Markets are not the economy, but it's still important to understand and follow economics.
One of the unfortunate "trends" of 2020 was the increase in debt at various levels. Now, debt can be a good thing ... it greases the international wheels and can be an important part of long-term financial plans for countries (in the same way you or I might use it.)
But too much of a good thing is a bad thing, and doing that math gets pretty complicated on the national level.
To help put it in perspective, I want to look at the U.S. debt on different scales.
First, you can look at this US Debt Clock for a staggering interactive visualization of the inflows and outflows in America. Click the image to watch it update in real-time. I encourage you to look at some of the components tracked. It made me think about our future differently.
The U.S. has the largest percentage of the world's debt, but Japan has the worst debt-to-GDP rate at over 224% (compared to America's approximately 127%)
During 2020, debt held by the US public increased by $4.2 billion - the largest dollar increase in history. A large part of that increase in debt was due to the federal deficit which was reported at $3.1 billion
To help understand the image, Texas is actually a great case study. Texas's bubble is big because it has one of the highest total debt levels, but is green because its debt ratio is pretty good at 62.5%.
California has the highest total debt, but is very light pink, stating that its debt ratio isn't bad. Some states' liabilities outweigh their assets by a factor of 4x or 5x which is scary.
This is a helpful illustration of the delicate balance of taking on debt. It's okay to take on large amounts of debt if you have a reasonable belief that revenue outstrips interest. To contrast that, some of these states have unsustainable debt levels - and only survive because they're a part of a bigger whole - the U.S. - and have an extra safety net.
What about Consumer Debt?
Most of America's debt is Federal - but consumer debt accounts for a non-trivial portion as well. Here's a chart that shows the change in U.S. Household debt since 2003.
Student, Auto, and Home Owner loans have all increased substantially - with the cost of student loans raising over 500%. Almost every category of consumer debt has increased.
While our country has gotten richer, and the standard of living has increased, we also have more people living in large amounts of debt.
Things To Consider
These charts are startling. Debt is a powerful tool ... but comes with risk as well. The question is, are we as a country and individuals managing the risk appropriately?
It's hard to look at these charts and say that there isn't an issue. The hope is that the government stimulus packages will make a difference - but Band-Aids won't fix the root of the problem and can even lull people into a false sense of security.
Last week, Microsoft won a contract to provide the U.S. army augmented reality ("AR") headsets. It's worth up to $21.9 billion over 10 years, and they'll be providing over 120,000 AR headsets. Porn has been the leader in VR/AR innovation, but it's unsurprising that war is also being used to drive innovation. Human nature is human nature.
Virtual reality (VR) and augmented reality have been around for a long time, but there's been a massive boom in innovation and interest over the last 3-5 years. Not only are the technologies becoming more affordable, but the animation is becoming more realistic, headsets are becoming more portable and longer-lasting, and our physical and virtual realities are beginning to blend.
We're moving towards a world where technology envelops every aspect of our lives ... figuratively and literally. It's funny because I felt the same way in the late 90s as cell phones and the internet proliferated. It feels quaint in comparison to the ubiquity of technology today. Even our toasters are smart now.
The following (still fictional) video is thought-provoking. What happens when these new technologies are used to influence behavior, decision-making, and even your identity?
Like many things, these technologies make possible awesome new capabilities (if used well) and horrific consequences (if abused or used in authoritarian ways).
Your doctor or nutritionist could help you make better choices for yourself. Your therapist or coach could help you perceive and respond differently to the challenges life presents you. Marketers could better influence your purchases. Employers could better monitor and measure your performance and productivity. And governments will not be far behind ... doing what they do. It all toes the line between beneficial and creepy.
Because of where we are in the adoption curve, it is becoming more common to discuss bioethics and AI ethics. Likewise, as we accelerate into an age of exponential technologies and mindsets, be prepared for increasing scrutiny of the promise versus the peril of various new technologies and capabilities.
We live in interesting times, and only getting more interesting as it goes!
Have you noticed that it's easier for most people to identify and solve someone else's problem than it is to do the same for themselves?
Humans are emotional creatures. As a result, our decision-making often suffers from fear, greed, and discretionary mistakes.
As an entrepreneur, I strive to be objective about the decisions I make. Towards that goal, using key performance indicators, getting different perspectives from trusted advisors, and relying on tried-and-true decision frameworks all help.
Combining all three creates a form of "mindfulness" that comes from dispassionately observing from a perspective of all perspectives.
That almost indifferent and objective approach is also where exponential technologies like AI excel. They amplify intelligence by helping make better decisions, take smarter actions, and continually improve performance.
I shot a video about mindfulness and the future of A.I.
Artificial intelligence is cool. The truth, however, is that AI is still relatively limited. Individual techniques (or algorithms) are good at "something". The challenge is that they only focus on what they need to come up with their answer, without considering a different perspective. While it is good at what it is good at, it isn't necessarily good at empathetically understanding that a different technique, which comes up with a different answer, might be "right" as well.
The future of AI likely will be based on swarm intelligence, where many specialist components communicate, coordinate, and collaborate to view a situation more objectively, better evaluate the possibilities, and determine the best outcome in a dynamic and adaptable way that adds a layer of objectivity and nuance to decision making.
One of the lessons I teach to our younger employees is that an answer is not THE answer. It's intellectually lazy to think you're done simply because you come up with a solution. There are often many different ways to solve a problem, and the goal is to figure out the one that comes up with the best results.
Even if you find THE answer, it is likely only THE answer temporarily. So, it is really just a step in the right direction that buys you time to learn, improve and re-evaluate.
While I'm not really in a supply chain business, they are interesting to me because they do with physical things, many of the same things I do with virtual things.
Supply chains use complex systems to achieve "simple" goals. Figuring out how to streamline processes is both an art and science.
Global supply chains remind me of the complicated machinery and gearing that goes into a finely made analog watch ... the watchmakers know that even if you don't know how the watch was made or what a mechanism does, it's still interesting to watch it tick and admire the engineering.
Recently I found a website - ImportYeti - that tracks over 60 million companies' sea shipment records. Here is an example showing Tesla.
It uses bills of lading and other public information to tell you information about the frequency of shipments, the suppliers, and what they delivered.
There is a ton of interesting information here. Hope you find some creative ways to use it.
If you are interested in this, I also suggest looking at Eli Goldratt's The Goal, which describes the "Theory of Constraints," which deals with how bottlenecks limit performance.
Yes, that is Tom Hanks wearing a Bubba Gump shirt punching Covid-19.
So, what is an NFT, and why are they becoming so popular?
NFTs stand for non-fungible tokens, which are unique digital assets on the blockchain. They've been around since 2014, but only recently blew up in popularity. They're essentially collectibles ... but digital.
An NFT might be an image, a gif, a video, etc. But, because they're given a unique code on the blockchain, the ownership and validity of that item can be tracked.
Surprisingly, owning that NFT does not give you copyright of that digital asset. In fact, some images have been made into multiple tokens, and some tokens include multiple pieces of art which have been sold individually. The digital files themselves are still infinitely reproducible ... but that code on the blockchain is not.
In a sense, that means that NFTs are the digital equivalent of an autographed item.
In the past, when I've talked about Blockchain, digital art wasn't something I actively considered. Blockchain made sense to me as a way of proving provenance and helping establish the authorship and authenticity of an object - but I assumed it would be high-end physical art.
At the end of the day, if someone will pay for it, then you can sell it. That's part of the beauty of Capitalism. Most collectibles don't make sense from a macroeconomic value sense. They're worth something because of their value to their collectors.
Think about Beanie Babies, or Pokemon Cards, or even more mainstream collectibles like Sports Memorabilia or Whiskey.
While I won't say that "I get" the appeal of NFTs ... I get it. As the world becomes increasingly digital, "real" and "tangible" have new meanings.
Is something not "real" just because it's digital?
It reminds me of a painting by René Magritte called "The Treachery of Images." The painting shows an image of a tobacco pipe. Below it, Magritte painted, "Ceci n'est pas une pipe," which is French for "This is not a pipe."
The famous pipe. How people reproached me for it! And yet, could you stuff my pipe? No, it's just a representation, is it not? So if I had written on my picture "This is a pipe", I'd have been lying! — René Magritte
If you're still a little lost, SNL had a funny skit last night with an NFT rap song. Enjoy.
I spend a lot of time doing research ... not the way data scientists do, but I enjoy keeping an eye on the pulse of things.
Recently, I've noticed increasing talk about bubbles. One of the most obvious potential "bubbles" being the relatively stable bullish performance of the markets, despite the lack of a full economic recovery.
So, without making a prediction, caution is probably fair, but recognize that people aren't blaring sirens and running with their arms flailing in the air.
Instead of focusing as much on today's bubbles, I thought I'd share a great summary on "how to spot a bubble" by Barry Ritholz.
He suggests 10 elements:
1. Standard Deviations of Valuation: Look at traditional metrics – valuations, P/E, price to sales, etc. — to rise two or even three standard deviations away from the historical mean.
2. Significantly elevated returns: The S&P500 returns in the 1990s were far beyond what one could reasonably expect on a sustainable basis. The years around Greenspan’s “Irrational Exuberance” speech suggest that a bubble was forming:
3. Excess leverage: Every great financial bubble has at its root easy money and rampant speculation. Find the leverage, and speculation won’t be too far behind.
4. New financial products: This is not a sufficient condition for bubble, but it does seems that each major bubble has new products somewhere in the mix. It may be Index funds, derivatives, tulips, 2/28 Arms.
5. Expansion of Credit: This is beyond mere speculative leverage. With lots of money floating around, we eventually get around to funding the public to help inflate the bubble. From Credit cards to HELOCs, the 20th century was when the public was invited to leverage up.
6. Trading Volumes Spike: We saw it in equities, we saw it in derivatives, and we’ve seen it in houses: The transaction volumes in every major boom and bust, almost by definition, rises dramatically.
7. Perverse Incentives: Where you have unaligned incentives between corporate employees and shareholders, you get perverse results — like 300 mortgage companies blowing themselves up.
8. Tortured rationalizations: Look for absurd explanations for the new paradigm: Price to Clicks ratio, aggregating eyeballs, Dow 36,000.
9. Unintended Consequences: All legislation has unexpected and unwanted side effects. What recent (or not so recent) laws may have created an unexpected and bizarre result?
10. Employment trends: A big increase in a given field — real estate brokers, day traders, etc. — may be a clue as to a developing bubble.
11. Credit Spreads: Look for a very low spread between legitimately AAA bonds and higher yielding junk can be indicative of fixed income risk appetites running too hot.
12. Credit Standards: Low and falling lending standards are always a forward indicator of credit trouble ahead. This can be part of a bubble psychology.
13. Default Rates: Very low default rates on corporate and high yield bonds can indicates the ease with which even poorly run companies can refinance. This suggests excess liquidity and creates false sense of security.
14. Unusually Low Volatility: Low equity volatility readings over an extended period indicates equity investor complacency.
There are many ways to make money trading ... and even more ways to lose money trading. If it were easy, everyone could do it. There is a mix of art and science combined with hard-to-quantify factors at play.
But, survivorship bias is big in trading because hindsight is 20/20. It's easy to look at a popped bubble and say "oh, obviously that was a bubble" ... but if it was that easy, trading wouldn't be so hard.
Trends continue until they don't ... but at some point, they don't, and that's where people get hurt.
My gut tells me it is time to pay closer attention.
Sometimes I write posts about business ideas I've found to be particularly helpful. Today, I am writing about a concept that I would call "foundational," called the Gap and the Gain (which was created by Dan Sullivan of Strategic Coach). The base concept is simple – nonetheless, understanding and applying it can have transformative effects. The central concept is that you can be successful and happy or successful and unhappy ... and the difference between the two is likely how you choose to measure your results.
Are you focused on the gap (all the things you still don't have) or the gain (all the things you already have)?
As an entrepreneur whose business is based on innovation, one of my unique abilities is being able to think about what's possible ... and then find the golden thread from where we are to where we want to be. It's why I believe one of the "secrets to success" is to become comfortable being uncomfortable. Why? Because almost anything you want is beyond your current capabilities (otherwise, you'd already have them). Being able to transform the goal into a directional compass leading you in the right direction is easy for me, and gives me energy.
But, that unique ability comes with a pretty obvious drawback ... I'm never where I want to be (because I'm constantly looking at the horizon, and as I move towards it, the horizon continues moving). This is the curse of many entrepreneurs. They live and die without a fulfilling sense of accomplishment because they're always focused on the next mountain. The progress that they've made getting to here, and the confidence they built getting to here, raise the bar of what's possible. Instead of focusing on the progress and wins that got them where they are, they monomaniacally focus on the gap between the current reality and their new shiny goal.
The distance between where you currently are and where you want to go should be motivating. In fact, I'd argue that the ability to stretch your vision further is a skill you should reward rather than punish. It is simply a matter of perspective. Measure from where you started, but don't lose sight of the bigger future. One pushes you from behind, and the other pulls you forward.
That's the gap and the gain, and it's a great lesson that is useful in businesses and life in general. Ultimately, you're in control. You get to decide what you focus on, what it means, and what you choose to do.
Personally, probably the most important way this lesson has impacted me was in making more of the time left with my dad while he was dying.
That video is about a year that brought my Dad's death, the forced sale of my company by venture capitalists, and a divorce (in that order). In many respects, it was a horrible year ... a year where it would have been easy to focus on the gap rather than the gain.
Luckily, sometimes, life's darkest days bring the greatest gifts … if you are willing to look for them.
One of my biggest takeaways from that struggle was about the time value of life.
In finance, the "time value of money" refers to the principle that money's purchasing power varies over time (meaning, money today has more purchasing power than money later). In part, this is because the value of money at a future point in time might be calculated by accounting for other variables (like interest earned, or inflation accrued, etc.).
It occurred to me that a similar calculation applied to life ... or living.
During the last part of my dad's life, it was easy to focus on what we were lacking ... time ... we would have done almost anything for a little more time.
In his last year, things that used to be unimportant, or even mildly irritating, took on increased importance. For example, a dinner together became almost a sacred event; a kiss goodnight was truly heartfelt, and saying goodbye meant something ... because it could be the last time.
Because of that focus, he took more "life" out of that time. Necessity is often the mother of invention. While I wouldn't have chosen the situation, it changed his mindset (frankly, it changed our mindset), and as a result, we increased the amount of life we squeezed out of that little bit of time.
Obviously, the choice to make more of life shouldn't wait for the death of a loved one or a similar crisis.
We can choose to focus on what we want and what we gained to make the most life out of whatever time we're given.
I spent a lot of that year moving away from pain when I could have been moving toward opportunity. I'm grateful I learned that lesson before he passed.
To close, I want to leave you with a lesson from my dad that really stuck with me.
The difference between good and great is infinitesimal. People who are good take advantage of opportunities ... but people who are great create them. ~ Jacob Getson
It's a conscious choice we can all make.
Hope that helps.
If you want to learn more about the specifics of the "Gap and the Gain," Ben Hardy wrote a great article on the subject.
I enjoyed the chart, and had a couple of different takeaways:
Many companies tried to capitalize on the streaming wave by launching half-baked streaming services, but it's clear that the pioneers are still extending their lead on the fast followers.
Despite Netflix already being the industry leader, they saw a 34% increase in 2020.
China's largest provider - Tencent Video - only has 120M users, which is about 8% of China's population. In contrast, Netflix has 74M US users, which is about 23% of the population.
The New York times is the only News subscription source big enough to make the list, yet it's at the very bottom with 6M users. Though, it did see a 61% increase in 2020.
Disney+ grew 95M in its inaugural year, which is a credit to the brand recognition Disney holds.
Interesting stuff and large numbers!
How will the world re-opening impact those numbers? How about 5 years from now? What do you think?
Will virtual reality and augmented reality start to impact these numbers?
With that much money and on the line, I expect this to remain an industry segment primed for innovation, growth ... and a few surprises.
I remember when my son finally got smarter than our dog. For the record, it took longer than I thought it would.
With respect to human intelligence, language is likely the first domino. It allows "chunking" and makes learning new things more efficient, effective, and certain.
Language is powerful in-and-of-itself. Using language consciously is a multiplier. Today, I want to focus on one such use of language – the power of naming things.
The Power Of Naming Things
“I read in a book once that a rose by any other name would smell as sweet, but I've never been able to believe it. I don't believe a rose WOULD be as nice if it was called a thistle or a skunk cabbage.” - L.M. Montgomery, Anne of Green Gables
Before I go into detail, I shot a video on the subject, with a few examples from our business.
Having a shared language allows you to communicate, coordinate and collaborate more efficiently. But it's hard to have a shared language when you're discussing something intangible.
That's where naming comes in. When you name something, you make the "invisible" visible (for you, your team, and anyone else who might care).
I've often said the first step is to bring order to chaos. Then, wisdom comes from finer distinctions. Naming is a great way to create a natural taxonomy that helps people understand where they are – and where they are going.
I like thinking of it in comparison to value ladders in marketing.
Each stage of the value ladder is meant to bring you to the next level. By the time someone gets to the top of the value ladder, they're your ideal customer. In other words, you create a natural pathway for a stranger (meaning someone who doesn't know you well) to follow, to gain value, trust, and momentum onwards ... ultimately, ascending to become someone who believes in, and supports, what you offer and who you are.
Ultimately, successful collaboration relies on common language. That is part of the reason naming is so important. The act of naming something makes it real, defines its boundaries and potentialities, and is often the first step towards understanding, adoption, and support.
Creating "Amplified Intelligence"
There are always answers. We just have to be smart enough. - John Green
Here is an example from our business. When we first started building trading systems, all we had was an idea. Then we figured out an equation (and more of them). Next, we figured out some methods or techniques ... which became recipes for success. As we progressed, we figured out a growing collection of useful and reliable ways to test, validate, automate and execute the things we wanted to do (or to filter ... or prevent).
For someone who didn't understand the organizing principles, it probably seemed like a mess. Compounding the problem is that fear, uncertainty, and doubt are inhibitors to potential customers and stakeholders (like the employees working in a business).
Coming up with the right organizing principle (and name) makes it easier to understand, accept, and adopt. For example, many traders and trading firms want to amplify intelligence – meaning they were looking to make better decisions, take smarter actions, and ultimately to perform better (which might mean making and keeping more money). To help firms amplify intelligence, we created the Capitalogix Insight Engine (which is a platform of equations, algorithms, methods, testing tools, automations, and execution capabilities). Within that platform, we have functional components (or modules) that focus on ideas like portfolio construction, sensible diversification, alpha generation, risk management, and allocation strategies. Some of those words may not mean much to you, if you're not a trader, but if you are it creates an order that makes sense and a path from the beginning to the end of the process.
It makes sense. It explains where we are – while informing what might come later.
The point is that naming things creates order, structure, and a contextual map of understanding.
It a compass heading that we can use to navigate and guide in uncertain territory.
A Quick Look At American Debt
Markets are not the economy, but it's still important to understand and follow economics.
One of the unfortunate "trends" of 2020 was the increase in debt at various levels. Now, debt can be a good thing ... it greases the international wheels and can be an important part of long-term financial plans for countries (in the same way you or I might use it.)
But too much of a good thing is a bad thing, and doing that math gets pretty complicated on the national level.
To help put it in perspective, I want to look at the U.S. debt on different scales.
First, you can look at this US Debt Clock for a staggering interactive visualization of the inflows and outflows in America. Click the image to watch it update in real-time. I encourage you to look at some of the components tracked. It made me think about our future differently.
The U.S. has a GDP of about $22 Trillion and our national debt is currently over $28 Trillion, but our net worth is still approximately $120 trillion.
For more perspective:
What about on the state level?
As a result of snowballing debt, President Biden's $1.9T economic stimulus package promised $350B in direct aid to states.
To help understand the image, Texas is actually a great case study. Texas's bubble is big because it has one of the highest total debt levels, but is green because its debt ratio is pretty good at 62.5%.
California has the highest total debt, but is very light pink, stating that its debt ratio isn't bad. Some states' liabilities outweigh their assets by a factor of 4x or 5x which is scary.
This is a helpful illustration of the delicate balance of taking on debt. It's okay to take on large amounts of debt if you have a reasonable belief that revenue outstrips interest. To contrast that, some of these states have unsustainable debt levels - and only survive because they're a part of a bigger whole - the U.S. - and have an extra safety net.
What about Consumer Debt?
Most of America's debt is Federal - but consumer debt accounts for a non-trivial portion as well. Here's a chart that shows the change in U.S. Household debt since 2003.
Federal Reserve Bank of NY via HowMuch
Student, Auto, and Home Owner loans have all increased substantially - with the cost of student loans raising over 500%. Almost every category of consumer debt has increased.
While our country has gotten richer, and the standard of living has increased, we also have more people living in large amounts of debt.
Things To Consider
These charts are startling. Debt is a powerful tool ... but comes with risk as well. The question is, are we as a country and individuals managing the risk appropriately?
It's hard to look at these charts and say that there isn't an issue. The hope is that the government stimulus packages will make a difference - but Band-Aids won't fix the root of the problem and can even lull people into a false sense of security.
What do you think the solution is?
Posted at 06:37 PM in Business, Current Affairs, Ideas, Market Commentary, Trading, Trading Tools | Permalink | Comments (0)
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