Wednesday, March 31, 2021

 Follow the Money

One of my favorite movies of all time is "Chinatown." One of the best lines in that movie is "follow the money." It rings true today just as it was spoken in 1974. It has undoubtedly been true since the invention of money. "Follow the money" will lead to the truth more often than not; why does this matter?

Today's Wall Street Journal published an important piece in the Opinion section questioning an "official" report from the WHO about the origin of COVID-19 which has now killed over 2,000,000 people around the world. Over 500,000 of those deaths in the USA alone. In terms of scale, COVID-19 single-handedly is on par with a World War. In addition to the deaths, the economic, social, political, and societal damage has been vast. This is why the origin of this virus matters. 

Attached is the WSJ Opinion article published today for your perusal. It is important to share this with your friends, family, and colleagues.

Daylight is a great sanitizer to fiction, lies, and bogus data. As Sherlock Holmes famously said, "If you eliminate everything that is not possible, then you are left with what is the solution, however unlikely." Well dear readers a careful read of this Opinion article should reveal a very definite money trail (yes, that's our own taxpayer-funded National Institutes of Health) from the NIH to the Wuhan Institute of Virology (WIV) to expressly support the development of gain-of-function on coronaviruses. Why? That is a very good question. Ostensibly it is done for the purpose of creating vaccines. The truth is out there, we still need to find it.

Friday, March 26, 2021

 Killing eBay

This blog post might pre-date many of its readers. eBay Inc. started in 1995, some 26 years ago. To give some perspective of what it used to be like: eBay was fun. It was weird. And all sorts of treasures could be had. It literally was a portal to a garage sale. Commerce flowed...well at least was partly conducted...on the internet. In the the "old days" you bid on an item, and if you won you sent a paper check to the seller. Depending on the seller, he either held the check until it cleared or shipped the item before it cleared (which would of course change his policy in the future to holding the check until it cleared.)

The item you bought usually showed up in about 2-3 weeks after you won the auction. Maybe. Sometimes it took significantly longer. But usually it showed up. And that's how it worked; you searched this platform for mainly used, broken, or well-loved items and bid on them. The platform was 99.5% composed of individuals either trying to unload a lot of their garage junk or buyers hoping to score a cool collectible, piece of furniture, or old car.

There was no tax on that purchase because it was conducted "online." A HUGE part (some would say the primary use) of the internet was the free-flow of commerce without the interference of the government. Naturally the internet boomed. For the first decade of eBay's existence the internet actually was a free-for-all place of exchange, commerce, and the opportunity of a liberated society to conduct business. These were halcyon days.

Then things got even BETTER...yes...something called PayPal emerged which allowed buyers and sellers to almost instantly conduct business electronically (for a 3% fee.) This had massive implications. The velocity of sales now exploded. Time on platform increased exponentially. Listings on the platform increased exponentially. The check-clearing problem was solved. This the became the stage of eBay nirvana. It lasted for about another 10 years. But something bad started to occur during this timeframe too.

As with every successful venture, eBay had spawned a host of copycats. But that wasn't the beginning of its downfall, because it still had a massive and growing audience on its platform. More and more users became corporate though; the 99.5% of individual "mom & pop" sellers had "transitioned" to maybe 50%...while there was a noticeable influx of companies selling their brands via eBay. eBay repeatedly increased their fees; from listings to final value. Apparently no one with a cursory understand of economics (ie the "Laffer Curve") worked at eBay. Yet, the platform survived and moved a lot of merchandise....notice I use the word "merchandise," rather than garage stuff. Or hand-made goods. Or old collectibles.

By this time the first wave of competition had crested and the survivors remained; chiefly amongst these rivals was Amazon. It had taken a different approach, one that would position it for dominance in the future. Rather than never taking inventory, Amazon set-up absolutely amazing fulfillment centers which it used for both its own products and for the benefit of resellers on its platform. Amazon also was laser-focused on creating an integrated e-commerce juggernaut. eBay *kinda* was...they had purchased PayPay, StudHub, and a host of other technologies.

At some point the unraveling of all their acquisitions began, and it coupled with a full-court press of trying to squeeze out small sellers and focus on the high-volume businesses on the platform. Fees increased again. Gross merchandise volume (GMV) began to flatline. Up in Seattle GMV spiked...and spiked again. As often happened, politicians realized something very, very successful wasn't being taxed. As the law is written in life, "there is no benefit without taxation." So the campaign began at the behest of alleged "victims" of e-commerce...traditional brick-and-mortar retails stores crying foul over sales tax, even though they could, and did, set-up eBay stores. Something else behind the scenes was driving this purge.

In spite of a conservative-majority (whatever that means,) the Supreme Court took the first nail and whacked it into the coffin with the Wayfair decision in 2017. Wayfair mandated collection of Sales Tax on all internet transactions. By this time eBay was already limping along after its abandonment of small sellers and spinning off all its crown jewels (PayPal would go on to be worth MORE than eBay itself.) Amazon was perfectly positioned at this point to take advantage of eBay's sickening lack of leadership.

Amazon essentially "flipped a switch" and was able to easily enact Wayfair. More importantly, they gobbled up market share and became the most important retail sales platform on the internet. A close second was interestingly enough Wal-Mart, which via tech acquisitions after 20 years of watching the growth of internet retail sales finally decided it was here to stay and got serious. I wonder if it would have taken Sam Walton two decades to catch a trend? Wal-Mart moved rapidly to scale after paying McKinsey millions in fees to tell them they already had a large footprint of stores that could act as fulfillment warehouses. eBay floundered. The second wave of competition, name Shopify and Etsy arose and eclipsed eBay's GMV.

The second nail in the coffin was happily whacked in place this month by the mis-termed "American Rescue Plan Act" by the hungry, hungry hippos in Washington, D.C. Starting next year, all sellers on internet platforms will be required to be issued a 1099-K for total transactions exceeding $600. Kiss the bloom off internet commerce readers; this is the death knell for individuals and small businesses. Amazon and their ilk will do just fine, as this law essentially codifies their monopolies. Remember, regulation and taxation are friends of big business; small business and individuals PAY, while big businesses skirt the laws and route profits through elaborate tax avoidance schemes. (Unless of course you have a cousin in Ireland who owns your data rights who leases them to your sister in the Netherlands whose son runs the money in Nevada and disperses it in the Caymans to his cousin. Then you're all set.)

For the rest of America, once again our freedoms die in darkness...supported by the billionaire who owns the newspaper whose slogan is: "Democracy Dies in Darkness." The irony cuts deeply. Through a confluence of ineptitude and collusion, the eBay model of commerce which launched and sustained the internet for nearly two decades is dead. It has been killed by politicians and judges on Federal Salaries, with Federal Pensions, and Federal healthcare who don't have garage sales and think "scratching out a living" involves more lobbyist money from big tech or Chinese manufacturing companies. The internet has simply become the fulfillment arm of Amazon while individuals and small businesses will continue to be squeezed out of existence. E-commerce is dead. Long live e-commerce!

Monday, March 22, 2021


Tokenization of assets is the springboard of capitalism. Ever since the establishment of the Amsterdam Stock Exchange in the early 1600s, the world's first official stock exchange, capitalism has taken flight and created a system of joint ownership of various assets. This allowed for virtually anyone to own a piece of a company without being personally responsible for its fate, yet this owner could share in any potential upside via an increase in the share price or as the early mining stocks in America proved, dividends from said share(s).

Here at ILAF we are always at the forefront of financial technology and innovation. Well kinda. But as financial farmers with a deep respect for ownership of assets that grow large over time, we would be remiss if we didn't talk about the advent of a *new* kind of financial development: tokenization.

Tokenization is the process of splitting either a real physical asset (such as a car, real estate, or even comic book) or increasingly non-fungible digital assets into identical pieces or shares or tokens of ownership. For all intents, what is occurring is a ledger system which is extremely NON-crypto in the sense that there is no ambiguity as to an asset's provenance. Crypto is probably one of the biggest fallacies of all time; it is eminently clear who owns what, what they paid, and when the item was purchased. Fungible assets, however, have anonymity by definition; think gold, physical paper cash, and oil for example.

One massive market that has been overlooked for decades, save perhaps for the avant-garde, haute couture world that Sotheby's and Christie's have built their empires on...paintings and sculptures. People of a certain generation, for generations, have stored their wealth in art. Primarily paintings. But for the past several decades as the older generations pass on and their collections are broken up and reconstituted by others as the wheel of time turns, a new store of wealth has emerged. Composed primarily of what loves were enjoyed in the past, or what loves where unobtainable in the past, a host of collectibles including classic cars, baseball cards, watches, and comic books have emerged.

Why would the comic book emerge as one of the hottest stores of value? Arguably in 1938 with the publication of Action Comics 1, a new generation of art, culture, and value was created with Superman's debut. Batman followed in Detective Comics 27. A host of other heroes soon joined the ranks. And in the early 1960s as culture itself changed dramatically, Marvel Comics launched the Fantastic Four. In quick succession The Hulk, The Amazing Spider-Man, The Avengers, etc. followed. So began the continuity of a medium that has influenced, often defined, culture for nearly a century. Those early pieces of paper are now worth millions. Perhaps billions. What does this have to do with tokenization? Read on fellow financial farmers.

I was recently introduced to a platform called Rally which has successfully tokenized collectibles into distinct pieces of collectible ownership. The implications of this should be vast, as there are a finite number of old there are only so many X-Men 1 graded CGC 9.4 (13 to be exact) available in the world. Granted "new" old collections are sometimes found, but they are increasingly rare. Limited supply of high end goods, regardless of the category, usually prove good for their underlying owners over time, especially if there is consistent demand by a growing population. The item becomes a store of value.

Bitcoin is all the rage in terms of tokenization; but the true unleashing of value, in my opinion, will be in the vast untapped value trapped in least as long as the living generation valuing the assets lives; will a Monet always be a Monet? Only if each succeeding generation values the artwork as much, or more, as the previous generation. Unlike bitcoin though, tokenization of collectibles offers the owners a piece of tangible asset; the value, of course, is always in the wallet of the beholder.


Sunday, February 21, 2021

 A Bitcoin for Your Thoughts?

I am not a crypto fan for a variety of reasons; for one it feels like a pure Ponzi scheme, for another it has no ties to a physical commodity (think gold standard), and it can be seized electronically at will by almost any major government...but there is one trait that is very, very interesting about Bitcoin: The IRS wants to know on your 2020 1040 "At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?" Unfurl the red flags.

Why does the Deep State want to know whether you have virtual currency? Well dear readers, taxation is a by product of any benefit. This first example of this phenomenon in the United States sparked the Whiskey Rebellion in 1791. Whiskey had become a store of value; tilled fields planted with rye ultimately harvested and distilled into whiskey became in many respects this country's first portable, stable, and universal currency. Naturally the government wanted to tax this store of value. Hence the brewing discontentment which resulted in the Whiskey Rebellion.

Ultimately a paper currency was introduced which was backed by silver and gold; this metallic standard lasted well into the 20th century until under the Nixon administration the gold standard was revoked in order to pay for the escalating costs of the Vietnam War. The result was disastrous for working Americans as their purchasing power collapsed and inflation raged. The amount of paper currency, fiat money, in circulation exploded.

Gold has been a universal store of value for over 5,000 years...maybe even longer. "God's money" gets its value from the toil required to obtain it; gold is rare, it cannot be made by man, it is portable, and it looks really cool too! Almost every civilization that had some access to gold made it the backbone of their civilization's economy; even today vast hordes of gold are stored by central banks around the world.

Virtual currency offers central bankers even more of an advantage over paper money; not only can a limitless supply be created, but it can be tracked, seized, and controlled with ever more sophisticated means; virtual currency is big data's dream scenario...information about consumers can be collected en masse and interesting scenarios develop such as migration patterns, spending habits, and legal status.

As adoption becomes mainstream, the question arises with a theoretical limit of 21,000,000 (21M) Bitcoin how high in USD can it possibly go? An investing analogy to the Great Tulip Bubble was that during peak mania, a single bulb could purchase a assume a nice house and we're talking about possibly $1M. Tulip mania did not end well, and I suspect Bitcoin will also end poorly.
If paper currency is just fiat money, tulips are just flowers, and Bitcoin is potentially a Ponzi scheme what is an investor to do? Felix Zulauf from this week's Barron's had a very interesting take: "Millennials are buying Bitcoin instead of gold...I don't believe that Bitcoin will ever make it as money used in daily payments. It is too complicated, the price is too volatile, and "mining" it requires too much energy. But as long as people think Bitcoin as a safe store of value, the price could go higher, and it could become a mania."

Finally, as Steve Jobs famously used to end his product launches..."one more thing." Research indicates that Bitcoin is an environmental disaster given the amount of energy resources it consumes to "mine" the virtual currency and where does some 20% of the world's Bitcoin mining take place? China's Xinjiang region, "where the U.S. government says a genocide is occurring."

A possible solution? Let's get back online with the gold standard by digitizing gold. I hope the next craze in virtual currency is GoldCoin.

Friday, February 12, 2021


A Special Purpose Acquisition Company (SPAC) model is turning the traditional Wall Street monopoly on Initial Public Offering (IPO) deals on its head...and heads are rolling in angst. Consider the recent hit piece by Bloomberg "Investors in SPACs Need to Know the Real Deal." Or any of the various rants by Jim Cramer on CNBC about why he doesn't like SPACs. But wait, a host of recent traditional IPOs (those birthed by traditional Wall Street investment bankers) like DoorDash, Airbnb, and most recently Bumble all soared on their first day of trading. Great for retail investors, right? Not so much. 

(Intentional?) Mispricing by investment bankers has led to massive single day pops on issue, leaving the IPO company in a lurch (yeah, those are dollars they left on the table, rather than going into corporate coffers) while the investment bankers make a killing (all the money is made between the lines) for a service that could have been accomplished via a direct listing like Palantir accomplished or...gasp...via a SPAC. Oh yeah, one more about all those retail buyers (read as the general public) who had to pony up to pay the premium price for a new issue? Hosed. Their only hope now is to bet on a high price going higher.

In a raging bull market, proximity to the deal flow is vital. Everyone knows this, that's why there is so much demand for IPO deals. That's why the margins are so fat. That's why traditional investment bankers crush it. It's an easy algorithm, get as close (early) to a deal of a good issue as possible. Retail investors know this well. And about a year and a half ago a SPAC launch occurred that first kinda appeared under the radar...Diamond Eagle Acquisition Corporation was to acquire SBTech and DraftKings. This seminal event ushered in a new wave of investing for the retail investor and the small company. It was a renaissance moment. Since the DraftKings deal went public, literally another hundred SPACs were launched. More are on the way.

Are SPACs risky? No doubt. Like any new issue without a track record, investors need to be cautious. When owners, founders, venture capitalists, private equity managers, hedge funds, AND retail investors, however, all are on the same page, it definitely seems like the investing world is thinking different (like Steve Jobs advised.) The one player traditionally clear and present, however, is noticeably absent...the investment banker.

SPACs are a great democratizer. And the Bloomberg article is quite right on one point; if investors still want to buy, so be it. One of the great legacies of the previous administration was the creation of an investing environment that put an emphasis on less regulation, less red tape, and more freedom. The result of this philosophy has begun to take root and bloom. The big potential losers are the static, entrenched monopolies which have maintained their status via ever-increasing market size fueled by bolt-on deals...who just said Microsoft...and bales of cash to lobby DC preventing competition. The big winner? You.

Sunday, February 7, 2021

 Reminiscences of a Stock Operator

Recent stock market volatility with the GameStop (GME) short squeeze illustrates that there is nothing new under the sun, indeed some 100 years ago Edwin Lefevre chronicled the career of a character inspired by Jesse Livermore. If you've never had the pleasure of reading it, I highly recommend "Reminiscences of a Stock Operator." It is one of the seminal books on trading, risk, and human behavior ever set to typeface. 

Wednesday, January 13, 2021

 When the Fringe Goes Mainstream 

When fringe ideas go mainstream lots of money can be made. Buckets full of money. The resulting services and products from what were once considered fringe ideas have fundamentally changed society when they were embraced by the mainstream. 

Consider the societal impacts of Bitcoin, electric vehicles, sports gambling, pot (rebranded cannabis), and even gourmet coffee. All of these products or services originated in previously fringe sectors of society. They were what the mathematical, specifically the statistical community, have labeled outliers.

Outliers traditionally have been considered data (or even people) that are significantly outside the average or median set of data. Consider the image directly above. The data clustered in the bottom left would equate with a point or even slope if it was two-dimensional on the graph. Notice the point on the upper right of the chart. In the study of statistics, this is know as the outlier.

An outlier is an extreme value that is either much higher or lower than other data points. Not to get too complicated, but the outlier typically skews the mean and median. Traditionally outliers are discarded from a data set because of this effect. My experience has been to embrace the outlier. As a matter of fact, I suggest investors keep an eye out for outliers. 

The case for keeping outliers on your investing radar screen is strong, because as alluded to in the first paragraph mucho dinero can be made getting in on trends early. That is typically when prices are low, because demand is virtually non-existent. In fact, the trend may be so early there may not even be a way to monetize the idea into a product or service yet. That makes investing in a nascent idea tricky. Often investors will pony up benjis for corollary product or service that aren't necessary the real thing.

In any industry created from a fringe idea, the birthing process is difficult and fraught with failure. The commercialization process of converting a fringe idea into a business can be best summed up as loony. It's like the primordial proteins, enzymes, heat, pressure, and time aligning to create a new life form, which of course is what a fringe idea converted into a new product or service most resembles. It is at this point when its product or service is launched and ownership can be had, whether in private equity or via purchasing the asset directly (Bitcoin), or licensing it (McDonald's franchise) that an investor can now gain exposure.

Ideas aren't two dimensional like most data on a chart. They aren't even three dimensional. The bridge between mathematics and ideas is tenuous at best. Ideas embrace at least length, area, volume, and time. The world as we know it has three dimension; length, width, and depth plus one dimension of time. String theory postulates that the universe operates with many more dimensions. Ideas are definitely at least three dimensional, consequently traditional statistics has been a poor utility to identify fringe ideas that will become mainstream. A better litmus test is needed that incorporates both mathematics and humanistics. Arthur Schopenhauer famously said "All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident." 

Since I am not as smart as Schopenhauer, I use something called the "Laugh Test." The "Laugh Test" is if I laugh out loud when presented with a fringe idea. I almost immediately put that new idea on my investing radar. The "Laugh Test" for me has proven to be an accurate predictor of potentially ground-breaking products or services, plus it also has produced countless failures. This litmus test, however, is also why I think certain environments are fertile ground to create new products and services, and also why AI will have trouble cloning this distinctly human gut reaction to what is funny, what is love, what is scary, etc. Emotions are a key factor in converting a fringe idea into a mainstream product or service. And once the mainstream embraces a fringe idea, its products and services typically change the course of history.

Tuesday, January 5, 2021

 Georgia On My Mind

As Ray Charles put it so eloquently, "Georgia On My Mind" is the theme for today, tomorrow, and the future of the United States. Not to get too peachy, but the significance of today's Senate runoff race cannot be overstated. 

The Republicans currently enjoy a 50-48 lead in the Senate, with Vice President Mike Pence acting as the 101st vote if needed as his duel roll as the President of the Senate. This could all change by tonight. Democrats need to win both seats to take control, a split victory will lock in the win for the Republicans. 

The stakes are especially high given that a Senate victory for the Democrats will ensure complete control of the legislative and executive branches of the government. In theory they will have de facto power to pass and enforce legislation at will. California is a good roadmap of what could happen if this scenario plays out; unchecked political power has completely wrapped this blue state in red tape. Victims of this hegemony are fleeing California en masse.

The flip side of this coin is that if Republicans win at least one of the two seats then the GOP will have the ability to stymie Democratic government control. In this scenario we would have an actual two-party legislative government.

Single party government control rarely turns out well, as the minority party is steamrolled and builds angst amongst the minority coalition of voters who have to endure authoritarian regime(s). Almost inevitably, single party control is vigorously overturned the next cycle. Consider: Reagan-Reagan-Bush-Clinton-Clinton-Bush-Bush-Obama-Obama-Trump-Biden.

The universe seeks balance. The recent political scene has been anything but balance; it has become highly polarized in terms of candidates and ideology, brother against brother and friend against friend aligning along their political beliefs. Sadly, what has been lost is ability to view life in grayscale; rarely are issues ever just black or white. The results of this senate race will for a long time leave "Georgia On My Mind."

Georgia On My Mind
Ray Charles