Category Archives: Economics

The Tech and Bitcoin Bubbles.  A Dual Threat?

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Today is Black Friday, the biggest consumer FOMO Day of the year.  Shoppers go nuts to track down the best deals ever on that special something that someone can’t live without.  Items that will cost far more tomorrow, if not this afternoon.  Never mind that many of the items will be available for much less on December 26th.

Think back for a moment to the 2003 to 2007 period, our previous economic FOMO period.  We had low mortgage interest rates and lax underwriting standards for them.  Home buyers flocked to the cheap easy money, often with no income or other documentation required.  The housing demand generated by these loans drove prices up significantly.  Buyers were paying prices for homes and borrowing amounts they could not economically afford. 

Interest rates began climbing in this period, and by 2007 had reached levels that made the payments on the prevalent adjustable-rate mortgages unaffordable.  The owners of those houses could not make the new payments, and fewer new buyers could afford to buy.  This reversed the uptrend in housing prices and put many owners underwater, meaning they couldn’t make their payments or even sell the home.  It accelerated into a housing price collapse.

The crisis, which first hit banks and then the investment markets, tipped the economy into a recession.  Rising unemployment rates put more homes into foreclosure and deepened the recession.  It was the dual events of an artificially fueled housing bubble bursting and high unemployment from a real recession that brought the whole house of cards down, ending up with the the worst economy the US had seen since the Great Depression.

Fast forward to today and we face another FOMO Dual Risk.

The investment markets are currently floated by a small handful of companies in the tech sector.  If this bubble were to burst, many levered investors would be hit with margin calls.  They would face two choices: Sell those stocks into weakness often locking in losses and further weakening share prices.  Or, use cash or other capital to meet the margin calls.

But…

Today a notable amount of “other capital” is in Bitcoin and other similar crypto.  Crypto is not cash, but a commodity and would need to be sold to pledge against a margin call.  This could create a run on the bank in crypto, depressing those values – who knows how far.

And there we have it, another Dual Threat risk.  This could be even bigger than in 2007.

Stay Tuned…

The Bottom Line:  Understand all the risks.

–Michael Ross, CFP®

There’s A New Fry Guy In Town…

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For quite some time, I have been pontificating two things – well, OK more than two things, but these two came together for me today. 

I believe that investing in non-publicly traded startup and early stage companies offers the potential for returns that can dwarf the returns one can reasonably expect by investing in public companies.  There are many reasons for this, but the reality is, by the time the company goes public, via an IPO, the new investors are buying out the earlier funders and founders.  In other words they are selling to you.  What does that tell you?  These investments come with a much higher risk – requiring much more homework and verification, and statistically the failure rate is higher.  It’s an arena where nobody (except maybe founders) should put all their eggs in one basket.  However, all it takes is one real home run and the duds are long forgotten. 

Besides the higher risk, there is an additional caveat.  Most people cannot legally invest in them.  According to the SEC, you must be “accredited”.   You don’t have to pass a test, just have a high level of income and/or assets.  In other words the rich get richer.

I have also been a fan of AI Robotics.  AI is promising us the moon.  Most of it on a practical basis is still a bunch of hype and truly useful applications to date are far and few between.  I guess if you have a HS term paper due tomorrow, it could be helpful.  The ability to produce smart robots is one of the areas that hold short term economic promise.  A robot that can efficiently do complex non repetitive tasks in a varying environment has real value.  Most of the companies developing and producing these are relative cottage industries.

Today I stumbled across a company called Nala Robotics.  I did some digging.  They are based in Illinois and make a series of fast food kitchen robots.  You can see for yourself here; www.nalarobotics.com  The videos on their site are really cool.  I could only find information on one round of funding for $1.9 million, although I suspect there must have been more than that.

It’s hard to cull information on small closely held companies without really digging.  Since, I am not doing this on behalf of a client, I did a quick search.  Pricing info was vague, but they offer one of their products “The Wingman”, a robotic fryolator for rent at $2,999 per month.  If you do the math, that’s less than what it would cost in salary, taxes, benefits, and workman’s comp for one month of a $15/hr. minimum wage fry guy being available for all the hours a location is open.  I would guess there are other efficiencies.  No sick days. The ability to react instantly to demand as food is being ordered.  It even automatically cleans itself.

It’s hard to tell if Nala will be the grand slam home run in this field.  I would guess the makers of these machines that get the order from McDonalds and the other biggies will go to the head of the class.  It does seem that we are on the precipice of an explosion in this genre and many other AI robots.

This is clearly happening.  Stay tuned.

The Bottom Line:  Rosie Meets Edison

The American Experiment…

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Earlier this week, I attended the Exchange Conference in Miami Beach.  One of the speakers was Jeremy Grantham, of GMO, a well-respected, multi decade institutional investor.

He went to great lengths to point out that while the equity markets in America are overvalued by many historical measures, we have the best economy on the block.  In fact, he noted that since 2015 the rest of the industrialized world has not participated in our economic boom.

He didn’t seem to be able to come up with a reason why.  For instance, they also had low interest rates and went on a Covid fueled fiscal spending spree.  Yet they almost all have slowed down in recent years.  Why not us too?

It made me think.  What is different here?  After pondering a bit, I now have a theory.  The Tax Cuts and Jobs Act (TCJA) took effect in 2018 and brought the corporate income tax rates down from the mid to upper 30’s to 21%.  It is a huge cut by percentage. 

It did a few things.  It brought our corporate tax rates down to levels comparable to most of the rest of the developed world.  No longer would our multinational companies have to keep profits earned overseas, offshore to avoid more taxation upon repatriating them, or be at a disadvantage competing with foreign companies.  It increased profits and Return on Equity for many, so they could raise additional capital at more favorable terms.  Most crucially, it created more cash and retained earnings that could be reinvested in growth, development, and technology.  This created jobs, efficiency and growth.

Was this the catalyst?  Did companies largely divert spending from Uncle Sam to investing in their own growth, productivity, and efficiency?  This investment has been despite higher interest rates.  Efficiency equals economic growth.

The overall earnings of the S&P 500 firms have moved up some 50%+ since the TCJA took effect.  This has meant more economic growth, more jobs, and more innovation, such as AI.  This is the real trickle down.  Every American benefits.

The Bottom Line:  Capital serves us better in the private sector than in government hands.