Global unease, from commerce to currencies, rattles raw materials

Are the worst fears now priced in?

THEY make an intriguing posse: about 160 “scouts” in jeans and muddy boots, jumping out of cars with ropes in hand, plunging deep into corn (maize) and soyabean fields across the American Midwest. They are not just farmers. They include commodity traders and hedge-fund managers. Their quest: to predict this year’s harvest by using ropes as a measure and counting, to the last ear of corn and soyabean pod, the yield in a given area. “We have a really beautiful crop. I think this is going to be a record,” says Ted Seifried, a market strategist at Zaner Group, a commodities brokerage in Chicago, during a stop in Nebraska on August 21st. The mud on his boots is a reassuring sign of ample moisture in the soil.

But when he gets back into the car with others on the Pro Farmer Midwest Crop Tour, the talk turns to darker subjects, such as trade tensions, collapsing currencies and what he calls the start of an “economic cold war” between America and China. “While we’re driving the 15-25 miles from field to field, we certainly have a lot to talk about. By and large the American producer thinks the fight with China is just. But it’s very much affecting the pocketbook.”

From the midwestern farm belt to the commodity markets of Chicago, New York, London and Shanghai, this is a tricky time to be producing and trading commodities. Americans may relish their stockmarkets soaring (see article). But a rising dollar, higher American interest rates, sliding emerging-market currencies and fears of a tariff-induced blow to exports to China have taken a toll on commodity prices in recent months (see chart 1).

In the background lurks climate change, fears of which have grown with the heat and drought battering Europe’s wheat crop this summer. European grain prices have surged as a result. But those of many other commodities are sagging. On August 22nd a pound of arabica coffee fell below $1, less than the cost of a takeaway brew and the lowest in 12 years. Raw sugar was also at ten-year lows. Both have been hit by oversupply in Brazil, as well as a slide in the value of the real, the Brazilian currency, which makes it more compelling to sell crops, priced in dollars, rather than store them.

The previous week, prices of copper fell into bear-market territory, down by more than 20% since June, on fears that protectionism would dampen global growth, especially in China, whose efforts to crack down on financial leverage are another drag on expansion. Oil prices have dipped for seven straight weeks, also because of concerns about lacklustre demand in emerging markets and because a strong dollar makes it dearer for those with weak currencies to buy crude. Gold has developed a strange habit of sliding in sync with the Chinese yuan.

American corn and soyabean prices, meanwhile, continue a long streak of weakness caused mainly by harvests that get more bountiful by the year. The Department of Agriculture is forecasting a record corn yield this year and the biggest harvest of soyabeans ever, something the crop tour is likely to validate, Mr Seifried says. But that is lousy timing, given that China, which was America’s biggest buyer of soyabeans, raised retaliatory tariffs on the crop in July. Farmers hope to sell more in Europe, where soyameal for animal feed is in high demand because of the high cost of wheat. But the slide in the real also makes Brazilian soyabeans more competitive.

Optimism flickers from time to time. Many commodities rallied in the run-up to the latest trade talks between American and Chinese officials, which were due to end after The Economist went to press. The dollar fell, bolstering some commodities, after President Donald Trump said in an interview with Reuters on August 20th that he was “not thrilled” with the Federal Reserve’s policy of raising American interest rates. Progress in talks on the North American Free-Trade Agreement would also be good news (see article).

But BHP, the world’s biggest miner, issued a blunt assessment of the longer-term dangers to its products during its otherwise promising year-end results on August 21st. It said protectionism was “exceedingly unhelpful” for broad-based global growth, adding that Sino-American trade tensions could weaken both countries’ GDP growth by a quarter to three-quarters of a percentage point, absent counter-measures. Both America and China imposed another tranche of tariffs, on a further $16bn-worth of each other’s goods, on August 23rd.

Analysts point to two main ways in which these tensions hurt commodity prices. The first is because of the rising importance of emerging markets to demand. In a report in June, the World Bank calculated that almost all the growth in the past 20 years in global metal consumption, two-thirds of the increase in energy demand and two-fifths of the rise in food consumption came from seven countries: Brazil, China, India, Indonesia, Mexico, Russia and Turkey. This group now exceeds the Group of Seven industrial nations in consumption of coal and all base and precious metals, as well as of rice, wheat and soyabeans. Commodity prices are therefore far more sensitive to these countries’ fortunes than they used to be. Hence their walloping last week when the plunging Turkish lira gave a shock to other fragile currencies.

The second is speculation. Ole Hansen, head of commodities strategy at Saxo Bank, says that fears of a trade war have clobbered prices of the most globally traded commodities, notably copper, as short positions by speculators have surged (see chart 2). China accounts for half the world’s demand for copper, the same share as its consumption of steel. Yet steel prices have fared much better because the most liquid steel contract is in China, which is much more affected by domestic supply and demand factors than big global bets. A steel-futures contract in Shanghai touched a seven-year high on August 22nd.

As ever, demand from China remains the biggest swing factor for commodities. BHP reckons China will use fiscal and monetary expansion to help offset the impact to its exports from the trade conflict, which could benefit commodities. But even if the worst is now priced in, plenty of volatility lies ahead. As Mr Seifried quips from the cornfields of Nebraska, “predicting the future is a son of a bitch”.

The Industrial Revolution could shed light on modern productivity

Researchers differ on whether rising wages gave the impetus to industrialize.

HOW much yarn per day could an 18th-century British woman spin? Such questions are catnip for economic historians, whose debates typically unfold unnoticed by anyone outside their field. But a running debate concerning the productivity of pre-industrial spinners, and related questions, is spilling beyond academia. Each probably produced between a quarter of a pound and a pound of yarn a day, the historians have concluded. But at issue is something much more profound: a disagreement regarding the nature of technological progress that has important implications for the world economy.

Economic growth of the sort familiar today is a staggering departure from the pattern of pre-industrial human history. More than a century of study has not resolved the question of why it began where and when it did. This is a matter of more than historical interest. Weak growth in productivity has economists asking whether humanity is running out of ideas, and whether it is losing its ability to turn new technologies into rising incomes. A clearer understanding of what exactly happened in 18th-century Britain could shed light on the matter.

Those studying the productivity slowdown typically focus on supply-side factors such as workers’ skills and investment in research and development. Explanations of the Industrial Revolution often draw on similar factors, namely the characteristics of Britain that made it a fertile place to apply new technologies to production. Some scholars emphasise institutional features such as the emergence of stable parliamentary democracy, the rule of law and secure property rights. Others credit Britain’s capital markets, communities of skilled tinkerers and cultural habits that encouraged disciplined effort and entrepreneurial ambition.

But if such factors are necessary for industrialisation, they do not appear to be sufficient. Though other parts of north-west Europe shared many such features with Britain, it was in Britain alone that industrialisation began. Economic historians have therefore considered the “demand side” of industrialisation: the conditions under which firms found it worth experimenting with unproven technologies. In particular, scholars are embroiled in a debate concerning the “high-wage hypothesis” put forward by Robert Allen.

Over the past two decades Mr Allen has argued that the key to Britain’s industrialisation lies in the expansion of commerce and trade that preceded it. That had pushed up wages for British workers, while pay elsewhere in Europe stayed flat. On the eve of the Industrial Revolution, British firms operated in a market where coal was cheap but labour was dear. It thus made sense for firms to seek ways to use coal-fired machines to wring more out of their workers. At British wage rates, tinkering with new spinning or weaving equipment made sense, Mr Allen writes, whereas in France, say, new modes of production were less likely to pay off. Not until decades of mechanisation and innovation in Britain had boosted the efficiency of new equipment was it worth adopting on the continent.

Mr Allen’s work has prompted a wave of research delineating the contours of the high-wage argument. No systematic income data existed at the time. Scholars must instead glean wage information wherever history chanced to leave it. They must determine how productive workers were (hence the debate about daily spinning rates), and whether they were typical of most labourers. And then they must work out what such workers bought with their earnings, and at what price. Consumption of expensive wheat bread might imply that real wages (that is, adjusted for living costs) were low—unless those workers could have bought cheaper bread, made from oats or barley, which would suggest they earned enough to afford a luxury.

This work has galvanised efforts to understand a critical period in economic history. New research by Jane Humphries and Benjamin Schneider, for example, reveals information on the economic role of women and children, who earned less than men, in the spinning industry. Judy Stephenson has uncovered new details about construction workers in London and shown that many estimates of working hours are probably too high.

Those who disagree with Mr Allen’s thesis try to find evidence to support a rival, older, theory that the impetus to industrialise came from low wages rather than high ones. In this story vast pools of cheap labour in pre-industrial societies were a potentially lucrative resource and anyone who could put it to better use stood to benefit enormously. In Mr Allen’s narrative, spinners’ wages, though very low by modern standards, were high enough to motivate the development and deployment of equipment like the spinning jenny. For Ms Humphries, however, capitalists found the spinning jenny attractive because it enabled them to squeeze more out of the cheap labour of women and children.

Tinker tailor

For now Mr Allen’s theory looks more compelling, though further work might easily alter the balance. Yet the central role of labour costs in both theories has lessons for economists studying productivity growth today. They tend to treat wage growth as a function of technological progress, rather than an influence on it. The ability to produce new ideas surely depends upon supply-side factors, from the number and quality of engineers a society produces to the competitive environment facing large firms. But if productivity is growing slowly, that might also be because labour costs discourage experimentation with new technologies.

Such experiments are slow, risky and expensive. When profits are high and wages stagnant, they are hardly worth the trouble. Until wages become too high, human burger-flippers and call-centre workers, like hand-spinners, will do.

How Artificial Intelligence Is Taking Over Oil And Gas.

Artificial intelligence, or rather things like machine learning and automation, which are often wrongly called artificial intelligence, is a big thing in oil and gas right now. The hype around AI spreads a lot further than the oil and gas industry, but in it, the technology is making the first splashes and it looks like they are fast multiplying.

While “AI”—or more accurately predictive and analytic algorithms, and automation—in the upstream segment of the industry has garnered some attention already, there is a somewhat surprising part of the oil and gas industry that may be as ripe as exploration and production for some software help: permitting and environmental assessment.

Researchers from the Environmental Defense Fund are working on a system using Natural Language Processing that could streamline what is now a very complex process to the benefit of all stakeholders involved.

Here’s how one of the researchers, Evan Patrick, puts it: “Natural Language Processing pulls out information similar to how humans get information from reading. If developed and scaled up, it could turbo-charge critical analyses of oil and gas permit applications that companies submit under the National Environmental Protection Act. Other types of development proposals could benefit, too. This would, in turn, help local regulators and other stakeholders in Wyoming and beyond determine whether a project will pose a threat to wildlife, water or a cultural heritage site – and to better balance industry claims.”

This sounds like a solution to so many problems that it should be implemented immediately. And yet, getting an idea that involves processing huge amounts of information—and machine learning does involve exactly this sort of information processing—is a slow and torturous job. Basically, it means teaching computers to “scrub” data from various sources, as Patrick puts it. But while this sounds simple, this teaching process involves the input of massive amounts of data, and doing this takes a lot of time.

This is a problem that’s not unique in oil and gas, and for those developing the algorithms it’s not really a problem: it’s a step along the way that you simply can’t skip. While it’s true that we’ve become used to everything happening almost immediately, sometimes good things take time. Training algorithms to find and process information regarding oil and gas permits and environmental assessments will make life easier for thousands of people, and will make the permitting and assessment process that much more reliable.

The AI market in oil and gas has been estimated to reach US$2.85 billion by 2022, growing by a compound annual growth rate of 12.66 percent. Again, this AI market actually involves predictive algorithms, automation systems, and analytics, which are not exactly artificial intelligence, but the trend is clear: oil and gas is adopting more and more software solutions to improve their results and bottom lines. But here’s the great thing about algorithms that help the permitting and environmental assessment process: it will benefit everyone from Big Bad Oil to environmentalists.

Put very simply, “Advanced computer processing can help us catch problems that now fall through the cracks, and to react more quickly when we do find them,” according to Patrick.

Greece’s eight-year odyssey shows the flaws of the EU

The island where the euro crisis started has yet to recover from Europe’s help

KASTELLORIZO is “the end of Europe—or perhaps its beginning”. So says Yannis Doulgaroglou, co-owner of the Hotel Kastellorizo, a sunny inn on Greece’s easternmost inhabited island. A tiny rocky outpost just off the Anatolian coast, on maps of Greece Kastellorizo is often relegated to an inset. Yet it was from the island’s picturesque harbour, on April 23rd 2010, that George Papandreou, the prime minister, stared blankly into a camera and acknowledged that his troubled country had lost access to capital markets and needed a financial rescue package from its euro-zone peers. The day is etched in the memory of most Greeks. Chuckling, Mr Doulgaroglou recalls the journalists who scarpered from his hotel once they realised the prime minister was saying something momentous, leaving behind their unpaid bills.

Eight years and three bail-outs later, as Greece prepares to leave its final programme on August 20th, Mr Papandreou’s remarks seem laden with pathos. He directed his ire at the “speculators” who had sent Greek bond yields soaring, more than at the successive governments that had overspent, under-reformed and fiddled the national accounts. Yet, he vowed, with a “common effort” Greece would “reach the port safely, more confident, more righteous and more proud.” He called this the “new Odyssey”.

Odysseus faced great hardships, but his travails culminated in a happy homecoming. After so many years of servitude, it would be nice to think that Greece’s journey will reach a similar conclusion. There are indeed signs of recovery, led by strong tourist numbers on islands like Kastellorizo. Growth has returned, albeit in nugatory form. But the scars are everywhere. It is now not unusual to see a dozen men shooting up in broad daylight in the middle of a central Athens street. As Greeks know only too well, after the emigration of hundreds of thousands and a near-25% drop in GDP since 2008—almost half as much again as war-torn Ukraine—no one can mistake their country for a success story. Mr Papandreou’s predictions were precisely wrong. That is the lesson of Greece’s eight years of pain, and one that offers this columnist, shedding Charlemagne’s robes for a new posting after four years, a chance for some parting thoughts.

A good case to be made for the tedious procedures of the European Union is that they transmute inflammatory political arguments into technical matters to be smoothed away by anonymous, apolitical bureaucrats. Where countries once fought over resources or territory, their membership of a club with a common rulebook channels disputes into lengthy negotiations that result in communiqués nobody reads. Deathly dull, and perhaps a trifle undemocratic. But better than what came before.

Yet there is something self-serving about this narrative. Greece created its own problems, but was largely a bystander while “solutions” were imposed by others. The rules of its bail-outs reflected the installation-by-stealth of austerity as official euro-zone dogma. And it was the victim of bad policy as well as power politics. Other governments regularly promised Greece jam tomorrow in exchange for hardship today. But projections for its recovery consistently proved wildly optimistic, as the austerity visited on the country, wholly predictably, deepened its recession and made its debts ever more unpayable. It was the most ruinous way imaginable to make a point. Now Greece, left with threadbare public services, eye-watering tax rates, weak institutions and appalling demographics, is supposed to run large primary surpluses (ie, before interest payments) for the next four decades.

This is magical thinking masquerading as policy. Too often in today’s Europe, acute problems are not dissolved by silvery diplomats but rather transformed into chronic ailments that remain bearable, until they are not. True, banking reforms and institutional changes have made the euro zone more resilient. That was why Syriza, an amateurish bloc of ex-communists and elbow-patched professors elevated to power by desperate voters in 2015, saw its own brand of anti-austerity magical thinking quickly squashed. (The collateral damage was capital controls that have not yet, as Kastellorizo’s hoteliers and builders grumble, been fully lifted.) Greece turned out to have a simple choice: a devastating Grexit, or capitulation to the punishing terms its creditors required to keep it inside the euro.

But the euro zone’s failure to collapse bred complacency. In the past six months, amid unusually benign political and economic conditions, governments have failed to muster the will to build up the euro zone’s defences against the next shock. Nor have they used the space afforded by smaller numbers of Mediterranean crossings to produce a long-term asylum strategy, indulging instead in pointless squabbles over quotas. The sticking-plaster solutions in Turkey and Libya cannot last for ever.

These issues bubble away for years, corroding trust within, and between, countries. Odd as it may seem, governments are taking the easy way out. It is simpler to squabble and delay than to break taboos, like writing down Greek debt or forging a unified asylum policy. One lesson, then, of Greece’s crisis is that the single currency is harder to fracture than critics predicted. Another is that the EU will go to considerable lengths, including the impoverishment of its own members, to avoid taking hard decisions.

Wobbly but still upright

The EU’s ability to defer hard decisions—the legendary fudge—once testified to its resilience, or at least its ability to manage disagreements. But in a more unpredictable world, where Europe is battling instability from outside its borders and populism within, it risks becoming a liability. Alternative models, from Chinese state capitalism to Russia’s resentful nationalism, are available, and gaining adherents where voters are losing faith in the European model. You feel this especially strongly on Kastellorizo, just 20 minutes from Recep Tayyip Erdogan’s authoritarian Turkey. But the warning should resonate across the continent.

Blockchains could breathe new life into prediction markets.

Putting crowdsourcing and crypto-currencies behind an old idea.

WILL a Democrat win America’s next presidential election? Will Tesla file for bankruptcy by the end of 2019? Punters now have a new option for such bets: Augur, an online prediction market. Whether it takes off will be a gauge of the viability not only of such markets but of decentralised applications built on blockchains, the databases underlying crypto-currencies.

Augur is not the first online service that allows people to buy and sell predictions like shares. Since 1988 it has been possible to bet on American elections via Iowa Electronic Markets (IEM), run by the University of Iowa. PredictIt, a site based in New Zealand but with a largely American audience, and Betfair Exchange, a British service, also let users bet on political events. Some firms run such markets internally, for instance to predict demand for a product. All have the same goal: to gain insights into the future by giving those who hold useful information an incentive to reveal it.

But legal barriers have long hampered such attempts at crowdsourcing. In America many prediction markets are considered a form of illegal gambling, or akin to trading in commodities futures that requires a licence. Regulators have allowed such services to operate if they are structured as non-profit “research” initiatives and limit bet sizes and numbers of traders, as IEM and PredictIt do. But because of the legal risk, private investors are reluctant to finance prediction markets. Intrade, an Irish site, shut in 2013, partly because the Commodity Futures Trading Commission forced it to stop serving Americans.

Augur’s decentralised design should allow it to sidestep regulatory difficulties. In 2015 the Forecast Foundation, a non-profit group of developers, raised $5.5m by issuing a crypto-currency, REP, in a form of crowdfunding now known as an initial coin offering. Rather than living on a few servers, as Intrade did, Augur is a “protocol”, or set of technical rules, based on the Ethereum blockchain, that allows punters to set up their own prediction market. This will make betting cheaper, says Joseph Krug, one of Augur’s developers, and shift legal responsibility to bettors.

Yet decentralisation creates a new problem: who will decide the outcome of a bet? For Intrade, the firm itself declared the winner. For Augur, any holder of REP can become a “reporter”, in charge of checking facts on the ground for a fee. So that they are kept honest, reporters must stake some REP, which is forfeit if other reporters overturn a decision. Reporters can close a market they deem illegal or unethical. If they err, whether towards caution or tolerance, they can lose their REP deposit.

Markets have been created on the deaths of famous people. That has raised fears about the rise of “assassination markets” that incite people to commit murder for financial gain (none has been shut down yet since there have been no trades). A more immediate problem for Augur is getting people to use it. Predictions.Global, a website that tracks activity on Augur, lists nearly 1,000 markets with almost $1.5m at stake. Yet most are bets on the value of crypto-currencies. Worse, according to DappRadar, another website, the number of daily users has fallen from a peak of 265 in early July, straight after Augur’s launch, to 37 on August 8th.

Mr Krug says he is unconcerned. Augur is clunky and slow for users: downloading its software and the Ethereum blockchain can take hours. Now that they know the system works, he and his developers plan to make it more user-friendly. But success is not in their hands alone: Ethereum has run out of capacity and needs major upgrades.

Even if Augur is not a wild success, it is a “worthwhile exploration” of the viability of decentralised services, says Kevin Werbach, the author of “The Blockchain and the New Architecture of Trust”, a forthcoming book. Learning needs a lot of doing in the complex world of blockchains.

Turkey’s crisis is not fundamentally contagious

Spillovers through trade and banking links should be limited

IN 1546 Girolamo Fracastoro, a doctor and poet, published an elegant theory of contagion. Infections spread in three ways, he argued: by direct contact, via an intermediary, or at a distance, through the air. In medicine, his theory is now considered quaint. In economics, however, it still works pretty well.

On August 10th President Donald Trump sent a pathogenic tweet, announcing a doubling of tariffs on Turkish steel and aluminium. It followed earlier sanctions on two Turkish ministers involved in detaining Andrew Brunson, an American pastor, on dubious charges. The lira, which had already lost 38% of its value since the start of the year, shed another eight percentage points in the tweet’s aftermath.

Early medical scholars believed gluttons were more susceptible to disease than cleaner-living folk. Similarly, Turkey has become vulnerable to financial disorder through macroeconomic intemperance. Businesses have borrowed heavily in foreign currencies. The government, which has manageable debt of its own, has guaranteed large amounts of private credit.

Inflation is now over 15%, far above the central bank’s target. But the monetary authority’s freedom to respond has been hampered by President Recep Tayyip Erdogan’s distaste for higher interest rates. The current-account deficit exceeds 5% of GDP. To fill that growing gap, Turkey relies on foreign capital inflows. But rising interest rates in America make capital harder to attract.

Turkey must now cut back. The country’s new finance minister, Berat Albayrak, who also happens to be the president’s son-in-law, says the government will strengthen fiscal discipline and narrow Turkey’s current-account deficit. Turkey’s central bank has also tightened monetary policy indirectly, suspending some of its regular auctions of cash, thereby forcing banks to borrow overnight at an interest rate higher than its declared policy rate.

The slowdown in import spending will pass some of Turkey’s sickness on to its trading partners. This is a direct form of transmission, akin to one rotten grape touching and tainting another, in Fracastoro’s analogy. The countries that export the most to Turkey, relative to their GDP, include Bulgaria, Iran and Georgia. But Turkey is not otherwise a big part of the global fruit bowl, buying 1.3% of the world’s traded goods.

Most foreign lending to the country flows through the local subsidiaries of European banks. On August 10th, reports suggested that the European Central Bank was worried about the exposure of some of the euro zone’s financial institutions. That prompted a noticeable fall in the Euro STOXX bank stock-price index. As The Economist went to press, shares of the two most exposed lenders were over 9% lower.The more worrying form of transmission is the second: via an intermediary. In Turkey’s case, the intermediaries of concern are its foreign lenders, which are also important sources of credit to many other markets.

Euro-area banks have lent about $150bn to Turkey, amounting to about 10% of their combined equity. The majority of those loans ($80bn) belong to Spanish banks, especially to BBVA, which owns half of Garanti, Turkey’s second-largest private bank. Other exposures are mainly scattered among the subsidiaries of Italy’s UniCredit and France’s BNP Paribas.

For this handful of banks, the immediate risk is that Turkish borrowers struggle to repay foreign-currency debts that are now worth much more in lira terms. Thus far, the country has relatively few non-performing loans (around 3%). But defaults are expected to rise sharply.

The infection should, however, remain minor. In a worst-case scenario, European parent banks would walk away from their local affiliates and write off the equity losses. That would cost them between 1% and 12% of group equity, according to Deutsche Bank. Such costs would certainly hurt the banks’ shareholders and perhaps oblige them to strengthen their capital buffers. But it would not threaten their solvency or require outside intervention, says Alexandre Tavazzi from Pictet Wealth Management. He thinks “the market is selling before looking at the numbers.”

That tendency to sell before looking represents the third, and perhaps most worrying, mode of transmission in emerging-market epidemiology. Fracastoro worried about “noxious air” transmitting disease across distances. Economists, mustering equal precision, worry that the dampened “spirits” of investors can transmit a crisis across countries, undeterred by the fundamental economic distinctions between them.

On August 13th, India’s rupee weakened to a record low (70 to the dollar) despite the country’s modest inflation and light foreign-currency debt. Argentina’s central bank hiked interest rates from 40% to 45% to demonstrate its commitment to stabilising prices and the peso. And South Africa suffered horrible palpitations in its currency. The rand fell by almost 10% after Mr Trump’s tweet before settling down.

But that day’s mania did not persist. Turkish regulators eased reserve requirements, giving banks greater access to the dollars on their balance-sheets, and curtailed currency-swap deals, making it harder for foreign speculators to target the lira. The government also said that Qatar will make $15bn of direct investments in the country, though the details were hazy.

The effect on Turkey’s currency was surprisingly powerful. Having traded at over seven to the dollar at the start of this week, the lira was hovering closer to six by August 15th. Global investors moved on to other worries, such as the disappointing earnings of Tencent, a Chinese tech firm that weighs far more heavily in most emerging-market investors’ portfolios than all of Turkey’s shares combined. Turkey’s crises, sadly, are more communicable than its rallies.

The New Paradigm In Monetary Markets.

Explaining a new paradigm can be both simple and impossible at the same time. For example, Copernicus taught that the other planets and Sun do not revolve around the Earth. He said that all the planets revolve around the Sun, including Earth. It isn’t hard to say, and it isn’t especially hard to grasp.

Indeed, one of its virtues was making the universe simpler. In the old geocentric model, there is the phenomenon of so called retrograde motion—the planets appear to stop moving forward in their orbits and move backwards temporarily. It’s difficult to describe mathematically, and worse, no one could explain the cause.

The hard part of accepting this paradigm shift, was that people had to rethink their entire view of cosmology, theology, and philosophy. In the best case, people take time to grapple with these challenges to their idea of man’s place in the universe. Some never accept the new idea.

Rising Prices Aren’t Intrinsic to the Currency

It is the same with money. The prevailing paradigm—the dollar-centric view—is akin to the Medieval geocentric view. This view is characterized by two premises. One, the dollar is money. And two, the value of money is not defined in terms of gold (which is believed to be just a commodity like oil or wheat). The value of money is defined as the inverse of the general price level. This means: what you can buy is intrinsic to the currency.

We can see this point in action, in almost any article about Venezuela. Nicolás Maduro, their corrupt and inept dictator, has destroyed production of just about everything. And he has rendered it impossible to import or distribute what little they still have. Consumer goods are truly scarce, so of course prices are skyrocketing. But people call this inflation or hyperinflation.

They accept that what you can buy is a property of the currency itself, missing that in Venezuela you can’t buy anything anymore, because of the socialist dictatorship.

Everyone knows that the dollar loses value. The Federal Reserve’s target is to make the dollar lose 2 percent per annum. The dollar goes down, and this is not a bug but a feature.

The Unit of Account

Being money, the dollar is therefore the unit of account. However, this contradicts the fact that the dollar goes down. A unit has to be stable, to be useful to measure anything. So how do people reconcile this contradiction? The dollar is the unit of account, but the dollar is constantly shrinking—i.e. it fails as a unit.

Their answer is to try to measure money in terms of prices. They add up the price of apples, oranges, petrol, rent, etc. And they use this consumer price index to define the value of money. They claim to measure the purchasing power of money. Remember that prices are measured in money. So measuring money in terms of prices is circular reasoning.

Anyways, purchasing power enables them to perform a neat trick. It informs them what the exchange rate of two currencies ought to be, based on so called purchasing power parity (PPP). PPP is the exchange rate at which you could trade your dollar for euros or yuan, and buy the same amount of goods in these currencies as you could with your dollar. We would not recommend trading the FX markets based on this notion.

We wonder if they use the purchasing power of the Yuma, AZ dollar or the midtown Manhattan dollar. The former has five to ten times as much power contained inside of it!

We are joking, but there is a serious point. The price you pay for your coffee and breakfast eggs with sausage is obviously dependent on the value of the currency. But it’s also dependent on a whole lot of nonmonetary factors, such as the cost of getting supplies into a dense city on an island. And of course regulations and compliance, taxes and fees, zoning, labor law, building code, etc. It is less expensive—it costs fewer real resources—to operate a store on East Palo Verde Street than it does on Lexington Avenue.

Is the Dollar Money?

Now we examine that first premise. Is the dollar money? Consider the gold standard we once had. You could bring a twenty-dollar bill to a bank, push it across the counter, and the teller would give you a gold coin. If the world for the paper bank note is “money”, then what is the word for the gold coin?

Since them, the dollar has been made irredeemable. Americans could not redeem their paper bank notes after President Roosevelt’s infamous decree in 1933. Foreign central banks could not redeem theirs after President Nixon’s equally infamous decree in 1971. Now it’s irredeemable, but does that change it into money?

At the recent Sprott Resources Conference, Grant Williams said that gold is the only commodity that does not go no bid. In times of crisis, ordinary things go no bid. Who would make a bid on real estate in Los Angeles if the U.S. Geological Survey said an earthquake is coming, 15 on the Richter scale, and nothing taller than a dollhouse will be left standing? There would be plenty of offers to sell real estate, but no bid to buy.

Why should gold be different? The answer is, “well it just is.” Needless to say, this is not satisfactory.

This is the monetary equivalent of retrograde motion in the Medieval geocentric view of the planets. Why do the planets reverse direction in their orbits? They just do.

In the paradigm shift we propose—that gold is money—there are no special cases. All things go no bid in a crisis. The key to this simplicity is to understand that gold is money. Money is the thing which is either bidding or not bidding.

When that crisis comes, the dollar will go no bid (but today is not that day). When we realize gold is money, then we no longer have this bit of “retrograde no bid” in need of an explanation.

The Glaringly Evident

The challenge to accepting the new paradigm is that it forces you to reexamine everything. The downside, if you don’t, is you can be blind to serious problems that should be glaringly evident.

It is glaringly evident that interest rates have fallen relentlessly since 1981. This is a serious problem Young people, deprived of interest and hence compounding, despair of ever being able to save for retirement. With banks cutting interest on accounts to nearly zero, one may as well dream of walking on the moon as having a few million dollars at age 65—both are equally unobtainable.

However, in our observation, the finance and economics mainstream don’t really acknowledge the long-term trend of falling interest rates. How is this possible?

The bond price moves inversely to the interest rate. A falling rate is the same thing as a rising bond price. A falling interest rate trend is the same thing as a bond bull market.

The Yin and Yang of a Bond Bull Market

A bull market!

Who could be against a bull market? A bull market is what the mainstream acknowledges. And by a process of arbitrage, a bull market in bonds induces a bull market in other assets including stocks and real estate.

A bull market is a positive spin on the epic collapse of interest.

Meanwhile, armed with the same dollar-centric paradigm, critics of the Fed scramble for traction. They keep saying that the government lies, and understates inflation in the Consumer Price Index.

The more mainstream folks in the liberty movement disagree. They point to the new iPhone, which admittedly is very cool, or the fact that Amazon ships your stuff even faster. To us, this sounds like Dug the Dog saying “squirrel!”

So some creative dollar-thinkers have discovered a new way to measure the dollar. No, not gold. Never that! We have actually seen people argue that the value of the dollar is the inverse of the stock market! 1 / P is out. Now it’s 1 / S&P.

They are struggling to explain an apparent paradox. If the Fed’s newly printed money isn’t going into consumer goods, then where is it going? It must be going into assets.

Not even Ptolemy’s geocentric model got this complicated. So let’s move away from this dead-end of monetary science. We have a much simpler idea.

Capital is Getting Scarcer

Capital assets really have gone up since 1981.

And let’s think about that for a minute. What is it about rising prices? What is it about Venezuela? Oh, right, prices are rising. When something becomes scarce, the price rises. And capital has been getting scarcer since 1981.

We write a lot about the destruction of capital, as the salient process of our system. For people to destroy their capital is a perverse outcome. It is a response to the perverse incentive of falling interest rates.

If capital is being destroyed, then wouldn’t capital assets becomes scarcer? If we see rising prices, isn’t that evidence of growing scarcity?

Theory predicts capital destruction as a consequence of falling interest rates. Theory also predicts rising prices as a consequence of increasing scarcity. And we have long had both falling interest and rising asset prices.

John Maynard Keynes, citing Vladimir Lenin, said that debauching the currency, “engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.” There is a reason why not one in a million can diagnose it.

The reason is that the other 999,999 believe the dollar to be money. They think that the measure of the value of the money is 1 / P. So they first look at consumer prices, but get frustrated that prices aren’t rising as they expect (especially commodities). Then they turn to asset prices and they think they have found the answer.

Real Interest Rates

As an aside, if the value of money is 1 / P, then then that means:

real interest rate = nominal interest rate – inflation

In the dollar-centric paradigm, interest is adjusted by inflation. So people who believe this will say “sure, nominal interest was much higher in 1981, but so was inflation.” We have published the graph of real interest rates before, suffice to say that the so called real rate is also falling. So not only are many people blind to the epic collapse of the actual interest rate at which actual lenders actually lend to actual borrowers—which they dismiss as nominal. They also miss the fact that this so-called real interest rate is falling too.

If you borrow $1,000,000 at 5% interest, then you really must pay $50,000 a year. That is real.

Monetary Paradigm Reset

Anyways, it is not that they are stupid. Most people are not stupid. The problem is that they are stuck in a false paradigm, which blinds them to the truth. The pre-Copernicus astronomy Medievals were stuck thinking that planets moved forwards in their orbits, punctuated by some backward motion. And today’s dollar Medievals are stuck thinking that the dollar is devalued by its quantity, and this devaluation can be seen in the prices, if not of consumer goods, then of capital assets.

The single most important issue of our era is the monetary paradigm reset, as people move away from the generally accepted dollar-centric paradigm, to the correct gold-centric paradigm.

Supply and Demand Fundamentals

Shh, don’t tell the dollar-paradigm folks that the dollar went up 0.2mg gold this week. Or if that hasn’t blown your mind, the dollar went up 0.01 grams of silver.

It’s less-uncomfortable to say that gold went down $10, and silver fell $0.08. It doesn’t force anyone to confront their deeply-held beliefs about money. But it does have its own Medieval retrograde motion to explain.

How the #$%&! could gold possibly be going down?!?

Next week, we will dive deeper into some analysis of what could be driving gold down in recent months.

In the meantime, let’s just say that we observe two facts. One, the market price of gold has been coming down since the second half of April. It has dropped about $135 since then. Two, our calculated fundamental price, based on the basis, had been rising through late April. Since then, it has come down about $220.

Whatever the cause may be, something real has happened. It is up to market participants to deal with it. Or else they can trade their money for Federal Reserve Notes, in the belief that this would eliminate all risk…

We will look at an updated picture of the supply and demand picture. But first, here is the chart of the prices of gold and silver.

(Click to enlarge)

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio (see here for an explanation of bid and offer prices for the ratio). It fell a hair week.

(Click to enlarge)

Here is the gold graph showing gold basis, cobasis and the price of the dollar in terms of gold price.

(Click to enlarge)

As the price of the dollar moved up this week (we don’t need to say that this means the price of gold, measured in dollars, fell do we?) we see a little bit of rising scarcity in the cobasis for the October contract. However, that is not true for farther-out contracts.

The Monetary Metals Gold Fundamental Price went down another $5 this week to $1,304.

Now let’s look at silver.

(Click to enlarge)

In silver, the near contract shows no change in scarcity. It’s not all that surprising, given that the price didn’t move much. However, it’s somewhat surprising as the near contract happens to be September and we are nearing First Notice Day. There is already selling pressure on this contract, which will tend to push its price down and hence its basis down and cobasis up (basis = future – spot, and cobasis = spot – future).

Basically (OK, pun intended) September silver basis and cobasis show nuthin’.

The further contracts show falling cobasis (scarcity) and rising basis (abundance). Even as the price dropped a few pennies.

My Other Rich Dad Taught Me His Secret System for Seeing the Future. And It's Pointing to a Hidden Play on the Bull Market's Poster Boy…

-By Robert Kiyosaki

Most people know me for my best-selling book, Rich Dad Poor Dad.

It told the story of my poor dad, my real father, who taught me to get an education, so I could get good grades… get a good a job… and work for a good paycheck…

And my rich dad, who taught me to work for assets so my money could work for me.

But what far fewer people know is that I have another rich dad…

One that taught me a method for seeing into the future.

It’s not a system many people know. Its origins don’t come from finance, either.

But when I learned it years ago, I began to see beyond the limits of linear time and space to find the truth.

The truth about human behavior, purpose, engineering, architecture, technology and yes, even money.

It’s helped me throughout my career find my mission in life…

It’s helped me build the successful Rich Dad Co…

And it’s helped me and my wife, Kim, create a multi-million-dollar real estate empire that provides us with tax-free cash flow year after year.

Today, this same method is pointing to one opportunity just over the horizon that few people are paying attention to. A hidden play on a financial story that’s been splashed on the front pages for days now.

I’ll share it all with you in just a moment. But first, to fully understand everything…

We Need to Rewind the Clock to a Sunny Day in April of 1967

I was 20 years old, standing on the side of this highway with my thumb out.

I was hitchhiking a ride from Kings Point, New York, to Montreal.

I was going to Expo ‘67 — the World’s Fair on the future. It was in Montreal. The centerpiece of the World’s Fair was the U.S. Pavilion, a massive geodesic dome that could be seen for miles.

The creator of the dome was a brilliant man, considered to be one of the greatest geniuses of our time.

And I made the trek to meet him in particular.

He supposedly could see the future.

In fact, his reputation as a futurist earned him the nickname “Grandfather of the Future.”

It seemed appropriate that the U.S. government had chosen his dome, a structure that represented the future, to be the U.S. Pavilion.

When I attended his lecture and heard him speak about the systematic way you and I can actually see the future…

I knew I had to make some changes. I knew I had so much to learn from this man.

And I knew my life wasn’t going to be the same.

His Name was Dr. R.Buckminster Fuller

Some called Fuller an enigma, someone who could not be defined.

If you research him, you’ll see that Harvard University claims him as one of their more prominent alums… but he didn’t graduate from Harvard. In fact, he never graduated from college at all.

Despite never graduating, he was awarded 47 honorary degrees over his lifetime.

Yet he often referred to himself as “just a little guy.”

I refer to him as “Bucky”… and I consider him my other rich dad and teacher.

Bucky taught me so much about how the world works and how to become truly wealthy ― mentally, physically, spiritually and financially.

After reading his book Grunch of Giants in 1983, I began to understand why the subject of money is not taught in schools.

GRUNCH is an acronym, which stands for Gross Universal Cash Heist.

Up until then, I didn’t have the courage to criticize the school system.

Like many, it was beaten into my head that schools and teachers were smarter than the rest of us, that they knew best and had our best interests at heart.

The longer I attended school, the more I saw the cracks in the facade of standardized education.

Reading Bucky’s work confirmed many of my unspoken — even unconscious — suspicions about the way the world worked.

I began to understand why we don’t teach kids about money in school. Our educational system is rigged to only allow education in money to the uber-rich and powerful.

This system has no interest in creating a well-educated nation and populace.

What they want is a world filled with obedient employees, soldiers and consumers. Bodies to buy their products, fill their factories and fight their battles for them.

The more I studied people like Bucky, the more angry I became.

But Bucky wasn’t focused on the negative…

He focused on improving humanity’s future through acting on opportunities. He even inspired John Denver’s lyrics “grandfather of the future” in his song “What One Man Can Do.”

Fuller is considered one of the most accomplished Americans in history, having more than 2,000 patents after his name.

I believe he made 50 predictions in his life. And, at the time of his death on July 1, 1983, 48 of his predictions had come true.

One of his last predictions was that a revolutionary new technology would enter the system before 2000. And of course you know how the internet emerged before 1990.

I mean it when I say Bucky had a method for seeing the future!

Several years after the World’s Fair, after attending one of his talks, I got the chance to study under him.

That’s when I learned his method first-hand…

The Power of Precession

Dr. Fuller taught me an important framework for thinking called the Law of Precession.

It can be used to peer into the future… and to decipher where the truly great investments are.

The term precession comes from physics. Technically, it is the change in a rotational axis… around an axis…  around another body…

But here’s a simpler way to think about it.

The Law of Precession simply states that for every action we take… a 90-degree side effect will form. That side effect will produce its own path (creating an L).

Here’s another way to think of it. What happens when a drop of water falls into a still pond?

Ripples go out, right?

Those ripples are the side effect of the water drop.

Or, think about honey bees. They spend their lives flying from flower to flower collecting nectar to make honey.

They act as if that’s their purpose but their true and (and much larger) purpose is to pollinate the flowers.

You can apply Dr. Fuller’s little-known law, to business and investment. Advancements in technology start-ups, partnerships, etc., can all cause ripple effects of opportunities.This simple but effective method of going beyond the surface and asking questions will help you see that there is always an opportunity.

No matter what a deal looks like to investors, someone somewhere is making money off of it.

A restaurant fails, the equipment supplier made money.

An office full of people gets laid off, the contractors that hung the drywall made money.

No venture is a failure to those who can look beyond the mundane, beyond the layers, beyond the straight lines, beyond rules and even beyond time.

Technology’s Accelerating Acceleration

Bucky Fuller once said that the speed of change will increase exponentially, the speed of progress getting faster and faster, compounding upon itself.

He went on to talk about a new technology that would explode before the end of the decade.

He said, “We are entering the world of the invisible.”

He said this technology would create change moving so fast it would become invisible — it was a concept he termed in an article called “Accelerating Acceleration.”

As an example, he used the rapid advance of aviation technology.

Think about how amazingly fast flight technology has expanded in the past century.

In 1903, the Wright Brothers flew the very first sustained airplane flight.

In 1969, we put the first man on the moon.

In 1981, we had the first NASA shuttle launch exceeding 18,000 mph.

And today, space travel is entering the private sector with aspirations of colonizing Mars… which we’ll get into momentarily. This is accelerating acceleration.

Technology, and how that technology affects business, is changing at such a rapid pace it is nearly impossible to keep up.

“We are entering the world of the invisible…”

That really stuck with me.

But as unpredictable, uncontrollable and scary as that may sound, he said something else that intrigued me…

By tracking the rate at which technology advanced, he claimed he could predict the future. This would be change moving too fast for us to actually see, though.

What did that mean?

Clarifying, he said, “Humans could see the automobile. They could see that change. If a car came toward them, they could get out of the way.” Because they could see the car, they could adapt and make changes to their lives.

But future inventions, he claimed, would be invisible.

Was he talking about cellular tech? Was he talking about the internet?

This is the man who came up with the theory of ephemeralization… the ability of technological advancement to do “more and more with less and less until eventually you can do everything with nothing.”

We can only guess what Fuller would have to say about the rapid growth of the information age.

We can only guess his feelings about a world where information is available to everyone, at all times.

Today, people are being replaced by technological innovations they cannot see and that they do not understand. Millions of people all over the world are unemployed because their skill set is no longer needed.

They are obsolete.

The teachings of our school systems, more than any time in history, set us up for a doom scenario. By the time you’re a junior in college, the expertise you’ve gained is outdated.

We cannot rely solely on careers and paychecks any longer. We cannot invest in whatever hot company comes along and expect to become a paper millionaire. Those days are over. We must train ourselves to look deeper. To examine the secrets of wealth.

Once I understood what Dr. Fuller meant by accelerating acceleration, I took decisive action to stay ahead of the curve. I have no plans to become obsolete. I’m not waiting for the economy to come back.

I’m working hard to stay ahead of an exponentially accelerating economy.

And that’s what I want you to do too…

The Art of Precessional Investing™

I have taken Fuller’s teachings and applied them to the financial world.

I call this method Precessional Investing™.

It means identifying something different from what a novice investor would identify as an opportunity.

Some people mistake it for being a slight tweak in their investment strategy. If they are looking into investing in the stock market, they might think it means to trade in and out of the market quickly.

To me, that’s just gambling. In my opinion, day trading is no better than playing the craps table. In fact, the craps table is better — at least you get a free drink!

When I talk about Precessional Investing™, I’m talking about something else entirely. It involves perspective and it involves research…

It takes an educated investor to look at their investments like a battlefield.

You must know the terrain, you must know the weather, you must know what’s on the horizon.

You must know when to advance, and, most importantly, you must know when to retreat.

Cutting the Bull…

Why do I talk in analogies so much? Because jargon is the language of secret keepers, not real teachers.

Many so-called experts want to sound intelligent, so they use uncommon words like “credit default swap” or “hedge” to baffle the average person. Both terms simply mean forms of insurance, but God forbid the experts use

that word.

Experts like to seem special, almost magical, and magic isn’t as impressive when everyone knows the trick.

Dr. Fuller writes, “One of my many-years-ago friends, long since deceased, was a giant, a member of the Morgan family. He said to me: ‘Bucky, I am very fond of you, so I am sorry to have to tell you that you will never be a success. You go around explaining in simple terms that which people have not been comprehending, when the first law of success is, ‘“Never make things simple when you can make them complicated.’”

My goal has always been to cut the bull. To take all the big words that everyone else is using, and make things simple. It was Dr. Fuller’s mission to teach the world, not to keep knowledge hidden behind clever words.

Dr. Fuller was adamant about the power of words. During one of his lectures I attended, he said, “Words are the most powerful tools invented by humans.”

Before I studied under Dr. Fuller, I had never respected the power of words. Words were just something people wasted. But in reality, they can be a tool used to get what you want.

I had flunked out of high school English twice. I did not respect the power of words. But by not respecting the power of words, I had denied myself the power to change my life, to change the lives of others.

I realized that words are the fuel to our brain — our greatest asset, and also our greatest liability. That’s why I believe that, in 1903, financial vocabulary was taken out of the educational system intentionally.

It was during this period that the “Industrial Revolution” had evolved into the “Machine Age.”

Huge conglomerates and corporations had formed and needed trained workers to keep their assembly lines running. The world’s richest families looked at the population and wondered how they could incentivize the people to train themselves for labor. It’s believed that this is when the rich realized that they didn’t need to incentivize workers if the choice was simple: work or starve.

If the average person is denied the tools and knowledge to understand how money really works, they’ll believe that their only option to take care of their families is to work till they die.

The idea of precession’s application to money was stolen from generations of people. By removing the knowledge that could free the masses, a nation has been created to work, earn a check, repeat, repeat, repeat… until death.

I knew I would always be a pawn, victim, or slave of the conspiracy if I didn’t understand and use the words the conspirators used. It was at that point that I stopped myself from using the words like “Get a good job,” “Save money,” “Live below your means,” “Investing is risky,” or “Debt is bad.”

Still today, our children are taught to believe only what the educational system wants us to believe. They are taught: follow insctructions, don’t look below the surface, don’t break the rules.

But if children only ever learn to stick to the status quo, they’ll never have any idea of everything they’re missing out on.

The key is education and seeing the precessional opportunities.

But most people have never learned Bucky Fuller’s Law of Precession.

The schools created their educational system to cater to the mass labor agenda.

They taught students that there was one path to “success” — getting a job, collecting paychecks, collecting government benefits, climbing the ladder… you know, the story we’ve been told our entire lives.

And they taught, and continue to teach, that any deviation from that path means ruin.

The students who believed that garbage cling onto their blue chip stocks for dear life or throw their money into the government machine, hoping to one day be rewarded for their years of patient service. There are still droves of financial lemmings following the line of Amazon and Apple off the cliff, not realizing that fame alone is unlikely to result in dividends.

The Biggest Example of This Today Is Tesla

At writing, the news is in a frenzy about Elon Musk and his company Tesla.

It’s a perfect example of a surface story everyone is paying attention to when they really should be looking for the Precessional Investment™.

Tesla is the next flashy brand to offer an overvalued stock to uneducated investors.

Musk has leveraged his sense of showmanship in a way not seen since the golden age of Apple, when Steve Jobs would have the world glued to their laptops, watching a four-hour keynote speech like it was the Super Bowl.

Much like Jobs, Musk has used his showmanship in equal parts to create his vision and tech-savvy companies, promising dreams of living in the future made real. He dominates the corporate news cycle with stories of private space exploration… mass transit systems that remind me of something from a Jetsons cartoon… and even personal flamethrowers (my team member is holding one of the flamethrowers in the photo below. It’s from Musk’s The Boring Co.)

But what remains of Musk’s companies when the flash fades away?

They are captivating, innovative and exciting, and — let’s be honest — have yet to turn a profit.

Sure, Tesla vehicles zip around every major city in America. And SpaceX has been responsible for blasting rockets into low orbit and returning them safely to Earth under their own power (a feat even NASA could not accomplish).

As a citizen of the world, all that is impressive.

But none of it turns my head as an investor.

Remember the Third Side of the Coin

All we have seen the past few weeks on the news, in the paper, wherever you look: Elon Musk and his Twitter rants.

The best thing about geniuses is you never know what they’ll do next.

And the worst thing about geniuses is you never know what they’ll do next.

Whether you concede that Elon Musk is a genius or not, it’s hard to deny he has all the unpredictability and volatility of his spiritual predecessor Steve Jobs.

Jobs was notorious for his ruthless production demands and unpredictable moods. It was said that if you were unlucky enough to get on an elevator with Jobs on the fourth floor, you could end up fired by the time you hit the lobby.

One thing Steve Jobs had going for him was his  general indifference toward social media.

Musk, on the other hand, can’t seem to keep his thoughts to himself and has what some would call a compulsive Twitter habit.

For anyone else, a heat-of-the-moment rant on Twitter would be embarrassing…

But for the CEOs of several major corporations, it’s a whole different can of worms.

One Twitter tirade from Musk is enough to push Tesla investors over the edge.

Why?

Because the current trend is that anytime Musk opens his mouth, or rather, whips out his cell phone, Tesla’s stock plummets.

I’m sure most of you saw the internet-shattering tweet he came out with on Aug 7…

Was he trying to manipulate stock prices?

Was he being genuine?

Was he drunk?

I don’t know. And it doesn’t matter.

Remember what I wrote in the welcome cover letter to this issue.

There are three sides to every coin. Heads, tails and the edge.

The truth exists in grayscale, not black and white. The capability to hold two perspectives at once is what makes the strongest investors.

So the question you have to ask is…

Who Wins No Matter How Tesla Performs?

This is where we get back into Precessional Investing™.

Precession tells us we should not go with the surface opportunity everyone is paying attention to.

We should examine the all other pathways that come from or lead to that surface opportunity.

Look at the ripple effect of opportunities that are set in motion by that first “obvious” investment opportunity.

Why?

Because sometimes those opportunities are richer by a long shot.

Let me give you an example of what I’m talking about…

Rockefeller Always Got Paid Thanks to Precession

Look at Standard Oil, the company founded by John D. Rockefeller.

By most accounts, it was the most profitable company in American history, run by perhaps the single- wealthiest human being in modern history.

In the 1870s, he gained his wealth through his creation of Standard Oil Co.

So Rockefeller became wealthy by investing in oil production.

Big shock right?

Except that he wasn’t content to invest in just oil…

Rockefeller also saw a huge chunk of money exiting his company through packaging (oil needs barrels) and logistics (you can’t burn oil in California if it’s stuck at a train station in Ohio).

To make sure he was in on it, Rockefeller used precession to see the opportunities beyond the obvious.

He invested his sizeable wealth into gaining influence over storage facilities, as well as the railroads that zipped back and forth across our growing nation.

Why did he invest in those spaces when he was already a billionaire?

Because the only thing better than profiting from your own oil is profiting from everyone’s use of oil.

By the time Rockefeller was done, there was nowhere to hide…

You wanted to burn oil? You paid Rockefeller.

You wanted to store oil? You paid Rockefeller.

You wanted to transport oil? You paid Rockefeller.

The lesson here is simple.

Be like Rockefeller. Use precession. Look at one opportunity and see the opportunities that surround it.

And that brings me back to Musk and Tesla…

Tesla Bears… Tesla Bulls… Tesla Precessionals

At writing, Bloomberg reports “the SEC” is intensifying its probe of Tesla… in the wake of Elon Musk’s provocative tweet Tuesday about taking the electric-car company private.”

A lot of smart investors who are “Tesla bears” say this is the beginning of the end for the stock and to short it…

A lot of smart investors who are “Tesla bulls” say now is an opportunity to go long the stock…

Here’s how I look at it as a precessional investor…

We already know that Musk is somewhat unstable, and we can see from that instability that there must be some struggles happening behind the curtain.

If you look at some news reports from recent months, you’ll see that a bigger picture is being painted here.

The Wall Street Journal reported that Tesla has been asking for refunds from some of its largest suppliers in a seemingly frantic attempt to close profit gaps and reclaim absent working capital.

It doesn’t take a financial expert to understand things aren’t ideal if a company is going hat in hand to its own subcontractors looking for a cash donation.

Other worrisome events include Tesla’s decision to end the $1,000 refundable deposit in its registration system for pre-ordered vehicles. Instead, they decided to require a non-refundable early payment of $2,500 for delivery of a pre-ordered vehicle.

You’d never imagine there were any concerns if you based your decisions on Tesla’s plans for catalog expansion.

Musk is more than happy to talk about plans to expand their vehicle production to commercial vehicles, SUVs, light trucks and residential energy storage (with solar aspirations being hinted at).

Tesla claimed they had 455,000 reservations for the Model 3 before they switched to the deposit system, but independent analysis suggests the number is actually almost 10% less than that.

Does this mean Tesla puffed its number?

Does this mean people’s excitement waned since the release announcement?

It’s hard to tell and you’re unlikely to get a straight answer from Musk himself.

Needham analytics downgraded Tesla to a “sell” status due to the slowdown in Model 3 pre-orders as well as (what they describe to be) Tesla’s “unsustainable capital structure.”

There are in fact many who see blue skies for Tesla and the Model 3 over the coming year.

Argus Analytics has said:

Strong demand for the new Model 3 alongside continued revenue gains for the Model S and Model X project significant sequential improvement in the second quarter, with the Model 3 likely to become Tesla’s top-selling vehicle and costing less for Tesla to build in 2019… We thus expect the company to achieve its target gross margin of 25% on the Model 3 in late 2019.

Regardless of the details, there is no shortage of reasons to shift focus away from Tesla as an investment opportunity and focus on precessional opportunities.

So where should you look if not to Tesla stock?

Let’s go through the method…

Since we’ve been standing on the edge of the coin and examining both sides of the Tesla argument, let’s examine everything we know about the motivations of Musk and Tesla.

What do we know for sure?:

1. Tesla wants to produce the Model 3.
2. ….That’s it.

That’s honestly the only conclusion you can draw with 100% certainty. Everything else is speculation.

We don’t know if Model 3 sales will remain positive over time.

We don’t know if Tesla will turn a profit.

We don’t know if Musk will derail company value with another social media tantrum… again.

Perhaps we should stop concerning ourselves with questions about Tesla’s profitability all-together.

Instead, use the precessional investment method to look into the future for the real opportunity!

Ask yourself:

1. What opportunities does Tesla create outside its own assembly line?
2. Who is profiting from Tesla manufacturing cars in the first place?
3. What does every Tesla vehicle use?

The answer is clear…

Lithium Batteries… and Lots of Them

Lithium batteries are technologically advanced, efficient (by today’s standards) and most of all, expensive.

Someone somewhere is profiting from Tesla’s hunger for lithium, so who is it?

The Model 3 and every other Tesla run on lithium batteries (big ones) and Tesla is going to need an awful lot of them to meet a full production run.

So where is all this lithium coming from?

The Clayton Valley mine in Nevada is currently the largest known lithium mine in America and is under the control of Pure Energy Minerals (PEMIF).

You should take a look at the company. PEMIF is not only a powerful controlling force in lithium mining but an environmentally conscious innovator as well (all the better to keep company with Tesla).

PEMIF has developed a more effective and environmentally sound method of mining lithium, moving from an evaporation process to a natural solvent process, which is not only safer but more profitable.

Tesla struck a deal with PEMIF to acquire a “significant quantity” of lithium at a “predetermined price below current market rates.”

Do you see the inherent advantage of investing in PEMIF over Tesla?

PEMIF is supplying Tesla with lithium, which means they profit whether or not the Model 3 is profitable.

As long as Tesla is making cars, PEMIF is profiting from them, even when Tesla’s shareholders, executives and anyone in between are not.

Possibly more important than PEMIF’s leverage with Tesla is the fact that the majority of their business comes from other sources.

PEMIF has the potential to supply contracts with numerous companies.

Even though Tesla is a major client, if Tesla suddenly failed, PEMIF would not collapse. It would simply sell its lithium to its other customers.

Here are some varying uses for lithium to show this point:

Energy storage: The most important use of lithium is in rechargeable batteries for electric vehicles, energy grid storage, mobile phones, laptops, digital cameras and other small electronic devices. Lithium is also used in some non-rechargeable batteries.

Lithium alloys: Lithium metal is combined with aluminum and magnesium to form strong and lightweight alloys for armor plating, aircraft, trains and bicycles.

Optics, glassware and ceramics: Lithium is used to produce optics, glassware and ceramics.

Industrial/HVAC: Lithium chloride is one of the most hygroscopic materials known and is used in air conditioning and industrial drying systems.

Lubricants: Lithium stearate is used as an all-purpose and high-temperature lubricant.

Pharmaceuticals: Lithium carbonate is used in medications to effectively treat manic depression.

These are all products that reach into different markets.

This broad and established series of potential clients protects PEMIF against any significant drop in revenue. (They like doing business with Tesla, but they don’t need them.)

And look at this price chart of lithium since 2003. The price has increased 300%!

As if that weren’t enough, PEMIF’s share price (PEMIF) is currently $0.09 making it a significantly less expensive entry point for investors.

Investing in PEMIF is MUCH less expensive than Apple, Google or Microsoft, all companies who depend on a company like PEMIF, by the way.

This makes the potential for gains much greater. Since PEMIF is tied so snuggly to technology, as technology grows so does PEMIF.

PEMIF would be a strategic investment opportunity because of their product; lithium has multiple uses and will only continue to grow in demand as technology evolves.

PEMIF is attractive because it does not cost much to invest in at $0.09 a share.

There are a lot of ways to profit from stocks, though. Stocks can make you money going up AND going down. They can pay dividends (cash flow) and they can make money as options.

I would research other precessional opportunities in lithium too, outside of PEMIF.

It could be another lithium miner… a battery maker… or perhaps a different electric-car maker than Tesla, with better prospects that’s getting less attention.

If one looks attractive and pays a good dividend, then you might consider buying 100 shares of that stock.

This could make you money two ways:

1. Dividend payments or…
2. You can hold on to the stock and sell options on it.

Then you’d be cash-flowing two ways. You’d get your dividends and be renting out your stocks in the form of selling options.

If neither stock pays a dividend, I might try buying call options. Instead of buying the actual stocks, I would buy the option to buy the stock in the future. Then if the stock went up in value, I would sell.

Why would I buy options instead of the actual stocks?

Options are far less expensive so the risk is less, but the profit upon selling is the same.

It’s just another way to maximize your profit while minimizing the risks.

The Precessional Investing™ method is important to understand and practice for these three reasons:

1. It’s how the rich invest
2. There are more opportunities to be found
3. It greatly minimizes risk

Being a successful investor means being in tune with the world.

Optimists love the idea of buying and holding on to their investments in hopes that they will pay off.

But if you plan on taking control of your future, you need to do better than just hope.

You need to educate yourself. Sir Francis Bacon

said often that “Knowledge is power.” Gain that knowledge and go down the road less traveled.

What You Should Do with This Information…

You should use this information to think for yourself.

Read more about lithium if that stood out to you.

Read more about options if that sounded interesting, but you don’t know enough.

You shouldn’t outsource your brain to me. That’s lazy. And laziness will keep you poor.

That’s why I’m not telling you not to invest in Tesla… or to dump your money into PEMIF.

I’m trying to show you that the choice right in front of your eyes is almost never the only path.

Most times the best decision is two steps away from the obvious thing everyone is focusing on.

You must have the awareness of an opportunity moving parts.

You must be able to see the choices that orbit and branch from one another. That is the core of Precessional Investing™.

Repeating the advice Buckminster Fuller received from his friend,

“The first law of success, ‘Never make things simple when you can make them complicated’.”

And that is what the financial world does. It takes the simple and makes it complex.

By making the simple complex, the financial world sounds intelligent and makes you feel stupid when it comes to money. When you feel stupid, it’s easier to take your money.

My objective has always been to make finance simple by creating financial education products such as games, books, web products, coaching, advanced financial education programs ― and now this newsletter.

You can be a kid or a Ph.D. and still understand our work.

The key to growing your options and your precessional opportunities is to keep growing your financial knowledge.

Play it smart,

Robert T. Kiyosaki

Editor, The Rich Dad Poor Dad Letter