None of the Following is investment advice. What follows are my personal opinions, right or wrong. I also realize that my opinions are based on normative behavior, which can never really be achieved. Nonetheless, we can strive to improve.
Art has become nearly all consuming for me. The appreciation of art is freeing, allowing someone liberty to learn and choose what they like themselves rather than being told what to like. Somewhere that art is not present: Las Vegas.
Las Vegas makes children out of adults. Humbles the kings and queens of the most remote suburbia and prominent metropolises alike. There can be no winners in Vegas, in my opinion. Bloomberg TV is playing from my hotel room as I type this, with some Morgan Stanley portfolio manager providing constructive ideas on China and seemingly debating with herself on why China is flagging this year, all the while saying diversification is key to success. Her broad message on China – “It can’t be as bad as reports suggest.” AKA “Gamble gamble gamble”. But it’s all by design.
This memo explains my view of the current global environment, which can basically only be read as the current state of the US Federal Reserve and the ‘Reserve’ Status of the US Dollar. Yes, I said it. Inflation dominated news in the first half of 2021. Over the last two months, it’s completely escaped headlines. Now China is in the headlines. The two are very related, in my view, and you will soon find out why and why I love America. But first, let’s get back to Las Vegas.
Parallels have perennially been drawn between Vegas and stock markets, and having played both, I think the parallels come down more to base, primitive humanity than to any kind of higher form of art. When I say ‘art’, I refer to ‘artificial’ or created by man. Humanity is the parallel.
This month, I published a very short investment guide. It is 74 pages in length, with many blank pages. Reading over it before I published, I thought – ‘Wow, this sounds really too simple. Nobody will appreciate this.’ I published it anyway. It’s not for anyone but myself really – to remind myself to keep it simple. I submit that my simple strategy wasn’t simple to curate, nor will the following memo be simple to follow. But I think it’s important for you to know.
I’ve experienced great success in markets over almost a decade. I never got a big head about it; in fact, I was incredulous each and every day. Not because the profits we are reaping, but because the game just seems too easy. It shouldn’t be that easy. In reality, it probably is. So keeping it simple is more important than anything else.
To prepare for Vegas, I read a few books on poker, thinking that my predisposition toward logic would give me an edge. It didn’t. The opposite happened – after about 12 hours over two days, I realized that there are too many factors to win consistently. I lost over and over again. I gave up, because I think the only activities worthwhile are those that both a) I enjoy and b) I am good at. Why spend your time hating something that you were born to do, or why spend your time loving something you are really- bad at? There you have it – another simplistic generalization specifically tailored to… myself. In poker, most books argue that to win, you have to wait for the other guy to make a mistake. To me, that seems borderline nihilistic.
Professional poker players abound, but they spends hours and days waiting for a payoff, and it isn’t a glamorous wait. It is all consuming – humans love the action of gambling… But everything is lost in the balance. As I see it, those people chase money rather than life itself, and they justify to themselves that the thrill of gambling is living. They might be right and I might be wrong, but I strongly feel for myself that gambling is the most basic human function and we should strive to avoid it at risk of our lives.
And yet isn’t that most things in life? How difficult is it to do the thing you love and you’re good at and avoid other things, especially if that thing is abnormal or even socially taboo? What if you discover the things you once loved and you were good at you realize you don’t love as much as other things? How difficult still that we should seek those things out endlessly, spending precious time waiting and waiting and waiting to be captivated? To look for inspiration and know what it is when you’ve found it? How many of us die without realizing a dream, without solidifying an ideal?
So the human nature is to settle, and not agonize, especially when everyone is telling you to. I contend that these are the questions underlying investing and life, at least for me. In that vein, the perspective becomes, what drives us closer or further to captivation, and how can we embrace and avoid those things discriminately? If your predisposition is to be impatient, that’s why you hire someone that is patient and that knows what to look for and embrace.
Media is the perfect example. Media encourages humans to gamble. It encourages base behavior. It prevents us from finding those things that we are both good at and can love. Most importantly, it is the way to win in gambling. Let me explain. The best professional poker players know their mark. They don’t really play the game in front of them, but they play the person they are gambling against. In Bobby Fisher’s notorious 1972 chess championship against Boris Spassky, Fisher created exogenous events to rattle Spassky (described in detail here). The Morgan Stanley manager I mentioned above is the same, waxing intelligently on a popular subject on a reputable media outlet with a great brand and title backing her up. But what she is saying is not good for investors. It encourages them to base decisions on visceral feelings and emotion rather than numbers and rationality.
In poker, you face others at the table with a lot more chips than you, people that capitalize on behavior and might win big. You want to be like that, and so you are encouraged to play like they do. Often, they won with luck or intense, untrainable behavioral abilities. Or they might have just bullied the other guy who had less chips. So, you play a hand and you don’t know what the other guy has, and that’s why you need more than logical skill. In investing, all the numbers are laid out for you. Volatility is pronounced everywhere at all times in stock markets, but numbers and logic truly do define the winners.
Morgan Stanley is not an investing firm, as far as I’m concerned. It’s a sales firm. That portfolio manager probably didn’t get to where she is by outperforming markets and picking very good companies; she got there because she is incredibly good at selling clients on the Morgan Stanley way, which is to invest generally and often.
I will be the first to say this strategy has worked, but why hire someone to do it for you? If you’re going to hire someone, why not hire someone that specializes in buying investments and not in selling investments? To buy investments successfully, clients need clear-cut, direct exposure to and analysis of all asset classes and I can’t see how many broker dealers can advertise themselves as investment advisors without being able to analyze and purchase both public and private assets for all clients that qualify. An investment advisor must look for any and all suitable assets in all classes and be prepared to buy them knowledgeably. If not, how can clients be properly advised?
The gamble of investing with Morgan Stanley is that they want you to play at their casino and not at someone else’s. They get your chips and put them in a safe deposit box and earn money just as easily as you would. However, you lose the opportunity to get better returns by paying about the same cost, which is possible with a true investment advisor. That opportunity could easily compound to millions of dollars over time. They will tell you it is all but impossible, but really that’s just another sales tactic. By waxing on the hot topics of the day and cautioning against ‘stock-picking’, they are simply advertising their casino; there’s nothing of substance there. Same as in all forms of media.
Of course, a large percentage of revenue globally is attributed to grabbing people’s attention. That’s the currency of the world these days, and while unprovable, I believe media companies and all sales firms favor their own revenues over the well being of their customers. Bloomberg is an exception, but it is very expensive to use. Case in point: The Wall Street Journal (WSJ) is $40 per month and Bloomberg is $2500, and WSJ can be accessed without a subscription. Bloomberg provides a fantastic, unbiased media outlet, which is why I keep paying the tab. After using Bloomberg for years, WSJ headlines seem chaotic and self-serving. This again is the casino effect – they want to captivate people in ways that aren’t good for them, but great for WSJ.
Let’s discuss Inflation and China.
Everyone was terrified about inflation (as it related to a market crash) for the first half of 2021, including one of my role models Michael Burry (details here). Every drop in markets for months was accompanied with a “hyperinflation” headline. My opinion is that inflation can’t really exist.
Since the deterioration of Jack Ma’s prestige (details here) in the first quarter of 2021, China has purportedly begun to ‘crack down’ on technology companies. The drop in Chinese stocks Year To Date has likewise been accompanied with a headline – that the government is destroying its own society* and the wealthy are the first to be cut down. My opinion is that the bigger investors like America more than China right now. China is the same as before, but the US is just better.
*While I cannot discredit crackdowns, I think such blanket generalizations are illogical and lazy.
My thesis – Are you ready for this? Both of my conclusions result from the US Dollar ‘Reserve’ Status.
Virtually all transactions worldwide can be performed in US Dollars. This one sentence says about everything you need to know about economics today. Contrariwise, printing money that can only be absorbed within an economy (such as the “Weimar Republic”) is a shell game – you are selling a piece of the government to the citizens that already own it. The only way money printing can work is to generate foreign investment at least in proportion to the money printed interstate.
Following Nixon’s abandonment of the gold standard in 1972, the US dollar’s only power was that of the US government, meaning that the price of a dollar became impossible to accurately define intuitively and incredibly volatile. Relative valuation is now normal in currency valuations worldwide, so much so that a reserve currency virtually must be defined that provides a ‘benchmark’ for valuation. Fundamental valuations are next to impossible to value currencies although theories abound.
Of course, since 1998, the US has openly printed money to escape calamity. Those dollars are purchased by US banks and foreign countries alike, which, in theory, gives those countries an interest in the US government just as a sale of equity shares gives a private investor a stake in a corporation. The first ostensible example of such a trade off was in the Panic of 1893 (details here), when JP Morgan himself brokered a sale of US gold reserves to England for liquid currency. The strategy worked then, it worked in 1998, and it will probably continue to work for many years to come.
I’m a big fan.
Printing money and selling off pieces of our government result in a higher ‘deficit’ but also rewards those that already hold US dollars. It is tantamount to having the dollar revaluated, completely dependent on whether there is demand for the currency. If there is ample foreign demand, inflation will not exist. That’s because the risk of having an inflated currency (i.e. a currency that is worth less than before) is transferred outside of the country. Those countries that continue to transact in the US Dollar after printing occurs are effectively betting that the higher deficit created will ultimately fund higher economic growth. They are cheering us on.
Now, any time this topic comes up lately, the first thing people will ask is “What about the wealth inequality money printing creates? Isn’t that a form of inflation?” The answer is a resounding YES. It is a form of inflation, but not the form of inflation. The form of inflation the US Government cares about is defined by the demand of those dollars, which is not affected by the lower classes of wealth within and without the USA. However, more important is an answer to this question – “Why does the US Government favor the wealthy?” This is an erroneous declaration – the US government is acting on behalf of the world’s population. The world needs a leader, and the reserve status gives the US that title. If there is demand for the currency (meaning that the US Dollar continues being used in as many or more global transactions), the US has an obligation to print money to fuel growth. We need more money to stimulate growth and advance mankind.
Additionally, since the USA is the leader and our money is actually appreciating versus other currencies rather than inflating with each print of new money, all citizens in the USA that are paid in US Dollars are better off than those paid in other currencies. This leads to my strongest theory on why Chinese equities are dropping relative to US equities: as the volume of the US dollar has dramatically increased, many other currency volumes haven’t increased as much, and yet the exchange rates are largely unchanged. If the same amount of Chinese currencies must buy relatively more US Dollars and the exchange rate is unchanged, the US Dollar and everything denominated in it has grown more valuable relative to Chinese currencies. Specifically, cash flows denominated in US Dollars have grown more valuable.
Because Chinese currencies (and all other currencies) aren’t as ubiquitous as the US Dollar, the above theory must be true. There are more people worldwide willing to accept the US dollar at any rate to complete necessary transactions versus that of Chinese currencies. Therefore, as long as the US Dollar maintains reserve status and makes up nearly all global transactions, it will simply get stronger each and every time there is a new print. So not only do foreign countries cheer us on by providing overwhelming demand for the US Dollar, they also provide essential services priced in old dollars.
For example, websites (like this one) say the purchasing power of $1 has dropped 40% relative to the same power in 2005. But, a car made in China 15 years ago might only be 20% more expensive, because that car is paid for in Chinese currency. We in the US will feel much, much richer relative to Chinese citizens because we can buy more of the Chinese currency with our appreciated US dollars.
Thus, I am a big fan of money printing.
To summarize, headlines are thrown around all the time. You should absolutely do everything you can to take those headlines at face value… if you want to lose money. But those headlines don’t make any sense for someone aspiring to make money. Know your enemy. The enemy of those wanting to make the most money are salespeople, casinos, and cheap newspapers. Sometimes you’ll play their game blindly and win, but you will eventually lose. It’s by design: it’s easy to begin gambling. It’s hard to stop. The key is to see gambling for what it is – something humans can’t help but love, but we can’t be good at.
Thinking on these levels normally leads you to completely avoid most things, which can be incredibly boring and against human nature. We will almost always choose things that a) we don’t like or b) we aren’t good at. Waiting for the easy decision is very hard, and further still, we might not recognize such great things staring us right in the face. The best thing that ever happened to the United States is an ability to print money at will, but 99% of the population will say it’s not a good thing. I guess I’m just an old-fashioned gambler to think that Jerome Powell is both the most powerful man on the planet and my best friend as an American.
You would be interested to know that I have recently invested in China. It was an easy decision.