Trading

  • Inflation and Other Economic Effects: Will They Last?

    I've recently posted about the rise in global & national debt and the increasing dissonance between markets and the economy. This post is about inflation and the long-term economic effects of 2020. 

    We're currently operating on $6 trillion of stimulus. The Trump administration approved the first 4 trillion dollars, and Biden's administration added another $1.9 trillion. Around $3.5 trillion of that went to purchasing government securities. Meanwhile, the U.S. Treasury also printed another $2B in dollars (more than they produce in a normal year).

    Here is an infographic showing the programs enacted to counteract the pandemic's economic impact.

     

    2021-total-coronavirus-legislation-graphicvia PGPF (3/15/21)

    These strategies make credit easier to get by growing the money supply and lowering interest rates with banks having more reserves. Without these and the Fed's other emergency measures, the economy likely would have crashed … but was it a "fix" … or did it just delay the inevitable?

    In the short term, the stimuli did a pretty good job of creating liquidity, preventing a substantial market crash, and increasing faith in the system. 

    Markets became more erratic and harder to predict. And other ripples are starting to show in the economy. 

    Inflation: Temporary?

    It's not hard to tell that prices have risen recently. But, while consumer prices have risen 2%, on average, investors continue to invest in treasuries and push the price of 10-year yields down to where they were in February of last year. That seems to imply that despite inflation and stimulus, investors still have faith in the Fed. 

    The hope would then be that the inflation is transitory and not a long-term effect of the stimulus. 

    Screen Shot 2021-06-18 at 3.18.22 PMvia Wall Street Journal

    It's possible that this inflation is the result of a post-Covid demand surge (and not the beginning of a larger trend).  You can also assume that the surge in prices of airfares, hotels, and sports games will drop once they become "normal" again. And, even if they don't, if wages don't rise with that new demand, it's easy to picture demand returning to normal. 

    The last time the Fed created money on a similar scale (the Great Recession), high long-term inflation didn't materialize, so it might not happen again. 

    Conclusion

    I think it's unlikely that we see another 1970s style surge – and I think it's equally unlikely we see major deflation. With that said, I still don't think we've seen the end of the effects of the pandemic and the pandemic stimulus either. 

    One of the practical results of the Fed's bond purchases is that it creates money to finance the gigantic debt run up by Congress. With the national debt at almost $25 Trillion, it gets harder to pick a measuring rod of financial health that isn't woefully inefficient. The idea of "sound money" or a sustainable fiscal path seems increasingly questionable. But, if you believe in Modern Monetary Theory and in the United States' amazing ability to borrow, it's possible that there truly is no worry. Japan is a potential example of that – with a debt-to-GDP ratio of double the U.S.

    So, even if inflation continues, it's hard to judge how bad a sign it is. 

    Whether or not there's a crash tomorrow (or 7 years from now), at some point, we know there will be a "correction."

    Predicting the future is hard!

    Curious to hear what you think.

  • A Look At Trade Blocs

    The Global Economy is more complex than I could ever explain in a single blog post. But one of the simplest ideas to understand is that trade and commerce are the foundation for the Global Economy. 

    Trade between states, nations, and continents is how you end up with innovation, global increases in prosperity, and resistance to the consequences of famine, natural disasters, and even pandemics. 

    But, the wants and power dynamics of these different entities can get complicated. There are many intergovernmental trade barriers.

    That's where trade blocs come in … Two you likely recognize would be NAFTA (now USMCA) and the EU.

    Trade blocs are meant to reduce trade barriers between participating entities but are sometimes controversial for their potential consequences. For example, they can result in rival groups, overly benefit certain countries, and potentially place undue pressure on certain exports. 

    In late 2020, the Regional Comprehensive Economic Partnership (RCEP) was signed and creates the largest trade bloc in history – accounting for over 30% of global GDP and population. Visual Capitalist put together an infographic about RCEP's formation and likely implications. 

     

    RCEP-Explained-The-Worlds-Biggest-Trading-Bloc-Will-Soon-be-in-Asia-Pacific

    via visualcapitalist

    The agreement isn't fully ratified (it is set to be fully launched by early 2022). Regardless, it will impact the global stage and create approximately $209B of income increase per year.

    Despite all the rules and benefits that RCEP will have for its 15 nations, it doesn't contain any provisions for labor unions, environmental protection, or government subsidies. 

    As China continues to race against America to be the largest global superpower, the RCEP is a powerful tool in its arsenal.

  • Here Are Some Links For Your Weekly Reading – June 13th, 2021

    252389

    Here are some of the posts that caught my eye recently. Hope you find something interesting.

    Lighter Links:

     

    Trading Links:

  • Getting To Next: How Thoughts Become Things

    Two weeks ago, I introduced Innovation Activity Centers which are the building blocks for my technology adoption model.InnovationActivityCenters2

    Today, I have a video and a worksheet for you that goes into the overarching Technology Adoption Model Framework. It explains how thoughts become things and how ideas scale with respect to capability, audience, and monetization.

    The four base stages of this framework are: Capability –> Prototype –> Product –> Platform. 

    It's a great use of 20 minutes. Check it out.

     

     

    While the Technology Adoption Model Framework stages are important, the ultimate takeaway is that you don't have to predict what's coming, only how human nature works in response to the capabilities in front of them.

    It's a bit cliche, but to paraphrase Wayne Gretzky, you just have to skate to where you think the puck is going to be. 

    Desire fuels commerce.  As money fuels progress, desire grows … and so does the money funding that path. As such, the path forward is relatively easy to imagine.

    This isn't about predicting specific technologies, but rather about the capabilities people will want.  I think of it as anticipating the natural path.  It is easier to ride the wave than it is to fight nature.

    Each stage is really about the opportunity to scale desire and adoption.

    It isn't really about building the technology, rather it is about supporting the desire.

    If you understand what is coming, you don't have to build it, but you can figure out where you want to build something that will benefit from it.

    This model is fractal.  It works on many levels of magnification or iteration.

    What first looks like a product is later seen as a prototype for something bigger.

    For example, as a Product transforms into a Platform, it becomes almost like an industry of its own.  Consequently, it becomes the seed for a new set of Capabilities, Prototypes, and Products.

    SpaceX's goal to get to Mars feels like their North Star right now … but once it's achieved, it becomes the foundation for new goals.

    This Framework helps you validate capabilities before sinking resources into them. 

    In the video, I walk you through several examples of companies, their innovations, and how they fit into each stage. I even used Capitalogix as an example. 

    I'm also attaching a fillable PDF of the form we used so that you can run through this with your business as well. 

    Tech Adoption Model for Entrepreneurs (1)

    As I continue to refine and work with this framework, I look forward to improving it and sharing it with you all. 

    As the world continues to change faster and more dramatically, this framework will help you anticipate changes, and it will also help you take advantage of them. 

    If you have any questions or comments about the idea, or how to implement it, feel free to reach out. 

    Onwards! 

  • Here Are Some Links For Your Weekly Reading – June 6th, 2021

    252233

    Here are some of the posts that caught my eye recently. Hope you find something interesting.

    Lighter Links:

     
     

    Trading Links:

  • The Law and Flaw of Averages

    The law of averages is a principle that supposes most future events are likely to balance any past deviation from a presumed average.

    Take, for example, flipping a coin. Should you get 5 "Heads" in a row, you'll assume the next one must be "Tails" despite the fact that each flip has a 50/50 chance of landing on either. 

    Even from this example, you can tell it's a flawed law. While there are reasonable mathematical uses of this law, in everyday life, this "law" mostly represents wishful thinking. 

    Crisis-of-2008

    It's also one of the most common fallacies seen in gamblers and traders. 

    Perhaps you heard the story about how the U.S. Air Force discovered the 'flaw' of averages by creating cockpits based on very complex mathematics surrounding the average height, width, arm length, etc. of over 4,000 pilots. Despite engineering the cockpit to precise specifications, pilots crashed their planes on a too regular basis. 

    The reason?  With the benefit of hindsight, they learned that very few of those 4,000 pilots were actually "average". Ultimately, the Air Force re-engineered the cockpit and fixed the problem. 

    It's a good reminder that 'facts' can lie, and assumptions and interpretations are dangerous. It's why I prefer taking decisive action on something known, rather than taking tentative actions about something guessed. 

     

    via ReasonTV

     

  • Here Are Some Links For Your Weekly Reading – May 23rd, 2021

    4Whamond

    Here are some of the posts that caught my eye recently. Hope you find something interesting.

    Lighter Links:

     

    Trading Links:

  • Powering Bitcoin

    In April, I talked about Coinbase's public offering and the top 10 growing cryptocurrencies. 

    In the past couple of weeks, many currencies have reached record highs, and then seen a steep drop-off. Some say it was due to Elon Musk's SNL appearance, others say it was due to Tesla stopping support of Bitcoin short term. Still others say it was just due.

    In any case, there are growing reasons to be wary of Bitcoin as a viable long-term value store.

    On top of the many reasons I've talked about in previous articles, I'm hearing many more people talk about it as if they are crypto experts.  Consequently, it reminds me of the Dot.com bubble. Sure, the Internet continues to boom (but many of the early high-fliers don't exist today).  Meanwhile, it's possible crypto will evolve like the Internet, but at this point, it's hard to discern how much of the success in crypto is luck versus skill.   

    There is a ton of demand and interest.  But fear of missing out and enjoying the roller-coaster ride is not the basis of a long-standing Platform. Blockchain is a different story.

    Back to Crypto … Even a blind squirrel finds a nut in a forest during a bull market. 

    Governments have a disincentive to allow alternate currencies (not backed by their government).  In addition, another obstacle for cryptocurrency mining is the high cost of energy consumption. 

     

    Bitcoin-Mining-Electricity-Consumptionvia visualcapitalist

    Mining crypto takes a lot of electricity because when people are creating new coins they're really solving complex math puzzles with a 64-digit hexadecimal solution known as a hash. To solve those equations faster than your competitors you need massive data centers which can even overload local infrastructure. 

    It's increasingly expensive and energy-taxing to mine new coins. For context, it's estimated that the current annual power consumption for Bitcoin alone (not including other cryptocurrencies) rivaled the state of New York, and beat Norway. 

    To compare it to the tech giants, Bitcoin took 129 terawatt-hours of power consumption … Google took 12, and Facebook only took 5. 

    Many are looking for ways to decrease the energy consumption of mining cryptocurrency using methods like renewable resources. 

  • Biden’s $4T Economic Plan Visualized

    Biden campaigned heavily on an economic plan centered around bolstering the middle class, taxing the wealthy, and investing in healthcare and green energy infrastructure. There are other aspects of his plan – but those were the focuses.   

    Now that he's President and proposing his $4 Trillion economic plan, we can take a better look at where he intends to spend that money. 

    The NY Times put together a data visualization to put the plan in context. 

    Here's the simplified version: 

    Heres-President-Bidens-Infrastructure-and-Families-Plan-in-One-Chart-The-New-York-Times-thumbnailvia NY Times

    And here it is with more detail: 

     

    Heres-President-Bidens-Infrastructure-and-Families-Plan-in-One-Chart-The-New-York-Timesvia NY Times

     

    Much of the money President Biden intends on using to pay for this plan will come from higher taxes on the wealthy, and 15 years of higher taxes on corporations. With another portion of the money being invested in the IRS to crack down on tax evasion. 

    Many people, both Republicans and Democrats alike, have fears about the new plan. 

    Time will tell if the benefits outweigh the detriments, and what portion of his plan he actually accomplishes. 

    Frankly, I'm not sure how much of what was talked about were trial balloons and negotiation anchor points or his intended outcomes?

    Time will tell.  We sure do live in interesting times!

  • WallStreetBets Analysis: Market Crashes & Oreos

    During the Robinhood & Gamestop debacle, I wrote an article about r/WallStreetBets where I essentially said that most of the retail investors that frequent the site don't know what they're doing, but there is the occasional real post with strong research you would see at a real firm. 

    As an example of good research done by the subreddit, here's a link to a post where a user (nobjos) analyzed 66,000+ buy and sell recommendations by financial analysts over the last 10 years to see if they had an edge. Spoiler: maybe, but only if you have sufficient AUM to justify the investment in their research. 

    There are also posts that show a clear misunderstanding of markets, and more jokes than quality posts, but I saw a great example of correlation ≠ causation. 

    In the past I've posted about the Superbowl Indicator and the Big Mac Index, but what about Oreos?

    The increasingly-depraved debuts of Oreos with more stuffing indicate unstable amounts of greed and leverage in the system, serving as an immediate indicator that the makings of a market crash are in place. Conversely, when the Oreo team reduces the amount of icing in their treats, markets tend to have great bull runs until once again society demands to push the boundaries of how much stuffing is possible.

    https://en.wikipedia.org/wiki/List_of_Oreo_varieties https://en.wikipedia.org/wiki/List_of_stock_market_crashes_and_bear_markets

    1974: Double Stuf Oreo released. Dow Jones crashes 45%. FTSE drops 73%.

    1987: Big Stuf Oreo released. Black Monday, a 20% single-day crash and a following bear market.

    1991: Mini Oreo introduced. Smaller icing ratios coincide with the 1991 Japanese asset price bubble, confirming the correlation works both ways and a reduction of Oreo icing may be a potential solution to preventing a future crash.

    2011: Triple Double Oreo introduced. S&P drops 21% in a 5-month bear market

    2015: Oreo Thins introduced. A complete lack of icing causes an unprecedented bull run in the S&P for years

    2019: The Most Stuf Oreo briefly introduced. Pulled off the shelf before any major market damage could occur.

    2021: The Most Stuf Oreo reintroduced. Market response: ???

     - LehmanParty via Reddit

    It's surprisingly good due diligence, but also clearly just meant to be funny. It resonates because we crave order and look for signs that make markets seem a little bit more predictable.

    Funny-mealso-me-meme-about-making-healthy-choices-but-also-eating-crap-like-all-stuf-oreos

    The problem with randomness is that it can appear meaningful. 

    Wall Street is, unfortunately, inundated with theories that attempt to predict the performance of the stock market and the economy. The only difference between this and other theories is that we openly recognize the ridiculousness of this indicator.

    More people than you would hope, or guess, attempt to forecast the market based on gut, ancient wisdom, and prayers.

    While hope and prayer are good things … they aren’t good trading strategies.

    A good reminder that even if you do the work, if you're looking at the wrong inputs, you'll get a bad answer. 

    Garbage in, garbage out.