Saturday, July 30, 2016

The stupid Italian way - "What for?"

First of all I have to apologize in advance, I am going to be rude and ruthless.

I have explained the reasons why I lef Italy in other posts. I thought that there was only one direction for Italy: namely, the decline.

It was not only a matter of economy, Eurozone, fixed exchange rate, de-industrialization, shortsighted policy makers and so on.
You see, the crisis in Italy simply brought to the surface what are some of our worst defects:
1. The inability of looking further than our nose tip.
2. The idea that, whatever happens, we will manage to find a way to move on
3. The idea that, if things get worse, then we will find the best, sometimes illegal, ways to withstand and overcome the difficulties without any  strategy: in Naples, there is a nice saying for this, that goes on like "to go through the night", which means to survive a  distressful night, ( it was originally referring to a woman suffering for delivering her baby). Just have faith.

More in general, in Italy we say "arrangiarsi", one single word that means: "to try to manage something, try to find a short time solution,  that gives you the opportunity of overcoming  temporary difficulties, since nobody is gonna help oyu. You are on your own.".

Just imagine that one year is made of 365 nights and you have to "arrangiarsi"for 365 days running. I think that this would send a shiver through the spine of a Dutch, German, French or Norwegian folk.

I was born in Rome: in Rome, we are typically cynical, ruthless, and with a subtle sense of desperate humor. This is our best resource, and our worst defect at the same time. We have grown up with this kind of idea, that is everything is always the same, nothing really changes. When islamic ISIS sent threats to Rome, menacing of destroying the "cittá eterna", we mocked them: "you are welcome, just try to avoid the traffic at 7.30 in via Appia", or "are you sure you wanna work that hard? what's the point of cutting heads at noon when you can enjoy a cappuccino in Piazza Navona?". Fantastic. I think only romans can answer this way from a kind of threat like that. The problem is that we apply the same approach to everything: "holes in the roads, queues at the post office, etc" We think we can solve anythings with a joke or by mocking the guy in front of us.

When I came here, to the Netherlands, I spoke with a cab driver: he said he had been an entrepreneur, he had owned four bookshops, had several employees working for him. Then, due to Amazon, and internet in general, the customers became scarce. So scarce that he had to shut down the activity. Now he is an employee. He said that if you do not dislike to work, you always find something.  I was in admiration. Respect.

Another cab driver told me a thing that, as an Italian, literally made me drop my jaw.
He said : "you know, Lorenzo, we stole the land of Holland from the sea. So, each time we raclaim land, we do not think to ourselves; and we do not think to our sons: we do that for our grandsons."

Now, the southern Italian side.

My son had to do repeat the same year at school in the Netherlands. When we came, he was five, and he was speaking a broken Italian, not even to mention a foreign language as complex as Dutch: so, he attended the same classroom twice. Together with some other Dutch classmates: in the Netherlands, there is no shame in repeating a class when you are a child: they say that children have different rate of learning and maturity so it is normal. Respect for such wisdom.
That said, my wife spends many hours a month helping our son to learn Dutch properly. Now, he speaks with his Dutch friends, plays with them, go to their places. I am very happy and the teachers told us he has made huge improvements.

There is an Italian child: she is smart, curious, and she has come here form the south of Italy only recently. Since she came here that she was  already 6, she could not repeat the same class, so she has passed to the class upwards this year. Nevertheless, teachers told her parents that the next year she will need to repeat the year to improve her Dutch before going further. No issue: the kid is smart and clever, but she needs to learn the language properly.

Now, she is not studying at home. Her parents tell her to apply. She replies : "what for? I have passed this year". And their parents give up.

Can you see? a smart 7 year old little girl that says "What for? I have passed this year."

Welcome to the average Italian way of the South of Italy.

Sometimes they ask me why there is this story of the Italian genius, who stands above all the others. The answer is simple: the general situation is so disorganized and messy that, if you are valuable, you are more valuable than any other homologous of yours in other countries. That is why Italians abroad are so appreciated, in general, and are successful: they are hard workers, are open-minded, elastic (differently from Germans and Dutches), have sense of humor and they have left their native Country because they were fed up with the lives they had to live and the general sense of "arrangiarsi" that prevented them to fully exploit their potential. In a nut shell, they have exported the best of the Italian attitude and have left at home the "art of arrangiarsi". Once you take the weights off, you are free to fly.

Friday, July 29, 2016

Inflation and wage growth

Last time that we spoke about inflation, we defined it as a raise in price of the things that you can buy with your money like tangible assets (houses), intangible assets (stocks, bonds), consumer goods (food, clothes, laptops), commodities (oil, gas, metals, wheat, coffee). 
Nevertheless, inflation can also affect also the cost of services: for example, education is also provided through a service (you pay the books and, above all, teaching and certifications), and so is medical care (cost of medicines plus the cost of the doctors and hospitalisation), or the swimming pool for your kids or the gym. Nevertheless, when you think about inflation, you do not usually think about raising fees for university or books, or tolls, but you are concerned about raising costs of vegetables, bread, meat, gas and power. That is, something that you usually buy and use. So, that is why you are typically concerned about what is defined as consumer's inflation. 
Inflation is always referred to a precise period of time and to a particular country. It  is of little use to know that the price of a loaf of bread has risen from 1 euro to 2 euro if you do not specify over which period this has happened and in which country. Typically, government provides data for inflation over a period of one year (year-over-year, or yoy inflation rate) or over one quarter of a year, that is quarterly. 

The goods (ie stuff) and services (the work of somebody) that you can buy with your money in a particular moment of your life are referred to as "purchasing power". 
So, if there is inflation in France, you would expect that the buying power of the citizens in Paris decreases: if the current inflation rate is 2% year over year, you can expect that a loaf of bread costs you 2% more this year than last year.
Is it the same for an apartment? or for gas? 
You start to see that one thing is an inflation impacting the cost of a loaf of bread, that you buy every day; another thing is an inflation affecting the cost of a TV, that you buy once every 5-10 years; another thing is an inflation impacting the cost of an apartment that you buy once every thirty years.
In this post, for the sake of simplicity, let's imagine that the same inflation rate applies to everything evenly. That is, both an apartment and the gas and a loaf of bread costs you 2% more every year.
If an inflation rate of 2% yoy is applied to an apartment costing today 300.000 euros, in 5 years the same apartment would cost you 331000 euro, that is 10.3% more.
Let's suppose that your salary is linked to the inflation, that is you get a raise in your salary, each year, equal to the rate of inflation. 
Let's suppose that you get 40.000 euros per year. So, after 5 years, you earn 44.163 euros.

Today, to buy the apartment, you would need 300.000/40.000=7.5 years of your salary
If you buy the same apartment in five years, you would need 331000/44000 = 7.5 years of your salary

If your wage increase keeps the pace with inflation, you would still need 7.5 years of your salary. In this ideal world, there would be no difference between today and tomorrow for your purchasing power. Yes, things cost more; but you also get more money, so there is no issue. You don't care a thing about inflation. Bear in mind that we are assuming that:
1. inflation is the same for everything
2. your wage increases with same rate of inflation

NOTE: Also bear in mind that in this scenario, you are a consumer, that is, you BUY things with your income. And your only defence against the raise in prices is that your income, that is only your salary, grows at the same rate of inflation. More on this in our future post.

Now let's suppose that inflation is still 2%, but your salary is growing up at only half the inflation rate, ie 1%. In five years your salary will be 40.000*1.01^5 = 42000 €.

The apartment today still costs you 300000 € and it requires you 7.5 years of your annual salary to repay it. No change.
But, if you buy the same apartment in five years, you would need 331000/42000 = 7.9 years of your salary

As you can see, you need to work longer, 7.9 years instead of 7.5 years, to repay the house (you lost 2000 euros of purchasing power) Should inflation have been the same, but had the government raised the taxes by 2000 euros in 5 years, the effects for you would have been the same. That is why some people consider inflation as a hidden tax. 

But this is wrong: you see, if it was a hidden tax, like the tax on your income, then you would pay this tax to the government only and the government would increase, or at least, not decrease the quality levels of the services it provides to you. Inflation is different. Inflation affects people differently according to the nature of their income and to the proximity of the source of money creation. But we will deal with this topic in the future. 

We may question: is it true that salaries have been keeping up with inflation in the last years?

Let's have a look at data from US for the last ten years.

The situation is not so bad. 
Let's have a look at the situation for the Netherlands, the country that is hosting me.

The situation is a bit worse. Inflation rate has exceeded the wage growth for years since 2010. Or, putting it in different perspective, the wages were too low with respect to inflation.

Let's have a look at how Italy has been doing.​

Italy is not so far away from the Netherlands.

Italy and the Netherlands share the same currency. It seems that in both cases the situation is worse than in the US.

In any case, everybody in the middle class, overseas in the US or in Europe, is complaining about the fact that they are overburdened with debt and that the wages are not sufficient to raise kids and guarantee them a proper education. At the time of my parents, with one salary, a family father could grow up a family of four. Now, this is no longer possible. 

So, if the graphs show us that at least in last ten years, when we are continuously told that we are in crisis, or not in so good times like in the 90's or 80's, we are not so bad, have all of us a problem of perception, that is we believe we are poorer than our parents but in reality we are in good shape? In other terms, our memories are fallacy and we suffer from a bias in perception? 

Frankly speaking, it seems strange. I mean, we have colleagues, friends, parents, relatives, and, at least in Europe, they say the situation has got worse in the last years. They cannot afford things they once could afford.

So, is it possible that the way the wages and inflation are not computed as they should be, to correctly reflect the real cost that an average family has to withstand?

Let's put it like this. Thirty years ago, to get a decent paid job, you just needed a high school diploma. Now you need a degree. So, you have extra cost that once you did not have. Books, teaching, extra time to study that is taken away from the time you could instead work.
Ten years ago, internet access was much more expensive than today, and suffering from worse quality of service
Ten years ago, gas was much cheaper than today. 
Ten years ago, a car was less expensive than today, but with less optionals
Ten years ago, a television was less expensive than today, but with less optionals.
Ten years ago, medical care was less expensive than today

So, according to the goods (gas, books, television) and the services (internet, medical care) you consider when you compute the change in prices and so estimate the inflation rate, you may say end up saying that inflation rate i 2%, or 3% or 4% or 10%  starting from the same dataset.

It is not that you are richer or poorer, it is that the government released inflation data are not reliable, or that it is a problem of the middle class. Maybe the middle class is suffering, but others (the poorest and the richest) are improving their lifestyles in your country.

  • we need to understand the difference between the median and the average to understand what a middle class is.
  • we need to understand what a regression is, to understand how inflation is computed. 
  • we need to understand what causes inflation.
  • we need to understand who benefits from inflation.
  • we need to understand how we can defend ourselves from, or taking advantage of, inflation.

NOTE: deflation is simply negative inflation, that is inflation with the minus sign.

Until next time.

Monday, July 25, 2016

Inflation - what is it?

Dear reader,

if you have a house, or you want to buy one, or you live under rent, I strongly encourage you to read what follows.
In a previous post, I wrote about the important sum of money I recently saved by NOT buying a house in the Netherlands in 2015. And I suggested you to wait until the first quarter of 2017 to do that.
In another post, I explained the subtle difference between money and credit: at present, we can conclude that under the current monetary system, money and credit are essentially the same thing.
And, since debt is the other side of credit, we have the following identity


The difference between money and credit is the following: money does not bring a yield, credit does. So, a bank deposit gives a yield, so the money in the deposit is, more correctly, credit. Cash does not bring interest, so it is money. 
Gold is the ultimate form of money, in that you keep it in the case of an economic collapse and as an asset to give to your offspring, which can be traded for whatever may be necessary in bad times. Bitcoin does not bring any yield, therefore it is money but currently suffers from many limitations (I explained these limitations here).

Nevertheless, nowadays commercial banks and central banks create money out of thin air: commercial banks create money when they create bank deposits, and further multiply this money by the mechanisms of fractional reserve. Central banks create money by increasing commercial banks' reserves. 
In the moment you withdraw cash from an ATM, that cash is decreased from the reserves of the Commercial Bank; the same figure is decreased from the balance sheet of the bank account under your name and therefore it ceases to be money for the bank to be used for its investment purposes or a debt towards you since the bank has to pay you a (very low) interest on your deposit. 
In other terms, in the form of cash, credit has turned into money. But cash is going to be banned, so only digital money, ie credit, is going to exist in the close future. 
I will cover this in future posts: now it is out of the scope of the topic I want to deal with. I realize that money creation and transformation is a complex matter and therefore I just wanted to give you a clue about the complexity of the topic. 

Due to the former identity, in this blog I mention indifferently about money or credit or debt. 
Today I want to talk about inflation. 

Some common definitions for inflation are the following.
  1. Inflation is a general raise in the cost of goods and services.
  2. Inflation is a general loss of value of your money.
  3. Inflation is the increase of money supply.

This is what you typically hear from TV news, talk-shows, etc. 
They are all correct, and highlight different aspects of inflation. 

For our purposes, inflation is what you observe when there is a general raise of the price of a few of , or all, these categories: homes, rents, energy, food, consumer goods, transportation costs, investment assets (like treasury bons), etc. 

The opposite of inflation is deflation. That is, your money increases in value. So, you can say that in deflationary periods, with the same money you can buy more stuff.
So, deflation is negative inflation.

Plain and simple, isn't it?

Well, actually it is not, at least for me. Just try to think about this for a moment: inflation is a human activity byproduct. I mean, the sun rising at East and setting at West is a plain and simple fact. Why does inflation exist? why sometimes they say we are in inflation and some other times they say we are in deflation? Who, or what, creates inflation? what does inflation affect? Is everybody affected the same way by inflation or deflation? Is it inflation bad and deflation good? Is deflation bad and inflation good? Can I make money in an inflationary period? or in a deflationary period?
As far as I know, we were not born with the letters of inflation forged inside our DNA.

Why am I so interested in inflation? You, as an informed family father, should be interested in inflation. Because, according to which side of the former identity you are (CREDIT or DEBT) you may lose wealth and your well-being or increase your wealth and your well-being.
Remember, if there is a creditor, there is a debtor, and vice versa. If there is an uphill, there is a downhill. You need to have the complete picture inside your mind to take effective decisions.

If you think deflation is good because with the same cash you can buy more gasoline, a better TV, a bigger house thanks to lower interest rates etc,, I remind you that on the other side of the coin  there must be somebody which is negatively affected by all this, namely the energy companies, which pay their employees, or the bank which has less marginal gain when they buy government bonds.
If you work for a bank which is currently suffering from low interest rates, you may be fired. Idem, if you work in the oil industry, and oil is paid very low, yes, you save money at the gas station, but you are fired because the oil company you work for is going bankrupt.
And if you are a retiree, with a fixed pension? well, in your case deflation is super welcomed. You get a pension, an income, which is raising in purchasing power for free! Unless the State, which gathers money through taxation and the issuing of new debt, go bankrupt because companies are selling stuff at a cheaper price, therefore their revenues decrease, their profits decrease and they pay less taxes to the government.

So, accordingly on what net position you have with respect to inflation/deflation, you may become richer or poorer, on the long run.
That is exactly why you need to understand how money is created and transferred. And how to hedge your assets, if you have any (and I include in your assets, forth and foremost, your children and your family).

Before moving on, I want to stress one point: we must be interested in the expected inflation, that is the future inflation rate, that is the inflation rate that is likely to occur in the forthcoming months. Remember what I told you about information: information is inversely proportional to the likelihood of a future event. If the event has happened, there is no precious information associated and you can throw the information about inflation in the "noise trashcan". Good for past statistics. Not for you.

I ran a poll among those friends and relatives of mine who claimed to know the meaning of inflation.
I asked them two questions:
1. if inflation is constant, is the price of things constant?
2. If inflation is decreasing, is the price of things decreasing?

The answers to both questions were all (well, all but one!) a sound "yes".

The correct answer is NO. Welcome to the realm of dis-information and mathematics.

I will explain this by an example.
Suppose you have 1000 euros, and the expected rate of inflation (or inflation, for the sake of brevity) for next year is 2%. This means that if today (2016) you can buy things that are worth 1000 euros, next year the same things will cost you 1020 euros, that is 2% more. Things cost more or, equivalently, your money is not worth the same.
Now the TV news say that in 2018, two years from now, the inflation rate is constant, ie still 2%. You may argue that the prices will be the same of 2017. Not at all! since inflation is a RATE, then prices are still rising, at a higher pace then before! in our example, from 2017 to 2018 prices are expected to raise by 2%, so our stuff that in 2017 is expected to cost 1020 euros, in 2018 it is expected to cost 1020*1.02= 1040.4

So, let's recap: the expected inflation is 2% for the incoming two years. It's constant. But the prices are raising. From 1000 euros in 2016, to 1020 euros in 2017, to 1040.4 euros in 2018.

Inflation for the cost of living is like the acceleration of a car for its speed: at low speed, if you keep the gas pedal fixed, ie the acceleration is constant, the speed, aka the cost of living, increases.

If deflation is decreasing, but it is still positive, you release a bit the gas pedal, so the velocity increases less than before but, in any case, it still increases.

NOTE: I know most of you do not love mathematics, but it is important to understand a thing. Inflation rate is called rate because it is essentially a ratio. In particular, expected inflation it is the ratio of the expected future cost of things, minus the present cost of things, divided by the present cost of things. In mathematical terms:

Expected rate of inflation = (estimated_future_cost_of_things - present_cost_of_things)/present_cost_of_things *100

Unless you love maths and crunch number, you can skip what follows and go straight to the conclusions of this post.

So, let's go deeper. If three people's height  are, let's say, 180 cm, 192 cm and 175 cm, what is the average height? well, you sum up 180 + 192 + 175, divide the result by three, and you get the average height.

Now, let's suppose that the rate of inflation for 2016 is estimated to be 3%, for 2017 is 6% and for 2018 is it is forecast as of 4%. What is the average rate of inflation?
Well, it seems easy: 6% + 3% + 4% = 13% divided by three years makes 4.33%.


Let's find out; well, let's say you buy something that costs you 100 dollars at the beginning of  2016.
At the end of 2016, it is gonna cost you 100*1,03=103
At the end of 2017, it will cost 103*1,06 = 109.18
At the end of 2018, it will cost you 109.18 * 1.04 = 113.55

So, in three years, the increase of cost will be

(113.55-100)/100 % = 13.55 %

For one year, on average, it will be:

13.55/3 = 4.52

So 4.52 is the real inflation rate year over year?


The average inflation rate is the fictitious and constant inflation rate that, over three years,would produce the same increase in prices of the three single and distinct rates.

Where is the issue? Again, inflation rate is...a rate, that is a ratio. And ratios are "averaged"not with a simple arithmetic mean, but with a geometric mean.

NOTE: the geometric mean in this case is (1.03 * 1,06 * 1,04)^(1/3) which gives 1.043259 ie an inflation rate of 4.32%. So the precise figure of the inflation rate turns out to be 4.32%.

Let's see if this is correct.

The original 100 euros, with an average inflation of 4.32%, computed with the geometric mean, shall become 100*1.0432*1.0432*1.0432 = 113.55. That's correct.

Hey Lorenzo -you might object - the average mean produced 4.33%, the difficult geometric mean gave 4.32%, so who cares? Let's use the arithmetic mean and that's it!
You are right: when the inflation figures are positive, strongly similar to each other, like in this case, and you consider only a few  years, there is not so much difference. Economists would say that the error is negligible.

We will incur again in the geometric mean when we will compute the yield of an investment. In that case, we will see that average and geometric means can be very different, and painful for your wallet if you do not take them into account.

Conclusion: in this first post on inflation, we have understood that inflation is a raise in the prices of things, from the vegetables to the houses to the treasury bonds to the cost of the bust tickets.
Inflation constant means price are raising, not that prices are constant.

So, just to make you "taste" inflation, let's suppose that for 5 years inflation rate is 5% year over year. And let's suppose that in the contract of your rent, it is clearly stated that the rent adjustment is based on inflation figures released by the statistics department of the government. It is not bizarre: my own rent contract in the Netherlands states that! So, let's suppose that today you pay 1000 euros per month for the rent.
How much will you pay five years from now?
1000 * (1 + 0.05)^5 = 1276 euros.
That is a whopping 276 euros more, or an increase of almost 30% of your rent.
So, 5% for 5 years is not 25% more, it is 27% more!

Now, as a family father, you understand that if you have an apartment to give for rent, it is good for you to write a contract in which the rent is linked to inflation, if you see that inflation is expected be positive for the forthcoming years. On the opposite, if you think there will be deflation, just go for a rent contract with fixed payments.

Coming back to my experience: in the house I have given for rent in Italy, I have chosen a fixed payment contract. There is almost deflation in Italy in the real estate sector. Here in the Netherlands, I have chosen an inflation linked rent. There is almost deflation also here, so I do not expect my payments to increase, at least until mid 2017.

We will come back to inflation again in the near future: sectors, causes, consequences, and forecasts for the real estate market and for government fiscal policy. We will also see that there is a good deflation and a bad deflation. And that the way inflation is created increases the gap between the poorer and the richer.

Inflation is the most important macroeconomic indicator that Central Banks use to steer their monetary policies. And the decisions taken by Central Banks have an indirect yet deep impact in our everyday life.

Survivalship in a world of dis-information: information, signals and noise (part 2) - How I made money with Brexit

In the previous post, we have seen that we live in a world that, they say, is bombing us with information. To me this assertion is deadly wrong. We live in a world which is bombing us with noise and biased information.
Among the others, the problem with this so-called  information is that this so-called information is quite often copied and pasted from one newspaper/TV news to another, hundreds of times. So the source is mostly the same, typically it is an institutional source, from a government's spokesman, and the outcome is that information is unavoidably biased and amplified at every stage of replication: you look at the event of the notice always from the same angle, super shiny. If there is a blind spot, you cannot see it.

Plus, the information we are getting is so overwhelming that, as a matter or fact, becomes useless: what kind of useful decisions can we take if we do not understand the root causes behind events and we have no time for thinking in a clear and unbiased way?

So, are we really talking about information, or about noise? Are we dealing with useful signals, or with glitches, spikes?

We have to be clear about what information is, and what is not.

There is an engineering branch, called information theory, which is extremely important and, to me, fascinating. It is not so trendy as microprocessors and fiber optics.  Yet, bear in mind that the personal computer, the mobile phones, the internet are based on the theories developed in the '40s by the founders of the information theory. These theories are high abstract and mathematical models which paved the way for the revolution of the digital media and the fall of the analog systems.
You can find all the details about its founders, types like Shannon, Hartley, Nyquist on internet. Shannon is the pillar.

Coming back to our original question, what is information for our purposes, within the scope of this blog? Information is whatever proves to be useful to take your decisions.

In information theory, the concept of information is strictly tied to the concept of the likelihood of an event to occur. If a remote event occurs, the information is very valuable. On the contrary, if an event is expected to happen with high probability, the information it brings is poor.

It is a (philosophical?) point that is very important to understand. Information is not only the news that you learn about an event that has occurred. This is a news. Information is linked to the expectation you had if that event would occurr or wouldn't. The less likely the event to occur, the most important the information content.

Let's make a real example: Brexit.

Brexit was mostly unexpected. The news carried out by the outcome of the referendum fetched a huge information content. It was a huge information content because it was highly unexpected. And, since the information it brought was important, the effects were immense.

NOTE: for geeks, if we consider I as information, and p(E), the likelihood p of an event E to occur, we can say  that

I ~  1/p(E)

where the symbol ~ means "proportional to". So if the likelihood of an event E to occur is remote, the associated information content is high. 

Information is always conveyed through a signal. That is, a signal is the carrier of the information. In the case of Brexit, the signal was the outcome of the referendum poll.
So, signal and information cannot exist without each other and they are often used interchangeably.
Anyway, there is a distinction. A signal always, ALWAYS, carries noise, which hides the true information. In electronics, noise is simply an unintended electric quantity that superimposes or modifies or distorts the useful signal. Useful signal is another term for "correct information".

A corollary, ie an immediate consequence of this definition of information, is that most of the news we listen on the radio, watch over the internet, does not bring information, but noise. They are completely useless to help us take the right decisions. They can flow so fast, their intensity can be so large, that we lose the real useful information hidden inside these signals.

Let's move back to the Brexit's example.

While giving the news, the opinion makers were repeating that old, uneducated (not to say boorish) people leaving in the suburbs or in god's forgotten lands had decided for the future of the young generations, driven by populist leaders like Nigel Farage.
Is this information? No, it is not.
The information was that there was a referendum, the outcome of the referendum was highly unexpected, and it created panic in those who were not ready for such a change.
Is the blame on old generations noise? yes it is. Why? well, let's just make the following observations:

1. if democracy is so valuable for young generations, why didn't young people go to vote on mass?
2. if young people are so attached to the euro-values, why did they consider not important to fight for these values putting a cross in a poll station? it was too much of an effort?
3. since young people are complaining that whatever they vote, nothing changes really (so the hype about "occupy Wall Street", Podemos, Movimento 5 Stelle), why did not they use a "people's tool", like a referendum, to change things?
4. if you are getting older and your future is detrimental, and all you can hear from the government is that if you vote against Europe you make a mistake without explaining the reasons why your conditions are worsening, what do you do? you protest to change those things that the policymakers have not been able to change until now. It is simple, straightforward. It is called vote of protest. Why are you so scared if you believe you are working in the right direction despite what old generations and unemployed people think? On the medium and long run, people will be better and nobody would vote for a Brexit.
5. People vote against something if something is not good for them. Did the old took away Erasmus from the young generations for the sake of spiting him or was there something else more important at stake?
6.  Are there any other points we missed in this question list?

This is an example of the use of LOGIC. It is bizarre that journalists that are supposed to have studied philosophy, of which logic is a branch, forget about how to implement what they used to study at the high school or at the college when they have to apply it to everyday life.
Well, actually, they did not learn how to apply logic: they simply passively learned what others had written.
Nevertheless: by using logic, you decrease the amount of noise and start seeing the right pattern. The problem with the correct use of logic is that it requires time, energy, memory and, above all, training.  The nice side is that it is a never-ending process.

NOTE: for geeks, the simplest form of applying logic with news is the equivalent of a low-pass filter in electronics or a moving average in a chart. You narrow down the fluctuations and look into the real pattern of data. The problem is "what do I measure to get the right information? what correlation analysis shall I perform? what regression analysis shall I run? what may be the links between two different events that occurred far away in space and time? what model validation do I need?", in other terms LOGIC is an active and self-learning and energy-consuming process, while low pass filters and moving averages are simple passive and low power demanding tools, like a google search with key terms. 

So, information is essential to drive you take the right decisions. Noise is whatever is superimposed to the correct information and drives you take the wrong decisions.

Now, in engineering the noise can have a stochastic (ie chaotic) nature or a deterministic (yet unknown) nature.

To adapt the engineering noise into real world news, we can think about the hype on Brexit as a  stochastic noise: you cannot foresee all the stupid things the policymaker and opinionmakers can say about the causes of the vote. Nevertheless, some newspaper will be left-wing biased, other right-wind biased: this deterministic approach is known and you may take it into account. You know that a populistic right-wind newspaper will mostly blame European bureaucrats in Brussels, and a left-wind populistic newspaper will blame their so called rightish populist leaders.
In order to train properly your logic, you have to demolish both positions as far as you can: what is left, is the real information, the real causes of the Brexit according to YOUR brain. 
When you understand the root causes, you can start taking advantage of the outcome, whatever it is.

I have made mine this famous quote by the English philosopher Herbert Spencer:

In other terms, I do not follow the attitude of the typical teacher who repeats like a parrot the concepts she has studied on textbooks without ever applying them to the REAL life.

The ultimate aim of knowledge is action.

In the case of Brexit, it was very simple to make money whatever the outcome would have been. I followed this approach.

1. If the Brits voted for the leave, this would have send a huge shock throughout the markets. So, Gold would have skyrocketed as a response to the collapse of the fiat money system.
2. If the Brits voted for the remain, this would have reinforced the EU leaders to go on with the austerity plan. The rage of the lower class would raise, because their protests would have been ignored so the risk of riots and protests in UK would ramp up. In this case, Eurozone would have breathed only a momentary sigh of relief, and gold would be constant, or slowly rising, due to presence of world spreading negative interest rates.

So, in any case, a bullish position in gold was a win-win strategy because this referendum was a lose-lose for Bruxelles and the European Central Bank. To get a risk-free leverage effect, the position was buying gold mining stocks. I did not use futures, nor other derivatives. If I had been British, I would have taken FURTHER profit by buying gold in Sterling two days before the vote, so taking advantage of the currency exchange.
1. Leave wins: sterling collapses, gold skyrockets in pounds, I sell the gold I bought in pounds and I kill two birds with one stone.
2. Remain wins: this was what markets were expecting, no information, so things would not change. I keep gold in view of lowering interest rates that kill people's savings.

And I made money due to this approach. I paid up my Summer holidays entirely. Correct information, logic-proof, and separation between noise and useful content were extremely important to take correct decisions.

It took me three years to get to this point from zero, while changing country, job, colleagues, and working as an engineer in aerospace companies, not as an economist immersed in the "right environments" or as an investor. And If I can do that, you can do that too. You have to change "vision" and exercise your logic constantly: not an easy task, but rewarding.

Sunday, July 24, 2016

Survivalship in a world of dis-information: information, signals and noise (part 1)

Figure 1: if you can read the pattern inside, you are not daltonic :-)

Today I am gonna talk about some key terms that you hear from the TV news, or read on the newspapers, especially when they are misplaced.
Bear in mind that this blog is meant for a family father or a curious guy who wants to understand what is really going on in the world of economics to protect his wealth, or to increase its assets, with the aim of providing his family with:
1. a good education
2. a nice house, worth its price
3. an understanding why the eurozone is a complete fail, no matter what the newspaper may write
4. why on average you are getting poorer and poorer if you are employed and you live in the Western Countries.
5. ideas on how to invest your money, or not to waste it, to improve your well-being

The aforementioned examples are only a few cases I have been covering: I will expand examples and studies as long as I go on writing on this blog. Of course, before you start to invest, it is important to understand what money is, what credit is, and how to avoid epic mistakes by getting into debt without knowing the risk associated.

As you may have guessed, I like having the  complete picture clear in my mind before writing. There are bloggers who are very good in keeping up to date with news and decisions from Central Banks or the European Parliament. I prefer a long term approach, and explanations that can be applied for years and years and can help you identify a trend, that is a path inside a large deal of information, quite often contradictory.
TV news and papers copy the news from each other (I will cover the reason for this in a dedicated post, because it is a very important and interesting topic), so it is very difficult to build a good opinion from information which is the same wherever the direction you look in: in other terms, it is difficult to get information with an acceptable degree of diversification.

  • whatever you political orientation is (left-wing or right-wing), 
  • whatever your education level or kind is (graduated, under-graduated, technical or humanistic)
  • whatever your personal interests are
  • whatever your personal attitudes may be

you take your decisions on the basis of the information you get from the world around you, that is friends, relatives, children, tv news, radio, books etc.

What your ears hear, what your eyes see, your mind is inclined to believe. You cannot escape this: you are a human being and yout brain correctly take decisions on the basis of the inputs it gets from the surrounding world.

The problem is:
what if the inputs are biased, wrong or incomplete? 

There have been cases of philosophers who so strongly believed in what there schemes about the world were, that they preferred to end up losing their mind or their physical faculties than recognizing that the experiences coming from the outer world were contradicting their sophisticated architectures. In philosophy, this attitude is called solipsism and, in a moderate doses, it is extensively valuable to live better and to focus on the right news and right signals.

NOTE: have you read the book "The big short" or watched the homonymous movie taken from the novel? In the movie, which is very close to the book, the character of Michael Burry, an investor who took huge profits from the american subrime crisis, was wonderfully played by Christian Bale. The guy was an man who, thanks to his genius and especially to his sickness - he suffered from autism- could see hidden patterns in million data that nobody was looking into and that no one else would have gut a clue from in any case!

Figure 2: gifted autistic for "unusual" pattern recognition

There is a drawback, or a risk, in this attitude:  if you look for hidden patterns everywhere, and every time, you end up going out of your mind in the worst case, or becoming a permanent conspiracy theorist in the best case.
In both cases, you get your feet off the ground and look only for evidences to confirm your theories: you become biased, and you are unable to look at the world with a detached view.

Typically, the more sophisticated and educated you are, the more you look for a general "scheme" behind things and you tend to isolate your mind from the daily noise coming from the customers in a bar, the chronicle, the economic and social complains from your neighbor etc.
You try to look at signals that are worthy to you, valuable to help you take decisions (change house, change job, change country) with the minimum risk and the best outcome.

So, we have three key terms here, that I have emphasized:
  • information,
  • signals, and 
  • noise.
In some of the next posts, I will cover the meaning of these three terms, and I will make examples taken from today's world and news to show up how information is rigged, especially in Europe's press. I will try to provide you with the means of understanding when information sounds "strange" or "rigged".

Saturday, July 9, 2016

My moving to the Netherlands: expenses

I already explained in another post the reasons why you should leave your country if the expectations for improvements for you and your family are vanishing. Sometimes our mind is extremely brilliant in finding explanations for not moving. Here I recap some of the justifications we give to ourselves:

"I am too old to leave."

"I don't speak the language."

"I don't have enough capital to make a move." 

"I can't leave my aging parents behind."

"My parents and grandparents were born here; I have roots in this country/I'm not going to be a coward and I want to fight for my country".

I respect everybody's decisions, but, really, if you are unhappy with your situation, or if you are scared about your job, your financial safety, just take a sheet of paper and WRITE pro's and con's for staying or going. 

I will tell you about my experience. 

First, you have to be aware, of course, that moving with a family may be hard and expensive, especially in the first year. So you need some savings apart. That's why you must evaluate carefully what you are going to do. If you are on your own, then this post is not meant for you: you typically have a native family to come back to if situation gets worse. You are in a lucky position. 

Second, I consider that you and your family rely on your own: no extra aunts, grandparents to ask for help. Me and my wife, personally, had our parents and relatives hundreds of kilometers away. If you have a network of relatives to rely on, that's good for you. 

I moved from Italy to the Netherlands in the Summer of 2014. I got the job after an interview in May. 
I had to plan:

1. the moving
2. what to do with my house in Italy
3. where to live in the Netherlands
4. how to organize the new school for my child

So, me and my wife spent one week in Leiden, close to the place I would work, in early Summer. I contacted some real estate agencies for a house to get for rent. I visited 12 houses in two days, I made up my mind for one of them with my wife ( we wrote on a piece of paper, in a pub, in front of a couple of beers, the advantages and drawbacks of each solution), finally one day before leaving we signed the contract. In the meantime, my kid was with his grandparents, in the South of Italy (extra expenses to go there, leave him with his grandparents and go back to Rome and fly to Amsterdam).
I say it again: you have to plan it carefully. 
Be aware we had our own furniture to move to the Netherlands: so we wanted an unfurnished house.
We also got information for the school that our kid would attend and for registering and getting the residence in the country. 

When back in Rome, we contacted several moving agencies to get an estimate for moving our furniture:  the cost was around 5000 euros. Fair price to cover 1750 Km, and the owner of the company removals was a nice and straight guy in his late fifties.

So, no vacation in 2014. Too many expenses and too many things to organize. 

It was just the beginning. Soon I would have to deal with:

1. Car registration - a nightmare!
2. Healthcare system
3. Social Security system
4. Tax office

plus a collapse of the real estate market in Italy that has prevented me from selling my house at a decent price. 
That's nice, eh?

Until next time. 

Thursday, July 7, 2016

Money Series: difference between credit and money - Is there any?

This post is part of the money series.

Last time, I explained my position about money, that is there are currently three types of money, namely cash, bitcoin and gold.
Cash is legal tender currency, that is it is backed by the government. If the government collapses, between toilet paper and cash I would prefer toilet paper because toilet paper would be much more useful. In any case, no government will crash overnight, so this is simple academia.
Bitcoin is digital cash and, differently from ordinary cash, its issuing is decentralized. It is not very much diffused, ​it is extreme volatile with respect to other currencies, and its main use is still speculative.
Gold is the ultimate form of money, and it is used especially as the store of value of last resort, since it is physical, atomic number 79. That's why, even if mondern Keynesian economists look at gold as a barbarous relic, it is jelously stored in super guarded vaults and countries like China and Russia are piling it up.
NOTE: There are many reasons why gold has been used as a form of money for centuries in the western countries, and it is not only because it is beautiful and shiny. I will talk about this in one of my next posts. 

Why I consider these three types of "entities" like money? Is your debit card money? what about your credit card? what about your savings deposit? What about cheques? What about the securities that you have in your portfolio -if you have any-, like bonds, stocks, stock options, futures etc?

Well, I consider all the aforementioned examples of money as, indeed and more correctly, instruments of credit or debt.

The difference is the following: 

1. money does not bring interest or commission costs when you use it. 
2. Credit brings interest and commission cost when you use it
3. Debt is the other face of Credit, ie, for every credit, there is a debt. For every creditor, there is a debtor. 

Let's make some examples taken from real life:

1. You go to the local market and you buy a sack of potatoes which costs you 5€. You pay cash. You get your sack of potatoes. The shopkeeper takes your cash. End of the story. There is an exchange of cash for goods, ie potatoes.

2. You go to the local market and you buy a sack of potatoes which costs you 5€. You have run out of cash and you pay with your debit card (bank card). You take your sack of potatoes. Your bank account is decreased by 5 €. The shopkeeper's bank account is increased by 5€. This is not the end of the story. To use your debit card, you need a bank account. This costs you in terms of commissions. To have the right for using the bank card reader, the shopkeeper needs a bank account, plus she pays extra cost for using the card reader. It is less money for you and the shopkeeper, more money for the bank.

3.  You go to the local market and you buy a sack of potatoes which costs you 5€. You have run out of cash and you pay with your credit card . You take your sack of potatoes. Your bank account is not decreased by 5 €. The shopkeeper's bank account is not increased by 5€. To use your credit card, you need a bank account. This costs you in terms of commissions. Plus, you need a contract with, for example, Mastercard. Each time you use your credit card, you are paid a commission for the transaction. At the end of the month, 5 € are subtracted to your bank account. 
Let's come to the shopkeeper, for her the situation is worse: to have the right for using the bank card reader, the shopkeeper needs a bank account, plus she pays extra cost for using the card reader. Plus, for each transition, part of the 5 € are kept by Mastercard, let's say 2%. At the end of the month, on the bank account of the shopkeeper ony 98% of the 5€ are transferred, ie 5*0.98=4,9 €. Ten cents less. 
If the shopkeeper 1  uses 4.9 euros to buy another thing by means of her credit card at another shopkeeper 2, and shopkeeper 2 goes to buy something at shopkeeper 3, and again and again, after 10 transactions, the original 5€ have become 4.1 euro. 0,9 € of the street guy's purchasing power have been destroyed or, which is the same, have been transferred to the types of Mastercard. 

4. You go on internet. You buy an antivirus license for 30 dollars. You pay with paypal. Paypal takes 2.9% + 0.3 dollars for each transaction from the seller's account. The principle is the same as example 3.

5. You go on internet. You buy an antivirus license for 30 dollars. You pay with bitcoin. 30 USD in bitcoin are 0.0465 BTC. You transfer 0.0465 BTC from your wallet to the seller's wallet. End of the story. 
NOTE: In some cases, a minimum fee may be required, a few USD cents, but the larger the pool of users, the less the fees will become.

With cash, after 10 transitions, 5€ are still 5€. With bitcoin, after 10 transitions, 0,01 bitcoin are still 0,01 bitcoin, with gold, after ten transitions, one ounce of gold is still one ounce of gold. No hidden costs. No commission cost, no interest.

6. You go to the bank and you ask for a mortgage, let's say 300 thousand dollars. The commercial bank, out of thin air, creates 300 thousand dollars, in your bank account. Now you have 300000 dollars of purchasing power. Of course, this comes at a cost. Firstly, you need to open an account, and, secondly, you have to pay an interest on that money. This interest is higher than the interest the bank pays you keep your money. So, it is not "real" money, it is CREDIT. You know how three hundred euros look like in the ledger of the bank? They look like this: "1001001001111100000". 
Now, let's suppose that you get out of the bank and withdraw 250 dollars from the cash machine. Your bank account has decreased to  299750 dollars. Now you have 250 dollars in cash and you can buy lots of sacks of potatoes. Is it real money? Yes it is, you can use it whatever you please. The problem is that you are paying interest on the original 300000 thousand, not on the remaining 299750! 

So, can we conclude that all money nowadays is in reality credit?

Yes, we can. The key point to understand here is how money is created, because money is created by commercial banks and each time a bank creates money, it creates an instrument of credit (for the bank), and an instrument of debt (for us, because we have to pay the original sum PLUS an interest).
NOTE: also Central Banks create money, but this money does not intervene directly in the economy of average Joe. We will talk about this in future posts.

The main difference is that, once credit has become cash, because you have withdrawn your money from a cash machine, the banks have no possibility to track it and to ask for extra commision costs or interest for each transition.  

So, in a nut shell:
  1. Banks create money
  2. Money is credit for the bank, debt for you
  3. Money always come with an interest
  4. When money becomes cash, or bitcoin, it can be transferred without extra commissioning or interest costs. Nevertheless, you still pay interest on the original creation of the money that you have withdrawn from the cash machine. You cannot escape from this.

I hope these examples have made things a bit more clear about the difference between money, credit and debt today. 
I will come back to these points many times in the future. 
Money is not related AT ALL with the effort that you make to do something. Not any longer, not in the present world

In most of the situations we only use the word money, even if what is behind it is actually credit. 
No problem. The important thing to understand is that nowadays money is credit, since it is created by commercial banks. 

So, in my future posts, unless I want to stress the difference between the three, I will use the term money, credit and debt interchangebly. And I will also explain why Credit is essential, and why Debt can be a good thing.

See you back in August.

Wednesday, July 6, 2016

Money series: what is money?

This post is part of the Money Series.
In a recent post, we have started to grasp the deep reasons of raising inequality in the western countries: in a nut shell, due to globalization and fiat money system, the western countries have undergone deindustrialisation, which has caused salaries to stagnate and debt to raise exponentially. At the same time, due to the huge mass of money created by commercial and central banks, the guys of Wall Street and of the financial City of London have seen their wages and benefits skyrocket.

In another post, we have discovered that amongst the many trends coming from the USA, there is the burden of debt taken by students who desire to get a degree: quite often, instead of finding a good job, they simply jump from one degree to another and remain unemployed or become waiters, bartenders or receptionists in call centers.

And, in another post, we have seen why countries like Italy, Spain or Greece have been suffering a lot since the crisis in 2008. Due to the stiffness of the euro system, creditor countries have literally "sucked" away wealthy from the peripheral countries. In other terms, not only the western countries have been struggling to escape from the grip of debt, but the euro zone countries in the Mediterranean belt have had to face extra problems coming from the adoption of a common currency. Italy, for example, has been experiencing the worst crisis since the unification, in 1861 (if we exclude two World Wars, but the TV news tell us we are in peace time).

From the examples aforementioned, we have started to catch a concept: money is not a trivial thing to understand.
If somebody is able to control how much money a country can dispose of, actually this somebody is able to make a country thrive or fail.

First of all, we need to understand what money is.
In essence, money is the means you have at your disposal be exchanged for goods and services, and be used as a store of value

In other terms, money is whatever is accepted between a large community of buyers and a sellers as a means of payment for goods or services: the place of exchange is commonly referred to as market. Therefore it is portable and it can be used as a store of value. And, due to the fact that you can use it for transactions of different quantities of the same stuff, it has to be divisible according to some metrics.

We are talking about large communities because an exchange between two persons may be a barter: there must be something that can be exchanged and exchanged several times, always being accepted and without losing purchasing power over the transitions.

Now let's clear up an important concept. According to my opinion, and I will keep this point in all my future posts in my blog, there are only three kinds of REAL money at present:

1. cash
2. gold
3. bitcoin

Let's discuss them one by one:

Cash, like banknotes and coins, is de facto the simplest form of money in circulation. It is used as a means of payment for transactions. It is portable. It is a store of value. Banknotes and coins are issued by the Treasury of a Country, in very limited quantity because nowadays most of the payments (over 97% of the total payments) are executed cashless, ie electronically.
The value of cash is based on the trust you rely on the government and economic situation of your country. If your country collapses, and you discover that to buy the same stuff you used to buy the day before you need the double of the notes in your wallet, well, cash become useless.
This is an extreme case, of course. But you need to understand the concept behind. Cash has a value because the government grants for its value.

Now there is an important point to catch here: cash does not return an interest. We will come back to this point in the future.

The most ancient form of means of payment and store of value, universally accepted. It is considered the definite money. Something that has "intrinsic value". This is not formally correct: whatever value is subjective but, since gold is universally accepted, both in time (present and past) and in space (different countries and states) then it is considered to have "intrinsic value". Of course if you are dying for lack of water in the middle of the desert, you don't give a thing of a gold bullion: you only want a bottle of water. But this is an example for academic purposes: when a grandmother gives her niece a present, it is generally a gold ring or a gold necklace , not a bottle of Perrier.
Like cash, gold does not return an interest.

It is an example of criptocurrency, at present the most diffused and used amongst the criptocurrencies.
Differently from cash (a promise to pay granted by the government) and gold (sound money), it is completely digital. It is a complex matter. For now, suffice it to say that there is no central bank that keeps control of the amount of bitcoins. The control of the payments is done via a decentralised set of servers. It has several pro's and some con's. The main drawback is that nowadays its market is tiny, very speculative, extremely volatile. Nevertheless you can purchase some things (both goods and service, like the subscription to an antivirus program for your pc) and it is especially suitable to grant anonymity (like cash) and for micro-payments (like cash) without paying fees to your banks. As far as I know, you cannot yet buy a car or a house in bitcoins.
Is it portable? well, not its classical meaning. You have a sort of "wallet"that is digital, and that is linked to your identity by means of a private and a public key. In any case, you can use it wherever you have a wireless connection with a smartphone. So, yes, it is portable, and thanks to your wallet, it is also a store of value. Bitcoin is, as a matter or fact, digital cash.

And, like cash, Bitcoin does not return an interest.

Today, cash is being banned. They say it is to contrast the criminal activities of drug dealers, tax evaders,  pimps and so on. Indeed, cash is such a small portion of the overall payments worldwide that this thing is ridiculous. There are many sophisticated and legal systems for eluding taxes; therefore the war on cash has another purpose, in my opinion. Cash grants for anonymity. Cash is not under direct control of banks. If there is a bank run, and the ATM's are closed (like in Greece in 2015), those who have cash are in a very strong positions with respect to all the others that have to queue in front of an ATM at five in the morning. By banning cash, if banks overnight shut down, you are shut down with them. So, in case of a bail-in, your savings can be sucked up to recapitalize the banks.
The simple idea of a bank-run would simply cease to exist. If cash is banned everywhere, which bank can you run to in order to take your money back if your bank is going bankrupt? Or if the government needs to raise funds from private citizens without formally raising taxes?
This is already happening: if you try to withdraw an important sum of money from your bank, this is seen as a very suspicious activity, even if you have worked hard for that money, for which you have paid all the taxes to the government, the town hall, the region, plus contributions to welfare, retirement funds etc. Just remember: when you deposit your money in a bank, that is not your money any more. It is a liability of the bank towards you. You become a creditor for the bank.

The main problem for a lover of civil freedom is that the control over the issuing of paper money (notes and coins) is centralized. This gives bankers and the government a huge control over your life. Bitcoin seems to overcome this problem: it is anonymous, it is decentralized. Plus, you cannot create bitcoin at will as you can do with paper money. This is important: the maximum number of bitcoins is mathematically fixed, so for sure the bitcoins in you digital wallet cannot lose value overnight once the bitcoins are sufficiently diffused and used by the people.

There are many other implication behind the ban of cash, but it is out of the scope of this post.
One point that I want to highlight is that the recent surge of gold is mainly due to the lack of confidence of major investors in the banking system. That is, lack of trust in the present credit system. This has driven also to a raise in bitcoin. Differently from bitcoin, gold is real, it is made of atoms, atomic numeric 79. Bitcoin is not electrons, it is even less than electrons: it is complex coded information. I do not fins in any books I have read about bitcoin this concept, ie that bitcoin is coded information. Ans, as information, it can be potentially hacked and needs hardware to be stored and used.

In one of the next posts, we will discuss what credit is, why it is different from money, even if we use the words credit and money interchangeably. Indeed, doing so, we are confusing the average street guy. And we will also talk of the other side of credit: the debt.