“There are some things you cannot explain to a virgin neither with words nor pictures” – Warren Buffet
“To learn to be a real lover you need more than words and pictures, but they are a good starting point to avoid putting things in the wrong places, both in sex and in financial market” – Antoni Dragnev
…and this article is a good starting point (at least when it comes to financial markets)
No matter who you are, you should read this article because financial markets have more impact on your life than Instagram, YouTube, the iPhone & iPad, Michael Jordan, Cristiano Ronaldo and Leonardo DiCaprio together (adapted from “The Big Short”). This is true whether you are an employee of a company, a lawyer or even a dentist (with a “stable profession”). I know you are a busy person, so I will try to use the KISS principe and keep this short and sweet (as much as it would be possible for an e-book of this sort).
People should have already started to realize that in the past (prior 1970s), a financial crisis in the US did not necessarily mean a global financial meltdown. However, in today’s globalized world, a meltdown in a few large countries (i.e. the G13 countries) could be large enough to bring about a financial disaster which could be worse for the average person than the crisis of 2007-2008. This is because, unlike most experts’ predictions, the crisis of (2020-2021?) is likely to be based on deflation (or at least disinflation) rather than inflation (the type crisis we had in the 1970s). As a result, in its nature, this crisis will resemble the great depression which started from 1929 (but it will not be as bad for people). This disinflation situation could eventually lead many of the G13 countries’ governments to take measures that could lead to asset/commodity/goods price inflation, which could be devastating for all of us – the individuals who work hard to make this economy work.
In this e-book, I discuss why capitalism doesn’t work the way it should and my main reasons for believing that the next financial crisis will be experienced latest by 2021. The pre-conditions for a financial meltdown have already started to occur in Q3 2018, which is when I started making changes to my portfolio of investments (which I also discuss later in this e-book). Lastly, I provide you with some idea on how I plan to avoid losing about 50-100% of my own purchasing power over the next 5-10 years.
This deflation/disinflation could eventually lead many of the G13 countries’ governments’ to take measures that could lead to (asset/commodify price) inflation, which could be devastating for all of us – the individuals who work hard to make this economy work.
1.1. Why should I read this e-book?
If my evaluation of the markets is correct (which will be known only in 2-3 years (i.e. by 2021-2022, from the time of my first draft – March, 2019, see Figure 2.1. a few paragraphs below)), we are likely to experience an extremely severe crisis lasting for two or three years, like the deflationary crisis of 1929. This however, does not mean that the American Stock Market Index will fall in comparable manner to the drop in 1929 as some predict (this could and is likely to happen in 2040-2050 but is a topic for an entire separate article which I will post in the coming years). Going back today, the disinflation crisis of 2020-2021 could mean that new quantitate easing programs (QEs) are used by G13 countries to create reflation (i.e. to provide liquidity to the financial system) in order to mitigate its impact on businesses and increase inflation levels.
Currently, the disinflation phenomenon can be observed from the M2 velocity graph (see Figure 1.1. below) which is at a new low since 1950s. This is not surprising, given that the Second World War ended in about 1945, and this suggests that the years from 1945 to about 2000 represented, the post war-recovery which created significant inflation. Since, 2000, even the US (the strongest of the G13 economies) did not manage to create inflation which is needed for economic growth (from a Keynesian perspective). In order to deal with this disinflation, money is added to the economy (physically or only digitally on banks’ balance sheets) to return people’s belief in the economy, increase consumer spending, business activity, lending of loans and artificially increase inflation levels (this has happened in 2009 and in 2002, for instance). However, a closer look at Figure 1.1. shows that these stimuli did not actually lead to a new trend of increased money velocity, but rather small corrective spikes in a big downtrend.
Figure 1.1. M2 Money Velocity US (Source: TradingView)
When reflation happens, people who do not own any investments start losing purchasing power as this causes price inflation (of the services and products we use) to increase, making it more expensive for us to buy them. For investments, however, price inflation means they go up with a comparable level and maintain purchasing power. My purpose is to provide you with a perspective on what I would do to mitigate financial losses and to emerge victorious from the coming meltdown. While, it is unlikely that the US or Europe “becomes Venezuela” and have hyperinflation, simple inflation of 50% over 10 years could mean that people lose about 50% of their purchasing power in a decade. Over 30 years, this would leave the same people working for less than 1/3 of what they used to earn as wealth will be transferred from savers to investors (adapted from @PeterSchiff).
It also means something else, the US could manage to solve this crisis by creating another short term spike in Velocity M2, which could lead its stock market to new all time highs by 2030-2035-2050. But afterwards, the US will enter an even deeper crisis (which really could be like the great depression) or like the one in Japan (from 1996-2019), extending for over 15-20 years. So the threat of a deflationary crisis is real, but the piper will be paid around 2040-2050 as FED will not allow this crisis to be that one… However, given that they have done this 3 times so far, this means that eventually the US will also have to learn that “Communism” doesn’t work and no central intervention (even FED) can stop markets from mean-average reversal (over the long term). But let us not get ourselves distracted by this long-term future, and focus on the current economic cycle.
If you are a lawyer, dentist, teacher or participate in any other profession which you think has no direct relationship to the financial markets, you are the TARGET AUDIENCE of this article.. “Smart money” (as in investors and fund managers) knows what to do… the question is.. when the time comes.. will you know? Or will you blame WallStreet, the Government, or (….) for your own inability to understand what’s going on in this world?
“Smart money” knows what to do… the question is.. when the time comes.. will you? Or will you blame WallStreet, the Government, or (….) for your own inability to understand what’s going on in this world?
1.2. What is this guy selling to me? Why did he write this Sh*t?
I am not here to sell anything.. I am actually writing this e-book because so many people blame Capitalism to be unjust but they fail to understand the cause. In academia, we try to explain a result/dependent variable (e.g. capitalism (in)effectiveness) by understanding the independent variable (the cause) which brings the effect. A simpler cause effect relationship is – the sweetness of my coffee can be predicted by the amount (or different level of) sugar I add to my coffee. In this same manner, the extend to which Capitalism doesn’t work is determined by the independent variable – people’s level of involvement in the Capitalist system.
I am probably one of the few “nerds” who has actually read “The Wealth of Nations” (1776) by the late Adam Smith (1723-1790). I am probably also one of the fewer people who has read most books on modern investing, but also books like Ben Graham’s Security Selection and more importantly Irving Fisher’s (1867-1947) books on investing and markets. I feel those great men would turn into their graves if they understood “how capitalism is working today”. Therefore, I have had enough of people besmirching their names and I feel it is up to me to clarify how EVERY SINGLE ONE OF US is the reason for why Capitalism does not work … in the way that it CAN.. and in the way that it SHOULD…. (and not the system itself).
EVERY SIGNLE ONE OF US is the reason for why Capitalism does not work … in the way that it can.. and it should….
My main thesis on why everyone of us is the reason that capitalism doesn’t work: First of all, let’s start with the fact that every theory has an underlying assumption (i.e. it works ONLY when certain conditions are met). The underlying assumption of Capitalism is that people are involved in the capitalist system in a meaningful way. Most people, think that being an employee is representative of being capitalist, this cannot be further from the truth. The capitalist assumption is that everyone is either 1) an entrepreneur or 2) an investor. These are the only two real “capitalist” forms. In other words, you either a person who wants to 1) create value for people and thus needs capital do so (entrepreneur) or you are a person who has capital and wants to invest it in a sound business opportunity so it can grow (investor). You can also be a combination of the two, just like Warren Buffet is – an entrepreneur in investing. Given that, the “system” is called Capitalism, it should not be surprising that a man who is both an investor and entrepreneur is one of the richest men in the world. The other richest people are also a mix of investor and entrepreneur.
Here comes the “us” part….
How do you think, when Buffet earns $1-$2-$5-$10 billion bonuses (or more) does he buy bread for $1 billion? Does he buy TVs, Laptops or any other goods which have similar amount to his earnings? No, he still buys 1 bread (and maybe a 100 to his favorite charity). This means most of his money is invested and throughout the years he gets disproportionately richer relative to those who do not have any investments (i.e. his investments make money on money). At the same time, employees (who most of us are) only make money (and no money on money). However, if everyone in the world was a capitalist (and this might seem Utopian from the time of writing of this e-book, but bear with me) and obtained some form of return from being either an entrepreneur or an investor, then everyone could buy 1 extra bread instead of Buffet being able to buy “all the Bread in the world” . In other words, if we (normal people) own a bit of the businesses across the world (which we started or invested in some business which we have a passion about), this would change “the level of the independent variable – people’s involvement in capitalism” and produce a new level of the dependent variable – capitalism effectiveness. In simple words, if more people were investors and entrepreneurs, Capitalism would work better as a system.
In short, if everyone finds a way to be “capitalist” in the system called “capitalism”, then maybe THE WORLD would be a bit fairer, and people would be a bit better off instead of complaining about Capitalism… The sad reality is that “SMART MONEY” knows all the things I am about to tell you.. and if you don’t do anything with this e-book, this would be on you… This is because we will allow the world to continue to become a more unjust place because we don’t understand how to make it just… I am trying to be your coach in this very complicated matter, but I need your help.
Some governments like in the Dutch government have started to understand this which is why they provide numerous financial benefits and stimulus for entrepreneurs. The Netherlands is the country with the most small business owners in the whole European Union (https://ec.europa.eu/eurostat). This is beneficial to the people of the Netherlands because they obtain a larger return (as business owners – > entrepreneurs) and is also favorable for the government because if new productive services are created, they can be taxed and this tax money can be used to stimulate business growth further. So in the NETHERLANDS, MOST PEOPLE ARE CAPITALIST THROUGH ENTREPRENEURSHIP!!!! I am too, this “E-BOOK” is a free content but owned by my company WaveRidersCM.
After blaming everyone…. let me give you an idea of how you can “actively help” to change the current state of capitalism.
The Netherlands offers another great example. You can be an (employee) capitalist in the following ways:
- Small business entrepreneur (like the Taxi-drivers in the Netherlands, having their own firms) – single ownership not working for anyone else
- Employee entrepreneur (working for a Taxi Firm – Uber), but having 10 cars and renting them out to other people who can also work for Uber
- Employee investor – so an employee who invests (like people working for Unilever and receiving compensation in Unilever stock) ; You can be a Doctor who invests in pharmaceutical companies or a doctor who invests in tech (the last one is the best from diversification point)
- Employee entrepreneur/investor who has his own business (i.e. hair-dresser working at salon X who creates salon Y and collects dividend from renting out the saloon or chair in the salon Y) – employee entrepreneur/investor; or employee working for company X who has 5 houses and rents out 4 of them for rent money (employee investor).
- Employee by day, entrepreneur/investor by night – employee for company X, but trying to start unrelated business company Y (e.g. before I became entrepreneur/investor, I worked for different companies and tried to start my own financial education company); or employee in Dutch market whose work day ends at about 17:00-18:00 and an investor in US markets (which open around 15:30 CEST and work to 22:30 Dutch time)
- Investor Entrepreneur (i.e. not an employee for anyone else, and starting a business with investing focus – like Buffet). I aim to be in this category, which requires me to answer the question “do I have unique skills in the field of investing to create value for people so I can call myself an investor entrepreneur?”. Writing this article, is a form of test of my abilities to provide “unique new value to people” based on “my imagined or real unique skills” to produce positive business results and help the Dutch economy grow.
- Entrepreneur investor – (again not an employee for anyone else but starting a business with non-financial focus, but still investing in other businesses). For instance, I have friends who have digital marketing agencies and invest in stocks. They belong here.
These 7 categories represent a blend of the employee, entrepreneur and investor. As such, they will not you make you a “true capitalist” unless you belong to categories 1, 6 or 7. However, being 2-3-4-5 (a variant of employee capitalist) is much better than being an employee alone.
*Author note (1): I will post a separate article on this typology and explain it further. However, for now it should suffice in making my point that being “capitalist” and being an “employee” are not mutually exclusive. I propose the new form of “employee capitalist” as means of improving people’s lives and the effectiveness of Capitalism together***
By becoming one of my proposed mixes of employee and capitalist, you can help capitalism in a really meaningful way. This is because we don’t change the world by changing only our opinions but also by how we spend our money. It should be clear that if our vote for politicians is based on a ballot, our vote on which businesses survive is determined by how we spend our money. In other words, money is how we vote for what gets done and who survives. When employees demand luxury goods to “appear rich”, they create “demand for child labor” and other means that companies “are incentivized” to use to lower production costs (so they can provide luxury goods to poor people). However, an employee capitalist would partially own such companies and get part of the rewards they earn. In turn, this can increase the income of the respective individual and thus he or she will not “demand luxury goods at low prices” (creating this fucked-up world). Even further, a 5% stake in a company in the US entitles a person to “vote on its board of directors”. Now imagine, what would happen if for 30 years, a person manages to get such ownership. Then, you can actively express your vote in front of the board of directors and also discourage such shady business activity.
Who am I?
So if you want to know who I am, I am the inevitable consequence that the system has produced to bring about some balance.. the prodigy who understands “The matrix” which is capitalism and the (financial) markets through which it operates. A person, who wants to help people “understand the Matrix” and use it to your advantage to improve your lives but also the average quality of life across the world..
My personal reason for doing this is “the invisible hand”, a term coined by Adam Smith (i.e. my personal interest to achieve my goals and to be remembered by creating something useful which can be of value for people – social and economic value creation). In that sense, I try to achieve my goals, by helping people achieve goals they don’t know how to achieve or goals which they never thought of in the first place. By doing so, I hope to illustrate that when a person who understands capitalism acts according to the “real principles of capitalism” he or she can bring a disproportional benefit to the rest of the world.
So I know, that to create “value” in this e-book of about 50 pages and for you to read it, I must share things that no one has shared (or in a way that no one has combined them). This is why I am here to explain to you “What THE MATRIX is”.. So, Blue pill or Red pill (as in stop reading here or keep on reading)?
We don’t change the world by changing only our opinions but also by how we spend our money. It should be clear that if our vote for politicians is based on a ballot, our vote on which businesses survive is determined by how we spend our money.
2. The financial crisis of 2020-2021? (Measuring “the Matrix”)
2.1 Introduction (Capitalism 3.0.)
In this section I break down “the Matrix”, which is what I metaphorically call the “financial markets and their developments” which are the essence of Capitalism. People have become so ignorant regarding this topic that on a daily basis I hear how employees explain that “markets have no impact on their lives”… Well you are wrong and I mean really, really wrong… As a consequence, most people are completely unaware of how the market and its developments affect every level of their lives, it should not be surprising that Capitalism doesn’t work (i.e. people think the system which they are a part of has no impact on them and choose not to participate adequately), which is either stupidity or complete lack of desire to be aware. This is until something bad happens, like a crisis, then people lose their jobs and these same people blame Capitalism for being unjust. In reality, however, Capitalism is more like “natural selection” in the wild. Some people understand the world (and the rules of the game) and thus they could adjust and live in it. Others do not and refuse to participate in it, so they are rejected by the system as they do not comply with its basic rules of “survival”.
But what happens if everyone participated in a proper manner?
Then, there would be “some degree of natural selection” but not “an extreme degree of natural selection”… This means that not every person will achieve the same level of success, but the “gap” between those who participate and those who don’t will shrink. This is because not every entrepreneur will start a successful business. Likewise, if everyone is investing they won’t invest in the same businesses and hence will not get the same outcome. However, every person will be rewarded by the same “compensation structure”, i.e. not only through wages for employees vs dividends for investors/business owners, but through a wage and investing income or other combinations. This WILL NOT BE “COMMUNISM” because individual skills and markets will play the same role and some people will still be better. However, this would “Capitalism 3.0.” and all the people who participate in the capitalistic system will be rewarded.
This is not the case of today (as most people still think they are not part of this system)… And even if not everyone can participate, a large majority can, which is a good starting point. This can improve not only individual countries, but the livelihoods of people across the world.
The wealth of a country is determined by the individual wealth of its citizens. The wealth of the world is determined by the wealth of individual countries. From here, it should become clear that to change any of these, individuals need to change their “wealth positions” by engaging in a meaningful way in the Capitalist system. For now, it only works in the “West” because the people living in Western countries have understood this. But if other counties followed this path, then this would create better opportunities for everyone (as I would be allowed to provide capital in poorer regions for higher growth while those “poorer” entrepreneurs can create new companies/markets which did not exist).
Did you know that “Mobile banking” was invented in the Philippines in 2001 and not in the West? We all benefit from this technology today as it has been applied differently by the Philippines and Western countries. However, because in 2001 in the Philippines, internet banking was not feasible as most people had phones but no computers (this started as SMS banking)… In the west, it turned to “mobile app'” baking post 2010. This is just one example of how engaging in Capitalism of those countries which have done a poor role can create a world with better goods and services for all of us.
!!!: Again, my stance of involving everyone in Capitalism does not mean Communism, it means Capitalism 3.0. where new business opportunities are created by people who would otherwise not participate in this system, creating greater opportunities for people in the west, but also for people in the rest of the world. A truly global world where one can be an entrepreneur in the Netherlands but an investor in India lets say (or the other way around).
*Author note (2): I will post a separate article on this idea and explain it further. However, for now it should suffice in making my point that being “capitalist” in the “capitalist system” is essential to making “Capitalism work”. Likewise, it should suffice to make people aware that the reason Capitalism doesn’t work, is not your government, not your bank, and not anyone else but you, the people who do not participate in this great system because you don’t understand it***
*Author note (3): I already hear some voices saying – but how can everyone be capitalist, there will too much competition and no employees… Not necessarily, for everyone to be Capitalist it does not mean that everyone has to start “Apple/Google or Facebook”. As I mentioned above, in the Netherlands, even taxi drivers are “entrepreneurs” owning a single-ownership type of company. In essence, every person can own a company which serves a particular purpose and be both the employee and entrepreneur for instance.
Again, my stance of involving everyone in Capitalism does not mean Communism, it means Capitalism 3.0. where new business opportunities are created by people who would otherwise not participate in this system, creating greater opportunities for people in the west, but also for people in the rest of the world.
Now that we have defined the importance of participating in Capitalism in a meaningful way, we can understand the importance of our own actions and inactions on the outcome of the effectiveness of Capitalism and its impact on our lives. In this article/booklet I try to provide “a one stop-solution for your capitalist needs”. I realized there are a few (if any people) who have read as many books as me on the topic and probably even less who are willing to share these insights with you. That makes them also stupid, because they have not understood the point of Capitalism as well and try to only benefit themselves.
You could say I am in love with the theory of Capitalism and heart-broken by the application by people… I am in love with the concept behind it, the idea which is how to produce better goods and services for people so that they can lead better lives (what I am trying to do with creating such a paper/booklet). I am disgusted with what WE HAVE LET IT BECOME… A way to create better lives for a few but not because of the “few” but because of our own laziness, stupidity and tendency to take “the easy way out” – it’s someone else’s fault that I am poor, it’s someone else’s fault that I got fired or that I don’t have skills….And of course, it is someone else’s fault that capitalism doesn’t work… Well, it isn’t, it’s our FAULT as we don’t have the right level of involvement to make the system work. We do not meet the key assumptions behind the theory to make it work effectively…
I say we, not you because I feel at fault for not having shared this information earlier…. so I am tying to take my own responsibility by creating this book, will you?
2.2. Section structure (on upcoming crisis and my own investments)
I have broken this section down into six main topics (and sub-sections) to facilitate the understanding of the reader. These are as follows
- Section: 2.4. Why the pre-conditions for the financial crisis have already started to unfold and when the consequences will be felt by the average person?
- Section: 2.5, What are the current market valuations and what is “common sense” saying about the market (and these valuations)?
- Section: 2.6. How I personally avoided investment losses in 2018 and 2019?
- Section: 2.7. What I think is coming next and my plans to “deal with the beast”?
- Section 2.8. The bull market and emergence of “fake heroes/idols” like Grant Cardone, Tai Lopes and other pseudo coaches
- Section 2.9.What If I am wrong?
Overall, I follow the principles taught to at me at the @University of Amsterdam and @Nanyang Technological University to derive my own conclusions by asking the specific research question “Do I think there is a financial bubble?” and the first two sub-questions (sub-sections 2.4. and 2.5.) represent the sub-questions of my research. After answering these, I follow the academic way in making predictions (rather than hypotheses as they are more qualitative rather than quantitative) in Section 3. In other words, the research part is sub-section 2.4. and sub-section 2.5. represent the basis on which predictions are made in Section 3. Sub-sections 2.6. and 2.7 outline my own actions. Sub-section 2.8 explains why you should not put your faith in learning on what I call “fake idols”. Lastly, sub-section 2.9. answers the sub-question on what if I am wrong on my market evaluation (in the short-run, as it it is not wrong in the long run).
2.3. Value and Relevance
To make this a more applied research which has “value” and “relevance” to every person, I have also added sub-section 2.6., and sub-section 2.7. which show “how I am being capitalist” in another way (through my own investing).
In this way, I try to be an exemplary student of Adam Smith who is trying to be capitalist in two ways – an entrepreneur and investors. Given that my personal interest is to see the system “work” so that I can have children in it and not worry that people will destroy themselves, I allow you to have free access to this e-book and its entire content (your welcome). I also do not want this article in a Journal because research journals are also “unfair” because they are made to be read by people like me who understand statistics, cause-effect relationships and thus they are “an elitist” source of information.
I try to write this article in a common-sense way that everyone can understand and if someone does not, I have failed at my purpose (and will have to revise it until it becomes understandable to people from bus drivers to investors).
And don’t feel bad, most investors also don’t know why they have chosen to be investors, in most cases it is “to make money” which they cannot do because they start with the “wrong why”. If you however, start with the “right why”, which is to have a better a fairer life for yourselves and your children and better quality of products and services, then your own journey is likely to be much more successful because your personal “why” is stronger that money implications. My personal why is related to the world which should continue to exist so my children can grow up in it and because I feel the name of Adam Smith has been besmirched which is not fair to him (i.e. it is not fair that he takes the blame for our incompetence).
Most people are completely unaware of how the market and its developments affect every level of their lives, it should not be surprising that Capitalism doesn’t work (i.e. people think the system which they are a part of has no impact on them, which is either stupidity or complete lack of desire to be aware. This is until something bad happens, like a crisis, then people lose their jobs and these same people blame Capitalism for being unjust.
You could say I am in love with the theory of Capitalism and heart-broken by the application by people… I am in love with the concept behind it, the idea which is how to produce better goods and services for people so that they can lead better lives. I am disgusted with what WE HAVE LET IT BECOME… A way to create better lives for a few but not because of the “few”
So let us get into the topic of answering the main research question – is there a financial bubble? Now we understand, we all must know the answer to this question because the implications will be felt by every single one of us (regardless of whether we know it and accept it or not).
2.4. The pre-conditions
“Do I think there is a financial bubble”?
Author Note (4): I wrote this draft on 31.03.2019 (see the screenshot below), so I was calling this potential financial meltdown 12-18 months in Q1 2019 based on developments of Q3-Q4 2018. (In my opinion this drop has started in Q1 2020 but it won’t end there). Unfortunately for me, I never got around to checking my draft for mistakes and it remained as a draft on my LinkedIn. So now I will post my original article, with very few additions (which become clear from the content itself).
I think the timing of this e-book is even better because while the Bull market was running, no one had an incentive to understand what’s wrong. Maybe, I am still a bit early because most of you I imagine have no clue we are already in the process of a financial meltdown.
Figure 2.1. Original Draft
2.4.1. The pre-conditions of a bubble (Theoretical Framework)
According to Bernstein, PhD, MD for a bubble to be exist, there are four pre-conditions for identifying a financial bubble, namely: a) a major technological revolution, b) easy credit, c) amnesia for the last bubble and d) abandonment of time-honored methods of asset valuation (http://1.droppdf.com/files/0opyj/the-four-pillars-of-investing-by-william-j-bernstein.pdf , p.137). Michael Burry, PhD used another indicator to predict the financial meltdown – e) new highs in levels of fraud. In 2018 all these conditions were met, which is why the title of this article refers to 2018 as the starting point of the 2020-2021 crisis (or the equivalent of 2006 of the 2007-2008 crisis). In 2020, we are most likely into 2007 when we had the first drop of the markets, but this is not the final and “crisis” drop which occurred in 2008 and most probably will happen during 2021.
(a) A major technological revolution (emergence of Blockchain) or shift in financial practice (cryptocurrencies):
The theory on bubbles predicts that in about every 10-20 years a new piece of technology will emerge and once it starts trading on financial markets, it will bring unjustifiable returns (e.g. Internet stocks 1998-2000, Bitcoin 2009 – 2011, 2013-2014, 2016-2017) which most people consider normal until they learn the very harsh truth.
In 2018, The Blockchain technology represents the disenchantment with new technology andand Cryptocurrencies – The shift in financial practice(I can already hear 1 million voices screaming against this, please suspend your judgement for now and keep on reading, I also like crypto but I must explain to you what needs to happen for it to work).
In 1998 to 2002, many investors correctly predicted the potential impact of the Internet on our future. This is why many investors were willing to pay outrageous prices for stocks like Amazon and Intel which were about 100x their dividend and subsequently lost about (80-98% of their value). Many specific ones went to 0. However, only AFTER internet stocks topped and experienced A SIGNIFICANT 98% DROP in value, Internet technologies became “cheaper to adopt” and by 2008 the Internet was widely available to us as the consumers. However, it took about 6 years and many “bad players” to be wiped out. In other words, this correction was needed for the prices to become lucrative for businesses to invest in Internet technologies and find new applications, which could provide new profits and thus bring new stock market return. Amazon, Facebook, Netflix and Google represent some of the key companies which were able to take advantage of the lowering price of this technology and produce new such returns. In other words, real new technology is always awesome as it improves our lives and provides means to obtain financial returns, but we tend to overvalue it first, adopt it later and slowly grow into the initially overvalued state. For companies like Intel, who reached a top of $70 in 2000, it has taken over 20 years to reach this same price (and we all know that Intel has been crushing it in terms of productivity in the last 20 years).
this correction (of 2000 – 2002) was needed for the prices to become lucrative for businesses to invest in Internet technologies and find new applications, which could provide new profits and thus bring new stock market return.
For @Bitcoin and other cryptocurrencies, this means that while a potential bottom in the price might have occurred temporarily, there is still the very big likelihood that the cryptocurrency might crash to new lows. In December 2017, I was out of Bitcoin at about 16-17k and I predicted price going down to 5k, 3.2k or 1.8k before resuming for an uptrend. By Q1 2019 (we had a drop to 3.2k). In other words, just like in the case of NASDAQ, it took about 2 years for market prices to potentially bottom and to provide “room for adoption”. Only at lower prices of blockchain technology and cryptocurrencies, businesses would commit to trying out these technologies and their application to improving service quality and profitability.
Many people predict that banks will be involved in crypto which should drive the prices up. My logic would rather be that businesses like @Western Union and @Moneygram have the opportunity to significantly improve their profitability, lower cost for themselves and their clients and thus improve the transparency and quality of the financial industry. There are of course, many other forms of cryptocurrencies which can prove to be useful in different industries (e.g. @Ethereum is a token which aims to be a platform for creating other tokens upon it, even the USDT and USDC tokens are built upon Ethereum protocol). Only when businesses can benefit from this technology, banks will try to benefit too…
Since we never reached the price target of 1.8k I cannot say whether Bitcoin has bottomed. So to me, in short, further drop in the price of all cryptocurrencies is possible. However at prices of Bitcoin around the 3k level, I feel comfortable with re-allocating capital to this speculative asset class. In short, I bought Bitcoin in 2017 for about 3k per bitcoin and I bought other cryptos when the price of Bitcoin was about 3k in Q1 2019 (mostly Ethereum and Ripple as I think these have the highest utility of all, remains to be seen, I will also discuss this in a separate post).
The key takeaway is that some of the cryptocurrencies could emerge as victors and provide returns over the next decade. Others will go bust as they have been the result of the bubble, just like many other Internet stocks in 2002. And even if all cryptocurrencies disappear, the underlying technology will be adopted (at the correct and lower prices) rather than at Bitcoin 20,000 as most people thought in 2017.
Only at lower prices of blockchain technology and cryptocurrencies, businesses would commit to trying out these technologies and their application to improving service quality and profitability.
One such example is @Facebook with its Libra coin. A business which aims to create a coin to be used on its platform and across other platforms to improve Facebook’s profitability and future growth.
Author Note (5): I have slightly changed the concept of the author as his main claim is there has no been a new major technology since 1) emergence of agriculture, 2) steam engine and 3) the production line (by Ford which made capitalism possible in today’s form). He argues that all other technologies are somewhat worthless. I disagree with this and I think Internet was the 4th such technology and Blockchain is and is and will be the 5th.
(b) Interest rates (price of money) and Leverage (Easy Credit):
B.1. Interest rates
At the point of writing the draft of this e-book (March 2019), Interest rates are at 2.5% which is near the historic low of 1955. My projection is that interest rates will go to near 0% (or 0.1% or 0.2%) before a massive spike in interest rates. By massive we mean raising them from 0 to 2.5%-3.5% or slightly higher (but not to 10% as in 1980s as this is not an inflationary crisis).
Figure 2.2. Interest rates of Q1 2019
This projection is based on Austrian economics perspective (e.g @Peter Schiff), which postulates that in a Keynesian economic system (the one which exists now), growth can be accomplished only by increasing consumer spending and cutting interest rates to entice consumers to spend beyond their means during periods of economic expansion. By definition, in periods of economic contraction (such as of 2007-2009 and as I propose 2020-2021) interest rates need to be raised (say starting in 2021-2022) so that they can be lowered during the next expansion (say post 2023-2025 to 2035-2045).
Within the concept of predicting bubbles from an Austrian perspective, this means the bubble can go on “as long as interest rates have room to go down”. If interest rates reach 0 or become negative, the only way from there is up. (Unless the government wants to run the risk of country-default which is unlikely for the US as they would lose the reserve status which their currency has).
What happened in 2018-2019 and What does this lowering and subsequent increase in interest rates mean?
Figure 2.3. US interest rates as of Q1 2020
Consistent with theoretical predictions, interest rates continued to drop driving consumers to spend further and increasing asset inflation (i.e. prices of stocks increased further from 2018 to 2020). In 2020, we are at 0.25% interest rate (from 2.5% in Q1 2019, so my prediction came true but because I did not post this earlier), which means we either have very little or no room to lower these interest rates further.
If interest rates dip below 0, this would mean that the US is likely to experience a great depression crisis like it did in 1929. This is inevitable, but not due for another 20-30 years. Most people mistake that this would be a hyper-inflation crisis like the one in Venezuela, but in reality it would be a Deflation crisis like in 1929 US or 1996 Japan (Author Note (6): as I said I come back to this in another article, but is important to understand why now is not the time to worry that interest rates won’t go up, they will go up).
What could happen from here (as in 2021-2022)?
From here, interest rates should increase again towards at least the 2.5%-3% mark so they can be lowered again for the next cycle of economic expansion. However, increasing interest rates, means 1) money flows out of stocks as they produce a low dividend and moving into safer assets such as bonds and even bank deposits (which increase deposit %) and 2) stocks losing further value (capital depreciation) so that profits can be paid in dividends (to at least match deposits) to discourage some investors from divesting (selling) their holdings in the stock market.
The most important implication however is that the price “of money” increases. This means if businesses are already leveraged (which they are), borrowing more money becomes disproportionately more expensive. Also, their current loans are adjusted to reflect this increase in interest rates. Together, these mean that many businesses will go bankrupt which will trigger a domino effect and will bring about the next economic meltdown.
Author note (7): I am discussing the case of US, but in European Union, it’s even worse. Some countries like Germany, France, Italy and Greece already have the same debt (or higher as % than the US) to sustain their stock market growths. In the Netherlands for instance, 10 year Dutch bonds are yielding -0.1%. This is good for people and bad for investors. Since 2000, the AEX (the Dutch stock exchange did not have a new high because the country has “faced” the disinflation pressure and has allowed its debt to be lowered. The Netherlands has debt of about 60% relative to GDP, making it one of the few countries below the 100% mark. However, as I said, this also means that stock investors did not obtain positive return since 2000 because asset price inflation did not happen. The reason I am explaining this is that this should eventually happen in the US. However, given FED’s policy on maintaining US as the best market for investors, it will not happen until US is forced to do so and the FED cannot do anything about it. This is also why this is a topic for an entirely new article. However the key point is, when interest rates go negative, the stock market cannot grow which means US will not allow interest rates not to go up because they will need the market to push to at least one new high (in the coming 20-30 years)… Then, enough “small actions” will have taken place to cause a 20-30 year deflationary period (as the Netherlands is having as of 2000 to 2020).
The moment interest rates start to increase, this will trigger the “meltdown” which won’t be an average recession (as in 2016 or 2018) but a real crisis such as that of 2007 (or even worse). This should happen by October 2021.
The small actions during 2002, 2007 and 2020 will lead to a big Financial Depression in the US as of 2040-2050. And yes, if by 2050 US becomes one of the worst stock markets, then the Netherlands, Japan and other markets which “faced reality” will become the best markets for investors (I get back to this in section 2.5.).
Lastly, only if the US does not deal with deflationary pressure in 2050 accordingly, this could end up in hyperinflation and country default (as most people don’t understand where and when hyperinflation comes in). So the risk of deflation which cannot be solved is the only reason to have hyperinflation.
Consumers are not the only ones who are enticed by “free money” (I call it free money because borrowing at 2.5%- 0% is essentially free money as the average inflation of US is about 3-5%, this would mean banks are giving us money to borrow money). In other words, the bank is knowingly losing about 2.5% to 5% on lending us this money.
“Free money” in reality means people borrow to do stupid things – e.g. taking a mortgage on one’s house to buy Bitcoin at $20,000k (many such examples in 2018). Taking loans (using leverage) to buy Bitcoin, all forms of debt to buy “this new technology” which brings exponential returns in the short term (for a few early movers) and exponential losses (for those who borrowed to buy on margin). In other words, it means that leverage allows people to drive themselves further into debt (when unknowledgeable people start to invest or when they use this money on personal consumption). This is consistent with the Austrian economics perspective, which explains that due to our current financial system, economic growth is associated with lowering interest rates to create further spending.
We discussed this in terms of investments, but low interest rates also help people to drive themselves into debt in another way – by buying things people cannot afford. Today, many people borrow money to buy TVs, mobile phones, laptops and other goods are available to them only because there is “free credit”. This means people buy things which they cannot really afford because the price of credit (i.e. the interest is lower). But what happens when interest rates rise?
US interest rates are at an all time low (of about 2.5%) in Q1 2019 and going to 0% by 2021 (my prediction going to near 0 or negative to fuel last leg of the bubble). This would create temporary high prices for investments as free money enters the system, but it also creates the pre-conditions for devastating 2020-2021.
We go in more details about valuations in the next section (Section 2.5.). The key takeaway here is: we have free money which most people are using to fuel a life they cannot support (look at US debt of $70 trillion vs tax revenue of about $1-$2 trillion). At the same time, financial institutions are using this free debt to create additional financial returns by buying stocks, bitcoins, gold, bonds and other assets using credit… Overall, this approach has its consequences… Think of 2007, Banks had 33x leverage for which US tax payers paid nearly $1 trillion (specifically about $700 billion, $0.7 trillion).
This time the amount could be 5-10x .. Did I get your attention? Yes, after a potential meltdown, the next bailout could be between 3-7 trillion (5×700 billion = $3.5 trillion or 10×700 billion = $7 trillion)
For a bubble to be existing, there are four pre-conditions: 1) a major technological revolution, 2) easy credit, 3) amnesia for the last bubble and abandonment of time-honored methods of asset valuation. In 2018 all these conditions were met, which is why the title of this article refers to 2018 as the starting point of the 2020-2021 crisis (similar to 2006 prior to the 2008 crisis).
After a potential financial meltdown (bursting this bubble), the next bailout could cost American Tax payers between $3.5-$7 trillion
By 2019, the US economy is roughly $21 trillion (as in the GDP of the country is $21 trillion). A debt of 70 trillion means that if the US sells all its assets (the entire country), its still cannot pay its creditors….
More importantly, a bail-out of $3.5 – $7 trillion would create 3.5/21 = 15.5% or 7/21= 33% of inflation only solely based on this bail out by 2022… If you think you can live with that and that’s not that bad, let me interpret what it means. It means that to match inflation levels, all companies will increase product prices by relatively the same or higher levels and we could end up losing a significant amount of purchasing power. On the other hand, professional investors are looking forward to this, as this means they could profit from the crisis and make 50-100% (some up to 500%), which puts you, the individual, at a much worse off starting position (because your wealth has been transferred as a saver to investors)… This means that while professional investors are making money (increasing their purchasing power for the future), people might experience losing more than 50-75% of purchasing power over the next 10 years following the meltdown of 2020-2021.
In a nutshell, easy credit and liquidity means, we are getting poorer because 1) we make mistakes as inexperienced investors, 2) we borrow to increase spending and 3) we do not consider transfer of wealth from savers to investors. To me, personally, this means that inaction in financial markets is also a mistake… Not participating in financial markets but borrowing to buy cars, phones, laptops or other products means people get even poorer by spending “free money” on more liabilities instead of buying real assets. If people buy such things, they force themselves to “pay out” not only the liability but also the interest associated with this liability, making them even poorer…and the bigger implication is that by not being a capitalist in the sense of entrepreneur or investors, most people will fail to obtain the returns which follow each crash. Together, this would give us something like a 30% inflation + 100% loss of purchasing power = about 130-150% loss of purchasing power by 2030-2031 for those who do not own any assets. If they also have debt… that’s even worse.
Due to the gain from investments + avoiding this inflation “rich people” will get “richer”. At the same time, those who do not have “the proper” participation in Capitalism would end up poorer (because they miss out on the gains and because they do not protect themselves against inflation). So, if u didn’t know why the rich get richer and the poor get poorer, this is the explanation.
B2.1. Leverage in student loans
Something which was not so big in 2008 was student debt. As of Q1 2019, student debt in the US is reported to be about 1.5 trillion (almost same as US tax rate). This implies that the Government believes all students will find jobs and be able to repay this debt… According to Barron’s about 20% students are already not able to pay this debt. If this number continues to increase, we can see how even student debt becomes a catalyst of a more catastrophic meltdown. It’s ironic that the “cost of education” could “cost tax payers” about $700 billion alone (if only 50% of those cannot repay the debt).
B2.2. Mortgage loans
“The statistic depicts the total mortgage debt outstanding in the United States from 2001 to 2019. The total mortgage debt outstanding in the U.S. amounted to approximately 16.01 trillion U.S. dollars in 2019.” As I have shown in the figure below, this is already higher than the “REAL ESTATE BUBBLE IN 2008”, which is horrible as this is not a “real estate bubble”.
Figure 2.4. Value of mortgage debt outstanding in the United States from 2001 to 2019 (in trillion U.S. dollars)
Together, US Mortgage and student debt represent about 18 trillion of the total 70 trillion debt of the US. I can break the rest of them down, but by now I hope you get the key idea.
The moment interest rates start to increase, this will trigger “the next financial meltdown”… This should happen by October 2021.
This would give us something like a 30% inflation + 100% loss of purchasing power = about 130-150% loss of purchasing power by 2030-2031 for those who do not own any assets. If they also have debt… that’s even worse…
On the other hand, professional investors are looking forward to this, as this means they could profit from the crisis and make 100% (some up to 500%) during the same period, which puts you, the individual, at a much worse off position (because wealth has been transferred from savers to investors)…
easy money (b2), low interest rates (b1) and a new technology (a) => dangerous speculations which end up hurtful to people. Moreover, people get themselves further into debt by buying things they cannot really afford.
(c) Amnesia of the last bubble (the global housing crisis of 2007-2009)
For such a thing to occur of course, enough unexperienced young individuals have to enter the finance world and a generation of veterans who have experienced at least 2-3 such markets exit (retire) from the industry. In about 10-15 years such a cycle of occurs, which brings a lot of young and unexperienced people (such as myself) to enter this world..
I personally entered this field because I am perplexed by how even hedge funds managers manage to blow $150 million (e.g. OptionSellers.com – https://business.financialpost.com/investing/wiped-out-hedge-fund-manager-confessed-his-losses-on-youtube because of stupidity, greed and general lack of understanding of the fundamental principles of how markets works.. I mean.. how can you promise clients a diversified portfolio and lose 150 million on 1 bet? (Not to mention he did not even remove his Rolex when giving this speech).
The point is… there is so much lack of general understanding of the fundamentals of market valuation and what investing actually is that even hedge fund managers themselves have become clueless (and not entirely coincidentally bashed by academics for being outperformed by simple ETF trackers, for more on this check the short and sweet book Elements of Investing by Malkiel, Burton PhD and Ellis, Charles PhD).
I am also writing this because I believe this concept of ETF investing has become so widespread that ETFs are also part of this bubble (we get back to this in sub-section 2.2.5 in the next main section – Section 2).
In any case, the key take-away is that for American tax payers to be so F**D basically someone or a lot of people need to fuck up big time.. And if you didn’t know.. there are about 10 American funds that represent nearly 70% of the US GDP.., so if these have access to easy credit and are leveraged, this means that a single drop of 50% of the market (they track) could make them experience significant “cash withdrawals” and create a whole new set of problems with liquidity in the financial system.
Easy money (b) + new non experienced investors entering the field (while experienced investors retire) (c) and a new technology which is not properly valued by young investors (a) => time for youngsters “to be woken up from this Amnesia” and to learn that prices do eventually go down to compensate for this irrational exuberance.
(d) Abandonment of methods of valuation
D1. The new technology
When I saw selling Bitcoin at 16-17K, everyone was convinced that for some reason its rally would extend to 100K. Given Bitcoin’s start at $0.05, this made absolutely no sense as NO BUSINESS WOULD EVER ADOPT THE TECHNOLOGY AT A PRICE OF 20,000 PER COIN. Again people were extrapolating an endless bull market by choosing to value Bitcoin on the basis of “hope” and some ridiculous arguments…
When Bitcoin hit 20.000 exactly (on 17 December 2017) I posted a picture on Facebook with the title “I wonder what happened to those shorts?” (as I expected price to dip since 18k). I was wrong by 2k, I admit it. Most of my bullish friends laughed at me for selling the 16k level and for “urging shorts” to come in… I also sold at 16k because if shorts had come in at about 18k, market liquidity would not have allowed me to exit… So 3k to 16k was good enough for me 🙂
Figure 2.5. Bitcoin short action anticipation
Only 1 day later, the market dipped to 14-16k (and later to 10k) and 1 year later to my 5k and 3k target areas. I can also put numerous screenshots of how I said I sell my Ethereum at 1K and 1.1k (I did miss the upside to 1.5k but I also missed the downside to $80).
D2. Stock market
The specific market valuations are presented in sub-section 2.2 in Section 2. (so they could be forward-looking instead of backward looking like this one).
Let us summarize some things here. Fisher’s dividend model uses dividend to understand how many years a person has to wait to get return based on the dividends that would be produced by a company in the future. This becomes the basis of current valuation for stocks.. and now it gets really interesting… yes, since Bitcoin does not have any dividends, it is not at all an investment. All those of you who mistakenly say you have invested in bitcoin better at least get the idea of what you have actually done.. You have not invested.. because in investing we calculate how many years does it take the dividend to get me to 100%, for instance tech stocks 1996, I would have paid $20 for $1, so 20 years.. (which was somewhat reasonable). Now it is 30-50 years on the Dow Jones Indices and about 94-98 years on the “tech index” – NASDAQ.. Just for comparison, in 2001-2002, it was $70 for $1 (or 70 years to get 100%!!!! crazy!!!).. so we getting close… we are forgetting and abandoning.. if we haven’t already done it (as now Nasdaq is about $94-$98 for $1 dividend, or I must live to 130 nearly…
What you have done is called speculation – what Soros does, not what I do and what Buffet does… this is called speculation for the purpose of capital appreciation… However, unlike Soros, you have not done it with investing instruments but with what he’d call (weapons of mass destruction.. He called CDOs in 2008 this, and I don’t think he will disagree with me that most crypto currencies have become such a weapon)… There are a few which provide actual utility such as Ethereum, but the best example of how it could work can be seen in the NASDAQ drop after the rally of 1998-2002.
Many others have posted pictures explaining Bitcoin will move like Nasdaq. However, the lack of their understanding of “why”, made it impossible for “HODLERS” to keep their cool (when market was exuberant on the way up and on the way down). I hope by now, you understand why, such a drop has been not only “predictably irrational” and why the next rally is also predictable (from my point of view). The predictability lies in having prices of this technology that are low enough to stimulate other businesses to “use this technology” and improve their own results…. In other words, most people have missed the reality that the important factor is not “people adopting the technology” but “companies adopting the technology” to improve business results. Only when companies adopt this technology, this leads to improved client satisfaction and only then, prices increase again… My favorite example of this is Intel stock…
Author Note (8): If you look at Intel in 2002, it had a price of nearly $70 dollars. It took Intel 18 years from 2002 to 2020 to regain the same price…. Why? Because, in 2002, Intel was valued “against its today’s potential”, just like cryptocurrencies in 2016 were valued at their “future potential prices”.. It took 18 years for every chip in every device that I own (My MacBook, My normal PC and my Iphone) to have an “INTEL CHIP”, i.e. for Intel products to be adopted….
Easy money (b2) + low interest rates (b1) + new non experienced investors entering the field (while experienced investors retire) (c) and a new technology (a) which is valued in ridiculous ways (such as Bitcoin and NASDAQ stocks) (d) => time for youngsters “to be woken up from this Amnesia” and to learn that prices do eventually go down to compensate for this irrational exuberance (as they did for crypto during 2018-2020)
I hope by now, you understand why, such a drop (in Bitcoin) has been not only “predictably irrational” and why the next rally is also predictable (from my point of view). The predictability lies in having prices of this technology that are low enough to stimulate other businesses to “use this technology” and improve their own results…. In other words, most people have missed the reality that the important factor is not “people adopting the technology” but “companies adopting the technology” to improve business results.
…in investing we calculate how many years does it take the dividend to get me to 100%, for instance tech stocks 1996, I would have paid $20 for $1, so 20 years.. (which was somewhat reasonable). Now it is 94-98 years on the “tech index” – NASDAQ.. Just for comparison, in 2001-2002, it was $70 for $1 (or 70 years to get 100%!!!! crazy!!!).. so we getting close… we are forgetting and abandoning.. if we haven’t already done it
E1. Crypto fraud:
- ICO (initial coin offering) Scams:
“Total funding of coins and tokens in 2017 amounted to $11.9 billion. $1.34 billion (11 percent) of ICO funding went to scams, the vast majority went to three large scammy projects; Pincoin ($660 million), Arisebank ($600 million), and Savedroid ($50 million), which together equal $1.31 billion. This suggests that while a large number of ICOs were scams, they received very little funding when compared with the industry as a whole.”
- Crypto mining scams:
Not a day goes by that somewhere in Facebook someone offers people to “mine crypto” and to easily receive – Bitcoin and other cryptocurrencies. In short, these are scams made to make people send money and scams whereby no one receives bitcoin.
Online mining sites – there are some sites that offer you to pay them 1 bitcoin to mine up to 10… economically, this makes no sense, and thus these are also scams… (someone might share his/her real experience in comments).
- Crypto reward scams
Recently I stumbled across a fake interview with Vitalik Buteren, which if he knew was happening would probably have sued the scammers, but basically the concept was “Ethereum give-away” which works like this. To receive Ethereums you must send at least 1-10, and depending on how many you send them, you are “going to get more” or “much much more”…I think I should not waste more lines on explaining how this is an obvious scam because the economics behind it make no sense.
- Crypto lending platforms (Crypto and lending credit fraud together):
@Nexo.io is the first one that comes to mind (as I am constantly terrorized by their advertisements). Promoting itself as a digital bank which it is not, with some assets that provide “safety” in an unknown way. You are enticed to put your crypto to get a quick loan “in a safe crypto environment”. When the market dropped however, at least 10 people wrote on “trust pilot” – NEXO, I AM LOOKING FOR A LAWYER, YOU SCAMMERS… another one said “NEXO LIQUIDATED MY ENTIRE PORTFOLIO”. These comments were covered by now by a set of positive comments… so even the Trustpilot page is organized to show only positive comments first.. VERY VERY IFFY. I wonder how many of the positive comments are real. @nexo.io ?
In other words, we have more crypto scams than ever…. This one represents an entirely new type of scam – both crypto and credit scam and it looks like “Bitconnect 2.0” (for those who remember Bitconnect)… That one I am not even going to discuss as when people say “guaranteed return”, my reaction is – RUN FAR and don’t look back. For Nexo, I’d do the same – run far, run quick…As the business model seems to be “let us pay you 1/3 of what your crypto is worth so we can take it all”.
E2. Credit fraud:
Figure 2.6. Credit card fraud in the US (in Millions USD) (Source: Shift.com)
- “In 2018, $24.26 Billion was lost due to payment card fraud worldwide
- The United States leads as the most credit fraud prone country with 38.6% of reported card fraud losses in 2018
- Credit card fraud increased by 18.4 percent in 2018 and is still climbing
E3. Real estate credit fraud
- United States
The following graph visualizes the levels of mortgage fraud in the US. Not surprisingly, they are higher than 2007 (which is ironic as we all know 2007 triggered the “real estate crisis”). Now comes the “everything crisis”.
Figure 2.7. Mortgage fraud in the US
As you can see, the fraud doesn’t only take place only exist in the form of mortgage fraud scams, but also social media scams, crypto scams, investing scams, you name it…
- United Arab Emirates (the everything fraud, apart from sand)
Here, I will share a specific personal experience because UAE would never share such data. In reality, UAE depends on European and US “investment” to sustain the country’s growth and if most people understood “what investing in UAE” really means, no European or US investor would ever put a cent into this broken, ponzi-scheming country. If you ever get the chance to go to RERA (Real Estate Regulatory Agency, the regulatory arm of the Dubai Land Department), go there before committing any of your money to a project. You will only see people who are trying to find information regarding their projects which are always 1) delayed, 2)not according to contracts, 3) the company has ran away with people’s money but another company will come, finish the project and compensate them (someday..), .. (or at least that’s the only thing I saw during my 4 visitations there).
The only possible thing as a foreigner is to sue the project, while it is made clear to you that as a European you have no rights in Dubai.
To get exposure to real estate, I only use REITs (real estate investment trusts – what I understand). However, last year, I was in Dubai, UAE twice for a personal vacation and I was invited to see a “hotel” in the middle of the Ocean. This project has a great idea, creating hotels to represent the different countries in the world in one place (but in the middle of the Ocean) (an opportunity for me to learn about specific real estate investments in 1 unit). This ponzi scheme is known as “The Heart of Europe project” by https://www.linkedin.com/company/kleindienst/. They have only bought a few of these “World Islands” representing Europe. As a European, this seemed like a super interesting and exciting idea (provided that it was legitimate).
So I wanted to do my due diligence and I paid some $2,000 to get access to the paperwork. To me this represented an opportunity cost of finding out if this is an opportunity or a ponzi scheme. The moment I got the paperwork, this project started to “smell, and I mean to smell really bad”.
What were the signals?
- As a foreigner, I was offered a structure of paying only 15-20% up front and that I will receive an investor visa which would entitle me to a mortgage. This seemed so wrong I had to check it… The moment I went to a bank official at Islamic Bank in Dubai, they told me no foreigner can get such a loan (red flag 1)
- An investment “which forces them to pay me 8% guaranteed dividend “. The word “guaranteed” (red flag 2).
- The flexible installments – the lower tier sales agents explain how you can send 10,000 euro instead of 50,000 and they would somehow negotiate it to be okay (red flag 3)
- Articles from UK investors who got burned by this project – https://www.theguardian.com/cities/2018/feb/13/not-end-the-world-return-dubai-ultimate-folly
- Last red flag a Dutch lawyer evaluated the contract and told me I am an idiot if believe in this (this was a hard one to admit but he helped me save me 348k). This is also why I do not try to conquer areas which I don’t understand alone and seek advice from more knowledgable parties regarding topics where my knowledge is insufficient
So my loss was not really a loss because the real commitment was over $350,000. This is why I would personally never ever buy anything in Dubai (or anywhere else in UAE). So while my initial comment that UAE are a ponzi-scheming country might seem too harsh, but from my perspective, it is the truth and I want the world to know it. I sent e-mails to RERA that explain this situation and got no response in return. I am hesitant whether to write that the government knows that this is a ponzi scheme, so I will just write that from my experience, Government bodies like RERA are useful only to help one lose his or her money investing in Dubai.
General rule of thumb: if you do not deal with financial markets on a daily basis and you “know about an investing opportunity and you think you are gonna win big”, take your money and spend it..because the chances are you will be the sucker…
Figure 2.8. The most important lesson of investing/speculating (Source thequotes.in)
I had such a bad experience, I never plan to even go on a vacation there no matter what. If more Europeans and US citizens applied the same logic, maybe we would have “some rights” in UAE instead of having “no rights” as in no “human rights”.
Easy money (b2) + low interest rates (b1)new non experienced investors entering the field (while experienced investors retire) (c) and a new technology (a) which is valued in ridiculous ways (d) + fraud (mortgage, credit, crypto or the newest baby – crypto credit) (e) => time for youngsters “to be woken up from this Amnesia” and to learn that prices do eventually go down to compensate for this irrational exuberance.
New technology (a) + low interest rates and easy credit (leverage) (b) + the entry of inexperienced investors (c) who use ridiculous methods of valuation (d) + fraud in the new technology (as well as others sectors) (e) will cause young investors “to be woken up from this Amnesia” and to learn that prices do eventually go down to compensate for this irrational exuberance.
I was recently asked if it would be more correct to say that they would be “woken up” or that these pre-conditions create the “need” for young investors to be woken up. The need has been there for a while now (about 2 years), so the reality is they are most likely “going to be woken up” because they were not when they should have been.
Author Note (9): At time of writing this, we had already seen 3k on Bitcoin 1 time. On Cryptos specifically, this somewhat already happened as we already had another drop of Bitcoin to 3k in 2020. Therefore, a lot of people, might have already “have been woken up from the Amnesia”. I will go into my current crypto valuation in section 2.5. (sub-section on cryptos).
Author note (10): Now there is a new “Amnesia” in NASDAQ stocks valuation which will also be seen from section 2.5., sub-section NASDAQ. That makes sense as 20 years have past since the last one, and most people do not care what happened 20-30 years ago (i.e. those who do not remember history are doomed to repeat it).
2.4.2. The implications for the average person and companies
Every crisis has negative implications for firms and individuals, but it also has positive implications. The really good people/companies manage to turn negative into positive (e.g. being laid off from a “stable job” (point 1 of (a) Negative – for individuals) could be the perfect opportunity to bounce “from the bottom to the top” through entrepreneurship or investing (in new opportunities or old forgotten ideas you never acted on) (Points 1 and 2 from (b) Positive).
- A financial meltdown means losing “stable jobs” and as consequence losing purchasing power if no assets are held by the individual who lost her/his job.
- Inability to understand why goods and services are becoming more expensive (e.g. housing). Many people think real estate is an investment. But in reality, the value of real estate most of the time appreciates with the same level of inflation. For instance, in the Netherlands, a house of 2002 which costed about 50,000 EUR now costs about 200,000 EUR. The only way in which a house becomes an investment if rent is paid as well… Only then the value of the income of the house would be greater than inflation (as the house does not have productive power with which to beat inflation). The same is true for all products we use – for phones, computers, oil, gold, etc., all items become more expensive over time (due to inflation). I remember when I came to Amsterdam in 2011, one sub-way ticket was about 2.20 EUR it is now at about 4 EUR -> inflation. For gold an oz. of gold used to cost about $30 in 1930 and now costs about $1500 (90 years inflation).
- Salaries – if salary has remained flat over the last 18 years, you have lost about 50%-75% of purchasing power (at least across the European union). People who earned about 2000 euro in 2002 need to earn about 4000 – 8000 EUR in salary per month to compensate for this inflation (so about 48,000 – 96,000 EUR per year).
Author note (11) – I will provide calculations based on M2 supply in another article to explain which professions in the Netherlands have outpaced the 4k mark and which professions resulted in people having lower purchasing power than they had in 2002 -> another argument for them to be employee capitalists
- It also means having no idea why this happened and blaming someone else for the mistakes made by people themselves – I hope I am not the only one that remembers how in 2008 American tax payers went out to “boycott” banks and blamed the government and WallStreet for doing what they did….
- Scams – permanent loss of purchasing power
For organizations (which I think can also be extended to individuals)
I cannot explain all of these with detail because then I would have to go another 10 pages. However, I suggest reviewing my source below as these are explained there.
- Decision making processes are broken and need to change
- Relations between departments (and people) deteriorate during the crisis
- Coordination (of activities and departments) becomes insufficient
- Organizational communication is lowered in terms of quality and volume
- New responsibilities and chaos in authorization to deal with the crisis
- Harder to reach goals during crisis
- Panic circumstances and fear during the crisis
- Demoralizing of individuals/personnel during crisis
- Opportunity – to avoid this type of crisis in the future and improving situation in the coming 10 years (as of today). I get into my specific portfolio and what I have been doing in 2018-2019 in sub-section 2.6. and what I plan to do in order to improve my situation in sub-section 2.7.
Author Note (12): Investing – But get used to bad news. “The masses long ago switched from stocks to investments having higher yields and more protection from inflation. Now the pension funds—the market’s last hope—have won permission to quit stocks and bonds for real estate, futures, gold, and even diamonds. The death of equities looks like an almost permanent condition—reversible someday, but not soon.” (From pillar of investing).. Another one is “Bitcoin is dead”, has been dead about 10 times in 10 years (it didn’t die once). I will post separately on this too.
- “System restarts” – Cleaning of toxic businesses so (new) good businesses can stand out
- New entrepreneurship – based on (non-)existing opportunities
For companies (which also can be extended to people in my opinion).
- Crisis creates unexpected opportunities
- Crisis created reconstruction
- We learn from the crisis – how to be more effective
- We become prepared for negative circumstances
- We develop fast decision-making during crisis
- Crisis forces us to determine and let go of weak departments/activities
- Crisis helps us to understand the importance of information and learning for competitiveness
- Crisis shows the importance of skilled labor
- Crisis taught us how to reduce costs (austerity measures)
Again, you can check the original source below for more info.
2.5. Market valuations and common sense
Investing is dividend compounded over time – Irving Fisher. The logic is that stock’s valuation should be based on the earnings which will be distributed as dividends in future years. If a stock/market has a high dividend yield and potential dividend growth, it is considered a better investment vs other stocks.
“Investing is dividend value compounded over time” – Irving Fisher
Investing – about dividends, so what do they say. According to this theory a stock’s value should be determined by the future stream of earnings which are distributed to investors through dividends.When the market gets overly enthusiastic stocks are discounting not only the future but the future of the future, meaning earnings are estimated from a point of already unsustainable earnings. I believe since 2019, we are experiencing the same phenomenon.
Overall it seems that today investors are buying $1 of dividend for between $37 and $94, meaning they would be willing to wait between 37 to 94 years to get 100% return on their investment based on the dividend perspective of investing. For those of us using this method shows that indeed a new generation of investors has entered and their are willingly (knowingly or unknowingly) buying stocks which would double based on dividend value only after at least 37 years.. I am 29 and I personally knowingly, would not accept this as it would mean I have to be 66 if i invest in DJIA (Dow Jones Industrial Average).. and interestingly for Nasdaq I’d have to wait about 92 or 96 years.. For me, 29 + 94 = 123, so double my money when I am 123. For me this already makes it a no-brainer of why I should be out of the market (represented by American Indexes and large-cap US stocks).
All calculations are performed on the basis of WallStreet Journal’s valuation of the indexes as of Q1 2019 and Q1 2020 (to compensate for not posting in 2019). This is based on: https://www.wsj.com/market-data/stocks/peyields
There is a great book called “Predictably Irrational” by Dan Ariely in the context of marketing and consumer psychology. Luckily for us, this concept of “predictable irrationality” did not start from Marketing but from Finance, so we can also know that markets are also predictably irrational (on the way down and on the way up). So let us see what this “irrationality” is.
2.5.1. Dow Jones Indices dividend valuation
Dow Jones Industrial Average Index – dividend yield of 2.27% as of March 2019; Using Fisher’s model for calculating how many years it would take to double my investment, I get 37 years. The calculation is as follows: 1/0.027= 37.03, so waiting 37 y to get 100%.. From age of about 30, this would mean I have t wait to 67 years old, which I don’t find reasonable. After the current drop From Jan/Feb to now Q1 2020, the dividend yield has increased 3.82%, the calculation is 1/0.0382 = 26.17 years (when this drops to 15-20 years, i.e. dividend increases to 5%), this might be the potential low of DJIA, but not for now.
Dow Jones Transportation Index (Q1, 2019) – dividend – 1.58% = 1/0.0158 = 63.29 years
Dow Jones Transportation Index (Q21, 2020) – dividend – 2.31% = 1/0.0231 = 43.29 years
So we can see that from the prediction about a market drop, we have a slight improvement of the situation. But this is by no means enough to start a new bull run (from my point of view). Dow Jones Utility Index – Dividend – 2.88% ; 1/0.028 = 35.71 years
The utility index is supposed to be defensive and least overvalued of all, this is true as we can see that Dow Jones Utility index takes 35.71 years to double an investor’s value from 2019’s pricing (this is much better than DJIA and DJT). However, whether waiting 35.71 years makes sense, I leave up to you, for me it does not.
2.5.2. Russell 2000 index valuation
While Dow Jones is representative of the large companies, there is an index about small cap companies such as Russell 2000. Here, things get even more fun.
- Dividend yield Q1 2019 – 1.45% = 1/0.0145 = 68.97 or 69 years to double investment from dividend (fun as I must live to a 100 to achieve this).
- Dividend yield Q1 2020 – 2% = 1/0.02 = 50 years, still better than 70 years but it means I have to wait til I am 80, so it’s a pass
“In 2019 small stocks are valued as NASDAQ stocks in 2002… So a collapse is imminent here (Amnesia).” (Q1 2019). In Q1 2020, I would say the collapse has started but not over (the current Amnesia is that “this discount is to be bought NOW”).
2.5.3. Nasdaq 100
As of Q1 (2019) Dividend yield – 1.04 = 1/0.0104 = 96 – NASDAQ MORE OVERPRICED THAN IN 2000 (where this number was about 30-40 years and we had the tech bubble) = 94 year, so I must live to about 125 years old to get this return. As of Q2 (2020) dividend yield – 1.08 – still danger = 92.6 years, so I “only” have to live to 122.6 years to get 100% return based on dividend alone
As of Q1 2019: “HELLO is any intelligent life still existing? Amnesia? In 2002, it was 70 years.. Congratulations despite being more educated you have been less knowledgable than people even in 2002…” As of Q1 2020, this continues to stand and is even worse because “sentiment is these are rebuys NOW”… Amnesia sweet Amnesia
- Dividend yield – 1.92% = 1/0.0192 = 52 years
- Dividend yield – 2.13% = 1/0.0.213 = 46.9 years
In other words, S&P slightly better than DJIA and much better than NASDAQ from current valuations, but still relatively poor as I have to be 82 to get 100% dividend return (from current levels).
By this measure, we may be a lot closer to year 2000 style bubble valuation levels than most people in the market believe. Essentially, most stock market indexes are being valued as if we are about to experience the type of growth which followed immediately post 2009 crisis. And while this is true for the long-run, in the short-run valuations need to get to 20-25 before a new rally can start.
2.5.5. Total Stock Market ETFs
Let us look at VTI – a US based Total market ETF fund, the value of which is about 800 billion (0.8 trillion value) relative to the $21 trillion value economy as of 2019 (or 4% of the whole economy). In 2019, VTI is paying 1.91% div – making it – 1/0.0191 = 52.36 paid for each $ in div (for reference in 1990 – the beginning of the tech bull run it was 20, in 2000 it was 70). This suggests that ETFs are also significantly overvalued and cash-outflows could be experienced in the coming years towards 2021-2022.
In 2020, this is somewhat confirmed as 60 billion out-flow were experienced and now VTI has about 740 billion valuation, at 2.13% dividend = 1/0.0213 = 46.95, almost 47 years. When this becomes 20-25 years, maybe it will be a buy.. This suggests that this particular ETF can lose up to another 25-35% from current valuations. This means an exit of another $200-280 billion from the fund could happen by end of 2021-2022.
2.5.6. Gold Mining Stocks
I use Angico-Eagnles Mine (AEM) as a representative of gold stocks – dividend 1.60% – 62.5 years
But is it a fair comparison on dividend basis of gold stocks vs other stocks?
Given that gold and gold mining stocks have been negatively correlated to tech stocks, it should not be surprising that gold mining stocks have been in recession since 2011-2012 to 2018 (while tech stocks have been up). Most investors do not buy physical gold or gold mining stocks in anticipation of a huge dividend increase. Rather, this sector rewards investors through capital gains (especially when US indexes are down).
Since I proposed the Amnesia in “NASDAQ”, the key difference is that NASDAQ is at about 20% up from $8000 to about $10,000 while gold mining stocks are up at least 50-100% (NEM, KGC, AUY) or in some cases 200% (EGO, NOVAGOLD) and still way below their previous highs.
When the stock market collapses, fears cause people to eventually turn to these types of assets (such as gold) and abandon equities to other negative levels of exuberance. The following abstract portrays the type of mood we should eventually have “The masses long ago switched from stocks to investments having higher yields and more protection from inflation. Now the pension funds—the market’s last hope—have won permission to quit stocks and bonds for real estate, futures, gold, and even diamonds. The death of equities looks like an almost permanent condition—reversible someday, but not soon.” – Source Bernstein (2012)
At one point this would mean that stocks will be undervalued too. However, NASDAQ and SMALL CAP stocks are dangerous and others (DJIA,DJT, S&P, VTI) are also overvalued (by a smaller degree) but not yet at levels which I would call discounted.
If there are any discounted assets, they are gold mining stocks, weed grower stocks and I would even dare to speculate that cryptocurrencies like ETH, NEO, XRP are also undervalued. Let us look into crypto next and weed stocks after.
I use NEO as it provides dividend and can be comparable to stocks in that sense.
NEO – 5.5% – 1/0.055 = 18 years to double, so when I am 48, much better than any stocks
The idea however is that NEO dividend is paid another coin – GAS the value of which has dropped significantly. Therefore, I cannot say whether this crypto is better than all stocks, I can in terms of valuation, this crypto looks much better than the entire stock market as a potential return from my point of view. Price projections ranging from to “200 – 500” for cryptocurrency prediction sites (so I’d take this with a pinch of salt, but even I believe 160 is possible for NEO). Source on price projections: https://currentcrypto.nl/neo-koers-verwachting-wat-gaat-de-neo-koers-doen/#NEO_voorspelling_2019,_2020,_2023,_2025
In section 2.6. you can see my expectations for Ethereum (similar view on XRP and NEO).
2.5.8. Weed growers (WEED ETFs)
- MJ – 9% dividend in 2019 = 1/0.09 = 11 years
- HMMJ – 16.7% dividend in 2019 = 1/0.167 = 5.98 years
So from my perspective, relative to other markets we have discussed (e.g. djia, nasdaq, djt, S&P). weed growers ETF is the most undervalued and thus represents the best market from the point of view of dividend valuation. As I am now 30, it means it would take me 6 to 11 years to double my money from dividends alone.
Industry outlook available here: “the global legal marijuana market size is expected to reach USD 73.6 billion by 2027, according to a new report published by Grand View Research, Inc. It is anticipated to expand at a CAGR of 18.1% during the forecast period”. Source: https://www.grandviewresearch.com/press-release/global-legal-marijuana-market
I hesitated whether to add MO (Altria Group), the producer of Marlboro cigarettes here as it was Tobacco and not weed. However, for me it has been a no-brainer that these companies will take a large stake in weed businesses. Yesterday (20.04.2020), this officially happened, so I will include this stock. MO = 8% dividend = 1/0.08 = 12.5 years! Now, this is an undervalued stock! only 12 years to get 100% dividend from return. This is the type of stock Fisher had in mind to look for as when looking for a company with high dividend and potential growth.
Author Note (13): I will write a separate piece on dividend stocks and why I believe dividend growth will slow down and the stock will produce returns via capital gains
Figure 2.11. Oil and Shell (Source: WaveRidersCM ©)
As I was finishing this e-book yesterday (20.04.2020), I planned to put a forecast on OIL explaining it should go to a new low. Today (21.04.2020) futures are traded at “-40” (I am sad I did not post yesterday, but you can see the prediction is made before the oil drop). This futures price, however will not last and the price of oil (as in WTI) should eventually stabilize around the 9-10 area. In essence, what is happening for futures to be at a price of -40 is that there is lack of liquidity to fill orders, so the price is -40 to reflect non-executed orders. New futures will open from 20, from where price can fall again and overall stabilization around $9 (for futures) and eventually around $9 (for real oil) before price is allowed to head up. Likewise, because I see many bulls on Shell, I also want to express an opinion that shell should dip further towards 9 at the very least.
2.5.10. China, Japan and India
Since 2000, Neither Chinese nor Japanese stock market indices have managed to reach a new high as opposed to all American indices which registered a new high in beginning of 2020. India, despite registering new highs could also be an interesting market to 2050 (to not make this impossible to read, I discuss only China here because of my word count limit.
The Chinese stock market which topped in 2006 is a similar story to the Japanese stock market which topped in 1996. Since 2006 and 1996, China and Japan respectively have both been considered poor markets by most investors. A few academics (e.g. Bernstein) have proposed that Asian markets are negatively correlated to markets in the US, which is why they have proposed about 10-15% allocation to Asian Pacific stocks. I agree with the basic premise that these markets are negatively correlated to the US and I agree that from the POV of the authors makes sense because they could provide returns when US does not. However, given that these authors live in the US, proposing higher allocation to those stocks would be “UnAmerican”, so I disagree with the proposed percentages (especially as of Q1 2019).
Author Note (14): To be fair, there is a difference between fixed and dynamic portfolio allocation. Therefore, I will write a separate post on this topic too.
What does Fisher’s valuation tell us?
2.7% in 2019 = 1/0.027 = 37 years
2.2% in 2020 = 1/0.022 = 45 years
This makes sense from two perspectives 1: negatively correlated to US stocks and 2: less efficient markets (taking more time to adjust to the mean average). In other words, because of the negative correlation between NASDAQ and SHANGAI, this means that in the next 30 years or so, the Shanghai Market could significantly outperform the US stock market.
Figure 2.12. Shanghai Composite (in bars) vs NASDAQ Composite (in Orange line)
From correlations point of view, we are missing the spike above new high like in US (in orange), we can see in 1996-2002 the internet bubble, then in 2006 in Shanghai bubble leading to 2007-8 crash, but not the recovery which followed in the US. Market is “less efficient” – less volume, less people trading it, so explains why it would take more time. But odds are, this crisis in the US, means the start of the trend for the Chinese stock market to outperform the US stock market in the coming 20-30 years.
From correlation to causation: That also makes sense from another point. Most books from these US authors have been the only source of information even for people who live abroad (such as myself). By definition, this means that most academically inclined people are inherently following this allocation.. This in itself means that by allocating according to those specific principles, most people have weighted “China” not according to its GDP value relative to Global GDP but at 5% at most. To me, China is the second largest GDP, i.e. should represent second largest allocation as in a 30-50 year period, it will outperform the US (so if the economy is expected to become larger, its stock market will also become better). Therefore, in times of expected NASDAQ crisis (like now and shorter turn of 2-3 years), this allocation could be even larger and China could be the largest segment of a portfolio.
Author Note: (13) Japan and India – reached LinkedIn’s page limit – so separate post on their valuation
2.5.10. The first signs of crisis, What does “SMART Money” say (Q1 2019)?
Maybe as of 2020 this will be very weird to read. But in September 2018, the first article on yield curve inversion (which is between 3 and 10 year bonds in the US) appeared. The general rule is that a crisis follows from 12 to 18 months after the inversion.
To me this rule has kept its validity and it was the main reason I called this article “the financial crisis which has started in 2018”. Because, in September 2018, we had evidence that in 12-18 months, there will be a crisis (in the financial markets). At the time of writing this today about 18-19 months have passed and the first Drop of AMERICAN INDEXES STARTED EXACTLY 18 MONTHS after this…
Figure 2.13. Inversion of yield curves between 3 and 10 year bonds (Bloomberg)
So let’s see what I wrote in Q1 2019:
31.03.2019. WaveRidersCM, CEO: “An inversion of interest rates indicates that most likely a correction of another 50% is likely to occur about 12 – 18 months as of the date of inversion”. What this meant is: I expect a crisis 12-18 months after Q3 2018.
In this case, the inversion occurred on In September 2018. However, the crisis is unlikely to be felt until 2020 or 2021 in the markets (and not by 2021-2022 by people). Why? Because, this chart represents the “NEWS OF THE NEWS”.. We need about maybe 1 to 1.5 years (12 -18 months) so that the effect is felt no the stock market. From there, we need about 1 year more to actually start experiencing losses in businesses due to unknown factor to trigger further sell offs.
In 2020, the COVID-19 became a trigger for sell offs, which may people think has already ended. I keep seeing articles on how the recession is over, which only makes me sad because once again it confirms that young, inexperienced investors extrapolate a future where growth cannot stop. So their entirely experience is based on the Bull market and obviously they failed to pay attention to history of the markets… They are in for a “lesson”….
Author Note (15): Yesterday I was on INSTAGRAM and I see all these money making pages which advise people to buy “FAANG” (Facebook, Apple, Netflix and Google) as a “hedge against the crisis”… This shows another form of Amnesia again (from crypto to NASDAQ stocks as in 2002, but worse). This is so crazy and such an obvious indicator, I must write separately on this too.
The next section explains my operational plan since Q3 2018.
2.6. How I personally avoided investment losses in 2018 and 2019?
- Gold mining
I have personally made significant changes to my portfolio as of Q3 2018 in anticipation of the meltdown in the US. Back then I called it “FANG” vs “BANG” which represents the top tier tech companies (Facebook, Amazon, Netflix, Google) versus (Barrick gold, Agnico-Eagle Mines, Newmont mining and GoldCorp). Since 2018, BANG stocks gave an average of about 100% increase. On the other hand, NASDAQ (the technology index holding FANG) barely increased from $7987 to $9500 (19% increase).
GoldCorp in particular, merged with Newmont mining. Therefore the list became BAN. Since 2019, I have increased my gold exposure further with 2 smaller tier gold miners – Eldorado Gold and Yamana Gold.
My new list is BANEY. This is not a recognized acronym in any particular portfolio and thus represents my own “gold mining ETF”
Key takeaway: Gold mining stocks is the asset category which led recovery post 2002 to 2007 and after 2008 crisis, from 2009-2011 (rallied 1000% and 250% respectively). Stocks started bull rally only after 2011 (when faith returns in the economy and investors move out of gold, to participate in growing businesses during economic expansion). In other words, this is the category which recovers first after crisis as investors are worried about losing purchasing power due to sub-sequent inflation. If we have begun a crisis in 2020, this could be the category which starts rallying towards new highs by 2023-2025.
- Electric Vehicles (EV) Market
The EV market is barely in its early stages of development. I have also been long on Tesla since 2018 and this is the only NASDAQ stock I would never let go (or at least for the next 20-30 years) and yes, it does not pay dividend (so applying Fisher’s model won’t work). However, to simplify logic, let’s go back to the well known model of Boston Consulting Group’s – BCG matrix. If anyone remembers the BCG matrix from 1980s, Tesla represents a “star” – a company with high market share in a fast-growing market.
Figure 2.14 Global EV sales forecast (Source: Bloomberg)
Key takeaway: The EV market is barely at its starting point (look at the trend of 2020 vis-a-vis 2040), so investing in companies like Tesla and other EV manufacturers is yet to become overvalued. Here comes importance of actual plays, If I had bought this stock above 400 I would have sold it, but as my buy is below 300, I would HODL (as in hold on for dear life). Author note (16): I can show more in how I actually play out my positions in another post/video update.
- EUR/USD, long USD
This is maybe the hardest thing to understand from my plays and maybe makes the most little sense. But let me try to explain, as of Q1 2018, it became clear that the Euro could be in trouble relative to the dollar. From there, we got a hint that a potential crisis might start as this would mean deflation or at least disinflation in the US (or such significant losses in the US market in USD and such an USD demand (based on outflows) that the price of each existing dollar raises rapidly). Another possible explanation is that investors anticipated since 2018 that interest rates in the US would remain the highest, making the currency more valuable. And a last alternative explanation would be that investors moved money to US bonds, worrying about Europe’s interest rates going to a negative territory.
Figure 2.15, Source: WaveRidersCM ©
When I took action for the first time in Q2 2018, it was unclear which one it was, but one thing was clear, we started to have pre-conditions for the next financial meltdown. My plan was to convert back to EUR at parity, meaning 1 USD becoming equal to 1 EUR. From a point where 1 EUR used to buy 1.24 dollars, this represented a 28% decrease in Europe’s currency (in other words, if the US wanted to buy Europe, it could to it at about 20-25% discount). For now we have a bottom of 1.06, which is not parity yet, but I am still looking for it. More importantly, as a European I hope but do not exclude the possibility that we can pay 1.1 EUR for 1 USD (or EUR/USD actually bottoming around 0.9), which would represent over 50% loss of purchasing power for Europeans when it comes to US goods (and that US could buy Europe at about 30% discount).
Key takeaway: In times of financial distress, the dollar is the strongest among all world currencies. In other words, when the US stock market starts to experience losses, the dollar becomes stronger against other currencies (as it becomes the most demanded).
2.7. What I think is coming next and my plans to “deal with the beast”?
I think that the people who think the US market crash will contain of a 25-30% drop like in 2018 are delusional at best, and I am hesitant to say idiots at worst. There is literally, no basis for an extended rally other than “the hope there will be one”. However, this does not prevent many Instagram marketers to post things like “you should buy this dip..”.. I would be very careful about investing my money based on Instagram posts. There is an old saying from about 9000 years before Christ, “those who trust the spear-maker to buy jewels for them end up paying with their own money”. In essence, this means do not take advice from people who do not know what they are talking about. I could be such a “spear-maker” too.. so I share my own view on how to handle “the beast” (as in the market crash) and use my portfolio (sub-sections 2.6 and 2.7) and predictions (Section 3) to show that maybe I am not a “spear-maker”. I choose LinkedIn because I can post a short e-book without going through the hassle of publishing a book (and I can update it regularly in 1 place).
- Gold stocks
I plan on increasing volume in Yamana, EGO (the EY of BANEY) from existing ones since larger gold miners (e.g. NEM, BARRICK) lead the trend and grow first but less rapidly. I plan to find other laggers such as Kinross Gold (KGC) and Gold Fields (GFI) which have greater profit potential in the coming years.
- Silver stocks
I have read tons of articles since 2018 advertising silver as the better asset relative to gold. For 1 year, one of the most notable gold/silver investors (Mike Malouney) has been focusing on silver instead of gold. While, this is generally, true, in 2018-2019, silver did not make sense. Many companies like – GPL, NAK, EXN, EXK (silver miners) went to new low in Q1 2020. Only now, these are interesting to me and I consider adding them.
- Euro long
Move out of USD and back to EUR at EUR/USD at 1.05 to 0.9 range. The idea is that while Euro loses value relative to the dollar in the long run (i.e. it has been the weaker currency for the given period of 2002-2020, there is one notable exception which is during the 2007-2009 crisis. This was not true during 2008-2009 as we can see that in 2008 EUR clearly topped against the dollar and started a bearish trend. This trend should reversed around EUR/USD = 1 or 0.9.
Figure 2.16. EUR/USD Source: WaveRidersCM ©
From today’s point I cannot say whether EUR/USD will begin a new cycle all together which will lead EUR to a new high. However, I would personally aim initially to obtain about 16-20% (assuming bottom around 1) to 1.16 or 1.20 and 1.24.
- Weed stocks
If Bob Marley was alive, he’d probably buy only these (if he would ever buy investments). Current view – very bad, unsure market; companies being sued and stuff. Socionomic theory posits, worst/best news usually appear near points of major trend reversal,. For bitcoin at 20k, there were 2 songs – Bitcoin billionaire and HODLGANG which appeared in December of 2017 – the top of Bitcoin. Now for weed, we have something opposite.. I recently read an article on Weed stocks which I personally thought is quite good – “move on we have forgotten and taken our losses”. More importantly, most marijuana players were “sued” which created an ever worse image, making them an appropriate investment from sociononomics theory perspective.
Figure 2.17. HMMJ (Marijuana INDEX forecast), Source: WaveRidersCM ©
Figure 2.18. ETH/USD (Ethereum forecast), Source: WaveRidersCM ©
Figure 2.19. SHCOMP (Chinese (Shanghai market)) forecast), Source: WaveRidersCM ©
- Bonds, specifically 1-5 year US bonds
Curve inversion means – short term bonds will outperform long term bonds, and given that the idea of bonds is to hedge stocks anything with a longer period of 10 years is useless. This has been explained further by Bernstein PhD, MD in the book 4 pillars of investing.
- Final words
However, I think bonds are also not going to have returns comparable to other assets I mentioned (e.g. gold mining stocks, cigarette stocks into weed, weed stocks and dare I say cryptocurrencies – ETH, XRP, NEO).
2.8. The fake-idols created by the Bull Market since 2009
I call these “Fake idols” because their performance could be explained by the bull market of 2009-2019. However, in first signs of troubles, Grant Cardone’s – Cardone One Capital froze dividends for 90 days showing that he had absolutely no clue what is going on in the market. In 2019 I attended a seminar by Robert Kyosaki’s protege in Amsterdam who advised people that now is the time “for real estate” and asked people to enroll for 10,000 EUR subscriptions to buy properties in UK…. I do not want to know how many people were suckered into this. For me attending these seminars is fun to learn what not to invest in.
There are so many “gurus” which lead money-making seminars that make me sick to my stomach as I know these guys are there to sell their useless programs at about 10,000 a pop. Instead, investing 10,000 accurately could produce significant returns. These guys have not understood that the only asset whose return increases exponentially with more usage is an idea. Therefore, sharing ideas and information should be done freely (as I am doing now). So I personally stay away (and will stay away) from “gurus” and try to be “my own guru”.
2.9. What If I am wrong?
If price disinflation turns into deflation – all asset prices would be temporary down and headed to new lows including gold and crypto. This would not mean they do not represent a suitable investment and speculation accordingly, but rather that deflation means that the value of cash increases relative to other goods or services.
This e-book will be posted as a method of testing 9 predictions:
- Prediction 1A: The next financial meltdown will occur by 2021-2022 in financial markets
- Prediction 1B: The consequences for average people will be felt about 2023-2025 (or at least 1 year post crisis in financial markets)
- Prediction 2A: Relative to 2007, this crisis will be based on sever deflation/disinflation
- Prediction 2B: This deflation/disinflation will be solved with QE of about $3.5 – $7 trillion which will create inflation of about 50-100% in the 10 years following the crisis (by 2030)
- Prediction 3A: US interest rates will increase from 0% to about 2-2.5% by 2025 causing many bad businesses to go bankrupt and further economic decline in the coming 2 years
- Prediction 3B: By 2025 a new cycle of the economy will start and interest rates will be cut again until the next crisis of about 2030-2035
- Prediction 4A: American Index Funds and ETFs (such as VTI) will experience strong liquidations which would bring another 25-35% drop in price by 2021
- Prediction 4B: These American Index funds will recover to new highs about 5-10 years after the crisis (by 2026-2031)
- Prediction 5A: Gold mining stocks will outperform traditional stock market indexes in the next 5 years to 2025
- Prediction 5B: Gold mining stocks will produce lower return in the next period of economic expansion relative to normal index fund stocks going forward from 2025 to 2030-2035
- Prediction 5C: After the stock market tops at a new high to about 2035, there will be about 15-20 years of deflation, making gold again the best investment during 2035-2050 (for a real deflationary crisis).
- Prediction 5D: In 2050-2080: The US will experience a real deflationary crisis as the crisis in Japan as of 1996, leaving no stock market returns for 20 years to 2070-2100
- Prediction 5F: If the US continues to exist (which from today seems very likely), after 2070-2100, the US will become an interesting market for investing again
- Prediction 6A: Cryptocurrencies (e.g. NEO, Ethereum, XRP) will outperform the US stock market (as in DJIA, DJT, Nasdaq) by 2023-2025
- Prediction: 6B: The blockchain technology is here to stay and will become widely adopted
- Prediction 6C: Cryptocurriences will continue to exist but it is yet known if these will be the ones of today (or new better players will come)
- Prediction 7A: Weed growers stocks will outperform the market by 2021-2023
- Prediction 7B: The trend for weed stocks will extend to at least 2025-2027
- Prediction 8: Tesla will reach a price of 2000-3000 per share by 2030.
- Prediction 9A: The Japanese stock market will resume to a new bullish trend after 20 years of flat to down trend
- Prediction 9B: The Chinese stock market will resume to a new bullish trend after 14 years of flat to down trend
- Prediction 9C: The Indian stocks will resume to a new bullish trend and continue to outperform the US stock market despite being up in the last 17 years
Unfortunately for me, the first hypothesis was partially confirmed before I ever managed to publish this draft as I planned to do it in March of 2019. Nevertheless, we can extend this to a testable prediction by rephrasing it as follows:
Prediction 1A: The next financial meltdown did not end in Q1 2020, but will continue during the 2020 and 2021.
Since 2018, things started to get very iffy, in 2019, they were already iffy enough to suggest a crisis could happen soon. The prevailing opinion is that the current drop of the markets was just another minor recession. This thesis is yet to be disproved as another more severe drop should come by the end of 2021. Only 2-3 years after that point will US financial markets become interesting again. This is because “small cap” and “tech stocks” are valued even more ridiculously than in 2002.
In the mean time, I believe gold mining stocks (BANEY + KFN), weed growers (e.g. HMMJ/MJ ETFs) and EV (Tesla) remain the optimal investment for the given period until 2023-2025. I will also turn my focus to EUR long relative to dollar by end of this year or Q1 2022.
From speculation point of view, my chose asset class is crypto (NEO, XRP, ETH and some others). As, I already explained: New technology (a) + easy credit and leverage (b) + the entry of inexperienced investors (c) who use ridiculous methods of valuation (d) + fraud in the new technology (as well as others sectors) (e) => young investors “to be woken up from this Amnesia” and to learn that prices do eventually go down to compensate for this irrational exuberance. As of Q1 2019 which when I wrote this, this claim was supported by another drop of Bitcoin to $3k and Ethereum to about $80. I suggest that even my entry of about 120 per ethereum could be slightly early as these prices could drop further. However, I do not see a better speculation as of today. Hint: Look at the chart of BITCOIN vs OIL, imagine the same thing vs US stocks and even physical gold futures
Bad businesses – must go out of business like Nexo or THOE/Kleindienst as examples.
If I had to invest somewhere with 30-50 years time horizon, it would be in Chinese, Japanese and Indian equities (and maybe German equities).
Author note (17): I will provide an overview of European markets in a separate post
Bonus: How to Handle a market panic?
“What is the investor to do during the inevitable crashes that characterize the capital markets? At a minimum, you should not panic and sell out—simply stand pat. You should have a firm asset allocation policy in place. What separates the professional from the amateur are two things: First, the knowledge that brutal bear markets are a fact of life and that there is no way to avoid their effects. And second, that when times get tough, the former stays the course; the latter abandons the blueprints, or, more often than not, has no blueprints at all…. Ideally, when prices fall dramatically, you should go even further and actually increase your percentage equity allocation, which would require buying yet more stocks. This requires nerves of steel and runs the risk that you may exhaust your cash long before the market finally touches bottom. I don’t recommend this course of action to all but the hardiest and experienced of souls. If you decide to go this route, you should increase your stock allocation only by very small amounts… so as to avoid running out of cash and risking complete demoralization in the event of a 1930s-style bear market.” (Bernstein, 2008)
Do not forget the new clarification of employee capitalist
I provided the basic information in sub-section 1.2., so the reader can review this sub-section as a reminder on my classification. As I wrote, I will post a new article on this.
Note to readers:
It would be really helpful to receive feedback on this article so I know on what sections I should focus writing my next articles.
If there are any stylistic or grammatical mistakes, please forgive me as I wanted to post this as soon as possible and I may have made some.
Feel free to leave questions in the comments section.
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