And You Thought BTC Was Risky

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.

7 Replies to “And You Thought BTC Was Risky”

  1. I saw the video and I do think it is interesting.

    But personally, I highly doubt that SPY, QQQ, VTSAX (insert passive index fund du jour) goes to $0 because there will always be active investors who are contrarian. Additionally, the algos will probably buy when these funds drop. And if all else fails, we can count on the fed and the government to buy the ETF/funds and bail out the stock market 🙂

    That said, I do own these funds. I also own some individual stocks like AAPL and SQ to name a few. As well as a good chunk of BTC and ETH.

    1. Hey Doc! Hope you are well. I can see it happening. The algo’s make money trading momentum not value and they trade both ways. If the market is heading to zero the algo’s just load up on puts and the faster it goes the more levered they get. Algo’s don’t say “Hey APPLE is cheap think I’ll buy some”. If the market goes up the algo’s buy calls and leverage that. It’s like playing poker. To win at poker you play the odds and size your bet. If you win 51% over a long enough time you’re a gazillionaire. If the actives don’t have money they aren’t going to buy, and if they have money they are not going to save your bacon, they are going to try and make more money by eating your lunch, so like Hugh in the video, he’s got $500 of your dollars in his pocket he received when your fund bought his share at any price and he’s willing to spend $10 in today’s market to buy that share back. If the market gets worse he may be willing to spend only $2. Hertz used to be a car rental company.

      This is the reason I sold out in March. EVERY measure of volatility went to the moon including gold commodities BTC stocks, bonds, REITS credit etc. When the vol quadruples or more the ability to predict value vanishes aka becomes 0. It’s like going into a black hole. In a black hole a point is dilated into a line and you can’t tell which point on the line is the actual “point” so time and space becomes indeterminate. In a crash if you own an index you own an aggregate and as such what you own is synthetic. You don’t own the market, you own a single thing with a single value and a single volatility that generates a single volume. It’s price is determined by it’s own local conditions in the face of high vol and high volume. It’s like a wild fire that makes it’s own weather independent of “the weather” in a broader sense. Owning a fund is only loosely connected to the underlying in the case of 4 x volatility. You don’t think funds can go broke? They already have. In the 2000 I owned a couple hundred grand in a fidelity fund that went broke. It lost 95% of it’s value and was then closed. So much for buy and hold. In 2008 some money market funds broke the buck. The XIV an inverse VIX went broke. Lehman went broke. Do not think for a second some Vanguard fund can’t go broke. Vanguard may survive but you’re fund may go to zero.

      You say the government will just bail out. That’s moral hazard, not a market. You might ask why there are riots in the street. The answer is moral hazard. The answer is “the government” bails out fat cats and says screw you to the people mostly the worker. That is not capitalism, and if it’s not capitalism then the “value” of your portfolio becomes unknowable. 100K at 5% inflation becomes 50K in 15 years. Still feeling rich if half your money evaporates in 15 years? Thinking of retiring in 20 years with say 10M? If in 20 years that 10M is worth 3M you might not be so happy. In another 20 years that 3M may be worth 1, but you’ve been living off that 1 so you may be fresh out of cash. In the mean time Wall Street gets paid, because it’s their job to pick your pocket. Ya Ya plow all your dough into low cost index funds and hold them forever that’s the ticket!! That works as long as the indexes are a small% of the aggregate market. When indexes dominate price discovery become indeterminate because the funds, when inflowing. always provide a bid at any price, and when outflowing, provide a sale at any price independent of value.

      You can see the disconnect from reality in the market itself. The Q’s are up 25% YTD but the financials are down 40% and 40M have been unemployed for 5 months and that isn’t changing anytime soon. GDP is down like 8% yoy. You CAN”T make new highs in the Q’s if GDP and unemployment are negative so what you own is a mirage, the same as the man who crossed the event horizon. It’s like jumping off a building and thinking you will float. You can hold that delusion of you like. Homey believes in gravity and game theory.

  2. I accept what you and George are saying. The real question is (to use your vernacular), what’s a mother to do? I don’t think cash will be a good place to be. Gold has done well for me, and the intermediate/long bond combo has been ok since the first of the year, but that could (probably will) change. I hate to sound whiny about doing some work, but do you think we are really left with doing research into cash-rich (or at least solvent) companies or paying someone 2 and 20 to do it if we want to be in the market? Expectations of inflation suggest some stock exposure, and I certainly expect some inflation. I have some previous experience with professional money managers, and it seems that when the market went down, I took every bit of the loss, and when it went up, I never made the money they suggested (or that I should have). These were not fly-by-night guys (or maybe they were/all are?); I’m sure that I paid for some nice lunches at UBS.

    1. Hi John

      To put it frankly we are on our own. Wall Street is a business and sells a product for a profit. Larry Kudlow is a salesman and sells a product for his boss hopefully for a profit. Powell is a salesman who sells a product for his bosses, the banks, for a profit. All of these people/institutions expect to get paid with your money. The boggleheads/Vanguard writes books and expect to get paid in your money. Fido warehouses your money at a profit extracted from your stores. The only thing free about free is it isn’t free and this isn’t simple. These jokers are not your friends they just make you pretend to yourself you know what you are doing and feel good about that while they siphon the dough.

      I think we are in stagflation. I think the tools being applied are exactly the wrong tools. I think there are 30M permanently unemployed. I think GDP yoy is negative something like 8% NOT POSITIVE. I think supply chains are disrupted. I think the currency is crashing. In March you had to pay people to buy your oil. The price of oil went negative. Today oil is 42 bux a barrel AND we have 30M unemployed AND negative GDP. How does an economy like that support 42 buck oil? The answer is the price of oil is inflated and does not reflect the true value. Commodities are a true measure of inflation. Powell doesn’t pump money into lumber or crude. CNBC and boys with pony tails don’t talk up commodities. There isn’t a bunch of salesmen like Kudlow trying to sell you bushels of CORN and certainly the market for CORN has been damaged, but the price is going up. The price is going up because the value of the dollar is going down and a down dollar reflects rising commodity price. Like anything buy low sell high so I sold my high dollars and turned them into low commodities and I will sell them back into dollars at some point when they are high thereby protecting myself against inflation. So commodities rising and GPD falling defines stagflation. The set up for stagflation is long commodities, long TIPS and some duration, own some well capitalized not over valued equities, gold and BTC. If the market craps fold and live to fight another day. We won’t be in stagflation forever. Where we go is not obvious. We could return to growth or we could as easily return to depression which is negative GDP and DEFLATION. Money can be made in any circumstance. Reality is still highly volatile IMHO

  3. Hi Gasem,

    Thanks for your insights.

    Would you be willing to share with us what type of commodities you buy to counter inflation ? Gold only ?

    How do you buy them ? ETF?

    Thanks for all you are doing.

    1. I have a core commodity holding of DBC and DBA DBC is metals oil etc, and DBA is food. I also have specific ETF like rare earth oil palladium sometimes I’m in COW CORN WOOD. I trade these buy low sell high and then wait to buy low and sell high once again compounding the profit. I don’t consider gold as a commodity but a currency. Any one commodity idea I keep to 3% of the portfolio so DBA on a 100K portfolio can be 3K DBC 3K COW 3K etc I stick to ETF’s because they are concentrated but diversified within the class and cost nothing to trade and usually have good volume. There are some commodities that are very illiquid or penny stocks like uranium and I don’t trade those

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