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gold; this metallic standard lasted well into the 20th century until under the Nixon administration the gold standard was revoked in order to pay for the escalating costs of the Vietnam War.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

Monday, January 4, 2021

 Where is Jack Ma?

Is Jack Ma still alive? After voicing criticism over China's financial sector, the wildly successful billionaire hasn't been seen in public for over 2 months now. Some wonder whether he is still alive. Many wonder what Chairman Xi has done with this man...Jack Ma has "gone missing."

As China projects its hegemony across the globe, it has become quite apparent that speaking against "the State" is grounds for termination. And if they can do this to a billionaire, well imagine what's really going on behind the scenes. Fang Fang was recalled after her cover as a handler was blown. Hundreds of "grad students" with access to cutting edge research at our top universities simply board a plane and are never heard from again.

An interesting corollary to Jack Ma's disappearance is the disappearance of Chinese stocks on U.S. stock exchanges. The Trump Administration's final days are being spent shoring up American exchanges from Chinese corporations with questionable financial ties, money laundering, and corruption. Parts of the FBI still seem to care...other parts seemed completely compromised. The "President-Elect" has financial ties to China that are troubling to say the least. Condon's "The Manchurian Candidate" quickly comes to mind.

Almost any global tech exec will give you an earful of the trade stipulations China has put on the sector; namely originators, inventors, and makers of technology are required (yes you read that correctly) to provide their Chinese "partners" with the necessary IP to industrialize China. The rust belt is testament to what happens on a large scale when this is employed; machines go first, then their operators aren't far behind. Silicon Valley should wake up to this reality, but I fear the greed is blinding right now.

What would it take for an American billionaire to be "disappeared?" That is an interesting question. It happened to Carlos Ghosn when he landed in Japan. It seem reasonable that the average billionaire might be "disappeared" off a yacht in the Med at any given time. Civil rights seem to disappear when you leave the United States and step foot on foreign land. Even in the United States now, billionaires are hedging their bets by championing the policies of the ruling elite. I guess you can never be too careful.

Why has Jack Ma "gone missing?" Linked is Jack Ma's Bund Finance Summit Speech, it may have cost him his life. Freedom is never free my friends.

Friday, January 1, 2021

 Join the R.I.S.E. Movement!

Retirement Income Starts Early

New day, new year! Have you joined the R.I.S.E. Movement? Retirement Income Starts Early (R.I.S.E.) is a new movement helping people around the world better understand and prepare for financial security. Although tailored to my readers in the United States, the R.I.S.E. Movement's mathematical and psychological principles are universal.

Depending on where you live, however, there are either some distinct advantages or disadvantages to financial security. The R.I.S.E. Movement is most effective in geographies with established rules of law protecting property rights, the ability to own assets, and the ability to migrate with those assets to other regions. Simply put, the R.I.S.E. Movement works best in democracies because they typically allow for the two great advantages of compounding wealth, namely time and owning the asset!

Let's get right into it. For the vast majority of both young and older readers of this blog I have stressed the importance of "Investing Like A Farmer," and by that there are ample descriptions of the value of buying compounding assets. The R.I.S.E. Movement is an implementation of those writings unified into a financial roadmap. There are several key tenets that I think are essential to both understanding and applying to your financial preparation.

First, happiness in life (at least from a financial perspective) is positive cash flow. What is joyous is passive positive cash flow. The ultimate goal of the R.I.S.E. Movement is to help you construct a portfolio with recurring and increasing passive positive cash flow.

Second, the cavalry is not coming. You're on your own in this life in terms of creating this portfolio. It is a bad assumption to rely on a friend, relative, or (gasp) the government to bail you out in time of need. As Johnny Cash once sang "Son, this world is rough. And if a man's gonna make it, he's gotta be tough."

Third, basket weaving is underrated. College students who take basket weaving to help boost their GPA get a bad rap, because not only is basket weaving quite useful it is also quite educational. From a financial perspective, the basket we're weaving is our portfolio. It is composed of many different reeds and together they will form a strong basket to hold our wealth and generate cash flow.

When is the Best Time to Start Saving?

As most financial companies will tell you, the earlier you start saving the better. This is because one of our greatest resources in life is time. The more time you have the more compounding can occur.

The chart above helps visually illustrate the value of compounding interest, that is interest upon interest upon interest ad infinitum. The real "juice" savers get is from the compounding effect of interest. But that chart, however, only tells part of the story. It is based on a single initial lump sum that isn't touched for 20 years. Let's take a look at a little more of a real world example, in which case we start with some small sum of money and then add to it over the years. (Click to Enlarge.) 

Obviously the take-away from contributing regularly over time is that a decent chunk of change can be generated assuming we get a modest rate of return and do not touch the funds thus allowing them to grow.

HUGE challenge of course is NOT touching the growing asset base. It is virtually impossible, however, for most R.I.S.E. Movement members to accomplish this goal because life, especially over a (hopefully) very, very long time will throw significant challenges at all of us; it could be health problems, education costs, vehicle breakdowns, children, parents, taxation, etc. There are literally thousands of challenges that arise over time which require utilization of our assets. That's the major flaw in most financial roadmaps, there is zero accounting for life itself.

This brings us back to the initial question posed, when is the best time to start saving? The best time to start saving is before you are born.

Weaving the Basket

Starting to save before you are born is difficult, because you don't have many of the educational tools yet to land a job. Obviously I'm writing to all the parents out there. And grandparents. The R.I.S.E. Movement champions independence, but there are significant advantages provided to those starting out in life who are able to leapfrog twenty years into the future. And what I mean by that is nearly every wealthy family has resources put aside for their heirs; whether it is cash, gold, real estate, the family business, etc. in either a Trust Account, 529 plan, life insurance, or other mechanism. The path to creating a solid asset base that can generate cash flow starts early

Now for those of you who weren't able to choose your parents or the country you were born in, well there is good news. If you're reading this then you probably have a vested interest in improving your lot in life, possibly to a significant degree. Read on.

As we've already discussed, time is one of the greatest commodities in life. Another one is education. Education allows people to transcend from their existing condition. This can result in a better job. A better job typically means more salary. That's a good beginning. With a decent salary excess income can be applied to building your asset base. Depending on how good of a salary, you can then start compressing time.

Wait, did he just say "compressing time?" Yes. The more excess income (income that exceeds your cost of living expenses) you have the more assets you can purchase. What is an asset anyway? An asset is something that pays you to own it. The world is full of assets just waiting to be purchased! There are dividend paying stocks, small businesses, real estate, mining claims, etc. The list goes on and on and on.

Whether young or old, there are certain tips I'd like to share in regards to "weaving your basket." Just as a little can be turned into a lot over time, the inverse is also true...namely a lot can be turned into a little quickly. The construction of your basket is going to be unique for almost all of us, but there are common elements to success. 

Create moats. By that I mean have different types of assets which are not correlated, not held in the same place, and are secure. For example, "diversification" isn't just having an Index Fund. Consider owning dividend paying stocks, bonds, real estate, gold, and a small business. Together they form a sturdy basket to hold the totality of your asset base, yet are not held in the same place. 

No single event should (or could) destroy your basket. Barring a meteorite or health pandemic of Biblical proportions, your basket should be able to withstand the test of time and what life has in store for you. See the paragraph directly above regarding creating moats. Chain reactions can be very, very nasty. Having liquidity on hand is a good thing (think cash money.)

Building a castle or a spaceship or a robot starts with one Lego. Remember that. Young or old we all have a certain amount of time left, act accordingly. Buy assets. Live. Add to your assets. Live. Buy more assets. Live. Use income from assets to buy more assets. Live. Get more education. Live. Use excess income to buy more assets. Live. Teach others. Live.

Your Future Starts Today

In the preamble of this post I mentioned that the R.I.S.E. Movement was tailored to my readers in the USA, but applicable to readers around the world. Each country will have its advantages and disadvantages in terms of educational opportunities, health care, and freedoms.

Generally speaking, the greater the educational opportunity, better the health care, and more freedom one has the greater your ability to harness all the facets of the R.I.S.E. Movement will be over time. Luck and hard work, however, can and often do trump many of the advantages of living in a democratic country with wealthy parents, opportunities for education, health care, and fundamental freedoms. If you have the self-discipline and motivation to harness the power of time you can compound opportunities.

Monday, December 28, 2020

 Roaring 20s

With free money and pent-up demand ready for release, the economy is poised to repeat the Roaring 20s all over again...this time with booze legal!

We are on the cusp of a Gatsbyesque epoch. The Fed has already declared they will not raise rates until 2023 at the minimum. Three (or is it four now?) major pharmaceutical companies have their Covid vaccines approved. There is an excess of over $2T sitting in savings accounts in the United States alone. The world is awash with capital...and all if it is looking for a home. Cue the big band music.

Traditional outlets of excess liquidity have been fulfillment of hedonistic impulses. The 2020s look like they will be no different as pent-up demand for physical relationships will undoubtedly result in a Baby Boom on par with the end of WWII. Plus, there are significantly reduced societal norms defining what a relationship should be...many couples live together for years, purchase homes/condos together, and begin their families without a thought of marriage. 

Loose money and loosened moral norms will accelerate natural trends to their apogee. It took approximately a decade for the "Lost Generation" to finally party themselves out of energy. The fireworks most likely will start in the United States. From there, it will spread in lockstep with vaccine rollout, monoclonal antibody therapies, and ICU/treatment capability.

What's going to be catalyst that pushes the country into the Roaring 20s again? Already signs of it are becoming apparent. High end liquor sales are creeping up. Second homes in vacation areas are becoming primary homes. Household wealth is up considerably. Real estate prices are soaring. Stocks are soaring. But the great litmus test is going to be an increase in the birth rate. That will be the lagging indicator that the Roaring 20s are upon us again and the good times are already rolling. Hopefully this time, however, a modicum of prudence learned from the Great Recession will let some air out of the balloon before it pops. But of course, nobody ever says "Enough!" So be sure to take some off the table on the way up.