Mountains of Debt

                                                                               

 

AMAZON, MICROSOFT, INVIDIA, TESLA, ALPHABET, Are all trading at 50 times price to free cash flow (which is the cash a company has on hand to operate after paying its obligations)  Maybe at 0 percent rates that's acceptable.  But at 3,4, 5 percent rates?  These stocks make up 25 percent of the SP 500, 50 percent of the Nasdaq 100.  These are the creme de la creme.  And because of 0 rates they are stretched to the breaking point with debt obligations.  On the other hand (or perhaps just differnt fingers on the same hand) 10 percent of all companies in the SP are Zombie Companies - which mean their debt obligations are so great that all their operating capital is not enough to simply service the debt - much less ever pay it down.

In fact there's a whole sector of the economy dedicated to finding healthy companies they purchase with debt that they load onto the companie's balance sheet.  It's called private equity.  It creates value only for those who purchase the company.  Everyone else either loses their job or gets stuck with the debt laden zombie.

It's how Jay Powell the president of the Federal Reserve Bank made his fortune.

At zero rates it's a winning game.  As rates rise, it exposes the game as the ultimate ponzi scheme.

Just like Crypto is a ponzi scheme.  First in Benenfits, everyone else gets screwed.

Does this sound like a healthy economy?  Or does this sound like excess debt policy perfected over 40 years of negative real rates?  And how does this economy shift into one with normalized rates after 40 years of debt binge - in all sectors: corporate, consumer, and government?

"Well debt doesn't really matter."  You hear that all the time now.  Because we've gotten away with it for forty years.  But the reason we've gotten away with it is because GLOBALIZATION was a massively deflationary force keeping material and labor inputs low through global outsourcing even as the debt piled up.

But now - Globalizaiton has reversed.  

It started with insanely stupid idea of Trade Wars and the insanely cynical idea of stoking Anti Immigrant sentiment (the very immigration that contributed to low wages structures that kept inflation in check.)   Now these ideas have morphed into Hot Wars between Russia and the West, and a dangerous Cold War between China and the West; and anti Immigrant Hatreds have morphed into Anti Other Hatred even within countries which is diverting resources from real problems to imaginary problems which is also highly inflationary.  Instead of fighting waste, corruption and institutionalized malinvestment we spend our resources fighting "wokeness."

These trends tend to be generational.  The Deglobalization trend unfortunately will last for the forseeable future and it will make the 40 years of massive debt buildup impossible to solve as long as it does last.

At the same time the spreads over treasuries for the corporate debt are still near record lows. even as the Fed is raising rates.  When the spreads widen, the number of Zombie Companies will only increase.

Consumer debt is at record highs.  Servicing this debt will only get harder.  Even as goods get ever more expensive.

And govenmnet debt has careened out of control - but reigning that debt in at a time when Government spending accounts for nealy 30 percent of GDP - is a recipe for depression.

So what is the solution?

Prepare.

How?

My solution is weather the storm with Hard Assets.  They will rise in value in proportion to the debasment of the currencies that must and will continue.  It is the only way to handle the massive debt.

Perhaops there are other solutions.  I'm just not aware of other good ones.  So I will put my faith in Hard Assets.

I

GEN Z AND HARD ASSETS

 

29-year-old Blake Martinez quit the NFL to sell Pokémon cards.

his business brought in $5 million in just 7 months

After selling a poikemon card for nearly $700,000, Linebacker Blake Martinez realized he could make more money selling pokemon cards than being a starting linebacker in the NFL.  He quit his day job, and so far has done quite well.

I know Blake Martinez because he was a tackling machine for the NY Giants.  Not the most atheltic - but brilliant at reading offenses and knowing just where to be.  He was the glue for a good Giants Defense.

I don't know anything about pokemon cards. But I do know comic books, trading cards, video games and all sorts of popular entertainment Hard Assets are bringing the same kind of money at auction as Fine Art, Collector Cars, and Rare Wines.

The fact is anything Real, Meaning Non-Digital - stuff that will continue to exist if all the electricity in the world were shut off - is beginning to appeal to the digital generation just as it does to the older generation that understands the value of Real Things from long experience.

As it begins to sink in even for gen z that all the crazy electronic fads - robin hood, crypto, NFTs, are being run by scammers, against whom there is little to no recourse once their precious electronic chits have magically disappeared into the ether; and now even Gen Z is investing in Real Things that have some cultural resonance for them.

Will Pokemon Cards still be worth something in 20 years?  I have no idea.  I don't understand what they are, so I wouldn't buy them.  But if there is a hard asset you do understand, I would bet - I am betting - it will accrue far more value over the next 20 years than any electronic asset.

Because when you own a Hard Asset, you can sell it for a fair market price, and it can't be front-run, hypothicated, hacked, bundled into some complex obligation, diluted, or simply moved into someone else's electronic account.  

And that type of security will be increasingly worth a premium even over the intrinsic value.  Even Gen Z is begining to undsertand that.

THE EXCESS SAVINGS FALLACY

 

The major reason that the US and Global Economy are really very healthy - we hear over and over - is that the US consumer is in great shape - with 2 trillion dollars of excess savings they can put to work any time they want.

On top of this we're told Retail Sales continue to show amazing strength,

Fallacy 1: If you take out Bernard Arnault, Jeff Bezos and Elon Musk, the excess savings number drops by 25 percent.  If you take out the next 5 richest humans, the excess savings number drops by 50 percent.

In fact 60 percent of Americans don't have enough savings to cover a $1000 dollar emergency.

Excess Savings?

Fallacy 2. Yes, the Nominal Retail Sales number continues to rise BUT REAL RETAIL SALES - that is to say Retail Sales Minus Inflation has been negative since February of 2022 - over a year.  

Unit Sales are massively down.  People are not buying more stuff.  They're just paying more for less stuff and going deep into debt to afford it.  Consumer debt is at an all time high.

This is not to suggest the stock market will do anything in particular.  After all the stock market can stay irrational longer than you can stay solvent.

But the real US economy, where consumption accounts for 70 percent of GDP,  is in trouble. 

Even as the Fed is raising rates to kill inflation.

That means all that consumer debt is harder and harder to service.

Real people, real problems.

But the Jobs Market is really strong right?

The only jobs number that counts is REAL WAGES; according to the BLS, Real Wages are falling even as real prices are rising:

From January 2022 to January 2023, real average hourly earnings decreased 0.9 percent, seasonally adjusted. The change in real average hourly earnings combined with an increase of 0.3 percent in the average workweek resulted in a 0.7-percent decrease in real average weekly earnings over this period.

So people are working longer hours for less money to buy things that are getting more and more expensive.

Finally when you hear analysts say Inflation is coming down now - THE FALLACY is that inflation is rising - just at a slower rate than before.  They really mean the rate of inflation is falling.  But if inflation has been out of control, just making prices rises a little less quickly even as your wages are falling does nothing for the the average worker.

So if you happen to be one of the fotrunate few who does have a little extra savings - you might consider putting it into something that will appreciate as the value of the money used to buy it deteriorates.

Like Hard Assets.

After all, what is inflation but the deterioration of the value of currency?

And as currency detiorates, hard assets appreciate.

COINS AND MEDALS AUCTION RESULTS: SOME RECENT RECORD PRICES:

 

THE EID MAR AUREUS: Q. Servilius Caepio (M. Junius) Brutus AV Aureus. The coin that celebrate the murder of Julius Caesar

Auction date: 29 October 2020 

WIth buyer's fee: 3.6 million dollars 

POLAND, Monarchy. Zygmunt III Wasa. 1587-1632. AV 100 Dukat
Auction date: 9 January 2018
Price realized: with buy's fee $2,260,000

Great Britain: Victoria gold Proof "Una and the

 Lion" 5 Pounds 1839 PR66★

Sold on Aug 19, 2021 for:

$1,440,000.00

Mary Tudor, Queen of England 1553-1558. Gold Medal, byJacopo Nizzola da Trezzo. 

Auction date: 18 November 2019  PRICE REALIZED: $970,000  Syracuse. Decadrachm signed by Kimon around 405 BC. Auction date: 14 November 2022 Price realized: $950,000 Antiochus III, 223 – 187. Octodrachm,  Auction date: 6 May 2019 Price realized $925,000 PLEASE NOTE THESE MASTERPIECES OF WORLD AND ARTISITIC HISTORY BARELY SCRATCH THE SURFACE OF THE PRICE OF SOME VIDEO AND COMIC ART FROM RECENT DECADES.  PERHAPS THERE'S SOME ROOM TO RUN...

 

 

RECENT POPULAR CULTURE HARD ASSET HERITAGE AUCTION RESULTS NERD EDTITION:

                                    Frank Frazetta Egyptian Queen Painting Original Art 

                                                Auction 7209 | Lot: 91027 | 

                                                            Sold For:  $5,400,000.00 

Norman Rockwell Home for Thanksgiving, 

                                        Sold on Nov 5, 2021 for:

                                    $4,305,000

Batman #1 (DC, 1940) CGC NM 9.4 White pages.... 

                                                  Auction 7239 | Lot: 91027 | Jan 14, 2021

                                                      Sold For:  $2,220,000.00

                                 Super Mario 64 - Wata 9.8 A++ Sealed, N64 Nintendo 1996 

                                                     Auction 7261 | Lot: 28137 | Jul 11, 2021

                                                       Sold For:  $1,560,000.00

                                                           

                                 Robert Crumb Your Hytone Comix #nn "Stoned Agin!"   

                                                  Auction 7212 | Lot: 91012 | Nov 21, 

                                                                Sold For:  $690,000.00

                                                      Auction 7167 | Lot 86267 » Horror

                                                  Dracula (Universal, 1931). One Sheet

                                                            $525,800.00

                                   Marilyn Monroe "Cherie" Ensemble from Bus Stop 

                                                         $399,000.00

REAL DIVERSIFICATION: GOLD PORTRAIT COINS AND MEDALS

 

When diverifying into real things it is always best to choose things you undertstand well.

Bcause nothing is a sure thing;.  You have to select wisely even in the realm if real things.

But let's say for a moment you have a decent working knowledge of world history and an interest in human culture.  There could be many different real things that would fit into this universe. 

But Gold coins and medals were issued to mark all the most significant milestones in human cultural history.  And they were issued in a form that is durable and chemically inert - it will never tarnish.  It will perfectly preserve that historical moment for all of human eternity wtih a minimum of care.  

And the form has a natural lustre that only improves over the centuries.  Add to that a portrait of the Monarch, or General, or King who presided over the event - engraved by an artist of great skill - and you have an artifact with tremendous intrinsic value.

Take this marvelous portrait of Alexander the Great minted in about 280 BC.   It looks pretty much the same as it did in 280 BC.  And it will look the same in another 2000 years. It's tough to say how many exist.  I'd guess about 50.  In this beautfiul condition maybe 10.   If you happened to be fascinated by Greek history and culture (which is the culture and history of the entire western world) this coin's contermporary portrait by an artist of supreme skill of Ancient Greece's greatest General may hold a certain fascination for you.

A classical artwork my a masterful artist that captures the personality of one of history's most interesting men.  In very limited supply.

What is that worth compared to say: stock in Tesla, or a unit of cryptocurrency, or a corporate bond from a highly leveraged company like Carvana, or a 1970 Cammaro, or a bottle of Grand Cru from 1958 that can not actually be drunk as it will turn the mintue it's opened, or a robe worn by Chubaca on screen in Star Wars - or a guitar once played on stage by Bob Dylan?  Or a huge stack of dollar bills?  

Well, you could compute the answer of what it is worth today against any of those things.

The question however is what is it worth over time against those things.

That is a very tricky question.

And it is a bit of a trick question.  Because Tesla, Carvana, Crypto are all risk assets that retain value only insofar is they appreciate on a sea of liquidity or crash as liquidity is withdrawn.   They have no track record worth considering.   Any of them may or may not exist in 5 years.  

THe Cammaro, the Wookie Robe, the Guitar, the coin and the Wine are hard assets that actually gain in value as risk assets lose value.  They may gain too even when risk assets gain in value.   After all, a tide of liquidity raises all assets.  

But They will all certainly exist in 5 years.  

The question is how they will perform over time.  

"Over Time" is the key element for all investment.

"Over Time" how have these assets performed?

The fact is, very few Hard Assets have track records of more than a few decades.  Is that enough time to understand performance over time?

And here we come to the most attractive element of historical gold coins and medals - they have a track record of appreciation over time - oftern hundreds and even thousands of years.  Through inflations, deflations, even surviving pestilence, famines, wars and the collapse of civilizations.  So do some rare historical documents, and some old master artworks and some historical artifacts.

It takes some work to discover and understand this track record.  But is is worth the while.  

Understanding  this is true Value Investing - Intrinsic Value Investing - as opposed to Momentum Investing in Current Fads.

It depends on your personality which appeals to you.

REAL STUFF: Sassoon Codex, the oldest complete modern bible (circa 900 AD) To be aucioned by Sotheby's etimate: 50 MILLIONS DOLLARS

 

NEW YORK — A Hebrew Bible more than 1,000 years old is set to be sold at auction in New York for up to an estimated $50 million, Sotheby’s announced Wednesday.

The Codex Sassoon — which dates to the late ninth to early tenth century — is the earliest, most complete Hebrew Bible ever discovered.

It will become the most expensive historical document or manuscript to ever go under the hammer when Sotheby’s puts it up for auction in May.

The document is being auctioned for the first time in more than 30 years, with a pre-sale estimate of between $30 million and $50 million.

In November 2021, Sotheby’s sold one of the first prints of the US Constitution for $43 million, a record price for a historical manuscript.

The book was considered lost for over 600 years following the destruction of a synagogue in northeast Syria where it was kept, until it reemerged in 1929, according to the New York Times. It has been in private hands since and is currently owned by Swiss financier and collector Jacqui Safra for $300,000 in the 1970's.

That's an appreciation of about 20000 Percent.  Not bad.

Other Real Things offered this year by Sothebys: Sex Pistols memorabilia

James Bond Memorabiia

Sports Cars

BASKETBALL JERSEYS

                                                            FILM POSTERS

                                                WHATEVER THE HELL THIS IS

                                                            AMERICANA

                                                         You get the idea...

DIVESIFICATION IN A 100 PERCENT CORRELATED WORLD

 

In a global economic market driven by liquidity all economic instruments: Stocks, bonds, derivatives and crypto currencies are 100 percent correlated.  

As long as the global system if flooded with 40 years and many tens of trillions of dollars worth of deficit and bailout fueled gambling, all paper/electronic assets: credit, stock, derivative, crypto rise together.

Yes, the Fed is raising rates.  But nobody believes they won't revert to zero rate/ unlimited bailouts the second a credit event developes.

So paper/electronic assets keep rising.

Meanwhile Globalization has kept inflation low with cheap commodity and labor inputs.

But when the next credit event occurs in a deglobalized world the excess liquidity created will cause an explosion in commodity and labor costs.

Then all paper/electronic assets will crash together,  Bond yeilds will shoot up crushing bond prices, and sucking capital out of risk assets like stocks, derivatives and crypto.

So how do you diversify?

Real Things.

Real things are completey uncorrelated.  Excess liquidity will only drive the price of real things up.  Those who have benefited from the last 40 years of liquidity fueled asset booms have already been in the Real Things trade for the last 10 years.  

But this trade has started slowly.  Until recently not that many people have regarded Wine or Coins or Sports Cards or Rare Books as serious investment.  They seemed more of a hobby. 

Fine Art, of course, has always been a serious investment. 

Suddenly the same auction houses that specialize in Fine Art are now also dealing in a vast variety of Real Things.  Sotheby's is auctioning off Basketball sneakers, whiskeys, handbags, watches and wines. Heritage Auctions is auctioning off Comic Art, Cartoon Art, Video Games, Music and Movie posters,  contracts, wardrobe and  Instruments... and the top sellers in these seemingly banal catagories are hammered off for millions of dollars.  

Fad?  It's hard to call markets that specialize in things that have deep emotional resonance rooted in shared history a Fad. 

Of course some of these things will fade in value as the items resonate less with subsequent generations.  Will a dress worn by Maralyn Monroe mean that much to movie fans in another 100 years?  Who knows?  It doesn't mean much to me right now, so I would never buy it.

But how about a gold protrait of Alexnder the Great minted just after his death?  Will that ever be less evocative than it is now?

Or how about a gold portrait medallion of Napoleon, handed out to a few dignitaries at his Coronation?  Will that ever be worth less to subsequent generations?

I doubt it.

And how many people right now even realize that, and similar items are avaiable on the open market?

The answer is more and more people are becoming aware each and every day.

ANYTHING REAL

 

The markets continue to melt up.  Therefor the economy must be on the mend, right?

WRONG,

The markets continue to melt up because:

A) The United States still has the world's reserve currency.  Global Loans and Commodities are mostly settled in US dollars.

B) The Federal Reserve Bank of the United States is still the Buyer of Last Resort of everything that is traded in the US Economic Markets.  Any and every type of Loan, Credit Obligation, Common Stock, Preferred Stock, Option, Future etc is backstopped by the Federal Reserve Bank and the US Treasury with dollars they can manufacture out of thin air because the US dollar is the Global Reserve Currency.

However, the Game is in the ending stage because:

A) Deglobalization is infaltionary for Labor and Commodity Inputs.  So these two things will continue to rise as the Fed prints money as long as the Deglobalization Trend continues.  Which is for the foreseeable future.

B) China, Russia, India, the Opec Nations and much of South America and Africa are tired of paying for the privilege of using increasingly weaponized US dollars that are exporting terrible inflation. Soon these countries Organized by China, will come out with a competing reserve currency. 

And when these two trends make the sea of US dollar Liquidity a burden rather than a benefit, the massive Econmic Edifice built out of Paper will crumble and only REAL THINGS will retain value.

Crumble How?  Well, at some point soon, one of the many recurring liquidity crises will be met with trillions of dollars of bailout money - and those paper obligations will still not function.  Because the paper edifice is now so large that ten or twenty of thirty trillion will not be enough.  And when that Bailout figure is just too high - Confidence will not be restored.

And after all a Confidence Game can not work without Conifdence.

And then Real Things will be the only things with value

I like Historically interesting Gold Coins and Gold Medals

But anything real: Real Estate, Rare books, Sports memorabilia, Historical documents, Classic Cars, Wrist Watches (!) Rare wines and Brandies and Scotches, Instruments, Rock Memorabilia, Toys, Entertainment Memorabilia, Fine Art.  not so Fine Art.  And all sorts of weird stuff like Hair Lockets, Coke Bottles, Antique Medical Devices, Torture instruments, Rodent Traps... 

Real Things.  People collect them.  

They will save you when the Paper Edifice collapses.

Bill Gates walked into a bar....

 

In assessing the health of the US economy we here something over and over:  "There are trillions in cash waiting on the sidelines.  And sooner or later all that cash must come flooding back into the economy," therefor the US economy must be healthy.  

The problem with this Trope is that 5 Trillion in cash would be about the amount of cash the Billionaire classs in the US possesses.  If the billionaires are flush how does that make the economy as a whole healthy?

It's like the old joke about ten broke guys are sitting in a bar arguing over the health of the economy when Bill Gates walks in.  Suddenly the average net worth in the bar is over a billion dollars.  So the economic health of the patrons of the bar is excellent, right?

We also hear that the labor market it tight.  Unemployment is near record lows, right?  The health of the economy must be strong right?

Only there are 100 Million working age people in this country who have left the labor force.  They are uncounted in the Unemployment rate.  Sure, some are disabled, but a vast majority are tired of working for a non-living wage, and a living wage today that includes the cost of housing, education, health care and energy would have to be pretty damned high, especially if you have kids.

So, next time a fabulously rich analyst goes on Bloomberg and talks about all the cash on the sidelines and the great labor market, you might consider that the analyst may be talking his own book.

With the vast disparity of wealth in this country it is very very hard to assess the health of the economy.  

HARD ASSET PRICES: Be a Cynic

 

There's an old saw: "The Cynic knows the price of everything and the value of nothing."

I'd say the Cynic doubts the price of everything in the search for value.

It's actually pretty easy to determine the price of any hard asset: Look at the last auction result.

A hard asset is worth exactly what someone is willing to pay for it.  Today.

That's pretty easy to know.

The problem is this may or may not be reflective of  value.

Take a brownstone in Fort Greene Brooklyn.

Today that's worth about 3-4 million dollars.

The same place in 1970 was worth about $80,000

Same "bones."  The same beautiful hardwood interiors and wainscotting.  Unrenovated.  Different neighbors.

Or Take an Alexander stater,

In 1970 this nice stater would have cost you about $800

Today if graded in MS (as it looks) it should run you between $12,000 to $20,000 depending on how NGC marks up the holder

Same coin

What's changed?

The prevailing economic conditions.  After the inflation of the 1970's was crushed by Volker and 19 percent interest rates, the united states - and the rest of the developed world went on a wild economic experiment wherein every slowdown and every crisis was met with rounds of central bank easing.

This has gone on for close to 50 years.  So all Hard Assets, from Real Estate to Coins have soared.

And so have all paper assets.

Not in a straight line,  But over time.

Today we have reached the boundaries that define this experiment.  Every Easing has created reams of new debt.  Every lowering of interest rates have fostered now rounds of malinvestment.

Malinvestment means that many of the paper assets that have soared have little or no intrinsic value.  Like Space Tourism.  Or Carvana.  Or crypto currencies.

During this experiment the governments have found ways to keep changing the way they compute inflation.  But in real life it's gone up at least 10 percent for each of those 50 years.

So as assets have soared so has the price of every damn thing you need to buy to live.

Now even considering goverment calculation inflation  is out of control.  However as the Fed tightens inflation will go up by less.  Still it will go up from a base of 50 years of turbo charged inflation to something even higher - if only a little higher.

The probelm is the Fed will have enomous trouble turbo charging another round of easing during the next crisis with inflation an acknowledged problem - even if it's moderating a bit.

So how to Value Hard Assets in this environment?

Current prices reflect current conditions: Massive Uncertainty in the Economic Environment foster uncertainty amongst the mass of buyers.  The wealthy who are relatively unaffected by prevailing conditions are still avid buyers.  

The well to do are nervous.

So where is fair value?

It's a very tough question that depends entirely on where you see the economy going in a year or two years.

If you think the Central Bankers have a pretty good grip on where we are and where we're headed - in other words if you think they can tighten enough to bring inflation down without creating another crisis that would require drastic easing that would reignite a terrible inflation problem -  you best bet would probably be to double down on paper asseets like common stocks.

If you think the Central Bankers may be pretty smart but they have a horrible track record on seeing into the economic future and they may be in over their heads here I'd say look for the value of hard assets to be much higher in the near future.

Personally I think it pays to by a Cynic and doubt the price of everything in the search for future value.