Wanna See Me Pull a Rabbit…

I was watching a video today. It wasn’t about what I’m going to write but it lead me to this conclusion once I saw the stats. The government changed 401K’s. It used to be you had to opt in to 401K’s now you have to opt out. It used to be when you opted in your money went into a money market, now it goes into a target dated fund AUTOMATICALLY. I found out 60% of 401K’s, now automatically funded, hold a single asset, a target dated fund. The amount held in this class is 2.4 trillion. You might say, well that’s good! People are being looked after! But who is really being looked after and at what cost? Fore every dollar put in a target dated 401K the government owns a percentage and that percentage has little to do with the fund. The government has effectively turned your retirement into their annuity which you will pay to them on their schedule for the rest of your life. The target fund is pretty much proprietary as well what you see is what you get. The fund gets to collect fees, forever, and even at 10 bp that’s a hell of a lot of fees on 2.4 trillion dollars. In addition your money is locked up in risky assets not of your choosing. You can’t buy gold or commodities or hedge in anyway. You can’t reallocated and put risk on or take risk off. Your money is entirely managed and not necessarily for your benefit.

If the market goes up your account grows. If the market goes down your account crashes PERIOD. If you need some money you sell some fund whether it be low or high. Your sale has no flexibility. You can’t sell bonds if they happen to be high and you need some money and not sell stocks if they are low. The same is true with purchase. You buy a share of fund automatically no matter if the market is at all time highs, all time lows or in the middle. Shares are purchased robotic-ally, essentially by government mandate. This set up makes you entirely vulnerable to SORR. The only thing you have to sell is a share no matter the price and the only thing you have to buy is a share no matter the price. Price is not part of the equation. The algorithm is dirt simple. A buy order is placed and a share is bought a sell order is placed and a share is sold. No other optimization allowed when a share is sold Uncle collects the taxes on the entire amount as ordinary income, not on just the profit. If you bought a share at $100 and sell it at $50, you get taxed on 50 even though you have a $50 loss. If inflation has eroded your purchasing power by 50% so your $100 is now worth $50, you get taxed on the $100, now worth $50 and the government pays off it’s debt with your devalued retirement money. I checked an old 401K today I haven’t looked at for a few years it used to be in JP Morgan, now it’s in a Vanguard target dated fund. It changed all by itself with no input from me.

The real trick is to stuff the rabbit back in the hat.

Stocks For The Long Term

I made my money largely from 1990 to today, about a 30 year investment career. I started investing in 1975, trading commodities in Illinois and did some other business deals, but in 1981, I went to med school and later went into the Navy to pay back the cost of medical school so my investing at that time largely consisted in cheap living and trading my time to stay out of debt. I am the cohort discussed in this video.

I followed the markets since I was a kid. My first real term paper as a kid was on Jesse Livermore. My second was on the stock market. Both required reading a book or two and trips to the library since those papers were written about 1963 or so. Al Gore is 4 years older than me and had yet to invent the internet. When I was writing my papers he was trying to get laid in the back of daddy’s car, the one with the huge fins.

I lived through the recessions of the late 50’s the 60’s the 70’s and the 80’s. I went into the Navy because the inflation of the 80’s, ate all my medical school savings, so these periods weren’t historic to me, they are my history. My Dad started a business in the 60’s and went out of business because of the recession in ’66. I remember Japan in the 80’s. Japan equity investors couldn’t make enough money it was like opening a fire hydrant of money. All the smart boys were buying Japan. Japan was invincible. I didn’t own Japan, except in the 80’s when I was in med school, I ate a lot of Ramen, plus some fried eggs. Once in a while some sushi.

In the chart presented in the video he looks at several time frames. He looks at the first 60 years. The first 60 years were a time of pensions. Investing was NOTHING like today. To invest you needed a LOT of money. Every trade cost $200. A round trip cost $400. That was the invention of stocks for the long haul. If it cost 400$ to get into and out of a trade that made $1000 there was a huge psychological barrier to making that trade. It still exists today in the form of cap gains tax. People will hold onto doggie funds just because of the $20 of cap gains that have built up over decades. They typically don’t even know what the cap gains might be because “it’s complicated” but they know they are there and it’s a barrier to doing the right thing in the face of doing the cheap thing with the least hassle. Yet everybody is a tycoon.

Things changed in 1978 when Jimmy Carter signed a bill that divorced savings and loan interest from prime. Before ’78 S&L’s were highly regulated and could charge only 2 % above prime interest. After Carter’s swipe of the pen, S&L could charge any interest the market would bear. Of course to make the interest they need the money to lend so the peeps were part of the equation. The S&L charged 6%, the peeps got paid 3%. 9%, 6%. 18%, 12%. This is called inflation. Another thing that happened is the 60’s. Boomers came of age got woke and womens got libbed. Those libbed womans went to work in the 70’s which means house hold income (money supply) increased dramatically. First thing mama wanted with the new dough was a bigger crib so housing took off. Just what the S&L needed a ready source of new credit applicants for larger loans. The result? Inflation. Housing prices sky rocketed and that’s when the myth of the investment nature of home ownership was born. Many of the silent and GI generation bought houses after the war like brownstones in Boston and NYC and saw their property values explode with the increased productivity caused by the 2 hands that had previously supported the family turning into 4 hands. That ship has sailed. There aren’t anymore hands to put to work so that boot in productivity won’t happen again, but boomer parents and grandparents took advantage to sell at a 500% profit and move to FL.

In the north, garages were constructed out of concrete block because it was cheap. Houses were constructed out of limestone and brick and wood. When I moved to FL I was amazed everyone was living in a house that up north would have been considered a garage. in terms of construction quality.

Another thing happened. Corporations wanted out from pension liabilities so the government created tax deferred vehicles by which “investors” could plow their dough into “pretax” accounts, let the money compound tax free and the government would reap decades of compounding as ordinary income tax when the geezer started unloading the dough.

John Bogel came up with the idea of low cost passive index funds in 1975 which fit this time frame of creation of DIY investing. There were other mutual funds but they were offshoots of the rip off industry where you had to pay fees to get in, fees to get out and fees to stay in, but since the pensions were shutting down it was they only game in town for most working people. A round trip was $100 to the broker, 3% to 7.5% up front to the mutual fund company, and then 1.5%/yr to maintain the account. What little money you did make, you would get to pay compounded taxes on later when you were a geezer beside the 1.5%.

Competition worked in the late 90’s and prices at brokerages started coming way down. I was day trading for about $10 a round trip in the early 2000’s and fund cost hit the skids after the 2000 crash again due to competition. Trading became easy as the internet came to be, and brokerages realized they could make far more money by cutting out the private broker and letting the tycoons (rubes with the computers) generate millions of round trips with the press of a button. Now we have AI and everybody has to trade against a machine.

The point is there really is no history to history in terms of repetition. Housing is NOT going to go up 500%. There is no second spouse yet to be leveraged. I trade ETF’s all day every day, as many times as I want in a day FOR FREE. Boomers are done. They made their nut and will now spend far less on a relative basis causing a hit on GDP. Millennial’s can’t buy boomer houses because millennial’s had their house money ripped off by the colleges. Come to OUR school for 6 years get a degree in gender studies, get drunk, get laid, get woke, get $150K in bankruptcy proof debt and screw your parents because their “nest egg” house is unmarketable to someone with$150K debt and a job and future equal to a gender study degree, post 2008 housing crash. That’ll teach them damn boomers!

When you listen to this video consider the history behind the graph. Gundlach is 60, 7 years my junior but none the less a boomer. He’s lived my shared history. Dalio is 70, 3 years my senior and he too has lived my shared history. I came to believe what these guys believe through my own independent analysis before I found their videos.

In Japan they believed in stocks for the long run. same in EU. China is not going to break out, they are going to become Japan. Russia is too alcoholic and crooked to amount to anything. I’ll put the short synopsis video first, it’s only 12 minutes and covers the bullets. The actual Gundlach interview is second.

I have no idea what future is going to unfold, but I’m 100% sure (on a risk adjusted basis) it won’t look like the past 30 years. When you look at a narrative consider the context within which that narrative occurs.

The Illusion of Independence

I’ve recently pulled back on reading and posting on FIRE blogs, except for a few I consider close friends. The more I study the reality of the interdependence of the financial system the more the concept of financial independence becomes a joke. The financial independence “movement” is simply a loose collection of narratives, all claiming some basis in fact, but in fact the basis is just narrative. The interesting thing is people base their realities, and the security of their futures on narratives and folk lore. As an aside I grew up on the south side of Chicago and in the winter they would open the hydrants around the park and the park. The park had been graded to form a shall bowl, so H2O in a big bowl plus a Chicago winter = instant hockey rink! In the summer the park dried out and we played baseball. This will eventually get somewhere.

I read Doc G’s posts sometimes at Diversfi and his story is a case in point. He’s a smart guy, quite entrepreneurial and managed to turn primary care into a near 1M/yr producer being a provider to nursing home patients. He lived on half and soon enough had a pile. He branched into side gigs including Hospice medical director and started a blog and a pod cast and a career in speaking. I was reading how all of that has virtually vanished for him. The nursing home practice is gone, the Hospice gig is gone, his partner in the podcast has other plans. Doc G is a smart guy and will no doubt survive, but the point is just because you write a narrative, a reality does not materialize. His narrative was not independent. It was entirely dependent. Dependent on the continued Hospice employment, on the continued podcast. Furthermore his “independence” is dependent on the performance of the economy. Doc’s in his mid 40’s and has another 45 years of expenses to cover.

I wish Doc well in his endeavor but it occurs to me he has an opportunity. Suzie O published a podcast with Paula at “Afford Anything” about the danger of “financial independence” and the FI world lost their minds! The very idea their independence could be threatened was anathema. Yet in Doc G’s story we see exactly how dependent we are, how in no time the narrative of our tycoonery can be blown away. The illusion of independence is the core narrative being sold in FIRE land.

In hockey to win, you have to learn to skate to where the puck is going to be, not to where the puck isn’t or was. You have to be where the puck is going to be and then put the puck in the net in a spot where the goalie isn’t, using velocity, acceleration, rates of change, probability, finesse, and brute force.

I have a friend who went to Chautauqua and heard JL Collins. He was all about buy my book! He was also all about “don’t review my book unless you’re going to give me and it 5 stars!”. He was prominently featured in this stupid documentary Playing with FIRE along with Vicki Robbin and half a dozen other FIRE movers and shakers as THE GURU’s. As I study real finance Guru’s these “luminaries” aren’t even smoke on the water.

Buffet says: “USE PASSIVE!!” Buffet is sitting on 100B dollars. If USE PASSIVE is the way to go why isn’t that 100B in VTSMX? I own BRK by the way. Munger has a few B. Munger owns 3 stocks. Not 3 funds, 3 stocks. Buffet made his dough by buying low and selling high. Buffet tells you to buy VTSMX. Why would he tell you to buy VTSMX and not own VTSMX himself? Why does Munger not own VTSMX? What is the present day value of VTSMX that would be all time high. Buffet doesn’t own VTSMX because he’s waiting for it go go low before he buys it (this is called timing). Buffet knows how to skate to where the puck will be. He’ll be there to buy you out when you will be forced to sell low. I own BRK for this exact reason Buffet knows where to skate and when to pounce. Munger knows to put his money in 3 winners not 2997 losers. One of those winners is BRK. Munger skates with Buffet. If you’re not predator, you’re prey. JL Collins knows this. He’s not a great guru he sells books to prey. Vicki Robbin is the same. She’s not a guru she’s a promoter. She’s the fisherman you are the fish.

Doc G with his recent reversal of fortune can become the voice of reason based on experience in this space. The voice of the reality of how dependent your “independence” really is. In surgery we have a saying: whip it out and someone is going to come along and cut it off for you.

Investing is not all gloom and doom nor is it all happy days are here again. Investing is about learning to skate to where the puck is going to be, against a very predatory competition who’s desire is to buy low when you are forced to sell low. Investing is dynamic and nuanced and success is hidden from view behind the narratives. Do not be complacent Buffet is waiting to eat your lunch.

More Good News

I’ve relied on the efficiency of non correlated assets especially stocks v bonds to buoy up my risk profile. What that means is I buy a certain amount of return and pay for it with a certain amount of optimized risk. Over decades the correlation between stocks and bonds has been zero. What happens if that correlation becomes positive? The answer is nothing good. There are portfolios out there that better capture non correlated diversity for example the Ray Dalio All Weather, or the Golden Butterfly, or the Harry Browne Permanent Portfolio. I’ve written about these, most recently here .

This morning I ran across this video, which describes the possible changing risk involved in owning a 60/40 if correlations change from non correlated to moderately or very correlated. It’s something to think about. I’m not saying it will happen, but we see central banks vigorously fiddling with the knobs, in a time were this amount of debt has never existed, and pretending to have “control” of the rudder. I’m not sure they control the rudder. I’m not sure they even control the narrative.

Is It Busted?

We spend our lives living in a narrative, actually multiple narratives. We live in the narrative of a constitutional republic, while at the same time the process has become anything but constitutional. We trade in markets which are built on scaffolds we don’t even begin to understand, because we substitute a narrative in place of actual knowledge.

Narratives are easy morsalized bites which may or may not have any basis in reality. Recently the FED has started to expand it’s balance sheet yet again, through the Repo market. In September liquidity froze, ballooning overnight lending rates from the FED’s preferred 2% to 10%. In order to stay solvent companies need to have their liabilities covered, i.e. they need to be able to point to some cash in the bank when the regulator and the market comes calling. If corporations, like insurance or brokerage houses are short on cash they borrow some over night from banks. Banks charge interest for the privileged and the interest they charge is independent. Banks accept collateral for the use of their money. So I may own 1M in US treasuries and I may need 1M to look solvent so I can borrow 1M in cash and put up my 1M in treasuries as collateral. The next day I expect some money to come in say 1,020,000. So I pay back the 1M plus the 2% interest and get my treasuries back. It’s a market.

What happened in Sept was interest to lend 1M ballooned to 10%, meaning suddenly banks saw a much bigger risk in the system and wanted 5 x the interest to lend the 1M for the same collateral that had been used as collateral the week before. The spike in interest also called a lack of liquidity was blamed on “quarterly income tax payments”. The narrative raises it’s ugly head. Taxes are more regular than sunrises. There is no business that is not aware of its quarterly obligation. It’s like numero uno on the calendar of up coming events in the life of a business. The idea that businesses somehow forgot to budget enough to pay taxes to the extent that it caused interest to balloon to 10% is simply ridiculous. I ran a business for 30 years and somehow always managed to remember to pay my taxes.

So what happened? A change in risk happened. No longer was the collateral adequate. In fact the collateral had been discounted 5X. Suddenly my 1M in treasuries or whatever was actually viewed as 200K when it came to getting a loan. Guess what happened in 2008 to Bear Sterns and later Lehman. “Sorry boys no more money for your crappy collateralize debt obligations (CDO’s) because they aren’t worth the paper they are printed on. We no longer believe the cabby who bought a 1M McMansion and then took out a 500K line of credit to buy a 2 new cars and a boat will be able to pay his obligation and so your paper that contains his loan is pretty worthless. We’ll loan you 3 cents on the dollar, take it or leave it. From our perspective It’s more likely the cabby will just plop the keys in the mailbox and walk away”

I ran across this video and it’s worth watching. It explains the FED funds market and how the government is having to inject money into the process to paper over the obvious excessive risk in the system. Guard your children and your wives, the narrative will not protect you. Only a clear understanding of reality will.

This Is What Your Up Against

I listened today to a video talking about market vol. The range of the VIX for the year is 11 to 36 and today it’s 13. In the video he spoke about AI’s effects. AI is a Bayesian like engine that reprices risk according to constant real time data streams and then trades on the picture the data paints based on likelihood. What does that statement mean?

Imagine you’re on a boat several miles off shore from your little island. You go out fishing every day to catch your family some supper and to have some fish to trade for other goods say maybe a bottle of white. You bases your life on the day in day out probabilities that today will be not unlike yesterday. Today however there was an under sea earthquake 2000 miles away which generated a tsunami headed to your island. While you’re out fishing the wave passes under you. Monstrous energy passes you but only a couple feet of vertical translation is all that you perceive. You just keep fishing since today is just like yesterday, maybe stay out an extra hour to get a few more fish to sell so the kids can have Christmas. Soon enough the wave hits the bottle neck and the energy dispersed across a huge area is all concentrated on your islands shore line and your island is destroyed. Your day was just like yesterday. Your boat is still intact, you have a load of fish, but you no longer have a home or a family, you just don’t know it yet.

This is how AI works. It creates a most likely picture and trades into that picture without the ability to understand reality. It relies on the presumption that the picture it creates is an accurate representation of reality, and the more days that picture goes unchallenged the more the AI scales it’s investment into the picture being actual reality. Since it has a huge presence in the market it’s picture of reality carries a lot of weight, in the pricing of risk based on it’s rules. The AI doesn’t care, it doesn’t understand beauty, it doesn’t understand families or islands or tsunami’s. It has some know ledge of tsunami’s but has no sensitivity to that risk to the picture given the preponderance of days and days of the same ol’ same ol’.

The data it is fed suffers under the same delusion as the passive investor. The passive investor doesn’t have an understanding nor a sensitivity for tsunami’s either. The crash hits and he’s plowing yet more money into a train wreck based on the picture a blog narrative painted for him. Why the future is like the past! But wait, no island exists.

In 1989 on Christmas Eve at 3:39 in the morning my house burned down. My picture I used to judge my normalcy burned up. It gives you great pause when in 5 minutes you go from having a complete life to having no toothbrush or underwear or shoes and it 25 degrees outside. But you are grateful you didn’t get burned up and your wife didn’t get burned up. You attend midnight Mass wearing smokey stuff you manage to find in a box under some rubble. YEP 4 x 25… I heard it in a love song.. heard it in a love song… can’t be wrong

Index Funds and ETF’s Are Not Like Stocks

I’ve slowly been working through understanding the extended risk of owning a large concentration in index ETF’s and index funds. The narrative goes “you can’t beat the market!!” It turns out ETF’s are not the market. They are derivatives and they are fairly opaque to market risk. The problem is entry, exit, price discovery and congestion. The problem is also the narrative that pretends these are nearly risk free assets ad certainly more risk free than single stocks.

ETF’s tie up your money. The money disappears month after month, year after year after being shoved in the maw automatically with no clear understanding of what is owned, the value of what is owned or the end game on how to get the dough back from the maw. No clear understanding of the financial manipulation and magic associated with these assets. In normal times, no big deal. You don’t know the value but you can write an order to sell and the ETF’s sell because they are liquid enough and your profit is basically determined by a state function . Come the crunch they will not be liquid, and a sale will be forced by illiquidity and robot sales to way below market value.

I saw some recent self proclaimed FIRE blogger “expert” talking about how index funds are safe because they represent such a small portion of the market. I guess he thinks 70% is small. These funds have never represented this level of market weight and nobody knows how they will respond to a crash, but my guess is the volatility will be increased as a power law not in some linear way. A power law for the integer “2” is 1, 2, 4, 16, 64 etc. If volatility is increasing by 2, 4, 16, and not 1, 2, 3, the carnage will be intense… beyond intense.

Included are a series of 3 videos for about 2 hours worth of how to think about your risk

It’s a 2 hour counterpoint to the mantra, when the boggleheads start spreading the BS.

I do not know what is going to happen. The VIX ETF is running 12 as of today. In Nov 2008 it was 62, a multiple of 5 compared to 12, which was the VIX in Apr 2007. ETF’s and index accounted for around 25% of the market in those days, meaning 75% of the market was amenable to price discovery. Today it’s reversed. I think it might be a Pareto principle situation. 80% of the BS is promulgated by 20% of the morons when it comes to risk. And people think Suzie O doesn’t know what she’s talking about.

Halvening

BTC is a currency based on a concept. It is also property like land, stocks and gold are property. It can be sold for dollars or purchased for dollars (or any other currency) on an open market. It has associated a futures market so it can be shorted. It exists in banks and people can lend and borrow against it and get paid interest. It is highly volatile. It is not a tulip. It is not worthless.

Gold has value and it holds its value because of its scarcity. Scarcity means you have to expend a lot of energy and capex to mine it, so there is intrinsic value, the cost of mining. It also hedges inflation since governments can’t debase it like dollars or bonds. It stands apart. Land is somewhat like that except land is under government control. Land has an advantage in that they aren’t making anymore of it so it too has a natural scarcity and therefore a natural means to store wealth.

It presently costs about $7500 in raw input to mine a BTC. The cost is a function of a miner’s efficiency and equipment and cost of electricity. So a single BTC is worth $7500 as a base cost, not nothing. It can go to nothing same as land can go to nothing, but it can also remain as worth something. BTC has a scheduled decline it what you get paid to mine one. This sets up a scheduled tension in supply and demand. In the beginning there weren’t many coins mined so it was fairly trivial to mine one. You could do it using a Raspberry Pi. Likewise the relative ease of mining made the value of a coin low so you could buy a cup of coffee for 10 BTC. As coins were mined the difficulty of mining rose since there are a total of 21M coins that will ever exist, so as coins get mined the cost to make more coins goes up. The cost however is not linear. It’s a power function. Every so often (about every 4 years) the amount a miner gets paid to mine a coin is cut in half. 1 goes to 1/2 goes to 1/4 etc so the cost of mining and therefore the base cost of a coin goes up. This occurrence is called the halvening. So theoretically in a binary BTC universe at the if it suddenly costs twice as much to mine a coin, the price on Tue may be $7500 and on Wed may be $15,000, because of the excess cost of production. It’s not a 2 x correlation but it’s a definite upward pressure on value. Value is set by trading in a market and just like gold or oil if the price gets cheap miners turn off their mining rigs, supply dwindles and demand over takes forcing price to rise.

You might say yea yea but who needs a BTC? I need gas to live my life but not BTC! Today there is severe financial manipulation and distortion in the markets. Interest rates are at a 5000 year low, a market peak (see what I did there?). This level of sustained government forced low interest coordinated around the world has never happened in recorded time. It defines an economic inflection point. Inflection points are when the local second derivative of a growth curve changes sign from + to – or – to +, so inflection points have a precise mathematical definition. If the inflection goes from + to – it means the failure of the growth curve is 100% assured unless another inflection occurs. The US stock market represents such a growth curve. The Japanese stock market also represents a growth curve. The Japanese market reached an inflection point in 1990 where growth went from + to – and despite the Japanese central bank’s wildest machinations to flip the inflection from +/- to -/+ they have failed. This is how important an inflection point is to an economy. Failure does not necessarily happen all at once. The Titanic took a long damn time to go down, a long time for people to get picked off one by one instead of a mass instant extermination.

Japanese debt is running 250% of GDP. Normally central banks reduce rates to the point such that relative deflation is replaced by inflation.

Inflation monetizes the government’s debt. You pay your debt in cheaper and cheaper dollars. Deflation does the opposite. You pay your debt in dearer and dearer dollars. Central banks manage this dearer and dearer conundrum by printing dollars. By increasing the money supply the value of each buck is debased. Why would the FED want 2% inflation and what does that mean to you? The government is 100 trillion shy in funding it’s liabilities so it would love 5% inflation or 10% inflation to inflate away it’s debt. Then it can pay you your SS check in dollars that are worth a dime. The problem of course is a loaf of bread worth $1 in today’s terms is worth $10 in “dime dollar” terms. The FED by it’s very policy of a 2% inflation rate is assuring your 1M nest egg will only be worth 500K in 50 years but the real cost of living will not be reduced.

So what’s this got to do with BTC? BTC’s value is based on the cost of mining, the same as gold. As such it’s price is not amenable to inflation. You can’t print BTC and there are 21M that will ever exist. Every time there is a halvening the base price of BTC has an upward bias based on it’s scarcity and cost of production, same as gold. Gold has been the metal because of its scarcity and cost of mining that has topped the scale in what is called “hardness”. Hardness means as fiat currencies fluctuate in value according to government manipulation (money printing) gold is set by scarcity and the cost of getting it out of the ground. If a $1 falls in half in an attempt to monetize the debt a bit of gold rises to 2$ based on it’s scarcity the fact it doesn’t rust and universality of acceptance as a store of value. After the next halvening in May 2020, BTC will attain a similar hardness to gold when viewed in terms of the intrinsic cost of energy used to produce it. In 2024 it’s hardness will surpass gold and the pressure on it’s price will further accelerate. If central bank’s game is to monetize debt owning something resistant to debasing is like getting paid a coupon on a bond. That will be the value of BTC and why it won’t go to zero. It won’t be amenable to inflation or government debasement. It can be stored on an encrypted thumb drive where as a kilo gold bar weighs 2.2 lbs and a 400 oz gold bar weighs 27 lbs. Try boarding a plane with a kilo or 400 oz gold bar. Try getting out of the airport without getting robbed. Try living in a country where the central bank is monetizing the debt without getting robbed. D o you think Venezuelans might have an opinion? Discuss among yourselves.

Living In A Game

I’ve been thinking about automation. Automation is disruptive. It improves efficiency at the cost of jobs. People wave their hands at this like somehow 3M idle truck drivers are going to solve their unemployment easily. This is what happened to this country. Billionaires and politicians shipped our jobs to Mexico and China, and the idle workforce got addicted to opioids. China returning the favor genetically modified opium poppies that can be grown year round and started sending tons of the 64 various analogues of fentanyl back in baggies. The fentanyl analogues have wildly different potency and a small therapeutic window between effect and death. RIP Tom Petty and Prince.

So what’s a mother to do? How do you create an economy for millions who are displaced and uneducated or under-educated? There are games now that allow the creation of economies within the game. You can “buy” actual virtual property using real money. Using your money you can build a house, furnish a house, and value add to your virtual life using your bank roll.

Imagine a virtual world where the game is retraining or initial training. The training pays you to learn, and the pay can be used to either create your virtual reality, enter into trading scenarios and competitions and group competitions. Currency would be digital like BTC and could be spent for real wold goods like food housing insurance etc or on virtual world goods and activities. You would have to engage to make any money. No sitting around in a stupor. The game would be stimulating enough to preclude the need for addiction. As expertise grew more avenues would open similar to different levels in a game. You could create online families as well engaged in common enterprise.

The game would allow a fair rule of law and justice in the administration of the rules, putting the lawyers out of business, as well as politicians. Since the currency is digital the money flow is completely track-able virtually eliminating fraud and illegal activity. If you’re a crook, your BTC would quit working and you can move to the woods with the ticks.

Jobs in the real world would feed back into the virtual economy. If you run a robot factory or a farm, or build housing, your work is essential and needs to be compensated. A population engaged in learning and entrepreneurial but legal enterprise and virtual reality would be a world wide economic powerhouse.

The concept is far from complete, barely a framework, but it would engage people in worthwhile work and virtually guarantee everyone a job. It eliminates the phony education system which hoovers up the futures of so many kids with pretend no knowledge education designed to give teachers a pensions. If your a fraud teacher no BTC for you.

The society is elastic and can be expanded as needed almost effortlessly.

The Dalio All Weather

Ray Dalio runs a highly successful multi billion dollar hedge fund, and is one smart cookie. In the investing community we are confronted with many portfolio choices. The Bogglehead approach is to use a concentrated stock portfolio to attempt to realize gains. I’ve written extensively about the danger in a concentrated stock portfolio, especially an inefficient concentrated portfolio like the BH3. The BH3 is an 80/20 stock bond portfolio with some global lipstick. If you characterize it any other way your kidding yourself.

I recently wrote an article about Harry Browne’s permanent portfolio and my efficient frontier mashup designed to further improve longevity and safety. Dalio created an All Weather portfolio which has some considerable homology to my Harry Browne mashup. Homology is a word that describes branching of entities from a common ancestor. I found it quite intriguing that my portfolio (sans BTC) is so similar to Dalio’s portfolio

My portfolio:

VTI 37% EDV 15% BIL 43% GLD 5%

Dalio’s

VTI 30% TLT 40% IEF 15% DBC 7.5% GLD 7.5%

Neither portfolio is concentrated in stocks. Mine has a cash position as the short term fixed component (which can be warehoused in interest bearing accounts), while Dalio uses short and long duration bond positions and Dalio has more exposure to commodities. My portfolio is on the efficient frontier with a 7% expected return and a 5% expected risk, Dalio has a 7.5% expected return and a 7.3% risk.

If you adjust the Dalio portfolio to sit on the EF the portfolio becomes:

VTI 35% TLT 18% IRF 42% and GLD 5% with an expected return of 7.6% and a risk of 6.3% very close to my 7%/5% portfolio.

If you Monte Carlo the efficient frontier adjusted Dalio portfolio you get:

This is a 30 year portfolio @ 4% withdrawal normal SORR. 9998/10,000 success rate.

This is 4% WR on a 50 year draw down. 97% success is very strong over 50 years at a 4% WR.

The reason I started looking at this is because a new attending contacted me in the PoF Facebook mentoring group about investing and I wanted to have alternatives with better risk profiles compared to what everybody else is doing. I have a hard time recommending something like an 80/20 mutual fund portfolio because of the problems with price discovery. One caveat is if bond yields go negative all bets are off. In that case I would probably stock up on gold and commodities DBA DBC and more GLD and dividend stocks. I can’t believe we are at a place where we even have to consider such a thing. The problem with this kind of portfolio is discipline. You have to be committed to staying the course. Because of the low volatility you won’t see monster upside years or monster losses. I would rebalance as needed.

This is truly an all season portfolio.