Dear Thoughtful Investor,

a series of letters on real estate, finance, and economics

#8 Brilliant Malicious Idiots

Dear Thoughtful Investor,

By this point you have likely noticed that I am very critical of the the global central banking system. I have known many Harvard MBA’s or MIT PhD’s that confuse the pervasiveness of today’s global central banking system as evidence that it is the best and most natural evolution of financial markets. It’s not. With all do respect to the brilliant minds of finance, I propose they take a myopic view of global financial markets and miss financial history. One might say the miss the forest for the trees. 

In a speech last month, the Chairman of the Federal Reserve, Janet Yellen said, Will I say there will never, ever be another financial crisis? No, probably that would be going too far. But I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will." Obviously she’s wrong. There will be another crisis, it is likely to be sooner rather than later, and Ms. Yellen herself is likely to be the one to personally give the economy a nice shove right when it gets to the precipice by tightening monetary policy a little too much at exactly the wrong time. We sent out our quarterly investor letter last week to the members of our real estate investment fund, in the letter I was attempting to explain why, even in the midst of a historically hot real estate market, I see a high risk of recession/correction in the next 6-18 months. To quote from the Market Outlook section of the letter: 

“The Federal Reserve is taking a hawkish stance and tightening monetary policy. The Fed’s stated goal to both normalize rates (to 3%) and reduce their balance sheet from $4.5 trillion to $3.5 trillion will tighten the money supply and is likely to exacerbate the feeble real growth rate of the economy. Mortgage rates are likely to rise straining ‘affordability’ in markets where buyers are already at debt-to-income ratios that may cause them to increasingly feel ‘house poor’.

(*I also see a lot of positive ‘tailwinds’ in the market, especially in real estate. I plan on describing these and/or posting the additional text of our investment letter shortly.)

It is not that I believe the Fed should continue its policy of extremely low interest rates, I believe the Fed should stop manipulating the market altogether and let interest rates find their natural equilibrium, markets forced out of equilibrium will eventually lead to crisis. But Ms. Yellen said she doesn’t believe we’ll see another financial crisis in our lifetimes. An excellent article on zerohedge [a must read!] ( reminds us of similarly stupid statements like Neville Chamberlain’s 1938 prediction of “peace in our time” right before 70 million died due to WWII (3% of global population).

Is this a premeditated statement of gamesmanship to cajole markets into a certain response? (Is she brilliant?)

Does she know that a crisis will happen and she is lying? (Is she malicious?)

Does she really just have no idea what is going on because she is steeped in outdated monetary models and 19th century economic theory? (Is she an idiot?)

Are central bankers brilliant? Are they malicious? Are they idiots?

Perhaps they are brilliant malicious idiots. A distinguished group of very intelligent, somewhat well-meaning but primarily self-serving, blindly myopic fallible  humans that end up destroying a lot of other people’s paper wealth with their blunders of market manipulation.

Statements like Yellen’s elude to the age of the Central Banks drawing to a close. Like other powerful empires that rule for a chapter in history then implode from within, central banks will ultimately commit financial suicide. A parasite that accidentally kills its host thereby condemning itself. As globally dominant institutions go, Central Banks have enjoyed an extraordinary run. Today only 7 nations do NOT have a central bank; but the system of consolidated financial control that Central Banks represent is cracking from the pressure applied by an unlikely source: technology. The financial world is moving into the Age of the Cryptocurrency and Central Banks are scrambling to either make the transition or get left behind.


Dr. Pippa Malmgren says in a recent interview: ”You have got to understand if the size of your debt problem is so big that it can’t be paid off and in fact even inflation, which is the usual way you would seek to default on your debt slowly over time, you can’t get enough inflation generated, then there is one further option. And that is you literally abandon the entire system of money, and accounting. I know that sounds unbelievably radical, but we have seen it happen before…Today, we are on the brink of similar step change, and the way you will do it is you move to electronic money in conjunction with blockchain. Blockchain is the new ledger, and e-money is the new currency.” (See video and commentary:

Thoughtful Investors would be wise to start studying cryptocurrencies (BitCoin, Etherium) and understanding the basics of blockchain technology. 

In our next several letters we will discuss more on the theory of money, the emergence of these technologies, and a few scenarios as examples of how this (extraordinary) financial transition is likely to take place.


A Thoughtful Investor

#9 Monopoly, Game Theory, and why we're all going to be using Bitcoin

#7 A Moral Hazard