🤡 Swimming naked, sticky inflation and a clown show.
How transitory is inflation (a look at history), destroying capital, Metamask IP logging, and some good ole' grift.
Happy Thanksgiving weekend to anyone who's celebrating. I hope you’re spending some quality time with your loved ones, or at least not fist fighting for TV's in Walmarts Friday morning.
I was lucky enough to bring together lots of my family from all over the world to my place for the weekend to binge on turkey and vino, and now after pressing send on this newsletter I'm off for a little annual WSOP tradition.
Here's what's been happening this week.
History Lessons: How “Transitory” Is Inflation?
Everybody and their uncle has been trying to guess what's going to happen next with inflation.
I've never seen so many crystal balls on Twitter.
Is inflation going down? Is it going to be transient or resilient? Is the Fed pivoting, slowing, stopping, jogging, or just guessing?
I hate to say it, but the article doesn't exactly paint a rosy picture.
"Bad news: History tells us that once the inflation genie is out of the bottle, it can take far longer to return to normal levels than most people realize."
The key takeaways directly from the article:
The US Federal Reserve Bank’s expectations for the speed of reverting to 2% inflation levels remains dangerously optimistic.
An inflation jump to 4% is often temporary, but when inflation crosses 8%, it proceeds to higher levels over 70% of the time.
If inflation is cresting, inflation levels of 4 or 6% revert by half in about a year. If inflation is accelerating, 6% inflation reverts to 3% in a median of about seven years, threatening an extended period of high inflation.
Reverting to 3% inflation, which we view as the upper bound for benign sustained inflation, is easy from 4%, hard from 6%, and very hard from 8% or more. Above 8%, reverting to 3% usually takes 6 to 20 years, with a median of over 10 years.
These things are complicated. It's ALWAYS different than it was before.
Now we have some perverted combo of leftover Covid supply chain shenanigans, Russian/Ukraine war disruptions, trillions in helicopter money, and so on.
This IS different than before, but how much of it will rhyme with the past?
I don't have a clue, and no one else does either (including the Fed).
But, like all crystal-ball looking, it's always a bit exciting to try and guess the future. I can't hate on that.
Also, just a reminder on why this matters. The YOLO'ers out there miss the low rates so they can go back to Gamestop hunting, but there's a lot more to it than that.
Furthers the wealth gap - the poor spend more of their income just to survive (wages never really keep up).
Furthers the wealth gap - the rich can just tuck their money in treasuries paying sweet no-risk yields.
Stifles innovation. As we chatted about a couple of weeks ago, with high interest rates the hurdle (necessary returns) for productive assets (startups) must go up in order to attract capital. That's hard.
Stifles innovation. It kills deals of existing assets to those who can improve them. See last week's issue with Nick and Dan and their storage units, or the unattractive outlook on deploying debt to grow an existing company (debt payments become too high).
Destroys old people on fixed pensions.
And a lot more that I'm sure we'll talk about another time.
I have a primer quote for our next section:
“As a rule, Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works.”
- John Stuart Mill
And boy oh boy, have we had some good examples of that lately:
🤡 Genesis 🤡
🤡 🤡 Masayoshi Son & SoftBank 🤡 🤡
Cumulative returns on SoftBank’s Vision Fund and Latin America portfolio plummeted from a gain of $56 billion a year ago to an overall loss of $1.5 billion in its most recent report.
The company’s core Vision Fund segment posted a $7.2 billion loss in the July-September quarter.
$56 billion to zero
🤡 🤡 🤡 Pomp 🤡 🤡 🤡
🤡 🤡 🤡 🤡 FTX 🤡 🤡 🤡 🤡
Just nothing surprises me here anymore. I'm numb. I barely even know how this dumpster fire is possible.
“Never in my career have I seen such a complete failure of corporate controls...”-John Ray iiiFTX liquidator
Note that this dude was the liquidator of ENRON.
He goes on to say:“From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.”
After SBF claimed that FTX's less-liquid tokens were worth $5.5 Billion, it turns out they're only worth $659,000.
SBF personally cashed out an undisclosed $300mil from a funding round.
FTX employees used corporate funds to buy personal real estate (in their name), took loans without documentation, and now there isn't even a true record of who actually worked there.
And note that SBF is still scheduled to speak at The New York Times Dealbook summit.
I just can’t help but be impressed by the massive destruction of wealth these guys pulled off.
I also can't help but be impressed at the massive amount of sketchiness going on behind the scenes. Is there some deeper cynical plot?
Anywho, here's something amusing for those who followed crypto for the last few years. A little schadenfreude on the now infamous Tweet.
I may sound like I'm being lighthearted and maybe even enjoying a bit of this. Well, to be honest, that is because I am. It's funny how crazy it got.
But I know it's not amusing to those who got caught up in this mess. I have friends who have taken a beating with all this craziness, and that's very sad.
The sad parts are not that these things are imploding, as they should, but that people who did not know any better got taken in. Even somewhat sophisticated individuals got wrapped up in this, so normies can get a bit of a pass.
The upside is that, hopefully, this lesson of what happens during market exuberance will stick with at least a few people in the long run.
This is not a jab at speculation. Speculators who know they are speculating are fine.
It's a jab at "investing" when it just isn't so. It's a jab at "it's different this time" or "valuations don't matter" or the common get-rich-quick-with-no-downside mentality.
The above clown show is just an example, but I put meme-stonks, companies that could never be profitable, extreme stock-based compensation, growth over any chance of profitability, token emission "cashflow", $20mil seed rounds, and beanie babies all in the same basket.
Sanity always prevails in the end. I'm not against playing the game, but just know what game you're playing.
It's sometimes annoying how right Buffett always is, but here we are finishing with yet another Buffett quote:
“Only when the tide goes out do you discover who's been swimming naked.”
The Bonus Round
Here's my new favorite alternative to Loom for video recording. Content At Scale announced that it can no longer be detected by AI writer detection apps. Metamask's default RPC will now collect your IP address and Eth address, here is alternative 1, and alternative 2 (DYOR) to prevent that. Privacy focused Proton.me (Mail/VPN/Drive) is 40% off for BF (not an affiliate link, it's just a good product)
Happy holidays and until next week,
Huge Disclaimer in Smaller Font
This content is being provided for information and discussion purposes only and should not be seen as a recommendation to do anything at all, especially not to buy or sell a security. Opinions expressed are that of the author, who is NOT a registered investment adviser, or a financial professional, or can barely even tie his shoes half the time. Do not try and copy the author or you’ll probably lose all of your money and have a rather bad day.