Yield - A Word That Means More Than You And Me Acknowledge

Wow! I'm only now realizing how long it's been since I last posted. Before we start, I'd like to check in with you and see how those New Year's resolutions are going. If you haven't kept many, trust me, you're not alone lol. However, I must say, the fact that there are so many is probably the problem. I guess it's true what they say: "always start small." As for me, I’m a little sad that I haven't read as much as I would have loved to, but I'm glad to be kicking it in other areas. Okay! Enough checking in already. Let's get to the matter at hand and "yield" something.

Yield is certainly an ambiguous word. You can look at it as I just did in the last sentence of the last paragraph. However, I want to look at it in terms of markets. I know what you're thinking; here he goes again. Sorry to disappoint you, but this is how I see the world because markets mean more and have a greater impact on our lives than most of us are aware of. Before I explain how, I'd like to point out that, in general, "yield" means some kind of output. Using the word output makes it easier to understand because, at the end of the day, life demands some sort of output from any person with the capability to produce one. It's how you're valued, in a nutshell. In my culture, they say, "Be a person of value so they don't go into a family gathering and ask you to run around and do errands." It's a bit of an insult literally, but paradoxically, it isn't because the leader must be the servant. Let's leave it at that because we are not into philosophy here. So, let's now look at yield in the context of the market and how it shapes our everyday lives.

Yield, in the market sense, is just the interest you pay on borrowed money. I know you must be wondering how that impacts you, but allow me to lay it bare for you. If I come to borrow $1,000, the person or entity lending the money to me is taking a risk, because what if I fail to pay back the $1,000? For this entity to bear the risk of lending me the money, they will demand I pay it back with interest of, say, 1%. Which means, when it's time to pay back, I'll pay $1,010. The $10 represents the "Yield." What I just explained is very powerful and very much the foundational concept of how difficult or easy our lives (in terms of the cost of living) become. Of course, this is without taking into account the "wrong" choices that some people may make to add difficulty to their lives. Okay! Let's go back to yield.

I have presented a case for borrowing. Now imagine these types of transactions are being done on a daily basis by literally everyone in the world, directly and indirectly. You are part of this vast system without even knowing it. The most basic way by which most people are in this system is through having a bank account. Whatever money you have in your bank account is loaned out to entrepreneurs or just any borrower, for that matter, at varying interest rates. You may always check your bank account and see what you have, but technically, all your money is not actually with the bank. If you demand it immediately, they take it from someone who's not asking for theirs and give it to you, and so on and so forth. That is to say, if everyone came at once demanding their money, the bank would not be able to pay. Why so? Because they have loaned most of it out for a "Yield." So, they'll take your $10,000 and loan out $9,000 to, say, John Doe at an interest of 3% per month. John Doe pays an interest of 3% every month, and the bank pays you maybe 0.01% and keeps the rest. I don't like that we're getting into too many numbers, so let me pivot.

                                                            Image by Google Gemini

The idea is that the system is just a giant loop of promises that depend on other promises, and so on and so forth. You borrow money to go to school, to buy a house, a car, etc. These are bundled and sold to another person who believes you'll pay your debt. The bank earns interest, and once you pay, everyone is happy. The bank can say, "Oh, John Doe is a doctor and will always pay his debt." So, they bundle many people like John Doe who owe money and call them "Class A debtors." Others they call Class B, and so on and so forth. I come to buy Class A debtors (composed of doctors like John Doe), and the bank charges me less interest because John Doe and co make enough money to pay back their debt. Unlike "Class D," made up of your typical warehouse worker who makes less money and is perceived as a risky borrower. If an investor loves risk, they would buy Class D, from which the bank is charging interest rates of about 10%. Wait, read that again. These are people who have gone and taken the best car in the market, working warehouse jobs, and can hardly pay back the interest. There is nothing wrong with their job; it's just that they have entered the "yield" trap without knowing. If they knew, then I could no longer call it a trap, but you guess here.

This paragraph should now help us understand the game being played with our lives. If I were to lend money to someone who will hardly pay back, I'd charge an interest of maybe 10%. However, there's always someone paying a guaranteed 5% or so without any risk. Yes, this someone is usually a government. Yes! And the most trusted government in the world that guarantees this is the US government, for many reasons we shall not go into in this episode. The idea is that, for me to decline lending money for a guaranteed 5% and chase a risky 10%, I need to really love high "Yield." This is how our lives, in terms of the cost of living, get screwed. I have given many examples, but perhaps the clearest of them is the recent events in Iran. I know you may have experienced high gas, fuel, or energy prices. This is not because inventories dried up suddenly. No! It's just companies saying, "Hey, now that ships have to pay a higher cost for going through the Strait of Hormuz, my inventory may go short in some months. So let me charge more to mitigate the risk that such an eventuality becomes real." Insurance companies that used to cover a ship for a yield of 5% per ship now say the risk is too high, so to insure this ship, they must charge 80%. Ships say that to transport this oil and risk being blown up, the ship now charges at a 50% yield, etc. A so-called first-world country like France goes to the World Bank to borrow money, and the bank gives them loans at 3% interest because the bank trusts France to be "transparent, efficient, and less corrupt" to pay back what it owes. A so-called third-world country like Cameroon goes to borrow from the World Bank, and they say, "Oh! You guys are too corrupt and mismanage a lot," so they borrow at 10% interest. These are scenarios where risk affects yield.

More specifically, central banks like the US central bank can print as much money as possible. How this is done is a topic for another day. What it does mean is that, because they can do this, they always have a rate at which they are willing to pay to borrow money, and this kind of sets the base rate on a short-term/daily basis because these are usually risk-free returns/yields, and "big pockets" love this. For this reason, they set the base rate that other markets like to follow because, you know, who wants to fight someone who has infinite money? This gives them so much power to be able to control the economy worldwide and make our lives either difficult or easy. This write-up is already too long, so let me wrap this up. If I had the power to set the base rate, I could say, "Hey, everyone, I'm paying a risk-free 10% to anyone who lends me money." Now everyone rushes to lend their money to me. This means banks and other lenders don't have money for the economy, and so things become difficult as prices rise everywhere. Or, I could say, "Hey, henceforth, I will pay 0% to anyone who lends me money." So banks and other lenders say, "Screw you, Acha; we will go and invest our money elsewhere in the economy." In this way, the system is flooded with cash, and things become really cheap, from buying food to houses to cars, etc. Hey, it is that simple, but I must warn that such scenarios require more nuance because when a balance is lost, more money may start chasing fewer goods, thereby causing inflation, which is another nightmare on its own.

So, you now have the perfect scenarios to see how powerful "Yield" is. Always ask what the base yield is. If you can spot the base yield, you can know where it may be headed, and if you know this, you can be prepared for the tough times. Muchas gracias, señoras y señores. Hey, I'm on a 105-day streak of learning Spanish on Duolingo. ¡Hola!