Greg Canavan

[7 min read]

Dear Reader,

In yesterday’s Rum Rebellion, you received a message from Woody (our Group Publisher) saying ‘I’m initiating a STOP PRESS EVENT across all our email publications later this week.’

I just wanted to clarify…it’s happening later NEXT week.

Which is a good thing, because it gives us more time to provide context around this event.

The biggest thing happening in the financial world right now is NOT cryptos. Well, not exactly, anyway. It’s what’s happening under the surface in the world of cryptos that is truly revolutionary.

When you understand this, you’ll understand that a completely new financial system is under construction. The smartest minds in the world are onto it.

It used to be Wall Street sucked in all the talent. That is no longer the case. The world of crypto is where the action is. Again, I’m not talking about the price action. That is a whole different conversation. I’m talking about the architecture of a new financial system growing up around your very eyes.

The traditional financial system has failed the generation that are building this architecture. That’s why they’re rejecting Wall Street careers to be a part of something new and exciting. 

What is this new and exciting thing though? You may not actually see it!

Well, that’s because the establishment either doesn’t get it or doesn’t want you to know about it. But rapid change is occurring and your knowledge of it will only be limited by your willingness to seek it out and learn about it.

People often say the only two constants in life are death and taxes. I disagree.

There is only one constant in life and that is change. If you need proof of that statement, look to evolution. Change and/or adaptation is the secret to longevity. Nature is ruthless towards those who don’t adapt. It’s the same with businesses.

Those that don’t change get eaten by a bigger competitor or eventually die out. In this day and age, with central banks doing their best to destroy the concept of ‘creative destruction’, that doesn’t happen as quickly as it used to. But it still does.

Investing is no different. If you go into the game raw, you’ll lose money. If you don’t change, you’ll continue to lose money. And if you stubbornly keep your course, the market will keep picking your pocket until you have nothing left to pick.

And then you’re out.

Change then, is a good thing. If you resist it, you’ll stagnate. And to stagnate is to go backwards, because everyone else who is willing to change/adapt/improve will overtake you.

That’s what I’m asking you to do today…think about the changes that are taking place in the world and adapt to them. But before you adapt, you must learn what it is you’re adapting to!

That’s the tricky bit.

I had a crack at explaining it in a Rum Rebellion essay a few weeks back:

‘Bitcoin isn’t just electronic money. It’s underpinned (and given value) by blockchain technology. Another word for this is distributed ledger technology. So what, you might ask?

‘Well, distributed ledger technology can do a few things.

‘It can facilitate transactions between two parties directly, no middleman required.  

‘It can record those transactions (and the ownership trail) without the need for a central party to “keep the records”. The record is maintained on the blockchain. And no one can mess with it. It’s “immutable”.

‘To put it simply, this is a free-market system that has developed in response to a corrupt and broken monetary system. As I often say, that system broke in 2008. It no longer works. It needs constant stimulus to prop it up. It is simply a legacy financial system run by the elites, for the elites. Us plebs still have to use it, but all it gives us is zero interest rates and depreciating currencies.

‘The key thing to understand is that cryptocurrencies and the blockchain technology that underpins it is a genuine alternative financial system. It is decentralised, meaning there is no third party (like broker, clearinghouse, custodian, market maker, etc) to facilitate payments.’

Ethereum, for example, is a digital protocol for smart contracts. This will severely disrupt the insurance and financial industries, and many more besides. It won’t be long before derivative contracts are conducted on the blockchain, removing the need for a third party to act as a safeguard (and extract fees for doing so).

In the meantime, many people who know the system is dead and dying are waiting for the ‘endgame’ to play out. This is a term used by critics of the current system to chronicle its demise.

But what they don’t realise is that the endgame is playing out before their very eyes. It doesn’t occur with fanfare. It doesn’t occur with a collapse of the economy or the stock market. Not in nominal terms, anyway.

In fact, a collapse of the financial system is much more likely to occur with nominal prices of assets and goods soaring. This is the point that it occurs to everyone all at once that the unit of measurement — the denominator of all goods and assets — is the problem.

That denominator is fiat currency.

We got a taste of this in 2020 and into this year. Governments and central banks spat out the largest amount of stimulus in history. Why do you think ‘new money’ — digital currencies — have gone through the roof?   

They see both what is coming (in terms of monetary debasement) and know a new system is required for society to move forward in a fairer, less corrupt manner.

Ignore this movement at your peril. We certainly won’t be.

More on this soon…

Cheers,

Greg Canavan,
Editor, The Rum Rebellion

Confessions of a Doomsayer
Bill Bonner

A dear reader writes to say we are wrong.

‘What these doomsday prophets like Bonner fail to explain is the efficiency of today’s supply chain that can quickly produce goods and services to meet demand. The market continues to roar in the face of his daily diatribes. If we were keeping score, we would say Fed: 40; Bonner: 0. I do enjoy reading the columns as I find them highly entertaining.’

Mike C

And yes, of course, we are wrong about a great number of things. This is partly because the odds are so heavily against us.

If we say ‘The bond market topped out on 4 August 2020’ (which we think it did), we are guessing that it won’t go higher and finally top out on any of the 365 days in this year.

And now, in our constant rehearsal of the ‘sky is falling’ forecast, we will be wrong again…until it finally hits us in the head.

When might that be? Well, we don’t know. It could begin any day now…or not.

In the meantime, the Federal Reserve will be right…and we will look like idiots.

Lesson learned

Today, we enter the confessional. And let’s begin by warning new readers that they should never pay attention to our stock market suggestions.

Publicly traded stocks don’t interest us; we don’t do any serious research on them.

And on the rare occasions when we comment on any particular company, we are as likely to be wrong as right.

(Full disclosure: We do own stocks! They’re managed for us by our trusted old friend, Chris Mayer.)

Just this week, we were reminded that, some months ago, in this space, we laughed at investors who were buying Hertz (HTZGQ).

The company had gone bankrupt. But somehow, it had found favour with the young traders who spend their time chatting about such things. They were so eager to buy the stock that the company — then in bankruptcy — decided to issue new shares.

It would have been a first in the history of finance…had not the US Securities and Exchange Commission (SEC) put a stop to it.

‘When you’re young…in love…at war…or in a bubble…’ we concluded, ‘there’s no time to think straight, or even think at all.’

Well, wouldn’t you know…we’re in a bubble. The used car market turned up…and Hertz — like a sleeping beauty, kissed by its Reddit suitors — came back to life. The company is back in business.

The whippersnappers turned out to be right. We turned out to be wrong.

We take no lesson from the Hertz story but that there are a lot of things you can be wrong about. We’re working our way through them, slowly.

A costly lesson

Take Amazon (AMZN), for example…please.

One of the most spectacular things we were wrong about was Jeff Bezos’ creation. When it came out — this was more than 20 years ago — we called it ‘The River of No Returns’. The title was clever. But the prediction was poor.

Amazon’s business strategy was a classic formula for failure. The company cut its margins so thin, it lost money on every sale. Then, it aimed to make up for the losses by increasing volume.

That was never going to work, we opined.

And it never really did. Amazon’s retailing business has never made enough money to justify the huge ‘investment’ (losses) necessary to reach its present scale.

So its core business is still a river of no returns — not worth a fraction of its current market price.

But how were we supposed to know that a virus would come along…so that people would stay home and be almost forced to order from Amazon.com?

Boom! Amazon’s net sales rose by more than US$100 billion last year.

And how were we to know that its huge data processing needs would get it into a whole new line of business that would be so profitable?

Yes, the cloud computing business. That’s where the money is. Amazon Web Services (AWS) accounts for a bit more than 10% of the company’s sales…but more than 60% of its profits.

AMZN gave our dear readers their first big opportunity to get rich. Those who were smart enough to ignore our advice could have bought the stock for under US$50. Today, split adjusted, it is over US$3,000, giving the company a market value of about US$1.7 trillion.

Jeff Bezos got so rich, he could go through the most expensive divorce in history and still have a net worth estimated at almost US$200 billion.

Mechanistic approach

So let’s turn back to the Federal Reserve, which is clearly ahead of us — as our dear reader tells us — on points.

There — on the big picture, the macro view — we do pay attention. And maybe there, we are less of an idiot than we appear.

Ours is a ‘moralistic’ view. That is, we assume that if we leave the dishes unwashed, sooner or later, they’ll attract cockroaches. But of course, that could happen any time.

Almost all other observers today use a more mechanistic approach.

They believe you can understand an economy — and are able to predict its next moves — by looking at dials and instruments, as if you were flying an airplane.

Losing altitude? Give the machine more throttle!

The trouble with the mechanistic approach is that an economy is not a machine. It is more like a living thing…infinitely complex, with purposes and prejudices we can’t possibly know.

As for adjusting the throttle, forget about it. You can’t plot a course…or determine the correct speed or altitude…because you never know where you’re going. You won’t know until you get there.

And you don’t know how to fly a plane, anyway.

Moralistic approach

But the ‘moralist’ is always wrong…before he is right. He notices when things seem out of whack. But he has no way of knowing when or how they will go back into whack.

That is what happened in 2000 and again in 2008.

Each time, the stock market was in a boom and the mechanics were proclaiming a new era.

The moralists denied it. ‘How could investors make money from unprofitable companies?’ they wondered in 1999.

Eight years later, they wanted to know how people could get rich by ‘taking out equity’ from their own homes.

Both times, the doomsayers (including us) were way too early, anticipating crashes years before they ever happened.

Then, when the crises came, the Fed gave the plane full throttle — ‘printing’ record amounts of new money. The mechanics saw a recovery. The moralists saw more trouble ahead.

And now, in the greatest bout of money printing in US history, we doomsayers see another calamity coming — the third major crisis of the 21^st century.

Will we be right or wrong?

Bad ending

The Fed has set off a boom. Everything is flying through the air. The mechanic sees sales increasing…unemployment going down…stocks near record highs.

Even things with no apparent value — NFTs, money-losing businesses, Dogecoin — can be worth billions. Dogecoin, created as a joke in 2013, is now said to be worth US$42 billion…or just slightly less than Hewlett-Packard, for example.

We try not to pretend to know things we don’t know. And we have no idea why Dogecoin is worth more than HP.

But we believe this boom is going to end badly…like the other two. Only worse.

Boom…boom…Ka-boom!

Regards,

Bill Bonner,
For The Rum Rebellion

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