MD on FI/RE

Money is to be made from BTC and ETH. These will soon enough be adopted by the financial industry because: THERE IS MONEY TO BE MADE FROM BTC AND ETH. Crypto is disruptive technology. Crypto is like moving from riding a horse to driving a car. Crypto is not going to zero. Crypto going to zero is like smart phones going back to landlines. Here is the picture of what is going to happen:

We are just below the little circle half way up the linear growth. There is something called the network effect:

In a fractal sense the picture of the smoke is just a pic of the network upside down. The utility of the network is so revolutionary, so much energy is released, it becomes impossible to go back to the previous state except for major destruction of the infrastructure. This is called creative destruction.

BTC and ETH are different creatures. BTC is an effective store of wealth. It’s highly volatile but it’s volatility has reduced dramatically as it’s become a harder “currency”. When I first bought it in 2015 it had a vol of +- 95% but it NEVER went to zero. Options were created in 2019 and the ability to hedge has dramatically reduced the risk range. In addition BTC banks have been created where BTC can be borrowed and interest paid in BTC. Gold is the closest equivalent. BTC was plentiful at its inception but it is capped at 21M coins. After 21M no more coins will be mined. The rate of return for mining a coin keeps halfing every 5 years. The cost of mining a coin is the energy it takes to do the computation. The cost of mining gold is the cost of extracting an ounce. That is golds bottom line. Also gold is pretty scarce, and so it also is “hard” plus gold doesn’t oxidize so it is stable as a wealth store over millennia. It does have a cost of storage where BTC does not and is more portable. BTC and gold today have similar hardness. After the next halfing BTC will be harder and the base cost of mining will increase because the profit margin in mining will decrease. So the value in BTC is intrinsically biased to growth for a very long time. BTC is yet to be adopted widely but since money can be made a market exists and since BTC is infinitely divisible there is no barrier to ownership. As the price increases you will simply own a smaller % of the 21M total and your stake will be a converted multiple of the currency you wish to convert into. You can invest in Dollars and redeem in Yen. Because the coins are fixed in amount the price per coin is the market variable. Once BTC starts to penetrate as a financial instrument it’s scarcity will force a rise in price. The last coin is slated to be mined in 2140 and today there are 18.6M in circulation, so as time goes on BTC becomes less compliant, scarcer, harder and will grow in value. I consider BTC an energy function equivalent to potential energy (the integral of work) measured in KWH

ETH on the other hand is uncapped in number. ETH is a technology tied to work not potential energy. ETH has a software layer which allows contracts to be executed for pay. Let’s assume you have a computation to do and I have a computer that fits your need. We write a contract where I do the computation and you get the result and I get some ETH which pays for my computation cost plus some profit. Once the contract is executed at the completion of my work, the transfer is transparent, immediate and permanent. You get the data and I get the ETH. That’s the concept. So ETH provides a basis for transparent contractual commerce peer to peer, and so provides a different function in an economy compared to BTC. Both are traded on a market but what drives price are based on different market variables including the ability/inability of purchasers to correctly value its utility but it’s utility will normalize over time. Since ETH is not capped it doesn’t have the kind of hardness BTC does but its utility and value lays in the efficiency in the work it can do. Both are loaded for growth IMHO. I own both so I don’t need an opinion on “which is better”. Both are disruptive technologies. This year ETH has seen explosive growth, in the past BTC was the killer. I own them in a ratio but the ratio is variable not fixed. Since they are completely divisible you can easily DCA or pay a lump sum. Will they pull back? I have no idea. When Fidelity etc starts retailing crypto, investment advisors can put crypto into client accounts, and demand for peer to peer worldwide commerce expands, I don’t see the price going down.

So what is BTC volatility?

BTC 13.77%

GZV (gold) 20.09%

VXAP (apple) 34.49%

VXAZ (amazon) 32.76%

GDX (goldminers) 41.15%

OVX (oil) 42.84%

VXN (QQQ) 25.99%

VIX (SPX) 21.64%

This year has warped my conversion schedule. I went flat in March before the big drop and generated a bunch of cap gains taxes. It’s worked out OK. I have a couple hundred K of short term and long term tax loss harvested which I can apply to the gains reducing my tax bill dramatically. In addition I only Roth converted up to the top of the 12% bracket (a little over 100K) to keep my ordinary income tax bill low. Cap gains raises ordinary income taxes beside the capital gains themselves.

There are several calculators I use to estimate taxes.

Tax Plan Calculator is a quick ordinary income tax calculator

Smartasset is a quick cap gains tax estimator

1040 Calculator is a more comprehensive tax estimator.

If you have LTCL (long term cap loss) and STCL short term cap loss, these can be applied to cap gains. STCL can be applied against STCG on a dollar for dollar basis. Accrued STCL can also be applied against LTCG. To do so is an inefficient use of STCG if you incur much STCG in a year. If you hardly ever accrue STCG the using STCL against LTCG may be an option. If you have both STCL and LTCL these can be added together and used against LTCG to reduce your tax bill. Since the CG taxes are likely the lowest I’ll ever see in my life time, I decided to reset my tax basis as well as protect my money during this time of high volatility. Using the capital loss in a low tax environment makes the write off more robust. If you have a 15% cap gain rate and a $1000 cap gain and a $500 cap loss to apply against the gain you wind up paying 15% on $500 of $75. If cap gains were 20% the tax would be $100, so paying in the lower tax environment in this case saves 25% on taxes.

As of tonight a Biden win is likely. Depending on the Senate outcome there could be change in tax policy coming. The most draconian would be a retroactive tax revision in 2021 if House, Senate and Pres all go blue. If Senate stays red, tax law will likely be static through 2022 and may become in play in 2023 but likely won’t take effect till 2024. If Trump wins tax law won’t change till 2025. AS of 2020 I have 67% of my Roth completed, this year in the 12% bracket. Next year in Jan 2021 I can convert up to the top of the 22% bracket and likely be immune from any tax changes. This would take me up to about 82% of my Roth conversion by Jan 2021. The next year 2022 would also be a 22% bracket conversion, taking my conversion to 92% of completion and would likely be still under the trump tax regimen. 2022 is a mid term year and the Senate would be liable to change from red to blue so 2023 may be the year they decided to raise cap gains, but by then I’m in my final year of conversion with only a small amount to convert and a concominent small tax liability.

In 2021 we start SS and so that adds to the conversion ceiling. 2021 will be a small SS check because my wife will retire at 62 taking her age 62 discount and I will take her spousal benefits which is 50% of her take. In 2022 I will turn 70 take my full SS and she will continue with her age 62 payout and we will continue like that until she reaches FRA when she will switch from her benefit to my spousal benefit 50% of my SS, or 150% of my SS. This maximizes our SS over a lifetime and when I die she gets a bigger survival benefit. Therefore 185K (using standard deduction) is about the top of the 22% and (185K – 0.85 * SS) is the Roth conversion ceiling if I want to stay in the 22% bracket.

I’m definitely be ready for this Roth stuff to be over and I’m definitely ready to start SS. My goal is 1.5M in the Roth for self insurance, 400K in a TIRA to RMD as an annuity, Social Security, and then use he brokerage as a piggy bank to pay the difference between SS + RMD and my monthly expense.

This morning I was greeted with this article Long term unemployment (>27 weeks) hit an all time high. 27 weeks is longer than half a year, all time high is never happened before. I then moved on to this article on food bank failures in the next 12 months. Boomers, the wealthiest generation in history continue to retire and the majority of Boomer money is in active funds. I have an old 401K that was in a JP Morgan portfolio during the course of my funding years. The JP Morgan funds, actively managed, had passible returns bur nothing spectacular. That fund was automatically liquidated by the custodian into a Van Guard target portfolio, passively managed according to a simple age based criteria which now allocates me automatically to 65% bonds 35% equities. It’s a tiny part of my money and over time has offered a positive return net expenses so I just let it percolate.

How I got from JPM to VG is important because this portfolio went from active to passive meaning there was a net outflow of active funds and a net inflow of passive funds. This means on the margin the ratio of passive/active funds in the aggregate shifted. My shift caused a small increase in the ratio so the NAV of active went down and the NAV of passive went up. On a one person level no big deal. On a population wide basis big deal. Often the first thing a retiree does is move his 401K into a roll over IRA to loose the management fee. In doing so this causes a demand in passive at the expense of active adding a risk premium to passive and a risk deficit to active. So my demand will on the margin increase the cost of passive my passive purchase and my sale of active will cause a decrease in what I receive for the sale. So if I sell $1 worth of active I may get 99 cents and if I buy $1 worth of passive it may cost me 101 cents. Not a big deal for me but it means the next guy will get 98 cents for his JPM and his VG purchase may cost 102 cents. This causes a further distortion because retirees are mandated to spend their money and money spending from a personal point of view is deflationary. If you have $100 and you spend $4, $96 are left a.k.a. your portfolio is deflated. Boomers also change their spending patterns. 2 years ago travel might have been overseas spending in hotels and on air travel. Today maybe an RV was purchased. This is also deflationary. It represents a kind of “stocking the pantry” move. Instead of spending into the economy renting big hotels on a recurring basis you drive your room around making smaller outlays. The RV represents a pantry of travel experience. All of the demand is pulled forward. None of these ideas are new but when linked to a massive demographic such as the Boomers and now Covid, and Now the highest long term unemployment ever, and now possible food shortages in the face of the rich getting richer….

There is a concept of elasticity which is how one variable changes with another. We use this concept when designing efficient frontier portfolios. We want portfolios with low cross asset class correlation so when one thing crashes the other thing remains unchanged, this is called inelastic or poorly correlated. Traditionally portfolios have been built over the past 40 years on a 60/40 model and that worked because of bonds and interest rates. Now in real terms bonds cost money to own and interest bearing accounts also cost you in real terms. This means in a crash you loose money in the equity and you loose money in the bond in real terms meaning the correlation is now positively correlated. In anesthesia when we would dissect root causes it generally wasn’t one thing that caused the disaster, it was 4 – 6 things, small generally uncorrelated things, that momentarily and dynamically all lined up pointing in the same direction.

This

Became

And that’s how volatility happens. The volatility of the upper figure is small, the vol of the lower one is massive.

In addition when you loose 10% you need slightly more than a 11% return to break even. If you loose 10 and need more than 11 to get back to zero that means you’re slightly more than 1% underwater when you make 10% back hence 10 + (-10) = -1

These are subtle ideas until they are not. If bonds no longer provide stability what does?

I read a Howard Gold Market Watch article yesterday with the above title. The above bears consideration. I read a book that looked at the aftermath of people wiped out in 2008 called Nomadland which I found compelling. It tells the tale of middle to upper middle class people who were essentially wiped out in the 2008 downturn. First went the job, then the pension and savings in an attempt to save the stability afforded by having an address, then went the house and people moved into their cars to suffer day work and gig contracts as the means to buy their daily bread. The sugar beet harvest is one of the best gigs all year, but it in reality is a bone crushing experience, especially for a 70 year old once college admin who burned up all his dough trying to save his address.

I’ve listened to a series of interviews (here and here among others) with Jeff Booth. His argument is basically about the creative destruction of technology causing an exponential deflation, and how the FED’s around the world will try mightily to ignite inflation to monetize the debt but will fail because the inflationary action of printing money is linear growth, while the deflationary action of technology is exponential, meaning it’s asymmetric. Broke Americans are also deflationary. If technologic deflation does prevail according to booth the problem will be solved.

The bottom of the Dead Sea is the lowest land mass place on earth. In order for a sea to be alive it has to flow and the water in that basin has nowhere to go. I was talking to a friend about the market and she made a comment about valuations falling back to earth, and it triggered this map in my mind. Suppose the valuations fall back to the lowest place? Suppose all the leverage, narrative, smoke, mirrors, sales gimmicks we get sold by CNBC FBN Bloomberg, guys with pony tails and bald heads, what if it all falls back to the lowest place, not a place of zero but a kind of gravity well of negative vitality. Why Not? Covid, Fires, Hurricanes, political idiocy, clueless arrogance, near open war fare in the streets, deficit to 6T, unemployment sky high, bankruptcy, what’s to stop it?

I belong to Real Vision as a narrative source which I use to inform my judgements (among others) and they sent me a survey about whether or not Covid (which actually to me means the present state of affairs) has changed reality forever. In my opinion the answer is yes. Reality feels different. There is a subtle hum of volatility and loss of cohesion in the background that didn’t exist before 2020. There is a radical shift in the narrative.

In times past the narrative oscillated around reality. It was like a metronome.

The center was reality and the narrative revolved around reality sometimes slightly correlated to the negative, sometimes to the positive, but always correlated to a relatively high degree. In times of crisis the correlation became very high. I think that correlation no longer exists.

Now what exists is alternate realities based on narrative alone. There is still a reality, you still need food etc but you can live entirely in a screen, work in a screen, see your people in a screen, and base your judgements entirely on what is presented by the screen and there is no longer much correlation between screen and reality. Reality and narrative have become uncorrelated or even counter correlated. To the extent the narrative is uncorrelated is the extent it becomes unreal and so who is going to win, reality or unreality?

That’s what is different now and why things will never be the same. We now live in a time where we have become unhinged, literally and I see little reason for people to become hinged once again.

Money in the future will be made by exploiting “unhingedness” If the narrative is a complete lie then the narrative will necessarily be crafted to separate you from your money, and that’s how you get to the bottom of the Dead Sea. That’s how you get captured by a gravity well.

We see vendors for THC based hallucinogens. It’s a big industry. In Canada they are expanding to other hallucinogens under the guise of “religion”. I recently met someone who was undergoing a series of ketamine “therapies”. Her particular series cost $11.000. In their nature these things are dissociative to the personalities of the users. Is it a measure of depravity that we have turned personality dissociation into a business under the guise of medicine and religion? I’m not speaking from a moral perspective but at what point does “freedom” become “slavery”? I expect at that point the future no longer a linear progression of the past.

I use a vendor that carves up risk into 4 quadrants based on economic growth and inflation

1. QUAD 1 = Growth Accelerating; Inflation Slowing
2. QUAD 2 = Growth Accelerating; Inflation Accelerating
3. QUAD 3 = Growth Slowing; Inflation Accelerating
4. QUAD 4 = Growth Slowing; Inflation Slowing

1 and 2 are when long portfolios make money

3 and 4 are when short portfolios make money

We are in Quad 3 also known as stagflation. The probability of Quad 4 is rising. Quad 4 is what happened in March. It is called deflation. Today the NAS is down 200 pts and the NASVOL (VXN) is up 2.5% to 37.

I woke up this morning and the Q’s were down 100 points. I sold out. The Q’s volatility (VXN) was 39.32 up +36% over 4 weeks and up +69% for 52 weeks. Apple Vix is 64 up 55% in a month and 92% in 52 weeks. The Q’s are down 5% and Apple is down 6%. Apple represents an overweight part of the QQQ and the XLK (I also sold my XLK), This is an avalanche. I should have sold yesterday but I lost 1% not 5%. It’s only noon we’ll see what 4 pm brings. Overall I made 7% in a couple months on the trade and missed that turning into a 1% profit headed into the red. I now have my 7% available to compound (maybe even in QQQ once again when it quits falling). Buy LOW Sell HIGH, compound the cash get off the mountain the instant the avalanche is happening.

Gold is down 1.1%. GVZ (gold volatility) is 23 down -.04% for 30 days. This is not an avalanche. This is a buying opportunity.

Here is an interesting video on avalanche. The price represents the snow mass tumbling down the hill. The avalanche is caused by built up potential energy under the surface, being released all at once into kinetic energy as price action.

I own BTC and actually it’s done quite well since March up over 379%. I didn’t buy at the low but I’m up 285% on my latest purchase of BTC and 400% on ETH. Most people will respond that BTC is sooo risky and it does have risk, but this isn’t an article on BTC, it’s an article on framing the risk of passive investing.

I’ve written a lot about this. I don’t think most people really get the danger they are in or actively choose to ignore the risk. When we look at how the stock market has behaved since the March crash, stocks have virtually erased the losses. The QQQ is up 25% and the SPY is up 5% YTD but the economy is still in recession barely up from depression. Unemployment is still out of control and businesses are going bankrupt all over the place. The dollar has switched from strong dollar to weak dollar ushering in real inflation, so economically we are in a period of stagflation, the scourge of the 1970’s. If we’re in stagflation (there is no if about it) how can the market be up for the year?

This video by George Gammon tells the tale. The difference between “then” and “now” is passive indexing. Vanguard was a tiny little fund created in the late 70’s. Today Vanguard, State Street and Black Rock own half of the market. That’s what’s changed and why there is a disconnect between the video game we call the market and the true economic reality.

This article speaks for itself. We’re all freaked about the number of deaths. The dead will remain dead. Re-frame the argument on the obvious ongoing morbidity and the real crisis comes into focus.

I’ve been trading a portfolio of about 29% of my assets while waiting for the election to shake out and the future to declare itself. The other 71% is sitting in interest bearing cash accounts.

My allocations

Cash 71%

Bonds 10%

International socks 0.1%

US stocks 4.3%

Alternatives 14.6%

My efficient frontier calc is 4.1% return and 3.4% risk My actual return YTD is 6.5%. My biggest winner is BTC and Etherium, my second biggest is GLD and my third is QQQ. Other significant proportions include commodities and TIPS as a % of their respective categories. My fee structure 0.25%

I’m trading a quantitative 4 quadrant system that has me long sector funds based on rate of change of inflation and economic acceleration/deceleration. I could go long/short but Roth and TIRA won’t allow shorting except by trading long/short ETF pairs like QQQ/PSQ or GLD/DGZ. I’m not day trading but trend trading a proprietary risk range, so when the price of an asset hits the bottom of the range I buy when it hits the top I sell and either go short or wait for the bottom to buy again. This causes intra-period compounding when trading in and out of a range. In other words if I buy $100 worth and sell at $105. When the price hits the bottom of the range $105 gets invested. If it goes then to 111 that gets invested at the next low end of the range etc. The cycles happen when they happen but they do happen several times a year and so compounding happens several times a year. The system has a quantitative directional test which tells you when a trend switches from bullish to bearish in the short medium and long term so if all hell is going to break loose it tells you to get out. If you’re out and miss a tiny bit of upside, who cares. The point is to not get squished by big downside which takes forever for recovery.

It is not set and forget. It requires daily and sometimes intra-day monitoring. If you can go short in your accounts you make money on the way up and then make money on the way down. If not you make money on the way up and go flat before the way down preserving your capital.

I don’t know what real inflation is today. It’s clearly accelerating based on commodity prices but I’ve made about double my nut/mo YTD, with only 30% of my money at risk, in the craziest year in my investing lifetime, with a net asset risk of 3.4%. Good enough for me. As a 68 yo man the land of Lucy In the Sky With Diamonds, I’m happy enough with base hits. I don’t quite know how to analyze tangerine trees and marmalade skies, except I’m clear we are not in Kansas anymore despite what Larry Kudlow or CNBC says.

As things stabilize with this virus and economic disruption over the next 4 years +-, I’ll be plowing more cash into risk assets always buying low and selling high, compounding that investment while avoiding the killer draw down. As investments permit I will diversify some internationally, and across currencies because given the multi trillion money pump in the US, it’s no longer safe to be 100% tied to US or the devaluing US dollar.

Next Jan. my wife and I start SS. She will be 62 and will file for 800/mo and I will file spousal for 400/mo. When I hit 70 our combined SS will jump to 4500/mo inflation adjusted, till she hits 66 and 10 mos, at which point it will be 5500/mo inflation adjusted. I call this the SS dosey-doe, and will maximize SS payout for my wife and I throughout. Since SS is presently tax advantaged and inflation adjusted maximizing the payout is desirable when it comes to portfolio asset mix.

I still continue with Roth conversions. It was a better deal for survivors when conversion ended at 70, but I’ll take advantage of the age 72 law as it exists. We’ll see what the Dem’s are going to do about tax law and debt monetization after Bernie Sanders is sworn in as Treasury secretary. Sturgis is this weekend. 250K people are partying and not a mask in sight. It will be interesting to see the spikes in late August. Wonder if they will make book on this event on BarStool Sports?

It’s good to know what you’re up against. In 1996 Blue went up against Kasparov. Kasparov swept but Blue won one game. Blue won the first game, but Kasparov learned. !n 1997 the rematch Blue had been learning too. Blue won in the 6th game in 19 moves. Blue had 256 processors and considered 200 million positions per second, analyzed the probabilities and settled on most probable and contingencies. The papers estimate Kasparov had the power to adequately analyze 2 deep probabilities.

Kasparov described the computer in game 2 as “playing like a god for one moment” and he seemed to be spiritually as well as intellectually defeated. After game 5 he felt the match was already over. He said “I am a human being, when I see something well beyond my understanding, I am afraid.”

Chess is ranked on a ELO scale. 100 = a 64% probability of winning. 200 = 75.8%, 300 = 85.3%. Kasparov was ranked at 2851 and the current human, Carlsen is ranked at 2882 a 31 point improvement in 23 years. The current leading chess computer is ranked at 3496, 614 points better than Carlsen.

Wall street is geared to make money. Casino’s are geared to make money. Casino’s choose games that are, over a population of players are guaranteed to pay them for their trouble. Wall street is no different. Financial television is no different. If you think you’re going to kick big Blue’s ass (or the current reigning chess computer called STOCKFISH) with a simple little diddy of save half, invest in low cost mutual funds, have a nice life, you will be fish food. Interesting that chess computers compete amongst themselves and interesting a chess computer is named STOCKFISH.

You think we are in a V recovery? The above map is how much world countries have indebted themselves in response to COVID. First is the tiny little country of Singapore. Second is the really huge country of the United States. The US was running a debt to GDP of about 105% just marginally over the point where increasing debt has a multiplier on economic output. Now we’re talking 130% well inot the territory where increased spending causes a decrease in economic activity.

What’s all that debt buying us? Zombie companies. Companies that should go out of business remain in business through bailout, which increases debt, which increases economic drag.

In the mean time something like 25% of the trading volume (aka increased volume and volatility) today is from new retail accounts opened by people plowing their $600/wk government check into speculation, like Hertz. What the hell may as well invest in a real zombie.

My BTC and GLD is kicking butt!! Wait a minute, the DXY is down. GLD and DXY have about a -.97% inverse correlation meaning my GLD is effectively shorting the DXY so gold hasn’t so much increased in value as the DXY has decreased. A decreasing DXY = inflation somewhere in our reality. In my case it’s in GLD and BTC and meat. But the Q’s Mr Natural what about the Q’s?? Every day in every way they get better and better, until they don’t. Why do you think the US is darkest of blue in the above map yet the QQQ’s have high returns? With a 50+M unemployment and bank profits down 38% it certainly isn’t because of economic activity. Seems like Q’s might be up because of video game activity from 25M new retail accounts.

Be very clear you are playing against STOCKFISH and STOCKFISH is made of silicon. STOCKFISH like the virus has no arms and no legs. The virus has one goal, to reach maximum entropy in the environment. A computer algo like a stock market version of STOCKFISH has but one goal, to separate you from your money. What was it old Kasparov said? “It was like playing a god for one moment.” He came into that tournament expecting to win.

My favorite saying: you either live in the truth or the volatility will painfully take you there.