MD on FI/RE

Every time I get into an investment the very first thing I do is figure out how to get out. Once you buy the risk you have to decide when to sell the risk. Risk is the actual thing we trade. If we buy the risk low, our next task is to try and figure out when/how to sell that risk high, or at least to sell it at a small loss.

The Bogglehead philosophy is BUY. Every month BUY. If the market goes up 100% regardless of cost BUY more risk. If the market drops 50% BUY more risk. The Bogglehead philosophy presumes a constant rightward and upward growth curve. It’s the ultimate in recency bias. The BTC game at present is asymmetric exponential growth.

People and youtube is full of blue curve mania. Will BTC go to 250K, 500K 1000K? 10,000K? Right mow BTC is running on a Bogglehead dominant philosophy. Just keep buying more and more risk and ignore reality. BTC will eventually become a red curve dominant reality. As institutions buy in they will not buy risk at any price. They will manage risk because that’s how they make money. Managing risk means some BTC actually gets sold at various points like quarterly rebalancing. At some point, a well defined well known point (when the second derivative of the red curve goes negative) the growth starts to slow. It still grows but at a slower rate. At that point the exponential growth party is over. At that point the cost of your risk goes way up.

When that point happens I don’t have a clue, but that red graph is how things will play out for BTC. Institutional adoption because they actually manage risk will force growth to be managed also which means the volatility of the asset will be dramatically reduced. It means the rate of growth drops, the asset goes from being underpriced to correctly priced and the price growth due to asymmetry vanishes.

ETH OTOH isn’t relying on asymmetric growth to create it’s value but it’s ability to do work. It’s protocol will make it into a super secure and super efficient means of transaction and therefore a low friction secure platform upon which to do business. Right now there is a bunch of friction built into transactions. Everybody is skimming points. ETH eliminates “the everybody” and so the transaction occurs between node A and Node B. The transaction is transparent and permanent and secure. Because of a high degree of reliability ETH contracts They eventually will become the basis for credit, leverage and derivative trading IMHO.

BTC’s feature is it doesn’t belong to anybody but you. It’s open source and apolitical. ETH’s feature is it will cost more to steal anything than the value in what you can secure in the theft. I’ve seen credible professionals (not swinging dick youtubers) do log regression analysis ranging from 400K to 1.2M per BTC occurring in 1 to 5 years. So if those values are correct and you have say 10 coins take 1 off the table at 400K. Take another off the table at 500K another at 600K. That leaves 7 coins and 1.5M in cash. I would continue to sell coins till I have 5 left. As the value goes up the asymmetric return goes down and the sky’s the limit becomes limited. Once half the value has been extracted, half the risk is also extracted. BTC can be used to generate interest. Right now as much as 8%. The remaining 5 would then go into generating interest. This plan or some similar variant. In the end it’s not how much money you make, it’s about how much risk you hold.

BTC is NOT an American phenomena. It is a global phenom. It’s traded 24/7. It does not respect American holidays. Lately the volatility has been occurring in the middle of the night aka in the middle of the Asian day. Americans and American financial media tends to have a very parochial understanding of “markets”. BTC doesn’t care about the QQQ’s or a bunch of anti-fa dressed up like buffalo storming the Capitol to take a bunch of selfies.

At Thanksgiving I wrote an article urging the adoption of some long term crypto strategy based on an asymmetric exponential probability of gain. Since Thanksgiving my BTC has increases 300%, and 900% for the year. I bought some Ethereum in April for for $100 and today it’s worth $1100. Th market cap of the crypto space has grown from just over 300B to just under 1T. I’ve had some 6 and 7 bagger investments in the past but they never grow this fast. Typically it’s a 5 to 10 year horizon. Early this morning there was a dip. Prices fell from $33,666 to $27,900 and have regained $32,327 in about 14hours. That tells you the demand is monstrous. A 17% correction was erased in a hand full of hours.

I recently saw a you tube video claiming if you own just 1 BTC you are in a group of 808,000 people in the world and if you own as little as 0.22 you will exists in the top 1% of BTC holders forever because the # of BTC is capped. 0.22 BTC is about $7260. If you want a 100K/yr retirement for 30 years you need about 15 BTC At todays prices that’s $495K. Pretty cheap retirement to purchase.

BTC and Ethereum constitute an efficient frontier. The least risk BTC:ETH portfolio is 74:26. I hold these roughly in the 75:25 proportion and have seen the fruit of diversification in my own portfolio. I keep seeing predictions based in 2SD regression lines that put BTC at 1M/coin in 5 years based on Flow models. It’s statistically possible but I think something like 20%/yr compounded is more realistic.

Here is a vid on some stats

Real Vision is allowing “powershares” up to 5 shares per month on my plus account. In order to share I need an email address. This I’m sure will generate a “special offer” to join real vision but in the meantime I’ll send you the share curated by me from behind the paywall to view. I’ll try to chose videos by professionals who give their unvarnished rants apart from the typical Wall Street sales boiler plate. i’m not sure how many “close friends” I can accommodate, but I’m not a well read blog so likely I can get 25 on the list. So if you want some behind the paywall curated content drop me an email addr in the chat and I’ll cut and paste you into the cue.

Real Vision is running a promo. It gives you a free trial to the site. Real Vision is the premier in depth financial new outlet on the planet and I generally watch at least one video daily. They cover every kind of topic you can think of by top people in the niche. They have a monster crypto library. It’s low on hype and high on financial dope (see what I did there)? As I understand it you can get a free trial without divulging CC info.

It’s behind a paywall so they aren’t selling anything but information. Take it or leave it but I find it worth my time. If you use the above link I get some kind of credit which could add up to a free year. You can read blogs by some plumber selling you on 4 x 25 or you can spend an hour with Stan Drunkenmiller or Ray Dalio being asked pointed questions about their opinions. There are 3 price levels, $199, $599 and $3499 each level gives access to more specialized content. It’s worth $1.64/day to me to have access to 24/7 Real Vision content and not be consigned to Youtube, but I have the time and the interest. There is also a multi topic forum called the exchange where people exchange. I searched FIRE on the main site and the exchange and not one reference. There were some references to financial independence like one entitled “Playing the Next Financial Revolution”, “Confronting the Establishment in Financial Markets” and “Financial Markets Confidence Trick” Not a single video on just “DCA into low cost mutual funds…” So if you want access to something beside FIRE echo chamber this may be your ticket.

I bought one of these Raspberry Pi 400 computer in a keyboard devices a couple weeks ago. I normally would not write about such a device but it’s $70 and is good enough (as in adequate) for a desktop replacement. To be fair you need a mouse, Micro SD card, power supply, some kind of HDMI monitor and a cable between keyboard and monitor to get it running. They have a starter kit that includes everything but monitor AND includes a book for $100. Many of us have a few old LED monitors laying around.

It’s features include the ability to run 2 monitors, built in keyboard, fan-less completely silent operation, 2 usb 3 ports, 1 usb 2 port, an Ethernet port, WiFi and Bluetooth. The O/S is burned to a $5 Micro SD card. It is possible to add a USB SSD drive to boot from which increases speed. The operating system is a variant of Linux called 32 bit Raspberry O/S well maintained, updated regularly and has available tons of free downloadable programs. The software can be upgraded by adding 3 lines to a txt file for slightly improved performance, and then you too can call yourself a hacker.

I have a Microsoft Outlook 365 account which includes web based access to the office suite of programs like Word, Excel, Outlook, Power Point, Calendar, ToDo plus access to One-drive online storage or Google-Drive. This makes the computer usable as a dorm room, summer cottage kind of device, where real work can be accomplished. It can be set up for some gaming but I don’t play games so I don’t know how well games work. It is completely adequate for financial tracking, brokerage and banking. If you don’t have an office account there is a complete perfectly adequate office suite built into the O/S, but I like Word and Excel and Power Point so all of my files are readily available for editing as I like using 365 and One-drive. This blog post was done on the Pi 400. It also has photo editing, audio programs, YOUTUBE, the ability to access my satellite TV, access to my network printers etc. I can run it from a remote desktop control program called VNC from any of my other computers.

Mine has 2 monitors (which were sitting around in boxes), a cheap $12 wireless mouse, and a $30, USB 3, mSata 120GB hard drive I got off Amazon, and a little massaging of the software, and I have a completely usable desktop environment. It’s probably not quite good enough for engineering majors or graphics intensive majors but pretty well good enough for the average college kid or high school kid on a budget.

Pi computes are well know for their programming capability and this one is no exception, with a complete compliment of programming software built into the O/S. Once set up, it’s been 100% reliable. At max load it uses only 6 watts of power and at idle it uses 0 watts of power. You can install other flavors of Linux for free but I find the Raspberry Pi O/S works fine. Every time you install a new O/S it requires initialization of various accounts like email etc, so if it ain’t broke…. Did I say it’s plug and play at $100 plus an old HDMI monitor or TV?

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.