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.

 

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."

 

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.

 

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." 

 

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!

 

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.