20 Jan 2022

MarketWatch

We see continued selling in the broad indices with another day down more than 1% in the S&P500, we are down -5% for the month to date, this must be one of the worst January performances on record. Natural gas is leading the way down on the day yet is still up on the month despite its poor showing this week. Silver and Gold both had big days with Silver on a strong charge this week up 5.24%.

Deals & Raises

I am shaking my head in wonder at the price, $68.7 billion, Microsoft paid to acquire Activision Blizzard the gaming company owner of Candy Crush and Call of Duty. People of my age still see this as a somewhat frivolous hobby, but it appears this is big business. I used to play COD (call of duty) and many of the others back in the day probably when I had a sense of humour and a receding hairline. Now I have neither.

Milkrun is somewhat close to home, you may recall me writing that I founded South Africa’s first online grocery delivery business – Mickson. Well 31yr old Rich Lister Dany Milham has just raised the largest or one of the largest early stage venture capital raises at $75 million for his uber (is that too much?) quick grocery delivery business (in Australia). His business model is to be able to deliver groceries within 15 minutes. He is by no means the leader in this space I have read a number of articles about other competitors in the USA. Here are some of my thoughts:

Do we really need to get our groceries delivered in 15 minutes. I mean come on. In the old days grocery shopping was a day out with the family. I get the convenience factor for delivery, remember I started a business that did exactly that. For health reasons my wife does most of our family grocery shopping online. However, do you really need to get your eggs delivered in 15 minutes. I guess this is symptomatic of the society we live in that seeks instant gratification. I truly believe it when I say that we are on a slippery slope when we are prepared to throw “money” at every inconvenience. As a youngster I used to joke to my parents can you make a wee for me, when I was lying in bed and didn’t want to go through inconvenience of getting out of bed. Who knows what we will outsource next…..

There was another thing that Milham said that troubled me. He is the co-founder of a very successful mattress startup called Koala that helped him and his partner net $150 million each. He says, “It took us eight months to raise $100,000 at a $1 million valuation at Koala. [In June] it took us two weeks to raise $11 million at a crazy valuation. Being a second-time founder it’s a different world.”

We are living in a crazy world where we have monopoly money in circulation. I am really not a fan of this business model and just don’t get it so my view is that they never turn a profit and the investors quickly lose their investment. As the saying goes, “easy come, easy go”. Speaking of money here goes the real idea I wanted to discuss today I got side-tracked.

Money Complex

I want to make a case for the collapse of the US Dollar, I am not committed to this idea but would like to see if I have a strawman argument below.

Inflation in the US is running at 7%.

The 10yr Treasury is yielding 1.8%

The Fed has created a monster it now needs to kill or be killed. It has up until now deceived to believe that it can tame the monster but inflation has shown up and it is a beast. Who wants to invest in bonds, the so called safe haven investment, when you are going to lose more than 5% each year for holding the investment. The short answer is no rational person will want to do that unless they have a view that inflation will not last and will drop well below 1.8%.

The Fed has announced it will be slowing down its buying and then will start to shrink its balance sheet. Just from the jawboning from the Fed bonds have sold off heavily already, wait until the actual selling starts. Who will buy the US bonds to lose real money? Who will buy the bonds when the Fed is a seller? Who will buy the bonds when the Treasury is forced to issue more bonds to fund its deficit spending.

The US dollar over the last decade has been supported by foreigners buying bonds enabling the US to run trade deficits and not feel the consequences with a weaker dollar. A country running trade deficits with rampant inflation and a weakening currency is what is called in a death spiral.

Let us go over the basics. If you import more than you export in US dollar denominated goods (still the world reserve currency) then you have USD leaving the country to pay for the goods. Up until now the foreigners receiving the USD are happy to funnel those dollars back to the USA to purchase bonds (and other assets). Foreigners are happy to do this as earning a bond yield with low inflation was still a positive real yield but now this is not the case. If foreigners no longer have confidence in the returns they are getting with bond yields in the USA they will rather convert their USD to their local currency or another currency that they believe is offering them better more stable returns. If this happens that foreigners are no longer buying as much or are net sellers of bonds then the effect on the USD will be dramatic.

Since 1986 we have witnessed a major devaluation in the value of the mighty “Buck”. This is not coincidental that it is happening when the money supply has been steadily increasing under the orchestration of the Fed, culminating in the spasmodic death throws of the printing press working over time like no other time in history inn 2021.

A weakening dollar is going to add fuel to the inflation raging as imports become even more expensive in dollar terms. This is your classic death spiral of inflation begets dollar weakness and dollar weakness begets more inflation. Holy crap Houston I think we have a problem, Transitory My Arse.

The only major problem I have with the above thesis, is that Europe might be in a bigger mess and its real yields may be worse off than the US and will therefore still be relatively attractive, same for Asia and other sovereign buyers of US bonds.

The State

I really couldn’t believe what I was reading when I read the speech by Japanese Prime Minister Kishida made yesterday to the World Economic Forum about his “New Capitalism”. He believes Abenomics did not go far enough to get the Japanese economy on stable footing. Kishida is making a case for more state involvement, he does add subtly, that it should not be at the expense of democracy. Well for this libertarian Austrian Economist I simply want to be sick.

Covid

A friend of mine from South Africa shared with me and a friend from Israel a chart in a chat this morning that I think gave him a bit of false security and smelt a little bit of schadenfreude.

My response was simple. Take note that the time series has been normalised per million. Of course this is only worth comparing with countries that have reliable reporting. Unfortunately less developed countries do not have the luxury of being able to capture the true cause of death for most of the population.

Do not get taken in by headline numbers and comments, do your homework, apply critical thinking.

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