hardworking. But he’s benefiting from being in the Big Club that George Carlin railed about. The rest of us ain’t in that club, and won’t ever be. But our futures are being determined – or more accurately put, undermined – by it.

All that liquidity being provided by the central banks? To keep that money flowing it needs to be cheap to those who want to borrow it, so the banks have concurrently driven interest rates down to the lowest levels in recorded history (going back over 5,000 years). Some extra-aggressive central banks have even pursed negative interest rates.

What this has resulted in is a tremendous transfer of wealth to the already-rich at the expense of everybody else.

Those with the means and access to borrow have been able to get essentially free money to do so; while savers and those dependent on fixed income have been starved of any yield whatsoever.

Free Money's Affect on the Cost of Living

The wave of global stimulus plus the low cost of borrowing has driven capital into nearly every asset market, rocketing prices higher. So those who have held those assets have become substantially richer, while those who have not have become increasingly priced out.

Along with asset prices, prices of nearly everything else have risen, too, dramatically increasing the cost of living:


But, as costs have risen, wages have not. Especially when measured in real (i.e. inflation-adjusted) terms.

Real wages are now 7% lower than they were in 1973 – and that’s calculated using the official government-reported inflation rate, which we all know vastly understates the actual inflation rate. (Read our report on The Burrito Index to understand why the true price inflation households suffer is more like 5x greater than the official reported rate.)

So the rich see their assets shoot the moon, and they get access to the ‘money river’, to boot. While the rest of us see stagnant real wages and a skyrocketing cost of living.

Is it any surprise that a tremendous and still-growing wealth gap between the 1% and everyone else has resulted?



Most of Us Are Not Financially Prepared for Retirement

The future looks dim for those sleepwalking into it.

As we’ve written about at length in our recent report The Great Retirement Con, the average American worker is woefully unprepared to afford his/her retirement:


And for those counting on a pension, odds aren't bad it may get reduced/eliminated during a future economic crisis.

Think that could never happen? Well, this 2018 article from Bloomberg suggests otherwise:

California Governor Jerry Brown said legal rulings may clear the way for making cuts to public pension benefits, which would go against long-standing assumptions and potentially provide financial relief to the state and its local governments.

Brown said he has a “hunch” the courts would “modify” the so-called California rule, which holds that benefits promised to public employees can’t be rolled back.

"There is more flexibility than there is currently assumed by those who discuss the California rule,” Brown said during a briefing on the budget in Sacramento. He said that in the next recession, the governor “will have the option of considering pension cutbacks for the first time.”

That would be a major shift in California, where municipal officials have long believed they couldn’t adjust the benefits even as they struggle to cover the cost. They have raised taxes and dipped into reserves to meet rising contributions. The California Public Employees’ Retirement System, the nation’s largest public pension, has about 68 percent of assets needed to cover its liabilities.

Across the country, states and local governments have about $1.7 trillion less than what they need to cover retirement benefits – the result of investment losses, the failure by governments to make adequate contributions and perks granted in boom times.

“In the next downturn, when things look pretty dire, that would be one of the items on the chopping block,” Brown said.

And this is in California, one of the most pro-worker/pro-entitlement states in the Union. If California is already sending out warnings like this, you can be sure that the other 49 states are thinking of making (at least) equally-harsh cuts when the next recession hits.

Potential cutting of promised pensions is just one of the many ways in which those running the system will act to preserve their share of the pie when crisis next arises. Those concerned about what other measures might be taken would do well to read our report Upon The Next Crisis, The Rules Will Suddenly Change.

How the 99 % Can Still Prosper

So, what can the rest of us in the 99% do about it?

Is this a lost cause? Should we just accept our fate and sink to the bottom of the money river, smothered by its high prices and low yields?


The good news here is that there’s a clear set of strategies for keeping yourself afloat while the system continues to pursue these pernicious and deeply unfair policies. They take focus, effort and discipline – but anyone implementing them will have good chance to stay ahead of the rising cost curve, and have a real shot at financial prosperity.

In Part 2: Winning Against The Big Club, we examine a number of strategies for offsetting the soaring costs of everything from housing to healthcare – with particular focus on the investments and actions you can take today, inside and outside of the markets, to preserve the purchasing power of your wealth from the nefarious “stealth tax” placed on your money by the kind of inflation discussed above.

Click here to read Part 2 of this report (free executive summary, enrollment required for full access).

This is a companion discussion topic for the original entry at https://peakprosperity.com/drowning-in-the-money-river/

Are indeed a big part of the problem. In the end this not just a legal problem, it’s a moral dilemma and a human crisis. It’s not just math and it’s not just money printing. Human beings come to this site because they have human priorities. There are plenty of people who “don’t get it” but there are plenty who do. The difference between Chris and Adam and the many people with their background is Chris and Adam. Something drives them to do this and if it’s anything like my own experience it has something to do with the eyes of our children. I can’t look into my own if I don’t fight for them

thanks for that real world example of your colleague who is swimming in the money river.
It really helps to illustrate how some lucky/smart people are getting access to all of the new money. It helps me understand how some people can afford the Porsches and Mercedes I see rolling around the streets of London.
Now for what to do… on to Part 2.

dcm wrote:
Are indeed a big part of the problem. In the end this not just a legal problem, it's a moral dilemma and a human crisis. It's not just math and it's not just money printing. Human beings come to this site because they have human priorities. There are plenty of people who "don't get it" but there are plenty who do. The difference between Chris and Adam and the many people with their background is Chris and Adam. Something drives them to do this and if it's anything like my own experience it has something to do with the eyes of our children. I can't look into my own if I don't fight for them
What drives me? As I've said before, this "job" is not the easiest one in the world to have. It's not the most lucrative or the one that will get you invited to swank events where many successful will people admire you. It's the job on the right: ...except I wouldn't say I've got a handle on 'the truth.' I do know bullshit when I smell it, and I know when things are false. It's like the standards of guilt in the legal system; the burden is never 100% certainty, just 'beyond a reasonable doubt' or maybe just past a 'preponderance of evidence.' To be clear, absolutely clear, I am not seeking sympathy here, nor asking for support in a sideways manner; I have willingly chosen this 'profession' and I'd choose it again. You only get one turn on this rock, you come with certain gifts and talents and it's up to you to either do something meaningful with your life or not. I find deep meaning and purpose in my work. It's wildly challenging and ever-changing. I might get better at it, but I'll never be good-enough. Which makes it a serious profession, like being a professional athlete or musician or physician. There's always 'better' in front of you, which keeps it all fresh and alive. Life is about change and movement and flow. Stagnant is the same as reverse. I do what I do because it needs to be done. I do it for all of life on the planet. I do it for you. And I do it for the people I know more intimately. It's almost as if I don't really have a choice in the matter. I cannot ever imagine giving this up to go and work for a big bank, or a political cause or otherwise join the great, easy flow of humanity in its general direction of travel. Why? Because I don't believe in it. It's BS. It's wrong on so many levels. (Been waiting to use that image for a while... :)) As we've discussed, in the US and elsewhere levels of depression are alarmingly high and striking at younger and younger ages. It's been re-termed demoralization which is more fitting, and that has its roots in the loss of meaning and purpose from one's life. The easy path today is also the demoralizing path. Consuming and contributing to the ruin of spaceship earth lacks any meaning or sense of purpose. The 'harder' path is not harder at all when one considers the impact of being demoralized. The main narrative of endless growth is breaking down all around us. It is unfair, destructive, and lacks any long-term future in which one can invest a sense of meaning and purpose. It's failing, alarmingly, and I happen to think demoralization is a perfectly normal and healthy response if an individual's only other option is to gleefully participate in their own destruction.
It is no measure of health to be well adjusted to a profoundly sick society. - J. Krishnamurti
So this is my path, I cannot possibly bring myself to wrap myself back into the comforting folds of society, and I will continue to call BS on the many falsehoods that are not serving our better long-term interests. Let's not take anything for granted either. None of us know how long we've got, or what might happen next (right Hawaiians?). This is it. This is our watch. What are your truest talents and how will you use them? Nothing else really matters.

we’re out of balance … with so many bubbles

I want to emphasize a point that Carlin makes (at 1m:07s) in the video above:

"What they don't want is a population of citizens capable of critical thinking. They don't want well-informed, well-educated people capable of critical thinking. They're not interested in that."
For me, this is a huge reason why PeakProsperity.com exists: to preserve and nourish critical thinking

Speaking of big clubs that you ain’t in…this is a major disaster for the 43,000 people involved and all the stiffed creditors and suppliers:

Tense last-minute rescue negotiations failed to yield a result over the weekend, and on Monday morning a major British construction company announced it was going into liquidation after it was unsuccessful in securing a financial lifeline. Carillion, which employs 43,000 people around the world, said in a statement Monday that rescue talks with stakeholders including the British government had collapsed, sending the company into compulsory liquidation. (Source - ZH)
Why is there a "big club" involved? Well, when I check the handy dandy list of who's been buying and selling lo and behold it turns out that beginning on Sept 30 there were a raft of Big Clubbers getting the heck out. The big "winner" here was Schroder which got out on 6/30/17 with the first big stock price dump happening on 7/7/17 Always good to follow the big boyz and girlz because they are in the club, and you ain't. Must hurt to be whomever bought those millions of shares too, eh? Want to bet any money that the sales desks of those firms were busy selling this amazing stock to widows and orphans (and pensions and other suckers) to facilitate their unloading?

I’ve been thinking about this article since I read it days ago (not many articles do this anymore so thanks). I had some feedback:

  1. MONEY RIVER: When housing crashed in 2008 or so I was positioned to buy the cheap real estate that came out of it. Of course, the bailouts kept home prices high and prevented a deflationary fire sale. I was pissed, but it was then I realized stocks were the place to park money for now, regardless of how overvalued the they were based on PE ratios and BV. So blue-chip, high-dividend value stocks who are making good money (which one can own at $7, I’m not ballsy enough for index funds which have all the garbage in it) have been, and are, a good way for the common man to participate in the 1% money flow. The money must go somewhere.
  2. INFLATION BY SECTOR: I observed this in 1990 but came to a different conclusion: Health Care, Housing, and Education were the “key” areas of inflation. The reason why? They were outside of the free market, needed to survive, and one could not just conserve - you gotta have all three and the government jacks up the the costs (through student loans, law and insurance with medicine, and property taxes).
    Solution: staying fit/healthy is key to keep away from medical care and outrageous insurance; housing could be dealt with by buying your own place and renting part out; and education by staying in STEM or trades that pay off right away and never take a student loan, work and save first.
    But energy can be cut way, way back. Just live where one works and vacation where one lives, and live in small SF.
    RETIREMENT BY GENERATION: I think “savings for retirement” to be an unrealistic view of the generation gaps. Bottom line: Boomers had it very easy and the opportunity for lots of money and early retirement. Gen X way, way less, and Mills even less. The Boomers just didn’t save gobs of money because they were, well, confident they wouldn’t need to. X & M simply didn’t have as much opportunity and it’s taken some time for many to come around to this reality.
    Also, keep in mind “retirement” is a brand new thing in history (it used to be your kids taking care of you) and doesn’t make much sense for knowledge workers (more for ditch-digggers whose bodies break down).
    I’ll have some more comments later.

thanks for the thoughtful post and info on your past actions. Sounds like you’ve made good moves. I’m still on the sidelines in cash & PMs, so I’m hoping to take advantage of the next recession.
I think the same thing will happen in the next recession - the CBs will print money to prevent a major crash of home prices and stocks, so prices should rebound after a crash/correction.
Do you agree that it will follow a similar course to 2008? Will the prices be allowed to fall even as much as 2008? Do you think that real estate and stocks will still be the place to take advantage of the 1% money flow?
Thanks, E.

E: Do you agree that it will follow a similar course to 2008? Will the prices be allowed to fall even as much as 2008? Do you think that real estate and stocks will still be the place to take advantage of the 1% money flow?
To be clear, I was so wrong in what happened in 2008 I’m probably not the right guy to ask, I never thought the government would illegally bail out the banks and the public would be happy about it because their 401ks were saved. I just happened to buy stocks at the bottom of the crash because the real estate option was closed.
But to answer your question: Yes, blue-chip, high dividend paying stocks with 25 year track records did fine in 2008 and beyond, and conservative real estate (eg no McMansions) did fine too (sadly). So I think we will bail everyone out over and over, propping up the equity and housing markets until one day we go bankrupt. Which we will. But I also don’t think I’ll get to see this moment of truth anytime soon for the USA: largest military, huge food exports, massive energy supplies in coal and NG, massive technology advances compared to the rest of the world, fairly decent rule of law (minus family law), bread and circus social programs. So like Rome we can probably keep this insanity going a long while basically as the cleanest shirt in a very dirty laundry pile. But what do I know? This could change overnight with a war or political crisis…hello, Bernie & Trump! So I just keep 10% in PM and 30% in RE, live poor, and invest the rest & expect to lose it.
E: I think the same thing will happen in the next recession
I agree. But again, what do I know? We might have a revolution by then…

Brain power burns carbs; but they’re hard on the rest of the body. So in the end, even knowledge workers who are overworked find their bodies (and minds) breaking down.
Ever wonder why far sightedness is called prstesbyopia (the priest’s disease)?
But most of your points seemed spot on.

To finish up my feedback on this article (lots of stuff covered & takes time to get it all down):
4) ON INFLATION VS WAGES: Real wages are frozen while inflation runs ahead, this is true. However, it’s important to pin down what inflation can be avoided. The “Burrito Index” is a classic example: food itself has not increased nearly as much as delivered burritos, since raw food has little labor tied to it. When a person does their own housework, buys their own raw foods, repairs their own stuff, cuts their own hair, etc., they can avoid the cost of labor and with the internet one can pretty much do anything on their own. We’ve kept track of our spending to the penny for 20 years now and on many inflating areas (energy, food, housing, medical) we have actually created deflation in our personal lives just because of all the information available now makes cutting back have no impact (or even positive one) on quality of life. For example, in the article’s chart on “food inflation” it shows 51% increase since 2000, but if one just eats raw foods (aka cooking at home which is healthier anyway) this increase has been very modest; our costs have actually dropped since 2000 due to gardening/hunting. I know this DIY lifestyle doesn’t sit well with Boomers who want to live like it’s 1960 forever, but their immigration act of 1965 guaranteed much lower wages for all (even at high-wage fields). Not much we can do about it now but respond.
5) ON THE 1%: Looking closely at the animated graph of our division of wealth…notice it’s not just the “1%” who have done well. The whole top 10% are doing very well also compared to the lower 90%. Why? The cognitive elite and/or culturally stable (hardworking, non-consumer-lifestyle, no divorce) are able to change rapidly to our new hyper-competitive, WTA economy. I note even plumbers and contractors who are willing to change with the times are entering this 10% area of “extreme” levels of wealth. I don’t know how our culture stops this without some form of communism where we all get poorer or going back to a monolithic culture like the US had in 1950 where most people are cognitively and culturally the same.
But great article. A bit too broad and cursory (hell, each subject could an article) but one can’t have anything :-).