MD on FI/RE

IT’S THE SUDDEN STOP

Watch this video only if you have a spare set of underwear handy. Ms Booth exactly echo’s my fear and what I’ve been writing about.

In the beginning was LTCM, long term capital management. The financial system almost came down in 1998 because of the over leverage of LTCM. The bad paper was absorbed by a consortium of 12 banks. 10 years later 2008 the financial system worldwide almost came apart. The bad debt was absorbed by the FED. Soon we could see strike 3 and only 1 balance sheet remains uncorrupted the IMF. It’s a game of hot potato and it’s what worries me.

James Rickards has written a new book called Aftermath, the 4th in his series on international financial macroeconomics highlighting how he thinks about surviving the next financial crisis. He kicked off the book tour with the following podcast. This guy is smart. He was the general counsel for LTCM and has been at the epicenter ever since.

A second video explains Dr Michael Burry’s equity bubble position regarding passive investing. I have mentioned my concern regarding this but I didn’t know Burry had this position. The guy is kind of annoying but in the video does a good job explaining the problem though he’s hawking his products so you have to look beyond the soap he is selling. I’m tilted small cap value in DFA funds.

Notice how he talks about a 45 year DCA time horizon to lower risk. This is not FIRE. In RE you are not DCA you are spending down.

Here is one debunking the real estate craze and the “it can never go down” notion. Macro Economic trends often last a Long time, but not forever.

I read this Guardian Article today. It struck an eerie correspondence in me regarding the FIRE movement. I knew some food bloggers and their lives revolved around getting the foodie shot. If your purpose for eating is photography, is there a disconnect. Are you enjoying the food or the photographing, displaying, and commenting on the food for your following?

In the FI world I see the same. Is it about living in freedom or is it about chronicling some process you cooked up so you could publish? In the foodie community not much is lost if the beautiful steak is tough as an old boot. In the FI world much more is on the line. Success is about right sizing and diversifying risk, because failure when you are old is catastrophic. Is life about turning your work into a vacation? Is publishing on your “vacation life” merely advertising for your book or God forbid your movie? FinCon is listed as a media event. What does a media event do except tune up product?

I came across this MMM article today. He bottom lines:

In this situation, the following three sentences represent the entire universe of probability for you:

• If you retire with $800,000 in investments, you willprobably make it through your whole life without running out of money (a 5% withdrawal rate)
• If you start with a $1 million nest egg (a 4% withdrawal rate), you will very likely never run out of money
• If you start with a $1.33 million chunk (a 3% withdrawal rate), it is overwhelmingly certainthat you’ll have a growing surplus for life.

So I dutifully Monte Carlo’d a 3% WR on a 60 year horizon using a super safe BH3 portfolio.

Runs out of money 11% of the time with normal SORR. The first failure is 12 years in. Not what I call overwhelmingly safe. Let’s add 3 years of initial bad SORR:

60% failure rate and the first failure is only 10 years in. That means if you retire at 30 there is a 10/10,000 chance you’ll be SOL by age 40, a 2663/10,000 chance you’ll be broke at 50, a 4631/10,000 chance you’ll be broke at 60, yep super safe NOT

I read an article on Millennial Revolution debunking FIRE as a cult. On 3 out of 4 by Wanderer’s own criteria FIRE is a cult. But is he talking his book (literally there is an add for their book at the end of the prose). I disagree with his last point and find all 4 points cult like

Here is what he defines as a cult:

WARNING SIGN #1: AN IDEOLOGY AT ODDS WITH NORMAL SOCIETY He calls FIRE cult like on this count.

WARNING SIGN #2: AN AUTHORITARIAN LEADER He calls MMM as the leader. I call the Bogelheads social media as the leader. Either way there is a narrative that needs be followed to be on the inside.

WARNING SIGN #3: INDOCTRINATION/BRAINWASHING 4 x 25 anyone? He claims no brainwashing yet in the MMM article I easily refute the safety of the argument. He points out they have a workshop and a book. Because you hold church services for the cult does not mean you are not a cult, it just gives you a means to fleece the flock.

WARNING SIGN #4: EXPLOITATION

He says no exploitation. Fincon just finished. A meeting devoted to honing the social media tools of exploitation. I guess GOOGLE and FACEBOOK aren’t about exploitation either. Read the article about “Living Fully” again. Is FI about being actually independent or about being an Instagram equivalent?. If your 60 year projection fails 60% of the time you ain’t holding your mouth right.

I’ve discovered a source of information that is about 10 layers under the boggleheads. The conclusions they talk about are conclusions I’ve come up with independently. In FIRE land there is a concept of tribe. People look at FIRE as their tribe. MMM is a tribal leader, as is WCI and JL Collins and all the rest. I’m at best on the perimeter of that. FIRE is not my tribe, but neither do I consider FIRE my foe. I’m an American and I wish my fellows well, success, and happiness.

I’ve spent some time trying to understand economic behavioralism. I’ve always been an efficient markets kind of guy, but the arbs and the robots have morphed the markets into something which has a market perspective and a meta-market perspective. The morphing agent is big data and the effect big data has on the human brain. You will do what your brain tells you to do and a huge portion of what you do is irrational and sub-cortical. If the data comes fast enough reaction becomes totally automatic based on fear responses or possibly pleasure responses.

You see this in video games. Massive data flows with complete manipulation of visceral responses with virtually no thought involved except which arsenal do you choose. The decision is not whether to kill “someone” but how to do it most effectively, and then let the emotional reactions have their way, actually their meta-way since no one really gets killed or do they? The way to shaping behavior is through practice.

FIRE is about shaping behavior and its about practice and practices. It’s also about meta-practice since much of FIRE is irrational and about the biochemistry it accesses. There are many systems based on this, multi-level marketing comes to mind as does Dave Ramsey as does High School and College and even Medical School. Clearly working 100 hours a week for a decade has its visceral consequence beyond the acquisition of a certain skill set.

The following video looks at some of how society has been structured in our country, not all that different from the promise of med school. When we buy a stock we become owners from our point of view. When we take a job we become stake holders in a corporate society. From the corporate point of view we are merely resources. From the political point of view we are the same merely resources. In corporate land we are the resources that propel profits, and from the political POV we are the resources that propel political power and tyranny. All of that has a meta- component.

To access the video you have to sign up for a free 2 week trial so be aware. The information on the site is extensive something like 1500 videos on all kinds of topics. I went ahead and joined @ 180/yr because this is my tribe. This is the level of analysis and challenge in which I choose to operate, even if it doesn’t affect my portfolio. I don’t operate a hedge fund but I want to know something of that level of operator since my portfolio is dependent on the market. I also don’t operate my portfolio on leverage but it turns out I am the leverage since it’s my capital that is at risk so in some respect I am levered. It makes me more committed to understand when to buy and when to sell and when to hold in a dynamic and ever more complex market environment. The mantra is buy low sell high. You don’t have to buy everything or sell everything however. You can buy some and sell some and take a profit to buy some more when it’s low and sell some more when its high, or not. For that I need a level of thought deeper than buy cheap index funds and take a nap.

The video is not an investing blueprint, but a commentary on history from a long time insider. A commentary with a much different narrative than what we get as retail marketeers.

https://www.youtube.com/watch?v=sJQYBWUqdIE

So far my diversity play is working as I expected. Today the S&P is down .85%, and my diversifiers are all up, GLD ^ 1.5%, Cash (BIL) ^ .01% (but cash is in an interest bearing account.), EDV ^ 1.1%, and BTC ^ 8%.

GLD EDV and BIL represent stability. BTC replaces the volatility I lost from selling stocks. The % I own of each asset adds up to a portfolio located on the efficient frontier, and with a Sharpes ratio of >1 (about 1.5:1). My overall portfolio risk remains about 10% (9.5%). Since each diversifier is only a “small percent” of my equities exposure, I’m still largely concentrated in equities. If the bull continues I’ll be riding the bull. If the crash comes I expect the diversifiers to act as a parachute. If the crash is severe and lengthy the money in the non stock pots should sustain me going forward.

I study the markets. I’m no great “student” but I do what I can. I’ve written about the problem of indexing. John Bogel may yet blow us up. Index funds and ETF’s now make up way more than 50% of the market. There are many “Active” investor funds that are closet indexers. The fund may own a big position in indexes (passive) and some single issues (active) and then charge 1.5% on the fees. The point of the fund is the 1.5% fees. The passive part is a Chevy, the active part is the Fuzzy Dice. This means in the main many active funds are passive funds with fuzzy dice and high fees which is why they under perform. Passive indexers like boggleheads like to sneer with the old nannie nannie na na, I’m smarter than you are without understanding why they are smarter. The problem with all this passive index investing is price discovery. An index hides the price. If I own a crappy company that happens to be in the S&P 500 a percent of my price goes up and down based on whether the S&P goes up and down. So my crappy company gets hidden in the weeds. Crappy companies represent excess risk, so by owning and funding the S&P 500 the index risk rises despite the % of crappy companies it owns. You think you are diversifying away risk, but part of that “diversity” is actually masked by inefficient price discovery. The index gets bought month in and month out automatically by indexers despite a rising (or falling) % of crappy companies. This was the case with the FANGS from a few years ago. The FAANG (6 stocks 5 +Microsoft) was 13% of the S&P 500’s return, and 40 stocks were 35% of the S&P’s meteoric return. That means 460 stocks were crappier stocks. Not a knock on them just a knock on the “safety” of the index. If the FAANG rolls over, the index rolls over, so the “diversity” is an illusion. Only 6 stocks control your fate, yet month in and month out you invest in the illusion and sneer at the dopes.

If the market is 70% passive and the price discovery is opaque you are crusin’ for a brusin’ because you can’t tell what’s going on, or at least you don’t try to discover that. The number of stocks positive neutral and negative in an index can be and is tracked, and you can bet those active guys track it and if they see the risk rising they lighten their load. Not the bogglehead however. He just sneers and blindly keeps buying risk oblivious to the real risk because he can’t measure it. Let me give an example.

A cat 5 hurricane is bearing down on my house. It’s 200 miles away. Its track is slated to take it within 47 nautical miles from my house. As of now I’m ground zero, the spot where the hurricane will come closest to the FL coast. My risk is higher than anyone else’s. Yet I sit here today, it’s a little overcast, a nice breeze, the temp is a balmy 84. By tonight the winds will pick up around midnight. By 2 am Wed the storm will be passing by my house headed on up the coast.

Look at the contrast of knowledge by my physical reckoning it’s a nice overcast FL day. By my electronically price discovered reckoning today is not a good day to close on a property (buy some risk). It’s a better day to board up and stay in cash and hunker down. In my case a little bobble in the path can make the difference between 60 mile per hour winds and 150 mph winds. So even though you’re a sneering indexer the opacity of the market can come up and bite you in the patootie when you least expect it. The pro’s know when to risk off you do not until it’s too late. Then you sell low and Buffet eats your lunch.

The yield curve is the precursor of a cyclical down turn. Because of FED policy the yields are low so the curve is flat and like my storm a little bobble causes the signal to flash. Yield curves often invert when shorts over power longs aka shorts are on the rise. In this market the shorts have been constant (more or less), but the longs have been leaving the trade. Equilibrium is based on the difference so an increasing short vs a stable long is one way to flash the signal. The other is a decreasing long vs a stable short. So the later seems to be flashing the signal. The signal none the less represents the market fleeing to quality but where is quality if not in bonds?

The world is rolling over everybody is in hock up to their eyeballs. Corporate debt is BBB and high, very high. Government debt is through the roof and inflation is low despite zero rates for 7 years, money printing and low unemployment. Pensions are underfunded and baby boomers are retiring NOW. Under water pensions therefore must buy more risk. Millennials went and bought gender studies degrees and beer belly’s on high interest non forgivable loans so all their money is slaved to greedy universities delighted to pick their pockets. With inflation comes debt relief. You “grow your way out of it” It’s the governments secret weapon and they could care less if gas prices go to 10 bux a gallon. Millennials would like that too, pay off their loans with cheaper dollars. Pensions funds would like that too pay off those damn boomers in cheaper dollars. Deflation however does the opposite. Deflation makes the dollar more dear and debt more expensive. You have to pay off your debt with more expensive dollars than you had yesterday, and of course those dollars have to come from somewhere either a job, or somewhere. So I think that’s where the longs are going, out of risk, all risk. Expensive stock risk, expensive bond risk, expensive debt risk, expensive unemployment risk, and into money. If dollars are going to be more dear the conclusion is clear own dollars. Everybody and their brother has been gorging on risk, seeking return while sneering at the consequence and putting on blinders to hide the probabilities. Just keep buying those low cost index funds and sneering your ass off. Why hell you read it on the internet. Money Mustache and Taylor Larimore laid out the road to perdition using St John’s good name. Freaky baby freaky.

I know, I know, this time it’s different. Now sing me the narrative “invest in low cost index funds and never ever sell…”

READ THIS

PS Today I read an article on Bloomberg by Michael Burry, who successfully shorted the CDO fiasco in 2008. His analysis on index funds is similar to mine in terms of price discovery and market distortion.

People blow off SS as a resource in retirement like it’s some “gravy”. It’s a short sided perspective. If you FIRE the affect of SS is muted since your wage history is muted and your ability to claim is distant. If you retire in a normal time frame as a high wage earner it’s economic impact on your retirement income is massive.

When you FIRE you throw away some human capital. You also throw away a huge chunk of SS. PoF discusses the diminishing marginal rate of return in his bend point article, but the overall return across 40 years of retirement is massive. It’s not gravy, it’s the main course. SS to a post age 70 retirement portfolio can mean virtual immunity to SORR for example because of how it reduces WR. I built a spreadsheet using my own numbers and my wife’s numbers to explore various scenarios with an eye toward optimization in retirement.

The spreadsheet comes with assumptions like inflation and it has a built in 25% haircut in 2032, which is consistent with how the law is written. You can mess around with claiming strategy like if you claim at 62 v 70 or if your wife claims at 62 and you claim at 70 and the sheet will project expected SS income out to age 100. You can add provision in case a spouse dies and see what a survivor benefit does to the scenario, or a post haircut survivor benefit scenario. If you have a TIRA you can track the effect of RMD on your total income, and you can calculate your tax burden and then the surviving spouses tax burden along the way. You can vary the year a spouse dies and see the effect of early death or late death. Understanding SS is an important bit of data in procuring a sustainable life.

This is a picture of the sheet. It plots my life and my wife’s life based on age. She’s 7 years younger. It takes into account the 2032 25% haircut (blue line), 2% inflation. the 15% tax break. Income need is how much you budget per year inflation adjusted. It adds RMD data from a 500K 6% TIRA portfolio into the mix so you have a total yearly income number and a total taxable income number. It subtracts income from need to come up with a shortfall which is the amount you have to extract from the portfolio ie WR. It does not account for income from the portfolio like dividends which can have tax consequence and throw you into a higher bracket.

As you can see if I live to 99 my SS and RMD at an age 70 payout, that will pay me and my wife 3.3M during the course of 29 years. My shortfall is 1.22M which is what I would need from savings to pay for our life. My total needed in retirement for 29 years would be 4.55M. With a wife and a long life, and optimized pre-retirement earnings period SS and a small 500K TIRA, can provide about 70% of retirement need. I would never call that gravy. It’s the beef!

Let’s say I kick off at age 83. I created a separate column that tracks inflation adjusted survivor benefits so you can track the benefit pre and post the 25% haircut

I can pick off any year of death and know how much SS will pay my wife thereafter.

My wife claims 50% of my SS since that’s the larger of the two possibilities. We can either claim separately or she can claim 50% of my income. Upon my death then she would claim the inflation adjusted and haircut adjusted survivor benefit of my FRA benefit.

Here is an example of my death at age 83

Notice the blue block reflects the change from joint income to survivor. Notice how much less SS pays out once I die, 3,3 v 2.7. Notice how the need did not change. Notice the extra WR required from the portfolio. Notice also the S S + RMD taxable income (SS Taxable). Recall once a spouse dies one deduction is lost and the tax bracket expands so the needed income expands even more and must be considered.

So there ya go, a quantitative way to think about gravy. If you understand this, this can be the difference in portfolio failure for the 4% WR, and 100% success. Plan wisely

My friend David Graham who’s opinion I greatly admire wrote a post called Fear Greed and FIRE. It poked a little fun at Star Wars while proposing a common investing point of view. I decided to counter with my own Hunter S Thompson-esque rebuttal proposing an alternative investing view point and a critique of common Bogglehead investing philosophy. Read David’s piece first as a set up to understand mine. Knowledge is best obtained against a backdrop of contrast. I didn’t want to litter David’s site with 3000 words of my own.

In reply:

You write 2 articles about peri-retirement risk and the notion that 10 years before and 15 years after you should “risk off” i.e. take some risk off the table. Then you come out with the mantra “stand tall young man/woman while the market mows you down, there is nothing you can do!!”

You are quite right, market timing when the horse has left the barn is stupid and deadly. It does not mean at some level, all market timing is deadly. Buffet is the ultimate market timer even though he likes to folksey up his analysis with “stand tall young man and let the market mow you down” His interest is in buying your shares after the crash. Buffet RIGHT NOW is holding a ton of cash. Why is that? There is nothing he is interested in buying AT THESE PRICES aka market timing, so he’d rather sit on cash than buy high. He does not DCA he buys low. I own a lot of BRK.B because I believe in Buffet’s market timing ability despite the rhetoric. You have to analyze what he does not what he says.

If you think about it and you go to work at 20 and retire at 30, according to your mantra you should start de-risking at 20 and stay de-risked till 45. So how do you make enough yield to cover 60 years of FIRE? How do you not run out of money? Are you using one of those double sided light sabers? Keep risk on, and Keep risk off?

The way money is made is you buy low and sell high. The thing you buy is risk. You buy IBM you are buying IBM’s risk, and you are hoping to reap IBM’s return but that return is not guaranteed by any stretch because what you own is risk. The reason Buffet is sitting on a pile of cash is he chooses to not invest in too much risk so he stays in less risky cash waiting for his entry into the risk pool, constantly analyzing risk opportunities. Essentially Buffet is waiting for recession. The chaf will go bankrupt, the strong will be beaten down, the naked will show themselves and he will buy low or GEICO will sell them a bathing suit. It’s that simple. When will buffet sell? Oh yes Buffet sells!! He sells a lot!! He sells HIGH!! That’s why Buffet is rich. BRK.B has outperformed the S&P 500 by 1.5 to 1. BRK.B is cheap to own Mine cost me $5 to buy it. BRK.B is well diversified they own 63 companies as well as a portfolio across many sectors. They are managed NOT passively and clearly outperform the market by a lot through judicious market timing yet the Boggleheads decry BUY PASSIVE, BUY CHEAP, YOU CAN’T TIME, STAND THERE AND TAKE YOUR LUMPS LIKE A MAN!! That advice is a load of crap IMHO. 2 times in my life I lost 1M in market value 2000 and 2008. I wish I had risked off before the crash. In 2000 some funds I owned (note “funds” not single stocks, supposedly diversified) essentially went to zero because the paper they contained was worthless, so don’t think standing tall can’t clean your clock. I made it back because in 2003 the week the Iraq war started I plowed a different 1M BACK into the market. I had the Buffet choice to make, be greedy when every one else is fearful. I asked my self this question”do you bet with America or against?” I bet with and bought low. 2000 was a different recession than 2008. 2000 was trading fairy tales. 2008 was trading unbelievable over leverage. 2008 was musical chairs. In some respects 2008 was worse, since in 2008 we could have and likely should have gone into depression but the FED and Hank Paulsen ginned up QE and moved 4T of bad paper off corporate balance sheets. It was either that or every bank, insurance company ad investment bank was going bankrupt and you can’t run a country without a financial sector. The ghost of Paulsen still haunts us because now it’s the fed’s job to bail us out aka we are living in the land of moral hazard. At some point the fed won’t work. The fed will pull the lever and it will break off in their hands. You can see it in Europe with 14T of negative bonds. Their lever already broke off. You can see it in Socialist Norway who went into default over free health care. Their lever already broke off. If you’re riding on a train and the lever breaks off and you can get off before you die GET OFF. (sell high scenario) If you’re riding on a train and the lever breaks off and you’re dead already, not much point in getting off, dead is dead (sell low scenario). No amount of levophed is going to do the trick.

The problem with FIRE is they are all worried about retiring early rather than worried about making sustainable money. Every year of retirement under the SS FRA, is adding leverage to your life. You are making a bet the economy will outperform, because you need out performance to survive, BUT your performance is linked to cheap passive funds which by definition can’t outperform. The economy out performance is your Millennial Falcon. No out performance you’re hosed. This MUST be the case since you own cheap passive funds that NEVER do better than the market by definition and you own them is some fixed AA and you own likely own TOO MUCH RISK and you pretend you are tough and can take a licking and keep on ticking. 50 years is a long damn time.

England once was the premier economy. That worked till the world wars, then the order changed and the US took over. Do not think the US is invincible. China is licking its chops If you own passive funds you also own the countries risk. It took 2 wars and a lot of dead people and huge deficits to settle the country risk pecking order in the last century. We are in the first phase of that war today.

I made a lot of money last decade. I study this extensively and personally I think the whole world is rolling over. There is too much debt. I’m concerned enough I sold some risk and invested in something less risky. I sold stock and bought gold and bonds. There is a second way to reduce risk and that is to diversify it away, using an efficient frontier plane. I’m in the process of applying that risk management process as well.

The efficient frontier calculates portfolio efficiency aka the most return for the least risk for a given set of non correlated assets. Correlated assets provide no to trivial diversity. Currently my asset classes are described by VTI BND BIL GLD and BTC. I own more sub choices than this but these describe in general my non correlated risk map. More than this the analysis becomes too complex to write about. Each of these are virtually uncorrelated with any other asset on the map, and exist in a specific asset allocation yielding the most predicted return for the least predicted risk.

There are other ways to manage risk except to stand there and take it like a man while your legs and arms get chopped off. If you’re a bogglehead you may get your head chopped off. That big old head is a tasty target.

I present this as point counter point comparison. It’s not about winning it’s about understanding.

Harry Browne was a man who lived mostly in the last century. He was an author, investment adviser, newspaper syndicator and Libertarian. He ran twice for president on the libertarian ticket in 1996 and 2000. He set up a portfolio for “all conditions” His portfolio consisted of 4 assets stocks bonds cash and gold in equal amounts.

If you Monte Carlo this you can withdraw 4% for 30 years with 97.55% success

If you have 3 bad years of SORR up front (the worst stress) you survive 94% of the time.

For reference a BH3 survives 3 yr bad SORR for 30 yr at 4% withdrawal 38% of the time.

So Harry Browne’s Portfolio is pretty damn safe. It does just what it says it will do. The Harry Browne does’t hit a home run, no 9M value at the 90% level, but it gives you reliable 4% come rain or shine. The HB looks like this on the EF plane.

It is not on the EF so lets adjust the AA and place it on the EF

Lets Monte Carlo that AA

With 3 years of bad SORR and 4% inflation adjusted withdrawal you survive 99.92% of the time and have half a mil left at 30 years in the worst case

5 YEARS BAD SORR:

This post is a radical demonstration of the power of diversity using the EF as a guide. If your goal is set it and forget it 4%/yr year in year out the EFPP is the ticket (efficient frontier permanent portfolio). The reason it works is a relatively high rate of return (7%) and a low SD (5%) . The BH3 (7%return 12% risk) fails 80% of the time at 5 yr bad SORR. The trick to the EFPP is don’t change anything. If the market is up one year do not be tempted to move some cash into stocks.

BTC badly distorts the EF

because of it’s out sized return and vol over the last 8 years but you can still do the calculation

This is my portfolio simplified around 58% VTI as the stock, 9% BND as the bond 7% EDV as the bond (total 16%), 16% as the cash in a high yield represented as BIL and 7% GLD. As you can see the portfolio sits on the EF. I can’t Monte Carlo this portfolio because the MC needs 10 years of data to run but I’m willing to give this a try. Disclaimer: I do not recommend this portfolio. If you do it don’t blame me. I think it’s constructed on sound Modern Portfolio Theory principles of maximal non correlated diversity. Do I expect 16% return? No. What I expect is smaller loss in a more robust portfolio, similar to the EFPP, if there is Armageddon. It amounts to that I’m substituting a source of high volatility and high return that is transparent and not open to market manipulation and completely non correlated to stocks for a portion of the vol and return normally allocated to stocks. The BTC bet is small only 3%. Notice the ratio of return to risk is like (not the same number but the same direction) as the risk and vol in the EFPP. with a greater than 1 Shape’s ratio. If you look at the BH3 risk is 12 return is 7. EFPP risk is 5 return is 7, less than 1 Sharpe’s In this portfolio risk is 10 return almost 17, so this portfolio and EFPP are “the same” Sharpe’s type vs BH3 which is different.

There has been a ton of analysis done on Harry Browne PP plus a lot of biased commentary. It’s worth studying but comparisons are often not logical but replete with bias discounting HB for whatever the author is hawking.

I own BTC and I’m adding to my position. I’m NOT ADVOCATING buying BTC. BTC is a mathematical construct and a social compact. I believe it behaves as a volatile store of wealth as well. People often say it’s not “backed by anything”. I don’t see that as true. I bought it with dollars so it’s backed by my dollars. People say but but it has no government. In fact it has a massive totally transparent government. The algorithm is its government

BTC is not a tulip. You can’t just plant a field of BTC cover it with manure and wait for the dough to roll in. It is not a bubble because it is not financed by credit. It’s price discovery is in the open market completely transparent. It is not open to window dressing like share buy back. It’s WYSISWYG what you see is what you get. It is not open to FED manipulation and control by banks. No one skims anything off the top except for the exchange fee. The IRS treats it as property like real estate and stock gains and charges cap gains. Unlike stocks and real estate there are no government incentives to distort pricing. It settles instantly. You push the button and the deal is done permanently and anonymously. The IRS is likely going to force some accounting like a 1099 be reported by the exchange, so what? You get a 1099 on your stock sales as well. The law is the law and the government deserves their cut of capital gains.

BTC is closed ended. It is designed so only 21,000,000 BTC will ever be created, so again it is not like tulips. It is more like gold, another store of value. You mine gold. You also can mine BTC using a computer. There is a certain amount of gold in the world and there is a certain amount of BTC. BTC is created by calculating using an algorithm and as each “coin” is mined by successful calculation that coin is added to the ledger. Once in the ledger that coin can be traded just like gold can be mined assayed turned into bullion and traded. The price of gold is set by a market mechanism and the price of BTC is set by a market mechanism. You can store gold in a safe and you as well can store BTC on a thumb drive in a safe. Once your purchase is on the ledger it remains on the ledger. The algorithm is virtually uncrackable which is why its called crypto. The ledger is peer to peer meaning it’s not stored in one place but is stored everyplace. Since the ledger data is “everyplace” it can’t be stolen or falsified. The algorithm understands cheating and won’t allow it PERIOD. BTC can be stolen like a bar of gold can be lost or stolen. You can loose your thumb drive for example or throw away your computer and loose your account info. No account info no BTC. (not entirely true if your BTC is stored on an exchange). BTC is anonymous. It’s like a Swiss bank account on your phone. You are a number and your account value is a number and there is no way for the system to understand who you are. A brokerage understands but the algorithm does not and it’s perfectly legit to trade outside the exchange. There could be tax consequences for that however. The exchange of value in a transaction is instant. No clearing house or bank or regulators involved. The transactions are world wide, no exchange rates currency markets central bank or government manipulation allowed. This means I can be a sandal maker on a mountain in Peru, I can call NYC and sell a load of sandals to BillyBob’s sandal store for a price in BTC using a satellite phone and as soon as the button gets pressed value is subtracted from BillyBob and added to my account. The transfer is perfectly liquid and perfectly transparent to the ledger and permanent. All that’s left to do is ship the sandals.

This is a HUGE advantage. Consider the infrastructure required to transfer money from NYC to Peru to your bank and have funds become available consider import and export taxes consider the currency manipulation balance of payments etc. All of that is eliminated in peer to peer. The other thing is BTC remains liquid whether the banks freeze up or not. This is the reason I first purchased BTC in 2015. It was during the Greek banking crisis and some rich guy was vaca in the Greek islands. The banks froze up and he most you could get is $50 a day and you had to wait online for that. No credit cards, no checks. All you could spend is the money in your pocket. The guy wanted to go home but he couldn’t buy a ticket. He had BTC, bought a ticket and split for Cali. I had some spare money and decided I wanted some of that kind of liquidity and libertarian money.

Now I see BTC as a diversifier. It has a long enough history it is not going to zero. There is 180B of stored value in the system presently as well as the cost of the infrastructure, which is a world wide peer to peer computer network. The value of the network is probably trillions so there is inherently stored value in the system, and there is no government allowed to borrow against that value or just print money. In the future BTC maybe the reason the internet was invented and not just watching porn. Freedom is a very hard thing to keep in a box once you taste it. BTC is a little like owning BRK-A it’s value is what it’s value is. It is not manipulated by stock buyback or stock splits or leverage. It’s not really open to financial engineering and so doesn’t carry that risk. I read 19% of S&P value is due to financial engineering not productivity. If that’s true owning BTC is way safer than owning SPY for example. If SPY becomes un-engineered 19% of its value disappears. BTC is volatile but if you own a coin you own a coin. aka transparently. If you don’t want to own the vol of BTC, don’ buy it.

It turns out BTC is uncorrelated to stocks, bonds, gold. and cash. It is a fifth form of diversity

You can see its seriously non correlated with any other asset class. Given my understanding and strengthening conviction of a world wide recession on the horizon I want my portfolio to be spread across as many non correlated assets as possible. But I also don’t want to throw the baby out with the bath water. I’ve made a lot of money investing. In the last 25 years stocks and bonds have been the place to be. Stocks are volatile, bonds have steadily ground higher and continue to do so. The long bond hit 1.9 today and the yield curve once again inverted. It is what it is. So now is my time to re-balance percentages out of concentration, and into the safety of greater diversity. To me that means own all 5 non correlated asset classes by selling some (not all) of the most profitable (sell high) and spreading that loot around. This keeps me 100% invested just not 100% invested in stocks. Will I loose money? Relatively unclear. What is clear is if the stock market crashes I WILL loose money, a lot of money because the risk is concentrated. If the dough is better risked across classes I will loose less and maybe even make some in some categories because of the non correlation. People gotta keep their dough somewhere and one categories loss is often another categories gain.

As BTC has been mined initially it was very elastic in terms of supply and demand. In the beginning it was easy to mine, you could do it on a raspberry pi. As more coin is mined the computing horsepower needed has risen exponentially. There are now specific rigs that are dedicated to mining that are basically super computers in their architecture. In addition collaborations of mining computer owners join together to form a mining consortium of computing power and then split the coin according to some algorithm. About 80% of the 21M coin has been mined and as mining progresses it becomes asymptotic in terms of mining horse power vs return. This model in my opinion will inflate the price naturally as the cost of inputs grows. also I think as the number to be mined dwindles the price will become more inelastic and scarcity should drive price. After the crash I predicted the price would stabilize around 9 to 10K. BTC has never gone to zero. It has steadily risen but in a very volatile way so imagine climbing a mountain with a LOT of steep hills and valleys along the way. It’s not that different than the S&P 500 in some respects. There are all kinds of excesses and crashes but the climb is relentless. I expect BTC’s chart will have a similar look 50 years from now. I think the algorithm is designed to pretty much insure that with it’s ever increasing scarcity of new coins. Some predict 25x growth some 40x present value. I’ll be happy with 2-3x. If you own say 100K and in 5 or 10 years that becomes 300K, not a bad deal. In 10 years 100K to 300K @ 2% inflation is 10% return.

China Russia NK Iran and several other countries are proposing a members only crypto currency. This would allow the countries to trade directly without converting currencies or pegging to say the dollar. If China needs natural gas and Russia has some they merely deliver the NG and get paid in crypto and the US doesn’t have anything to say about it or any way to manipulate it. Sanctions smanchtions. The crypto in that system is backed by gold. Presently China has something like 13000 tons of gold and Russia about 10000 tons. US has 8000 used to have 20000. Russia is the second largest gold miner in the world. That crypto is not BTC but if it comes to pass will totally legitimize crypto as world wide concept

The worst month for markets is traditionally Sept. There are 3 days left in Aug and a hurricane is scheduled to arrive at my front door in 5. There’s a metaphor in there somewhere.