Inflation Nation

 Inflation Nation

Nothing makes America poorer faster than inflation. Last Friday's annualized Consumer Price Index (CPI) number came it at a sizzling annualized 6.8%, the highest since Reagan had to go to work defeating the last remnants of the Carter's administration's handiwork. Reagan broke the back of inflation by jacking up interest rates to the point where inflation was tamed. The greatest Bull Market the world has ever witnessed soon followed. We might not have that luxury of both a prudent leader and the liquidity to tame inflation this time around.

Simply put, inflation is the by-product of a fiat fiscal and monetary policy run amok, too much paper money (fiat money) is created rather than actual value. Gold has well stood the test of time for literally thousands of years because it cannot be created by man. It must be acquired by toil. Not the case with Benjamins. The Treasury Department can keep on a-printing those bad boys all day long. In fact, with the modern marvels of blockchain and digitization 1s and 0s can now account for the actual "money." No need to even print it...just add a couple comas to the supply and viola, you have more money!

The Biden Administration is in a serious bind. There is tremendous demand for a limited set of real products; read housing, energy, food, education, healthcare, and hard goods. Consumers are not stupid. They are moving their digital paper money as quickly as possible into goods and services, hence simply via a classic supply & demand scenario prices go up with increased demand and diminishing supply.

Although the headline number of 6.8% annualized is bad, the reality is far, far worse dear farmers. The fact is the majority of Americans do NOT live in Megacities. As evidenced by the population density map of the USA below, the country is pretty well distributed with the East (loosely East of the Mississippi River) being at least 2X more dense than the West (up until you get to coastal California of course.) Why does this matter?

This matters financial farmers because both the CPI data set is a fallacy. The majority of Americans are seeing double digit inflation in everything that matters, and most importantly they're actually paying for it out of pocket. Let me explain. A significant portion of the residents of Megacities are subsidized in terms of housing, food, and healthcare. Meaning the government is picking up the tab. Whereas outside these areas, the median (not average) citizen is paying through the nose for higher gas prices, housing, food, healthcare, education, etc., etc.

The end result is a total theft of wealth from the very people who the Government SHOULD be focused on improving their opportunity in life with lower taxation, less regulation, and more opportunity for goods and services sold in the USA. The opposite is happening. The government is subsidizing cheap labor and goods overseas which then compete at a significant advantage against home-grown goods and services. The net result is the loss of market share, employment participation, and meaningful opportunity for the very citizens the government was elected to serve.

What is a hard-working financial farmer and patriot to do? First, keep calm and carry on. Second, look to circle the wagon(s) around physical goods and vital services. There is nothing "transitory" about the hordes of people competing for the same goods and services...lock up your share of real estate, blue chips (larger-cap monopolies paying a dividend, see "Rapko's Rules"), gold, education, and healthcare. Oddly enough having some cash might not be a bad idea, because even though its buying power decreases by the day (hour?) there is something to be said of "buying the dip" in terms of assets.

When will the ship turn around? It might not turn around. We have a timid Fed unwilling to buck the interests of the Biden Administration. An impartial Fed does not exist, if it ever did. So what this means is interest rate hikes will be milquetoast at best, especially if the "BBB Plan" is enacted by some unfortunate miracle. Part of the BBB Plan relies heavily on low rates, forever. As an investor this means 2022 doesn't look particularly bright in terms of upside as investors will be fighting for survival against the Fed.

2022 is all about finding assets which offer REAL growth in terms of capturing market share, increasing dividends, and raising their prices for goods and services. A great question to ask is "can this business pass along costs?" For companies without positive cash flow and living on the largess of zero interest rates it becomes a eloquent kabuki dance of finding investors willing to stomach volatility spikes. Only those that create and sell real value will survive.

The Fall of Kabul

 The Fall of Kabul

The Fall of Kabul is emblematic of twenty years of failed leadership from the military industrial complex, which has squandered trillions of dollars in U. S. taxpayer treasure and countless gallons of American blood in a wholly unsatisfying result; the complete capitulation of a democratically elected government to an angry horde of barbarians armed with American weapons, driving American vehicles, and cutting a direct path unopposed to the capital two weeks BEFORE America was projected to withdraw.

Who is culpable? The list is long, yet there is an eerie silence emanating from our most "distinguished" politicians and statesman/women...where is John Kerry? Hillary Clinton? Condoleezza Rice? Colin Powell? Do we even have a Secretary of State today? Four Presidents, including the sitting one, haven't released more than a Tweet. American Taxpayers, Veterans, and our Afghan allies deserve better than this...in the coming days, weeks, and months as heads literally roll in Kabul, we should take the opportunity to fathom the impact of this seminal event in our history.

Afghanistan demonstrates the near impossibility of establishing a democracy half way around the world, when even waging war closer to home is a tenuous task at best. Standing up essentially a new country almost always fails if the wellspring of democracy doesn't flow from within and a coalition of the willing really isn't willing to stay for the long haul...and by the long haul I mean multi-generational transfer of power. It is completely implausible to believe a new democracy can be rooted in a couple decades when the ghosts of previous belligerents still walk the Earth. We still have bases in Germany, Italy, Korea 75+ years after WWII!

Some time in the last administration we decided the mission wasn't actually nation-building, and the goal then shifted to withdrawing. The chaos that ensued is Joe Biden's "Saigon moment," it will live in infamy, as pictures of Afghans clasping to departing aircraft linger in the mind like a helicopter on the U.S. embassy in Saigon. Joe Biden owns this disaster. The weakness and incompetence of this administration is simply staggering. It begs the question, "What else have they completely lost control over?" The southern border immediately comes to mind.

Now we are left with "Operation Afghan Clean-Up"...is this administration up to the task? Probably not. Private billionaires, enriched mightily from the military industrial complex, need to act. Bill Gates needs to redirect "empowerment funding" to leasing a fleet of 747s. Jeff Bezos needs to provide logistical support and housing to all our inbound Afghan allies. George Soros and Warren Buffett need to provide incomes to all these brave allies who put everything on the line to help build billionaire fortunes. The days of Ross Perot funding private operations to free hostages should not be simply a legend.

If Afghanistan has taught us anything, it is that leadership matters. In the face of calamity our leadership completely failed. Bravado and tough rhetoric on the campaign trail somehow beguiled the American voters who elected shrinking violets. They need to be held to account. Freedom truly is not free. It is borne on the backs of those we want it most.

Taxflation

 Taxflation

Increasing taxes and rising inflation are a deadly combination. "Taxflation" is what we find ourselves in now globally as freewheeling politicians ratchet up the pain and are beholden to nothing but their own egos. Be afraid on this solemn day dear readers of the unencumbered politicrat whose loyalty lies only with increasing power. Beware what constitutes your "fair share," as soon it will be your full share! 

Every year Americans dutifully write out a myriad of checks to local, state, and federal governments to help fund our collective defense, social programs, and politicians' salaries under the banner of "civic duty" which is enforced by the threat of imprisonment. What other "civic duty" is compelled by the potential loss of liberty? What would be the collection rate if taxes were voluntary? Imagine if freewill dictated the scope of the government we received.

While the Biden Administration is planning to increase the budget of the IRS to something akin to a nation-state, increase tax rates, and (obviously) increase spending, the barn door is wide open out back. Billions in fraud, pork, and ill-executed government spending leaves the taxpayer without a doubt as the most maligned and least-loved animals in the barn. If America was "Animal Farm" the taxpayer would be the horse. And I think I have a pretty good idea who the pig(s) are feeding at the trough.

What to do dear financial farmers? "Fight, fight, fight against that dying light" of freedom! Readers of this blog well know I support voting, and especially voting with your feet out of states entrenched in burgeoning socialism. For those with strong backbones, however, there is yet another option: Run. And by "run," I mean run for office at the most promising level where victory may be assured. Change the potential outcomes of a country increasingly on the course of taxflation. It's your money, and the politicians work for YOU...isn't it about time we see some real return on our investment? 

Pipes & Rails

 Pipes & Rails

Velocity of Money is "a measure of the number of times that the average unit of currency is used to purchase goods and services within a given time period." The chart above illustrates the historical rate of money usage, with gray-highlighted areas indicating recessions. Up until the mid-1990s the velocity of money was pretty stable. Something happened in the late 1990s however that permanently slowed the usage of traditional forms of money...the internet sparked a tsunami of credit card usage.

Although in circulation for decades prior to the internet surge, credit cards had typically been a "wallet utility" in place of cash or check, not the primary form of payment. With the rise of the internet using a credit card to pay for goods became the de facto solution (readers of this blog old enough to remember eBay prior to credit cards at the dawn of e-commerce will remember sending physical checks to sellers for auction wins!)

Credit cards, however, are not included in the velocity of money because they are considered a debt instrument, hence in the late 1990s we see a precipitous falloff in the velocity of money which usually would be consistent will a massive recession (we have had those as well, most notably the internet bubble, 9/11, 2005 commodities crunch, 2007-2009 global financial crisis, and of course more recently the global pandemic 2020-2021.) One trend has remained in an upslope though; credit card issuances and credit card transactions.

Consider the fact that there are well over 2.8 BILLION credit cards in circulation globally. Although that leaves several billion people uncredit-carded, the credit card companies are working hard to close that gap.  One of the most stunning statistics, and there are many which would make an actuary gleeful, are the daily number of transactions. A Nilson Report indicated in 2018 that there were approximately 1 billion transactions PER DAY. This report is simply fascinating and worth a read. 

OK, so what does all this credit card talk have to do with being a financial farmer? A lot. My theory is that we  should be looking to own velocity; put another way own the roads and tollbooths, not the cars. Or maybe more relevant to today's fascination with "cryptocurrency," own the pipes and rails that it travels over so you can make REAL money on transaction volume. Consider the potential of non-cash transactions projected in the coming years:

Until citizens have the opportunity to own a tax collection and enforcement agency like the IRS, the next best thing in the financial world is to own velocity. It is a bet on population. It is a bet on commerce. It is a bet on technology. The underlying currency itself isn't necessarily as important as the monopolistic positioning of the "pipes & rails" on which it travels; ie we should NOT really be concerned whether dollars or bitcoin or Swiss Francs are being swapped, but rather that we're getting a piece of every single transaction at scale.

D-Day Remembrance

 D-Day Remembrance 

Few events have defined a generation more than D-Day. To a large part, an entire generation risked it all to save it all; democracy, freedom, and human rights. In the short term they succeeded. Along with saving the world as they knew it, the Greatest Generation also raised the Baby Boomers. In many ways the two generations couldn't be more different.

When the good times came after World War II there was an economic and social boom unprecedented in the annuals of history. The fruits of their sacrifices were harvested as America rose to global prominence in many fields; engineering, medicine, and business to name a few. But as President Eisenhower well warned us, there also rose a new enemy, the "military-industrial complex."

The MIC has metastasized over the ensuing decades to capture a wider and wider swarth of society, to the very point now that we once again see authoritarianism and socialism rising in the United States. It is extremely troubling to see the unprecedented growth of regulation, taxation, and group think in government which is dismissive or outright hostile to very American citizens elected officials allegedly represent. Canceling, muzzling, and jailing dissent has become commonplace. In many ways, the American government itself has become a criminal enterprise. On this solemn day, I ask what have we wrought from our nation's sacrifice?

Long March to Socialism

 Long March to Socialism

The Founders were brilliant. They knew if government is inherently corrupt, it must be kept small. Prior to the 20th Century, except for the Civil War period, running the government never exceeded 3% of GDP. Think about that. Today we're at 44%. The long march toward socialism is almost complete.

Why is socialism bad? The premise of socialism is the belief that all rights and property belong to the government, who doles them out to you. That is in stark contrast to the concepts of freewill, liberty, and the Constitution of the United States. America was built on the belief that our inalienable rights are from God; socialism believes that there is no higher power than the State.

For almost 150 years this country was able to survive on excise taxes, or tariffs, on foreign goods coming into this country. America's resources are so vast as to make this country completely and utterly self-sufficient. The American market is such that foreign products fight to gain market share in the United States. Somehow over the last century, mainly due to wars, we have abandoned this approach and instead decided to tax citizens directly, thus slowly eroding their liberty.

Where there is increasing taxation, there is decreasing liberty. Money concentrates power, and there is no greater concentration of power than Washington, D.C. Complexity is also a barrier to liberty, as it requires time and capital to comply with ever-increasing demands from the enforcement arm of the government, the IRS.

Only two Presidents in recent memory fully grasped the fundamental basis of supply side economics, best illustrated by the eponymous Laffer Curve; that a wealth transfer (taxation) ultimately lowers total income because it provides a disincentive to work both at the top (those being taxed) and the bottom (those receiving the transfer.)  Hence, Presidents Kennedy and Reagan implemented taxation according to the principles of the Laffer Curve; both saw economic booms (1961-1968, 1982-1990.)

Sadly, Joe Biden doesn't understand the economic policy of JFK. Kennedy understood, most likely from his father's influence who was a very successful businessman, that a rising tide lifts all boats; both high income earners and low income earners benefit when they keep more of their own money and decide how best to allocate it.

Laundering money through the government for social programs doesn't work because the government is too corrupt; there are too many lobbyists, politicians, and special interest groups wanting their "taste" before policy is created to actually implement a program. Once established, a government agency is as Reagan well put "as close to immortal" as anything on Earth. Government creep continues into every facet of life. Liberty decreases. Personal responsibility is eliminated. Kinda the opposite of the American experience. We can go to Europe for that anytime.

The criticism to low taxation (read high freedom) is that almost inevitably there will be outsize winners. Some individuals or companies or both acting as the same will monopolize industries. This is a natural result of capitalism. It actually shows that capitalism is working. The downside of monopolies obviously is that upon reaching monopoly status they provide stagnant utility to the economy because there is no competition which leads to a collapse in innovation, productivity, and ultimately economic stagflation. This is why the Sherman Anti-Trust Act must be enforced.

Part of the rise in socialism in the United States is directly tied to the rise of monopolies; they constrict liberty by steamrolling competition at the behest of the government. It is long past due that many of the largest tech companies receive immediate scrutiny and enforcement. Or if that is unpalatable to our elected "representatives," then smaller companies are provided with significantly lower rates of taxation, incorporation benefits, and work stimulus. Regulation favors the powerful. Naturally, less red tape helps smaller entities survive and thrive.

As financial farmers loving liberty and freewill, what are we to do? Trump had it right by reforming the tax code and saddling foreign competition with tariffs. Picking winners and losers isn't always popular, but picking America First should be popular...and it is a lot more palatable as the Founders well knew to charge foreigners for the privilege of doing business in the United States rather than extracting taxes from American citizens.

I fear in the current political climate the only option for Americans is to vote with their feet; move to tax-friendly (read freedom-friendly) states that respect industrious work. It may be possible to remain in states with onerous taxation, but as the race towards complete socialism continues states themselves will have to choose on what side of this conflict they stand; for the citizens and freedom, or pure socialism. The winds and tides of civil discourse seems to be pitting state against state once again, and once again it is about the unalienable rights of God-given freedom, liberty, and property.

 

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Crypto Meltdown

 Crypto Meltdown

Feels like 1636 all over again today with crypto crashing anywhere from 25-40%+ depending on the "currency" and, as expected by yours truly but apparently not by Coinbase, surging volumes at a key inflection point has taken down the major trading platform. All is definitely not well in cryptoland...at least with the Tulip Bubble you got some nice flowers for the cost of a home.

The problems with crypto are legion. First, it is not cryptocurrency in any traditional sense of the word cryptology...the entirety of the "currency" is easily tracked and this author believes it also can be seized or frozen very, very easily by the state. If the NSA is capable of tracking every conversation and data transmission in and out of the United States, then monitoring cryptocurrency is a piece of cake. But that's not necessarily the biggest problem with this "currency."

Crypto isn't backed by anything, except slave labor in China and fossil fuels (read coal) to mine it and put it into circulation. Once in circulation, crypto is subject to all sorts of tracking and seizure risks. With no physical representation, it lacks true portability. You own crypto at the pleasure of the state.

The best thing that could happen to crypto is happening. It is deflating. Confidence is eroding and its viability is being questioned. Readers of seminal classic "Extraordinary Popular Delusions and the Madness of Crowds" by Charles Mackay will recognize all the symptoms of a bubble in crypto. Shouting from the rooftops "the emperor has no clothes," however, often gets the cryer hung. Mackay said it best when he remarked "Men think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, one by one."

For thousands of years gold has been used by man as money. It requires toil to acquire from nature. It is rare. It cannot be created by man. It is malleable. It is portable. It feels nice. When it is in your hand you have little doubt what it is. "God's money" has been the basis of civilization almost since creation. True "crypto" is buried in the Earth. I would encourage financial farmers to consider its value to your portfolio.

Taxpayer Elegy

 Taxpayer Elegy

Jesus said "Render unto Caesar the things that are Caesar's, and unto God the things that are God's." Today millions of taxpayers across the country will transfer trillions of dollars in hard-earned income and gains to local, state, and federal tax authorities.

This "civic duty" is administered and enforced via the Internal Revenue Service at the behest of elected politicians. The IRS is one of the few unelected organizations capable of revoking your passport, directly reaching into your savings account without authorization, and denying your liberty. It is the ultimate enforcement arm of the political establishment; you don't vote, nothing happens to you. You don't pay taxes you owe, you can go to jail. America wasn't always this way.

The vast majority of taxation comes via personal income tax and associated taxes such as "Social Security, Medicare, unemployment, and other retirement taxes." Prior to 1913 there was no income tax. In 1913, the States ratified the 16th Amendment. This instituted the Federal Income Tax, many states would follow with their own tax systems over the coming decades. In 1913 IRS Form 1040 was FOUR pages long, today it is over 100 pages long. Inflation isn't only a monetary problem. Regulatory creep has resulted in the average American now unable to complete all but the simplest tax return. 

Why aren't more people concerned about taxpayer rights? Politicians certainly aren't...they live and breed (that's not a typo) on the largesse provided by the taxpayer. Politicians only respect those who control the pursestrings. ILAF proposes a solution to the income tax crisis kneecapping millions of Americans AND the concern about voting rights: Implement direct representation of the taxpayer via the annual tax return. Why? The IRS is probably the most inclusive of any organization in the world. It wants payment from everyone, regardless of skin color, orientation, background, handicap, veteran status, gender, or even intelligence.

The annual IRS return would serve both civic duties; voting and taxation. Referendums could be voted on directly from a return. Representatives could also be elected via the annual tax return. Ditto for the President and Vice President every four years. April 15th becomes Super Tuesday. This plan would truly restore power to the people, and maybe, just maybe next year you will get a "Thank You" card from your congressman instead of his lobbyist.

 

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Buying Dips

 Buying Dips

Buying dips is one of the great advantages long-term retail investors (aka Financial Farmers) have over their sporting counterparts who are focused on short-term (read high tax) trading gains. Here's how to do it.

When you buy a dip your goal should be to add acreage to your financial farm...at a price YOU are willing to pay rather than chasing a stock up. Even before the market sells off 700 points like it did yesterday for example, an investor looking to capitalize should be ready. The first step prior to even making a shopping list of potential targets, though, is making sure you have investible cash not only ready to go, but preferably deposited with your brokerage. Sometimes in the heat of the moment cash can be transferred but remains "unavailable" because it hasn't been cleared. Always have cleared cash ready.

Now with your cleared cash ready, the other thing that should be handy is your shopping list. This is a living document which has been assembled after careful thought, research, and diligence. It is often updated with new information or thoughts. Regardless, this shopping list has as its basis a group of stocks you want to own and the price you're willing to pay for them. Price discipline is essential. During a dip you are a price maker instead of a price taker. That is an important distinction. Bid low.

Buying dips is a confluence of action and inaction; the financial farmer has cleared cash prepositioned and a shopping list ready, now comes the order flow. Selloffs are tricky in that they often come on the heels of unpredictable data, by that very metric investors don't necessarily know the full impact of that data on the moment of release. Sometimes there are global macro events that trigger massive flights to liquidity that unravel over days, weeks, and months. Sometimes it happens in hours. The future is nebulous. But the investor should be prepared for the worst. This means that a selloff can markedly accelerate quickly. Very quickly.  That is why having a comfortable margin of error is vital on the purchase price. Use limit orders.

The other leg of the trade is the timing. Sometimes even if you get the stock you want at the price you want you still overpaid! Selloffs have a nasty habit of lasting longer and diving deeper than we think is possible, or even reasonable. That's why you should buy in tranches.

If your goal is to have a total 1000 shares of XYZ, consider buying the entire position in segments; make a an initial buy of perhaps 100 shares at the first price point (with a margin of err0r build in) that you think is reasonable. Then stagger those limit orders lower and lower and lower. The risk here of course is the opportunity cost of NOT getting your full desired position, but by using staggered limit orders you can ideally pick up some portion of your goal at pricing more favorable in to you. Stagger your order flow.

So to recap: Buying Dips is a great strategy for long-term investors who want to pick up stocks during a period of market weakness. The strategy involves having cleared cash ready to invest at your brokerage, having a shopping list on hand, and placing staggered limit orders. Although not foolproof, history has shown being prepared to buy quality stocks on a dip can result in meaningful gain over time. An old adage in the real estate world is, "You make your money when you buy, not when you sell."

 

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Inflation Kills

 Inflation Kills

Coming soon to a purchase near you...inflated prices! Often called "the silent killer," in economic terms that's exactly what inflation does; it strips away the buying power of the consumer. This morning's Consumer Price Index (CPI) release by the Bureau of Labor Statistics was truly shocking, well at least to people who haven't eaten food, driven a car, or purchased any physical goods for the past several months. For average Americans, there has been no doubt the damage being done to their purchasing power. Everything of value is markedly higher. A lot higher.

Over the past 12 months the all items index rose 4.2%, the largest increase in 13 years. That doesn't sound like much, right? Consider some of the outlying data: the index for used cars and trucks rose 10% in APRIL alone, this was the largest 1-month increase since 1953. The energy index has risen 25.1% over the past 12 months. Food they claim "only" rose 2.4%...assuming you're buying in bulk, and I don't mean Costco, I mean TONS of soybeans. Who are they interviewing for these price points, animals on a farm?

As previously mentioned, inflation is the silent killer. Why does inflation kill? Inflation kills because it marginalizes the backbone of our society: the American Middle Class. The Middle Class is the most sensitive to out-of-pocket purchases; typically they are small business owners or employees subject to the inelastic demand for vital goods-and-services; like gasoline, food, housing, education, medical for example. Inflation ravishes the American Dream because the cost for life necessities consume an ever-increasing share of the Middle Class wallet.

What can be done? As financial farmers you can vote with you money by buying stocks in companies that have the power to pass on increased costs to consumers. Darwinian? Yes. Effective? Yes. Buying inflation pegged consumer staples puts you in lockstep with bad government policy, at least you don't get crushed twice. Second, you can vote members of Congress out of office who do not have a sense of fiscal responsibility. Unfortunately, this takes years. So an alternative approach is to vote with your feet to lower cost areas of the country. If this isn't a viable option, then stick with ideas 1 & 2, and in particular make a God-awful stink to your local, regional, State, and Federal government. Remember they work for you!

Failed fiscal and monetary policy results in rampant inflation. The first flight is usually into dirt (real estate) and gold...fiat paper money continues to lose purchasing power until costs become absurd. In Weimar Germany wheelbarrows full of money were needed to purchase simple goods. Are we there yet? Not by a long shot, but rampant spikes in real estate, food, and vehicles indicate that people aren't dumb to what is occurring...money for nothing never ends well. You can't expect to burn a candle at both ends and not have the lights go out.

 

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Big Tech Five

 Big Tech Five

The Big Tech Five, aka Alphabet, Apple, Facebook, Amazon, and Microsoft, are monopolies in their respective businesses, yet have survived with tacit approval from the USA Government literally for decades without the hint of Sherman Antitrust Act enforcement. Why?

The Big Tech Five provide an increasingly disturbing symbiotic relationship with the government; we have reached the point where government really CAN'T break-up, much less shutdown, the Big Tech Five. Much of the existing intelligence structure is based on monitoring the social platforms, smartphones, email, purchase patterns, and contacts in the vast ecosystem the Big Tech Five provides to the government...either willingly or under the guise of plausible deniability. Just ask Edward Snowden.

The financial results of the Big Tech Five over the last decade have been truly staggering. They act as a massive collective vacuum sucking up TRILLIONS in revenue and have built competitive moats that are insurmountable to competition. You can't swing a dead cat in Silicon Valley or Seattle without hitting a billionaire. Consider, the Big Tech Five generated some $1.25T in revenue and pulled in over $250B in profits over the past year alone.

In terms of market capitalization, the Big Tech Five account for nearly 25% of the total value of the S&P 500. Apple or Microsoft (take your pick) are worth more than the ENTIRE Russell 2000 (you're thinking correctly, 1 company is worth more than 2000!)

The Law of Large Numbers would lead us to believe that the Big Tech Five may have peaked in terms of market share, capitalization, or influence...but that would deny the reality of what is happening. The Big Tech Five have branched out of their monopoly niches and spread their tentacles into other areas; finance, healthcare, and logistics for example. But one area where they ALL have spread their influence is politics.

The Big Tech Five have become kingmakers. They have the ability to sway public opinion by defining what is appropriate speech, actions, and results. This is what the colonists in America rebelled against, because by definition tyranny is political action without representation by the people. In large part the United States has become what President Eisenhower warned against on January 17th, 1961 in his Farewell Address to the Nation, a poignant part is below:

The military-industrial complex is real, vibrant, and for many, beautiful. To the average American, however, it should be repugnant. Senator Josh Hawley has recently released a crushing expose of the influence of big tech in America, aptly titled "The Tyranny of Big Tech." I highly encourage readers of this blog to pick up a copy. Consider the points he makes, regardless of political party, and how the freedoms we enjoy will become increasingly in short supply without a government run by the people, for the people. The word Orwellian comes to mind when current leaders propose a "Truth Commission" monitored by the monopolies. 

Surprisingly (or not), for investors in the Big Tech Five I think there is a silver (or perhaps even gold) lining in owning monopolies that end up getting broken up. Consider what happened to AT&T in the early 1980s. Or big tobacco. Or Standard Oil. In almost every case where the Sherman Antitrust Act was applied, regardless of industry, the net benefits to the American consumer were vast...and the respective shareholders also did really, really well too.

So as financial farmers I think it makes sense to own monopolies with the theory that: 1) As a shareholder you will reap the benefits (profits, market share, dividends, etc.) of the unfair competition they currently wield, 2) You can actively VOTE your shares supporting a break-up, 3) Ultimately profit from a break-up in the coming years if political will changes as a result of the people demanding accountability.

Owning the monopolies is one of those trades where you can be paid and profit from morally offensive business models, yet vote your conscience via share ownership, and ultimately if the monopolies DO break-up then there is the potential to reap both financial and moral victories from that scenario. Win-Win-Win works for everyone, even the billionaires should realize competition ultimately benefits them in the long run. There is an old Machiavellian adage that is very apropos: "Keep your friends close, and your enemies closer." 

 

 

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Follow the Money

 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.

Killing eBay

 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 it 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 of course would 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 an 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 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 though, because eBay still had a massive and growing audience on its platform. More and more users became corporate however; 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 understanding 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 far 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, namely 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!

 

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Tokenization

Tokenization

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 goods...ie 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 collectibles...at 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.

 

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A Bitcoin for Your Thoughts?

 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 house...so 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.

SPACtacular!

 SPACtacular!

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 thing...how 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.

Reminiscences of a Stock Operator

 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. 

When the Fringe Goes Mainstream

 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.

 

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Georgia On My Mind

 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

by

Ray Charles