None of the following is investment advice. This memo discusses The Federal Reserve’s tough decision and the results of speculation that are not oft discussed.
The current war is being funded not by Russian Rubles, but by Ransom. Today, people would rather fund a war than work hard to understand what they are buying. This is perhaps the easiest time there has been in history to be a terrorist – people are willing to give away their money (trillions of dollars) because money is free and has been for years. It may be impossible to change this behavior, and terrorists may dominate the world very soon, if they haven’t already. We are encouraging that to happen.
Alberto Giacometti worked in the Montparnasse district of Paris from the age of 25 until he died at the age of 65. He worked cleaning houses and didn’t exhibit until 1928 at the age of 27. Sufficed to say the workshop was modest. His exhibitions were immediately critically acclaimed far and wide, with Picasso himself attending in 1931.
Nonetheless, Giacometti never was a man of luxuries or extravagances. Like Michelangelo during the Renaissance, Giacometti would go days and sometimes weeks without bathing or changing clothes. Many critics believe that the best art has both a unique expression and is capable of conveying such an expression of determination to an audience. Giacometti’s expression was that he loved his life. And his life was art.
To me, Giacometti’s expression is a testament not to his decidedly unique artforms nor his relatively routine subject matter, but to his unwavering mission to produce art and seek perfection. His work ethic shines through in every piece he created. History is rife with those that ‘do it for the money’ and those that do it for the passion. I believe true investors and collectors have an eye to discern the difference. Giacometti was determined to perfect his expression of the human form, no matter how much money he was worth (estimates say about $100 Million).
The majority of people of late would rather have money handed to them than work for it. The best example is the ransom market. Ransom is getting paid without revealing your identity for things that the payor does not want to have happen. It’s a form of extortion. Ransom today is different. Ransom can be encouraging people to buy into an asset (that well-paid celebrities endorse) in the hopes of getting rich without any effort.
Is there really any difference? There are unknown parties getting rich off of your investment, completely anonymously, and you knowingly could lose everything you have. People are actually lining up to pay ransom and get robbed today.
“I want to have money live outside of traditional power. That’s why bitcoin was created, because people don’t trust governments.” ~Mike Novogratz, 3/2/2022
Does bitcoin have any other use outside of evading governments and regulators? Indeed, Novogratz made billions on bitcoin, and he’s called for $100k many times. Now this – an overture for money laundering.
Would any of us be surprised if tomorrow a report disclosed that Vladimir Putin controls 51% of Bitcoin? This could be the greatest risk to us all, that Putin could suddenly control the entire Bitcoin blockchain and destroy it. Yes, 51% ownership would enable that.
How would Novogratz maneuver? How could he look at himself in the mirror, knowing that he was a giant influence in allowing Russia’s Invasion? At once, he is calling for a place beyond regulators and also a place that can fund world wars against his own country. Blood diamonds and sex trafficking could be his next bets.
The word “Bitcoin” almost sounds fun. Investing there must make some people feel ‘with the times’. NFTs and cryptocurrencies too. The names are not descriptive of the negative elements. Would retail investors put money toward a “Russiacoin”, a “Bloodcoin” or “Bitcon”? To wit, the Germans are the only society to have a word for ideas like Bitcoin – Schadenfreude – one person takes pleasure at the misfortune of another.
We all are familiar with “pump-and-dumps”, but we are more accepting of them than ever. “Meme Stocks.” It also almost sounds fun, doesn’t it? In fact, entire chat rooms and online trader services are dedicated to creating pump-and-dumps and raising funds for them. Isn’t this literal terrorism and robbery? As a society, how do we allow this behavior? What if in reality, those services are run by Vladimir Putin? What if he funded the capital appreciation of “Meme Stocks”? How would we look at ourselves in the mirror?
Just as the Prodigal Son left an aristocratic setting to venture on his own, only to lose everything by a combination of his own gullibility and the cunning of draconian swindlers, here we have the very same. Instead of losing hundreds at a card table, however, we exhibit losses in the hundreds of billions from obliging retail “Prodigal Sons” ranging from the very wealthy to the rather poor. And what’s worse, these ‘losers’ blame themselves for the losses, not knowing how ordinary or common it has been in the history of mankind to steal and cheat each other.
Yet, the psychology of money has changed. In Giacometti’s time, the 1930’s era Great Depression, having money was life and death. If you didn’t have money, you would clean a house for an entire day, do the laundry, cook the food, scrub the floors, and only get a dime, which wouldn’t last one person one day. But you were happy for work.
To be sure, America has enjoyed a near 2300% increase of per capita income (“Standard of Living”) over the last 60 years, roughly 5.3% per year without adjusting for inflation. We expect Americans to have a much higher standard of living in 60 years, but there will be bumps, just like there have been over the last 60 years. I expect bumps of any size cannot prevent America from continuing to build our greatest artistic triumph – the US economy.
However, the pain of the Great Depression cannot be understood without living through it. Professional money managers that are encouraging clients to ‘invest for the long haul’ and ‘ride out short term pain’ are speculating beyond any fathomable imagination. Would those money managers have bought in the year 1929? How about 1930? Fact is, earnings reports were terrible this quarter and will probably worsen in successive quarters. Without understanding businesses and their results, it is arbitrary at best to buy anything at any time. A tenet of investing is to understand what you are buying. The Fed has allowed us to forget that and to instead, “buy the dip” out of instinct.
In March 2020, our economic infrastructure was threatened after 250 years of success. To address the threat, The Federal Reserve (“The Fed”) has been creating Trillions of dollars out of thin air and has been encouraging the private sector to create even more. Within a few months, we went from emergency to raging party. A couple of years later, many of us are drunk and can’t find our way back to normalcy.
I do not intend to place blame with the Fed. Timing the curtailment of easy money was impossible and still might be. I do believe that another tenet of investing is to encourage human productivity increases, and taking money away from productivity inherently produces nothing. We should encourage the advancement of America’s economic infrastructure by investing into production over all else. When we take money out of the economy, we lose the opportunity to benefit the economy, similar to spending your family’s money on booze. More on The Fed below.
Still, businesses that are producing great things have gotten to be too expensive, so there is little to no economic benefit to invest in them. We have seen this before. Betting on great businesses at extreme prices is not too much different than investing in purely speculative assets. Certainly, we will arrive at a time when investing in businesses will have real value to investors, and there will no longer be need to speculate on false idols of hope.
Our society has propped Bitcoin up because there are no other obvious opportunities. If Vladimir Putin does control Bitcoin, we allowed it to happen. It’s in the past. We should accept it, make Bitcoin an illegal investment, and move on. Why do we make it illegal? Because first, like Novogratz said, the point of Bitcoin is to escape Governments. If we get to regulating Bitcoin and knowing who owns what on the blockchain, there can no longer be a use case for it. It will probably go near zero anyway. Otherwise, if we keep it the way it is, we can never know if we are supporting the very organizations that will hold the entire world ransom. I hope, for our society’s sake, that this summation does not accurately reflect the reality of Bitcoin.
More on The Fed
2020 and our current situation alike, the global economic infrastructure has become dependent on central banks to kill the party or keep it going. Central banks will determine for us whether we work hard to produce or we are given trillions of dollars for virtually nothing. The questions then are – what are the effects on mental health between the two? Are people identically as productive under the two scenarios?
Responses are ground in individual empiricism. All that to say, “Who knows?”
Our firm believes people have forgotten the point of money and that people are much less productive today than at any time in history. Prominent investors say that the Fed is “behind the curve” which is emblematic of saying “they created too much money and stifled productivity”. Why would we be productive if production begets money and money is otherwise free anyway? Alas, the days of begging for a job to make a dime are removed from anyone’s memories.
What we are remembering is what’s been happening lately. Demand outstripping supply in almost all luxury and normal goods. From basic housing to Louis Viutton clutches. People begging for seemingly everything but dollars, which they are overloaded with and take for granted. To reiterate, we are more likely today to give our money away to terrorists. I guess that is “inflation”.
Inflation is the buzzword of the day. A nebulous, misunderstood concept that connotes both positively and negatively. Some professionals say inflation is a good thing – our economy is growing. Our firm believes it is not a good thing. We see it like the size of a bag when air is pumped into it. The larger the bag gets, the greater we believe its density, but there is really nothing there. That bag will pop, and the air will come out, and it will be painful.
Meanwhile The Fed is stuck quite literally holding that bag; a scapegoat for the luxury America has enjoyed over the last decade. Much to our surprise, The Fed can’t hold the bag any longer. Another emergency.
The bag the Fed holds contains about $9 trillion in mostly bonds that must be repriced down as it both sells those bonds and raises interest rates simultaneously. If the Fed doesn’t, businesses will continue raising costs, destroying the economic abilities of the middle and lower classes. In this, businesses have also come to believe that people have endless money and will pay any price for goods and services.
Letting too much air out too quickly will not be a good thing. America’s 250 year old infrastructure is balancing on a knife’s blade without our “money is free” psychology. Raising rates too quickly or selling too many bonds will destroy demand for financial instruments, which today make up a larger proportion of the US economy than ever before (about 93% of all assets). Thus, sudden movements could cause bedrock businesses to fail, failures to cascade, and the entire infrastructure to fall into ruin.
The other more likely alternative would be to let the air out slowly. This will be a yearslong process where the infrastructure will probably retain it’s composure, but the air will come out anyway. Meaning: financial assets will shrink and people will lose tremendous sums not at once, but over a yearslong process.
The futures of nearly all global citizens will be entirely dependent on the decisions of global central banks, more than at any time in history. We have inadvertently created an oligarchy – the global population is not at the mercy of the private sector whatsoever. Other political factions are taking note, making a rise against globalization and democracy more likely to succeed than in the past. The timing of Russia’s move over the past two weeks is not happenstance.
And yet, we are not only allowing it to happen, but we are funding it by paying ransoms and giving away money to people we cannot identify and towards ideas we can’t understand. Without regulation, Crypto companies can and do scam anyone putting money into an idea. How many times have we seen this over the past few years?
Years from now, no matter what the outcome of our current situation is, The Fed will be lamented for creating a society of drunken alcoholics that are happy to encourage their own downfall. The emergency we have isn’t inflation nor is it the giant bag The Fed currently holds, but that people will not understand what money is for without suffering in a major way. Yet again, sudden moves cannot cure such extravagance. Slow torture, death by a thousand knives, will be needed to sober us all up, but, like alcoholism, we will need to experience a hangover and an intervention to drop the addiction.
America will be fine in the long term. I’m proud of the American experiment and my participation in it. Discipline is a good thing – who among us would say we are worse off for having had the Great Depression? The war Russia is creating pales in comparison with the war we are set to have with our own financial discipline over the next few years. Inflation’s meaning has lately been conflated with a strong economy, one that can handle letting air out of the bag. Truth – inflation has made us weak, all too vulnerable to letting air out of the bag and susceptible to the overthrow of our precarious entire global economy.
Finally, The Fed will be forced to raise rates no matter what happens. If not, the situation just gets worse. We need to get away from speculation and get back to advancing human productivity. It is my belief that an intervention will do that better than any other medicine can. Let’s take a page from Giacometti, who would have died before giving up what he held most dear. Giacometti, who disciplined himself to seek perfection above all frivolity. Giacometti, who resolved to love his life, and that life is art.