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15 september 2015

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

Long legged blondes

Dutch disease

White Sensation Parties

Dutch Disease White Sensation


moulin rouge

Picturesque landscapes


van gogh 1280px-Van_Gogh_-_Starry_Night_-_Google_Art_Project

-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?



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?

And, please, feel free to share this article or my site with anyone.

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