Riding high on stocks? Aiming for high finance? Beware of the Dutch disease.

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Dutch disease

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-What’s not to like about Holland?

Well, free drugs and (almost) free women are perhaps debatable, except to us ahimsas.

dutch disease stoned

After workout, September 15, 2015

 

What’s not, is ‘Dutch’. And, no, I’m not talking about the people or their guttural language, but about the Dutch disease.

This short (5-minute, tops) post is all about the risk of losing one’s way and letting a windfall gain get the best of you.

 

The Dutch disease

“The Dutch disease” sounds better than it is. Trust me.

The old double-D is usually reserved for countries that get a windfall gain by striking oil, gold, diamonds or some other natural resource.

The discovery is supposed to be an unequivocal positive for the country, but most of the time, several dormant negatives are strengthened and actually make matters worse than before:

  • Politicians struggle for power over the the newfound wealth, breeding corruption and mismanagement.
  • The currency appreciates, strangling the export manufacturing sectors, while stimulating imports of (luxury) consumer goods.
  • The trickle down wealth erodes productivity and creates a nation of leisurely shoppers and welfare addicts.

Once the process has run its course, the country suffers from inflation, high cost level, unemployment, low productivity, low adaptability, corruption, poor governance etc. And its right then that the cause of the Dutch disease, the natural resource discovery, is exhausted, leaving the country much more worse off on all accounts than before.

You know, when you’ve been double-D:d

 

The ZIRP version of the Dutch disease

Zero interest rates work much the same way, just worse, in particular when the entire world plays the same ZIRP (zero interest rate policy) game simultaneously. After the interest rate cycle has run its course, what’s left is a world of dysfunctional and disconnected speculators with zero useful skills, instead of educated, creative and productive people in a functional society.

The Greenspans, Bernankes, Yellens, Kurodas, Draghis and Carneys of the world, not to mention the Swedish “let’s go negative” full retard interest rate champion, Ingves, “discovered” the natural resource of ZIRP and made sure the entire world contracted the Dutch disease.

In effect, they went to the streets and gave every junkie, every person with gambling debts, every irresponsible wacko they could shake a stick at, a wad of dough and said “There, I hope you’ve learned your lesson. And if you haven’t, there’s more where that came from”

 

Your own strain of the 2D

At an individual level, a bull market combined with zero interest rates might even have made you specifically contract the Dutch disease.

Check if you tick any of these boxes:

  • You think a quarter point interest rate rise would hurt your finances
  • You’re not even considering rising interest rates; “Why would they raise if it’s bad?”
  • Your mortgage is more than five times your annual disposable income
  • You’ve run up a sizable student loan or car loan without really gaining any useful skills
  • You actually don’t have a reliable income, since you left your job to “invest on the stock market”
  • You aren’t worried your real job skills are fading, since trading is going so well
  • Your only holdings are story stocks (no profits or no revenues, world domination plans, advertising dependent, story company clients only)

If just one or two of the statements above resonated with you, you should get checked for Dutch disease.

The risk is clear and present that you are financially fragile and couldn’t cope with a normalization of the economy (including 6% policy rates, 50% lower stock prices, and a decimation of finance related jobs and the professional support services that go with them), let alone an undershoot with even higher interest rates, costs (inflation) and lower stock prices and reduced dividends.

Oh, and then there is the creeping issue of automation that will kill off office workers, taxi and truck drivers and many other blue and white collar employees, outside the world of finance.

Feeling worried yet? Butterflies in your stomach?

 

Freakonomics

Here’s a tip for you:

Check out the Freakonomics podcast from October 16, 2014. It’s called “How Can Tiny Norway Afford To Buy So Many Teslas”.

It tells you how Norway finally cured itself from the Dutch disease, on the third time round of windfall oil gains. Now the Tesla is the most sold car model in Norway, and with only 5 million inhabitants, Norway is Tesla’s largest market outside the U.S.

Before that, they fucked up twice when oil prices increased (Norway found oil in 1969, and temporarily prospered during periods of rising oil prices before sinking back with a case of DD).

 

Don’t be that guy with the Dutch disease (Summary and conclusions) 

I’m sure you’ve heard several stories about people winning the lottery, only to be broke a few years later, with high debts, no job, no skills and no friends.

Don’t be that guy.

Low interest rates, surging stocks, increasing house prices etc. are like winning the lottery, like so many sirens of the sea luring you into stagnation and apathy.

Not even I am safe, despite my wealth, perhaps because of it… Remember, it’s not paranoia if they’re really after you.

Instead, make yourself change resistant and future proof:

  • Keep your skills updated, study online, use the abundance of free resources, such as Stanford, MIT, Khan, Codecademy, etc. Here is a list of 144 sites for that!
  • Keep your contacts up to date. Meet IRL, have fun, discuss what you would do if your income dried up, keep networking on LinkedIn
  • Keep your investments diversified
  • Check your spending while you can, instead of waiting until you have to (the latter will be much worse). Is that car really that fun or are you just trying to impress somebody?
  • If you’re still in school, think about which industries might be most resilient to automation and de-financation
    • Hint: It wont be stock brokering, stock research, portfolio management or algorithmic and HFT trading
    • It won’t be car or truck manufacturing either.
    • As discussed before, however, it might be psychology, design, marketing, programming, and as always, various forms of healthcare (unless your government has already ruined that market).
so you want to work in finance retarded hedge fund manager

Tell me more how you plan to buy happiness with your stock winnings

Yes, that’s right, even when things are going your way, interest rates are low, jobs, dividends and profits come easy, you’d better Always Be Investing. Most of all, make sure life’s journey is enjoyable and not dependent on becoming or staying ‘rich’.

If this article resonated with you. If you liked it, if you want more… Why not leave your e-mail address with me, i.e., subscribe, and I’ll send you my free eBook on finance, and weekly updates in my newsletters?

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12 Comments

  1. Hi Mikael,

    Very interesting post and an inspiration as always! I have dilemma that you might be able to help me solve.

    This is me: 28 years old currently employed and working in finance but not really earning anything of significance yet, (roughly 400 tkr a year). I have a bachelor degree in business and 4 years of relevant working experience, but I’m not closed to going back to university.

    My dilemma: Should I buy an apartment i Stockholm or not (I want to live in Stockholm). I have previously lived with my ex in her rental but as that relationship came to an end I am now forced to make a decision. To rent an apartment in Stockholm on the second hand market is also very expensive (more expensive on a monthly basis then buying), but the risks of buying a one – two room flat for something around 2,5 msek might be to great at the moment. If I buy I would at least be fine with staying in the flat for the next five years. What’s your take on my situation? What your take on the raising apartment prices in Stockholm (Sweden), when will the bubble burst and what will be straw that breaks the camels back?

    • Well, it’s a good thing to even have that choice, i.e., being able to afford buying an apartment if you want to.

      I personally would have rented in your situation. However, I would have been wrong historically so many times and for so long. On the other hand, perhaps I would have bought (since I actually did buy at the turn of 1996/97 when it already looked frothy, not to mention my latest step-up in living space in 2009. On the other hand – I bought for cash only, no debt, so it might be a different situation)

      I’m not at all sure the housing bubble will burst in Sweden (maybe it should, but it just might not due to the number of people moving toward the center). Not the way I’m sure the stock bubble will.

      I also don’t think anyone should speculate with their living space, so: Buy that which you actually WANT (in order to live close to your friends, work, restaurants, cinemas etc) and worry about the next step later. In case you actually do want to move 5 years from now, and prices have fallen, you’ll be able to buy a bigger NEXT apartment. Sure, you may have lost a little of your equity in the apartment but on a starting 1-2 bedroom apt it’s really not that much in the big scheme of things.

  2. By FAR your best article!!!!!!!!!!!!

    When you extrapolate (right word???) an idea into a more condensed, appropriate version (Dutch Disease), value is born. When I think of Mikael Syding, I think of the double D!

    Everything you wrote is right, of course.

    I would only say – what happened to a career?

    … where you’d focus on a certain question for the major part of your life? This would negate income/debt, overspend and welfare dependence.

    Of course, having a career does not mean you’ll be employed all the time. It also means you have certain barriers you’ll not cross. EG a doctor isn’t going to earn $10m a year, so they shouldn’t live as if they could.

    One of the problems with rampant capitalism (such as we have in the UK) is most don’t understand where “money” comes from. Thus, when “money” is easily accessible, they’re the ones sailing close to the wind.

    The cure could be called “common sense”.

    When “free lunch” is laid out, many people get fat. It takes a wise man to save it for when the times are lean. I think this is what you’re advocating – just because everyone else is doing it doesn’t make it right…

    – save your earnings
    – make sure you understand the true workings of life (money is earned, not printed)
    – invest willingly
    – fail often
    – focus on your earning capacity, not your paychecks

    Over years, you’ll reach a position where opportunities are so abundant you’ll have to pass them off to others. You’ll be so busy answering your question (career) that you’ll gladly give them away. Ironically, your opportunities (earning capacity) will accelerate by doing this. This is how the “rich get richer”.

    Always be investing!!!!!!!!!!!!!!!!!!!!!!!!!

    • Common sense? You NEVER go common sense!

      ”Det så kallade sunda förnuftet är ingenting annat än dålig genomtänkt teori, omedvetna reflexer av aktuella erfarenheter samt moderna sociala fördomar.” (Lars Herlitz)

      “Common sense is the collection of prejudices acquired by age eighteen.” (Albert Einstein)

      • Tack for quotes :)

        Maybe my version of common sense is different than those others.

        IE don’t get into debt with no hope of paying it back, treat people as you want to be treated, keep investing, do boring things, learn stuff that you’ll never use, eat green food, love, pick your fights.

        • The thing is I know Daniel And Rich would get along splendidly in real life, and definitely see eye to eye on life’s tougher topics – including “common sense”.

          I know and agree with Einstein’s quip, and I of course love the contrarian feel of it, the poke in the eye of the ignorant consumerist and his ‘common sense’.

          At the same time, I can see the Platonic version of common sense, the honed instinct of right and wrong I wish we all actually had, instead of the toxic variant going around these days.

    • Thanks for yet another insightful and clarifying comment. I was actually thinking of scrapping the entire article rather than publishing it. That’s how poor I am att judging my own writing, not to mention design abilities :D

      “Money” truly is the root of all evil. I’m not talking about real money, the money Ayn Rand and D’Anconia are talking about. I’m talking about the freely printable fake, fiat money that’s been sloshing around the last 40 years.

      • No problem sir. It’s the same for everyone (you’re your biggest critic). Your English is impeccable, your presentation exquisite and your topics thought-provoking.

        Surely you could say the “ego” is the root of all evil? In the end, everyone wants to be someone they’re not. It’s just some will do *anything* to get there.

  3. Great article Mikael, really enjoyed it.

    Although I am not in finance, I think we are all running some risk, because when the correction happens, many businesses will close and in general the circulation of money will be lower.

    Of course, as you said, staying educated and up-to-date is very important. Thankfully I am not running a Double-D risk :)
    Still, it’s nice when the money circulation is like that!

    You seem to be having a great time in Holland!

    • I’ve been in love with the Dutch since 1989 :). I’m not there right now though; haven’t been in Holland for 2 and a half years now

  4. Do you believe different governments will be better off when DD hits? I may be biased living in California; but the FED has done a much better job compared to Europe and APAC. Would this “out performance” not continue?

    Also if Inflation is on the horizon then why do you advocate lesser housing debt. Is it not better to leverage and buy a larger rental property and rent it out as long as rents cover your mortgage. When inflation hits you raise the rents. At least in San Francisco the rents stayed high even during 2007-2009.

    Thoughts?

    • Whether Fed has done a better job or not remains to be seen. When the scorecards are handed in in a few years we’ll see.

      On housing, I’m just saying you shouldn’t speculate with money you don’t have, i.e. don’t buy a house for consumption (living space) with excessive loans (more than you actually can pay back)

      Being a professional landlord is a whole different thing. Then location becomes much more important as well. SF may or may not cope unscathed.

      I’m not forecasting house prices, inflation levels, rents or interest rates. That’s up to you. Take the risk if you can afford it and have the knowledge necessary. If not, don’t.

      Most of all, don’t just extrapolate whatever trends are in place right now and count on them (easy times) to continue.

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