“The Big Short: Inside the Doomsday Machine” by Michael Lewis (W. W. Norton & Company, 2010) tells the story of a handful of investors who not only anticipated the subprime mortgage crisis, but engineered a means by which to make money off the inevitable crash. It’s a fascinating read populated with odd, contrarian characters who processed information differently, and therefore reached very different conclusions than the vast majority of other players in their industry. They bet against conventional wisdom, and became extremely rich as a result. As I read the book I kept asking myself, “where do I need to be placing my bets now?”
To take a “short” position in investing parlance is to bet against something. If, for example, someone anticipated that GE stock was about to take a massive plunge, they could make money on GE’s loss by “shorting” GE’s stock. The men behind ”The Big Short” saw the same things that a lot of us saw – housing prices were increasing to unsustainably high levels, people were borrowing more than they could afford to repay, and lenders were making very risky loans. The difference between the many who saw the trends and the few who profited from them was chutzpah; they poured themselves into understanding the market and then invested in what they confidently believed to be true.
Right now, I feel pretty confident in shorting the United States of America. To some limited measure we’ve deferred our economic crisis, but by no means addressed it. According to the U.S. National Debt Clock, as of today the national debt exceeds $13.4 trillion and is increasing by $4.2 billion a day. According to the IRS, last year’s aggregate tax revenues before refunds was only $2.3 trillion. This year’s annual deficit, which is the difference between what the government received in revenue and paid out, was announced today as being $1.3 trillion. In other words, the United States is insolvent.
Let’s use more comprehensible numbers for a moment. Let’s say that a homeowner had an annual income of $100,000, a mortgage of $600,000, and annual expenses of $150,000 so that rather than paying off his debt, he was increasing it by $50,000 a year. He would be bankrupt. And on a percentage basis, that’s roughly the condition of the U.S. government.
Like any other insolvent entity, we owe people money, and the bills are coming due. Who do we owe? There are six foreign countries among the top 15 creditors, including China and Russia. But the top debt holder is the Federal Reserve, with $4.7 trillion in U.S. treasuries. That’s most disturbing of all because it indicates that we are artificially propping ourselves up by printing money to buy our own debt. On top of that, 60% of our national spending goes to entitlements - Social Security, Medicare, Medicaid and similar programs – presumably to people who need government support. Only 40% of U.S. households are financially healthy enough to pay any taxes at all.
So yeah, our economic future looks dim.
We are all just pretending now. Like the financially troubled homeowner described above, we’re pretending that we’re going to get a massive raise, or maybe win the lottery, and be delivered from our troubles. But we’re not cutting costs or increasing our revenues. We’re not even buying lottery tickets. We’re just pretending.
So, how do we “short” the U.S.A.? I asked that question in jest to a financial planner the other day, and he promptly informed me that there are actually ways to do that. But making money off of the crisis doesn’t really solve the problem. Just ask the heroes of “The Big Short.” The cork was barely out of the champagne bottle for the these guys when they realized that their bet had triggered a worldwide economic meltdown that threatened to take them down with it. They experienced the very real problem of having no safe place to put their money because they, perhaps more than anyone else in the world, realized that every major financial institution in the U.S. was threatened with collapse. Despite having made legendary returns on their investment, several of them suffered severe anxiety-related health problems.
It’s now two years after the beginning of the crisis related in the book and just this week I saw a Bloomberg article regarding Michael Burry, the investor in the book who first figured out how to capitalize on the coming collapse. What is he investing in now? Stocks, bond, treasuries? No – agricultural land with water on site. Just ruminate on the implications of that for a moment.
Do you desperately want me to be wrong? Me too, and maybe I am wrong for now, but I’m not forever wrong. Everything that we see now will pass away, and all of the accounts and toys and treasures we value and strive for will be worthless. If you don’t believe me, then consider these words of wisdom:
Do not store up for yourselves treasures on earth, where moth and rust destroy, and where thieves break in and steal. But store up for yourselves treasures in heaven, where neither moth nor rust destroys, and where thieves do not break in or steal; for where your treasure is, there your heart will be also. Matthew 6:19-21
If you wish to be complete, go and sell your possessions to the poor, and you will have treasure in heaven; and come, follow me. Matthew 19:21
Beware, and be on your guard; for not even when one has an abundance does his life consist of his possessions. Luke 12:15
Instruct those who are rich in this present world not to be conceited or to fix their hope on the uncertainty of riches; but on God, who richly supplies us with all things to enjoy. Instruct them to do good, to be rich in good works, to be generous and ready to share, storing up for themselves the treasure of a good foundation for the future, so that they may take hold of that which is life indeed. 1 Timothy 6:17-19
Be a contrarian, take the narrow path and eschew the things that conventional wisdom calls good. Bet against this world, short the systems of this corrupt domain, and give yourself over to a life of outward-looking generosity. It’s not a loss, it’s an investment. Christ himself spoke of the eternal treasure we are storing up for ourselves in our acts of faithfulness to him. He offers to us now what he offered to the woman at the well – “Whoever drinks of the water that I will give him shall never thirst; but the water that I will give him will become in him a well of water springing up to eternal life.” John 4:14
Oh Lord, save me from despair, and give me the wisdom to drink deep. Replace my desire for riches with a desire the things of your kingdom. Help me to take hold of that which is life indeed.
