What went UP is now coming DOWN…and i t’s only just started

Tuesday, 14 June 2022 — Paris, France

[7 min read]

Dear Reader,

‘Good judgment comes from experience, and experience comes from bad judgment.’

Rita Mae Brown

Looking back, I now realise how green I was.

When first starting in this business in 1986, I was under the misapprehension of ‘the more complicated the better’.

Investments with labels like ‘special opportunities funds’ — and let’s face it, who doesn’t want to be ‘lucky’ enough to invest in a special opportunity — were all the go.

Or how about the ‘enhanced cash funds’? Of course, we want an enhanced return on our cash.

Mortgage funds with an image of a giraffe and those reassuring words of ‘never stick your neck out’. High returns without risk…where do I sign?

Business development managers (BDMs) would visit the office and explain their fund’s strategy on the whiteboard. The end result was an assortment of circles and criss-crossing lines. Impressive-sounding words flowed so easily off the tongues of the BDMs…hedge, arbitrage, leverage, derivatives, mezzanine debt.

You hid your ignorance by keeping your mouth firmly shut…better to be thought of as ill-informed than to open your mouth and confirm it.

It was the classic ‘emperor with no clothes’ predicament.

My ignorance stemmed from not appreciating the nature of the investment cycle. The upside rotation was the enabler of the spectacular performance numbers being touted by the BDMs.

The complex — and high fee-paying — strategies were delivering…who was I to question them?

Then along came the downside rotation on 19 October 1987.

The great illusion was exposed for what it was.

Special opportunities funds did indeed provide investors with a very special opportunity…to lose more money than anyone else.

Enhanced cash became diminished capital.

And the poor old estate mortgage giraffe?

It was decapitated.

In the years since, I’m reasonably confident I’ve seen all the industry product tricks.

There have been all sorts of bizarre and non-sensical marketing efforts designed to validate why superior past performance will continue for ever more.

These are…wink, wink, nudge, nudge…highly specialised investment strategies only the professionals are intellectually equipped to handle.

Yeah…pull the other one.

Industry experience — learned the hard way — is why I never bought into the Cathie Wood ARK hoopla. I’ve seen this type of flash-in-the-pan stuff before.

Everything in the ‘everything bubble’ is connected

Have you seen the news on the ‘Buy Now, Pay Later’ industry teetering on the edge of collapse? Why is anyone surprised by this?

This product was born into existence at the peak of the greatest credit bubble in history…and, in the very best of times, none of the firms could make a profit.

What hope did they have when the credit cycle turned?

On 22 September 2020, I wrote in The Rum Rebellion:

‘…one of the co-founders of “buy now, pay later” Afterpay is a millennial.

‘As a boomer (heavily influenced by my parents [frugal] approach to money), I think: “Who would be stupid/desperate enough to use a service like that?”

‘But obviously, there are plenty of people…people who have been born into the [credit bubble] build-up phase.

‘The hardship endured by my father’s [Great Depression] generation is completely foreign to them.

‘Knowing the stages of the debt cycle AND the lengthy time frames involved is hugely important in understanding the trends at play within society…

‘In the upcoming bust, the pattern is likely to repeat itself…a large percentage of first- and second-generation wealth is going to be lost in a Depression-like market collapse.’

Around the edges, that Depression-like market collapse has started.

Crypto lender Celsius is having some liquidity issues…who would’ve thought that could have happened (tongue is firmly in cheek)?

My disdain and distrust of-all-things crypto is very much on the public record.

Where does my (visceral) derision for cryptos come from?

Experience.

If you’ve been around markets long enough, you can see this is a massive con hiding in plain sight.

By the way, I see the very-much-untethered (to the US dollar) Tether [USDT] lent US$1 billion to Celsius…could the prospect of Celsius defaulting on this loan cause a run on Tether?

Watch this space!

Everything in the everything bubble is connected. What may appear to be isolated cases of collapse are actually bit parts of a much larger unravelling in excess, speculation, and downright stupidity.

How stupid is stupid?

High-flying hedge fund, Tiger Global (or, more to the point, former high-flyer), has lost 52% in value since 1 January 2022.

As reported by The Wall Street Journal on 6 June 2022:

The 9 June 2022 issue of The Gowdie Advisory included this background on Tiger’s ‘rigorous’ investment process:

‘In August 2021, boutique investment bank, AGC Partners, wrote this Investor Profile on Tiger Global:

“Tiger, like its namesake, has become the most feared predator in early and later-stage growth technology private funding.

“Because of their exceptional performance record and large check [cheque] writing ability, not only do they have the cache of being among the elite technology growth investors in the world, but they move much much faster with far less traditional due diligence.

“Tiger is also willing to pay more than anyone else, which makes it very hard to refuse their funding.

“Tiger has now made 600 investments since 2013, among them some of the most successful young technology companies in the world.

“With one of the highest investment velocities of any fund, Tiger has already invested in 187 companies in 2021 with a median check size of $114M and a median post-money valuation of $1.45B.

“As an LP [limited partnership], you would typically hesitate to invest in this buy high, shotgun style of investing, but in this crazy marketplace, it is working.”

‘Here’s the checklist on Tiger’s particular set of investment management skills:

‘And that, dear reader, is how you [as a hedge fund manager] make a multibillion-dollar fortune.’

Over the years, I’ve written many articles on the pitfalls of hedge funds and how, in the main, the managers invariably fail to outperform the (benchmark) index.

An article I wrote in August 2020 included a link to research conducted by Monash University:

In a boom, investors really don’t care about research reports or historical context. It’s all about returns…the higher the better.

The failure to ask, ‘How are the returns being generated and can the performance be maintained?’ never ceases to amaze me.

After reading the AGC Partners Investor Profile on Tiger Global’s investment management style, you have to wonder…how stupid can stupid be?

There’s a direct correlation between markets and intellect…the greater the boom, the greater the loss of brain cells.

‘Two things are infinite: the universe and human stupidity; and I'm not sure about the universe.’

Albert Einstein

As the deflation of the everything bubble gathers momentum, we’re going to be treated to story after story of man’s infinity stupidity.

What goes UP, comes DOWN…and this collapse is only just getting started.

Regards,

Vern Gowdie,
Editor, The Daily Reckoning Australia

Dear Reader,

It’s the ‘Decision of the Century’.

Like the decision to get married, start a business, or rob a bank, it will affect our quality of life for decades to come.

The decision to go to war in 1914 set the stage for the Russian Revolution, the Nazis in Germany, the Second World War, the rise of Mao in China…and 100 million deaths. This, too, is likely to be regretted for generations.

Mathematically, the US deciders have a 50% chance of getting it right. It’s either yay or nay…up or down…now or never. But politically, the odds heavily favour the wrong choice.

Either they voluntarily abandon their inflation policy…or let it run its course. The pain will be severe, one way or the other. Stopping inflation now will mean huge losses on stocks, bonds, and real estate. Businesses will go broke. Millions will lose their jobs as the economy corrects two decades of Fed mischief.

But sticking with the inflation policy will be much worse. The longer it goes on, the more distorted, indebted, and fragile the economy becomes. ‘When the money goes, everything goes’ — including the political system…and the social norms that a civilised society depends on.

Today, we look at the past in order to guess about the future. And let’s begin with the ‘forgotten depression of 1920’.

Hard and fast

US consumer prices rose at a 1–2% rate as the war began. By its end, they were going up at a nearly 15% annual rate. Then, in 1919, came the correction. The troops came home and looked for jobs…the wartime spending came to a halt…and the economy went into recession. US stocks lost half their value. Corporate profits dropped by 90%. Business failures tripled. And consumer prices fell 18%.

This pain came on hard and fast. But the dollar was still as good as gold. And the newly hatched Fed did not intervene. Capitalism had been wounded in the trenches, but less than 24 months after the armistice was signed, it had recovered completely. And not for nothing was the period that came next called the ‘Roaring Twenties’. The depression of 1920 had cleared out the wartime distortions, leaving the economy ready for strong consumer-focused growth.

Intentional, government-policy inflation is a very different thing. For one thing, it can last much, much longer — about 16 years on average. But it too eventually comes to an end.

The most recent example comes from Venezuela. Bloomberg this week:

‘More than two dozen office towers are rising from the narrow lanes of Las Mercedes. On the ground level of the 15-story Jalisco Tower, passersby can marvel at three red Ferraris on display at a dealership. The four-seater Portofino convertible, the cheapest, retails for more than $200,000, which equals the annual pay of 590 entry-level public employees. Across the street, an apartment building is under construction. A brochure advertises a rooftop pool, game salon, gym, and co-working space. Stores sell Hermès and Pronovias clothing around the corner. Not far away, a shop displays $1,000 stilettos from Gianvito Rossi, the Milan designer.’

What happened?

Did the Venezuelan feds confess that they had failed? Did they apologise, forswear their inflation policy, vow to balance the budget and back the bolivar with gold?

Nope…they kept inflating as long as they could.

Dollarise this!

Venezuela had a longstanding practice of spending more than it could afford…and papering over the difference with ‘printing press money’. 16 years ago, the inflation rate was already in double digits. Then, it took years more for the rate to get into the triple digits. During those years — from 2006–11 — an observer might have concluded that consumer price inflation was more or less ‘stable’ in the 20–30% range.

But then, in 2015, the inflation rate hit 256%. Three years later, it was almost a million percent (based on IMF data) and the Venezuelan economy made Mariupol look like a model of peace and prosperity.

It was easy to become a bolivar billionaire overnight. You only had to go to Caracas and bend over. There were billions of them lying in the street…not worth the trouble it took to pick them up. By then, the national currency had become so worthless that people used it to light fires or as packing material.

The country was a catastrophe. Five million desperate people left — many with little more than the clothes on their backs. Inflation reached nearly three million percent. The shelves were bare, and stomachs were empty.

The Venezuelan feds could still add zeros to their notes. But who would take them? Their ‘inflation tax’ collected nothing. And their regular taxes brought in only more worthless bolivars. (The Romans once devalued their own currency so much that they refused to accept it for tax payments.)

In other words, for the country’s rulers, inflation no longer paid off. By 2018, there was nothing more to be gained by devaluing the currency. There was no value left in it. So the Venezuelan feds allowed people to use a different currency — the dollar.

Bloomberg again:

‘Most significant, in late 2018, Maduro let the US dollar circulate legally. Everyone, from executives to street vendors, now carries greenbacks, which could have led to jail time under Chávez.’

And now, with a new far more stable currency available, the economy begins to recover.

We, the mob

Meanwhile, in the US, the inflation cycle is just beginning. CPI is still under 10% (officially). The ruling deciders can still boost their stock and bond prices by printing more money. They can still placate the mob with gimmie/stimmy cheques. And they can still pursue their favourite hustles — setting the Earth’s thermostat, ‘equality’, un-ending war with designated enemies abroad, and social control at home, made necessary by ‘terrorists’ in the ‘homeland’.

But wait. ‘The people’ hate rising prices. They won’t look too kindly on politicians that allow it. Won’t that be incentive enough for the Biden Team to turn away from inflation now?

We’ll look at that tomorrow.

Regards,

Bill Bonner,
For The Daily Reckoning Australia