Biden Bonds

 Biden Bonds

It was the best of times, it was the worst of times. Record low unemployment. Free healthcare for all. Open borders. Employment unionization. Limited law enforcement. And 9.62% I Bonds! Who could ask for more?

As CNBC proudly touts, the Series I Bonds available all this month are "virtually risk-free." Hmmm...let's ponder that fellow financial farmers. Why are the Series I Bonds pricing at 9.62% in the first place? Wouldn't that imply raging inflation? Why yes dear reader it would. And what is the I Bond's inflation component based on? Ahhh...CPI. Now what if the average American doesn't consume tons of soybeans or compute data in terabytes, but actually EATS and DRIVES on a daily basis? Might that skew CPI even higher?

To the shill writers at CNBC who are apparently fully endorsed by a government not-so-quite-on-the-level, obviously there is tremendous risk in the sense that you potentially are LOSING purchasing power due to inflation. How much? This author estimates Americans are losing approximately 2% PER MONTH (assuming you eat food and drive using a..gasp...fossil fuel car!)

Let me slide my Nobel Prize in Economics aside and grab my dusty calculator behind it....OK so 2% per month is like...hmm...24% annually! Wow. Maybe that 9.62% isn't such a good deal after all? Where is all that money going? Hint: Free ain't cheap.

One of my heroes, and an American statesman par excellence, Art Laffer wrote this AM in the WSJ: "The current 8.5% inflation rate is the highest in 40 years. But few policy makers or Federal Reserve governors seem to have learned the lessons from the last bout of surging prices--how it started, the economic wreckage it caused, and how to get out of it. We wince when we hear investment gurus arguing that because inflation often means rising consumer demand, it is good for the economy and stock market."

Quite the opposite is true. Both investors and workers care about REAL returns, ie stripping out inflation and seeing nominal growth...when purchasing power collapses (think high gas prices, high healthcare costs if you pay for healthcare, high education costs, high housing costs, high food costs, etc. etc.) larceny at a grand scale is occurring via inflation. Hence the worst of times.

So as investors back up the truck on Biden Bonds, consider for a moment WHY Series I Bonds are yielding 9.62% and pray that the limit isn't raised from $10K per person to $100K. It would mean the utter collapse of capitalism and the government would become all. Because, really why take the risk of getting out of bed in the morning if you can get a juicy 9.62% from Uncle Joe?

 

 

ARKK Barometer

 ARKK Barometer

Cathie Wood's ARK Innovation ETF (ARKK) acts as an excellent barometer for investor sentiment. Almost halved in a year, while the Dow spiked to over 35,000, ARKK visually displays the change in investor philosophy and risk appetite. 

A disciple of Arthur Laffer, Wood started her investment firm with the underlying thesis of disruptive innovation underpinning her investment goals, namely that disruptive companies create new markets and value networks. These companies hope to displace established market leaders aka entrenched monopolies.

In essence Wood is betting on a future of new technology that would improve humanity with better efficiency, because as a rule monopolies become less efficient and innovative as they mature into complete control of a market.

So why has Cathie's fund be cut in half? Rather than a collapse in the underlying technology, I believe there has been a 180 degree change in investor sentiment that believes reward (or gain) will come from "established" (read monopolies) that have existing market share, customers, and the big "E" in the P/E ratio...EARNINGS.

Mathematically, investors are betting on "business as usual" rather than innovation. Why? Because they are receiving signals that entrenchment wields the power and will be rewarded. Why? Because those are the signals being sent by Washington. How? Increased taxation. Increased regulation. Increased inflation. Increased enforcement. Decreased autonomy. Decreased workforce flexibility. Decreased worker qualifications. Those are a handful of the signals flashing. Investors have taken note.

Contrary to popular belief, Wall Street isn't dumb. Money flows where it is welcome and makes a return. Typically it chases winners. Just take a look at net new flows of money. It almost always flows into funds that have most recently performed well. And flees poorly performing funds. It seeks to survive and grow by chasing returns. The most successful funds of 2021 were the tech monopolies and natural resource monopolies. Small innovation got utterly crushed.

My final thought on this subject is that immutable laws are hard to break. They can be avoided. They can be postponed. But ultimately there is a reckoning. Although policy and regimes may put their weight behind the status quo, ie monopolies, the proverbial sidewalk flower will grow in a concrete jungle.