#207 Why the mega rich don't have magical investing powers, but there are some investing attributes they possess that we can emulate. More information, including show notes, can be found here. Episode Summary A new listener of Money For the Rest of Us inspired the question for this episode: how do the mega rich invest? Forbes reports that there are 585 billionaires in the US and most of them utilize a family office/professional management structure. But do they have some magical, secret way of making more money than the general population? Do they become exponentially richer by allocating their money in certain ways? These questions and more are explored on this episode, and it’s one not to be missed. What are the major differences in how the mega-rich invest? While the mega-rich, also known as ultra-high net worth individuals, don’t have any secret ways of making exponentially more money than the rest of us, they do invest in different ways. The biggest difference in investment strategies falls within the area of alternative investments such as venture capital, private real estate, energy investments, hedge funds, etc. Ultra-high net worth individuals invest as much as 46% of their portfolios in these areas, which is significantly more than many other investors. The mega-rich also hold more cash, combatting the illiquidity of their alternative investment strategies. These strategies are available to all investors but are more easily accessible to people with more funds at their disposal. Don’t be fooled, mega-rich investors DO make mistakes Even though the mega-rich invest in slightly different ways than typical investors, they are liable to make the same mistakes as everyone else. Many ultra high net worth individuals have fallen under the allure of hedge funds, but have generally been disappointed with performance. For example, a study CEM Benchmarking found hedge funds overall have been underperforming customized benchmarks with similar volatility at a rate of 1.3% annually, and they have been since 2000. Returns have also been especially disappointing in the long-short equity space. Do mega rich investors achieve the same rate of return as typical investors? Ultra-high net worth investors DO receive the same rate of return as other investors, however, they benefit from compounding. It’s simple math. If you’re able to put more money into a certain type of account that compounds in a beneficial way, you’ll come out on top faster than those who cannot invest as much. See Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

#205 If the Federal Reserve has printed over $2 trillion dollar and given it to banks to lend, why is U.S. inflation still low? More information, including show notes, can be found here. Episode Summary Many people wonder if the Federal Reserve is really printing money. Varied schools of thought exist behind the value of money, how it gets injected into a country’s economy, and how it impacts the private sector. On this episode of Money For the Rest of Us David offers insights into this complex subject, all while giving you the best information regarding the Federal Reserve, its open market operations, bank reserves, and why we aren’t experiencing hyperinflation. It’s sure to be an educational episode that you don’t want to miss. Can the Federal Reserve create money without printing it? The US Federal Reserve is not able to produce physical money in the form of coins or bills. That’s the responsibility of the US Treasury, their Bureau of Engraving and Printing, and the US Mint. The Federal Reserve, however, can “print money” when it purchases U.S. Treasury bonds with money it creates by adding to its member bank reserves. Kimberly Amadeo, a writer at The Balance, explains this buying/selling of US treasuries by saying, “One of the Fed’s tools is open market operations. The Fed buys Treasuries and other securities from banks and replaces them with credit. All central banks have this unique ability to create credit out of thin air. That’s just like printing money.” How do banks create money for individual borrowers? Contrary to what many believe may happen, banks do not transfer money from a different account or withdraw it from a central vault for loans. Rather, David explains that banks “create money out of nothing” and withdraw it when loans are repaid. Thus, excess central bank reserves are not a necessary precondition for a bank to grant credit and therefore create money. Banks typically only have to have 10% of all accounts in reserves. If a bank lacks the reserves to cover the payments, it can be borrowed from an inter-bank market or central bank system. Why haven’t we seen hyperinflation due to these processes? The United States hasn’t seen an influx of hyperinflation because the private sector hasn’t been willing to borrow enough funds to strain the current capacity of the economic machine. David further explains the lack of inflation by using the two money aggregates that exist in the US: M1 and M2. M1 is composed of currencies, paper, bills, notes, traveler’s checks, and checking accounts (demand-deposits). M2 is made up of everything in M2 plus savings accounts, CDs, retail money market funds, etc. In March 2009, at the height of the recession, M1 levels were around $1.6 trillion. As of April 2018, the M1 was at $3.7 trillion – a 130% increase! Does this mean households are wealthier? Not necessarily. The majority of them simply have more liquidity, because Treasury Bonds were sold to the Federal Reserve in exchange for checking account deposits. Episode Chronology [1:15] Is the Federal Reserve really printing money? [6:40] Two ways to address this question [11:50] So how do individual banks create money for borrowers? [21:20] Monetary aggregates in the US and how they indicate the level of wealth and liquidity [23:50] Why hasn’t this led to hyperinflation? See Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.