Monday, December 28, 2020

Roaring 20s

 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.

Saturday, December 26, 2020

Animal Spirits

 Animal Spirits

John Maynard Keynes coined the term "animal spirts" to describe the financial decision making process during times of turmoil. Their release is an apt catalyst in our current situation.

The original passage by Keynes reads: "Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over may days to come, can only be taken as the result of animal spirits--a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitive probabilities."

The pandemic has unleashed the animal spirits, with the strongest of all, survival, being most relevant in the time of chaos. It has accelerated the adoption of multiple technology platforms (internet retail sales, logistics, working from home, education from home, and telemedicine to name a few.) And oddly enough, the virus that has killed millions may have inadvertently increased productivity.

What does this all mean? I believe we are on the cusp of 2 major trends: 1) The Roaring 20s are about to occur all over again, or put better by one of my favorite philosophers Yogi Berra, "It's like deja vu all over again." Ditto for the second trend: 2) A Baby Boom of epic proportions is on the horizon as pent-up emotions are released across the world. An "end of WWII" scenario isn't out of the question.

Investors with ready capital can take advantage of these 2 major trends by identifying companies (or better yet, starting companies) that have the potential to unleash animal spirits. This is a key litmus test I use when looking to buy assets. Does the target company unleash animal spirits? Has this product or service created a paradigm shift in consumption, utility, economy, trust, etc.? Buying the future today has often proven to be extremely lucrative tomorrow.

Monday, December 14, 2020

Asset Inflation

 Asset Inflation

Headlines abound with terms like "mania" and "exuberance" in regards to recent stock market IPOs, journalists should rather focus on the collapse of the dollar.

With Fed Funds rate at essentially 0% consumers aren't stupid. Money is flowing like lava from a Hawaiian volcano into real estate and stocks (especially platforms.) Why? Well the chart above helps to illustrate approximately 100 years of the dollar's decline. Granted, a lot of things have become cheaper, or weren't even available to purchase a century ago (iPhone anyone?), but some things never change: the flight of dollars into real estate, gold, and businesses has been real.

What does this mean for the average investor? Well the average investor, one who typically does not receive pre-IPO shares or hold significant private equity wealth, is troubling. Given the market's recent spike to all-time highs it can be argued that stocks are frothy. Same thing with real estate. Gold may still offers value, in my opinion, to say Bitcoin.

Bitcoin has eaten up the traditional safe-haven status of gold. Bitcoin is an asset that is easily traceable, easily seizable, extremely tax-inefficient, hard to do business with, and limited in supply to 21 million units. Obviously ILAF isn't a fan.

What is a prudent investor to do? Where else can money be allocated? It is hard to believe bonds or CDs offer anything greater than an arena of cash storage with most likely a real yield that is negative...that's right, you are paying a bank to hold your money. They in return offer you protection on the amount (not the value) of the declining asset. Your opportunity cost is the true victim.

A good farmer, and investor coincidently enough, weighs the opportunity cost in making a decision. The future is nebulous, but the past often provides a looking glass into what has worked in prior situations. Most notably, I would turn your attention to the 1918-1920 time period in global history. The Spanish Flu most coincides with our current predicament.

With 50 million dead in the span of several years, which also coincided with World War I, Spanish Flu could arguably be categorized as humanity's singular worse disaster. Technology has offered some relief today. The world is also significantly more unified in a response (Operation Warp Speed should clearly be the Nobel Peace Prize Winner.) So politically, medically, and financially the "world" has acted considerably more in concert than 100 years ago. If the current scenario plays out similarly to the 1920s (which I think it will) prepare yourself for even more asset price gains...think Roaring 20s all over again, and a baby boom to rival the end of WWII.

Bottom line? After covering your monthly nut for housing, medical, education, etc. turn those remaining dollars into ownership in something more sustainable than cash...real estate, gold, business ownership, etc. Oh yeah, and don't forget to save something for the Big Guy! Trump Tax Cuts are 1st on the chopping block under the new Joe Biden regime.

Wednesday, December 9, 2020

Bob Dylan, Capitalist?

 Bob Dylan, Capitalist?

As reported in the Wall Street Journal yesterday, Bob Dylan sold his entire music catalog to Universal Music Publishing Group. This comes on the heels of Stevie Nicks selling her publishing catalog last month for $100 million. Mr. Dylan's deal is likely closer to a billion dollars based on higher-end royalty metrics, historical significance, and artist premium.

While the actual deal value has not been revealed, the timing is impeccable. With the Biden administration poised to sack the Trump Tax Cuts on day one, there has been a flurry of deals and IPOs (428 to date, not including the largest of them all, the upcoming Airbnb offering expected to hit the tape tomorrow.) It's no coincidence Mr. Dylan pulled the trigger when he did.

The savings of monetizing in 2020 are vast. Consider in Mr. Dylan's case, he'll likely pay ~24% in a one-time capital gains tax for his catalog (plus state taxes) versus the recurring ~37% (plus state taxes) on the annual income his music catalog generates. It is a savvy move, especially since a decent portion of his music right are *probably* slipping through his fingers via social media apps using his music without paying the vig (TikTok, anyone?)

Universal brings corporate muscle to the catalog, and the ability to further monetize new technology as well as expanding the innate Americana Dylan brings to the table with perhaps more mainstream television adverting in big market events (think Super Bowl.) Mr. Dylan's iconic status and vast potential of licensing deals arguably justifies whatever premium Universal paid to acquire the entire music catalog that spans decades.

All of this talk about monetization, however, leaves many music aficionados wondering if they have been left blowin' in the wind. It smells like capitalism, something Mr. Dylan has railed against his entire career. It begs the question, can a champion of progressive liberalism morally be...gasp...a fiscal conservative with this own money?

Tuesday, December 8, 2020



Wright Thompson's "Pappyland" is a swishing, swirling epic of family, fine bourbon, and the things that last. It is also my 2020 Top Pick holiday book recommendation. Thompson details the commitment it takes to become a master of a craft. Family legacy, horse-racing, and of course bourbon all play a central role in this tale. Branding and marketing is done over decades via the creation and sustainment of a family's legacy. One part Horatio Alger, one part Southern hospitality, but 100% Americana. Complex, nuanced, and long on the finish. A delightful tumbler. You sip these words and you want more of them.


Friday, December 4, 2020

Double Dip Anyone?

 Double Dip Anyone?

Double-dipping is a really bad idea in the time of Covid and equally painful in economic terms as well. In the culturally-definitive series Seinfeld, George is caught at a funeral double-dipping (dipping a chip that has already been dipped and eaten) in the sour cream. My elite friends at Harvard have taken the trouble of analyzing the danger of this possibility in detail. You can read their analysis here: "Double Dipping" Dangerous or just...icky?

Although a fervent Seinfeld fan, my interest is more along the economic terms. In particular, I'm wondering if we're setting up for a double-dip recession that will put a nail in the coffin of American small business owners (and the middle class.) Historically, a double-dipper has been defined as a recession that begins prior to the previous one ending. If we were to see a fall in GDP over two consecutive quarters that would qualify as the first (check that box), but it seems like GDP is recovering, right? Well...if you believe the "science" (and shut-up if you don't, a la Andrew Ross Sorken debating Rick Santelli) the 3Q GDP accelerated and we're out of the woods.

But look around the woods. Do you see a lot of small businesses open? Or people starting up new businesses? Any new coffee shops open up in your neighborhood? Or just the long, long lines at the Starbucks drive-thru? Is your local handyman killing it or is he hanging out at the full Home Depot parking lot? How about those local mom-and-pop retail stores? You remember them, right? If you can get past the traffic jam of UPS, FedEx, and Amazon delivery vehicles their shops are all boarded up on Main Street. 

We're in the midst of a Dickensian recovery; in particular a Tale of Two economy is bust. They were previously small business owners who owned restaurants and hardware stores and retail shops in your town's shopping areas. They've either been Covid-slammed or looted or both. The other economy, however, is a booming. Large capitalization companies are killing it; their infrastructure, logistics, capital, and political contacts have not only allowed them to survive, it has almost single-handedly allowed them to thrive. 

So when we talk about a double-dip recession, it is important to realize that there are two distinct economies at work right now; the small-business, family-owned company that has suffered greatly during Covid and the recent political chaos, the other is the monopolistic business with strong balance sheets that has cannibalized the consumer's buying power.

So in answer to the original question of whether we will experience a double-dip recession, my answer is that it is almost impossible that we don't; the dry powder typically used to bail out the middle class has largely been spent, ie the Fed Funds rate is already at 0%. The only thing keeping the economy afloat right now are sky-high real estate prices and a stock market at all-time highs. But these factors bedevil the fact that the U.S. Dollar has pretty much collapsed in terms of buying power. Anything of value, whether it be education, health care, or housing are at highs. Money is flowing into physical goods.

I suspect the end-game will be further erosion of the middle class and more dependance on government programs. The billionaire class will be the net winners. Raising taxes, punishing work, and increasing bureaucracy is not going to be helpful, unless the goal in an anemic recovery similar to 2009-2016 numbers. But that's what I think will be served for dinner; cold burgers and flat soda with a paper straw. The appetizer bowl of salsa with a bunch of chips floating on the surface will be the least of our problems.