Monday, April 5, 2021

Monday Morning Links

  • This is not a software company - the (frankly pathetic) unit economics of used car sales do not scale or somehow magically improve with a website and a domain name. Carvana still needs to acquire, transport, store, sell, and transport again a 2 tonne lump of metal with rubber wheels to complete transactions. All of that requires real estate and labour that scales linearly with each transaction. [S Morton]
  • The DMV notified him that Carvana was not a registered dealer in Missouri and would need to make adjustments to allow the title to be transferred to Mr. *****. After an in depth review of the issue, it was discovered that there had been a lapse in Carvana’s dealer’s license in the state of Missouri. This caused individuals, like Mr. *****, to have trouble titling the vehicle’s sold to them. This issue has since been resolved, and Carvana is recognized as a registered dealer in the state of Missouri. Carvana’s legal team has partnered with the Missouri Department of Revenue and DMV to confirm that customers who had purchased a vehicle from us in the beginning of the year, should now be able to proceed with processing their vehicle’s registration and title. [BBB]
  • Last month, Tom Kuennen, a property manager from Ontario, coughed up $500 worth of cryptocurrency for a JPEG of an Elon Musk-themed “Moon Ticket” from DarpaLabs, an anonymous digital art collective. He purchased it through the marketplace OpenSea, one of the largest vendors of so-called non-fungible tokens, or NFTs, in the hopes of reselling it for a profit. [Vice]
  • From now on, when referring to what Tesla calls its “Full Self-Driving” system, Jalopnik will say “Tesla’s Level 2 driver-assist system” or something similar. We’ll try not to mention Full Self-Driving without making it absolutely clear that the system does not allow the car to drive itself. At times, it’ll make for some awkwardness and become a little tedious, but hey you’re the one reading Jalopnik! [Jalopnik]
  • Case study of a retire-early story that didn’t go as planned. He attributes it to anomie, a breakup, and a health crisis. But it reads like he had just a little too much imagination to run the script as robotically as it seems to call for. About a decade ago, the early retirement crowd used to read/link to me but then seemed to decide I was too invested in the normie world. On my part I decided they were all acting dead and attempting to live in ways that a normally imaginative psyche would not allow. It’s not the financial narrative that’s implausible. It’s the accompanying psychological one. This guy did pretty well despite the breakup and health issues. He could have stayed retired at a pinch. It was the psychological plausibility that unraveled. He’s not dead enough. [vgr]
  • This webpage is for fellow minority shareholders of Life Insurance Company of Alabama ("LICOA"), a small insurance company that is headquartered in Gadsden, Alabama. The company has two classes of stock which trade on the OTC, one is "LINS" and the other is "LINSA". Despite being owned by a diverse group of shareholders, LICOA is controlled by descendants of its founder Clarence W Daugette, who work for and/or sit on the board of the company. The interests of this family group inevitably conflict with the interests of those of us shareholders who are “outside the family”. [LICOA Shareholders]
  • Don't just take our word for it - do your own research. Call the LICOA executives listed below and ask whether they put minority shareholders' interests first when making decisions. The company told State of Alabama insurance examination staff that they hired Rosalie F. Renfrow Causey because her “presence insures continuity in further company management by the Daugette family.” How does this serve the interests of shareholders who are not Daugette family members? Can we trust that when management decides who to hire or whether or not to sell the company they put shareholders' interests first, as they are legally required to do? [LICOA Shareholders]
  • Two diverging schools of macro thoughts are prevalent today. One calls for a “Roaring 20s” redux while the other believes in a forthcoming liquidity crisis. Both narratives have valid points and flaws. We find ourselves right in between the two. Let me elaborate. The central argument of the reflationary thesis is that a pent-up demand from consumers will likely cause explosive growth in the economy similar to the early 1920s. To be fair, financial conditions for US households have significantly improved. As shown in the chart below, their net worth is rising at the fastest pace since 1953, which also includes the largest wealth increase by the bottom 50% in history. Balance sheets also look the healthiest in a decade with the consumer deleveraging considerably, while savings rate remains elevate. This also means there is plenty cash on the sidelines. However, while we believe there is a strong probability that the re-opening of the economy will boost personal spending considerably, that is just one part of the story. By effectively creating the largest wealth transfer ever to the population, the US government now faces its own debt conundrum. The debt imbalances that restrain economic growth were never resolved. Instead, they were transferred from the private sector to the government. Overall US debt to GDP has soared to record levels at the same time as the stock and credit markets have soared to new extremes. These are not the preconditions for a healthy reflationary environment nor the typical signs of an economy in the early stages of its business cycle. Also, let’s be honest: The fact that financial markets are being impacted by a 10-year yield that is still sub 2% speaks volumes about the fragility of the US economy. This brings us to the opposing bearish narrative. We have yet to see a major reckoning for financial markets with asset valuations at record levels across virtually all asset classes aside from commodities. The dollar bull ‘deflationistas’, as they like to be called, have some important points to consider. Throughout history, speculative bubbles have always ended with brutal financial resets. Also, the dynamics behind “QE” are much more complex than the idea that money printing must always lead to higher consumer prices. In a deflationary reset, the debt burden tends to suck the liquidity out of the financial system causing a stock market crash, rising unemployment, and depressed consumer prices while money velocity collapses. However, what we believe most, and what the deflationary camp fails to comprehend, is that: The economic and social impact of the current fiscal & monetary policies are completely different than what we experienced coming out of the last recession, which was a deflationary one. From '08 to '11, the lower classes lost over 84% of wealth, a clear deflationary backdrop. This time, on the other hand, the US bottom 50% just had its largest annual increase in net worth ever. Such is a force that would be hard not to have inflationary repercussions. Ultimately, a deflationary bust is a risk if one believes policy makers will undershoot their stimulus. Clearly, given the level of commitment and size of the monetary and fiscal policies, we believe overshooting is a much greater probability. We clearly have a ‘money party’ going on and no one can afford it to stop, especially the Fed. So, how do we fit right in between these two narratives? It boils down to one fundamental thesis: We want to buy undervalued commodities and sell overvalued equities Let me explain. Today’s deflationary debt imbalances are being met with a truly unprecedented inflationary response. The need for extreme fiscal spending to mask the impairments in the economy entails a flood of Treasury issuances. With no sufficient buyers, the Fed must step in. It has to expand the monetary base to ensure subdued interest rates and allow the government to finance its debt and continue its wealth transfer and spending spree. This new aggregate demand is met with scarce supplies of basic commodity resources due to underinvestment in the forgotten old economy. Rising prices for food, energy, lumber, metals, etc. lead to cost push inflation throughout the supply chain. Some investors may be interpreting this macro dynamic as a healthy reflationary recovery. We believe there is a much greater probability that the economy is entering a disruptive long-term inflationary cycle. Since 1900, the US economy had two important inflationary periods, the 1910s and 1970s. Both times were marked by unique macro and geopolitical developments in which the median monthly YoY Consumer Prices Index (CPI) stood above 6% for an entire decade. The 1940s also had some sporadic spikes in CPI but, different than what most like to think, consumer prices did not consistently persist at high levels for the full 10-years. These inflationary periods were also marked by exceptionally low equity returns. From '10 to '20, the Dow Jones had delivered a 0.91% ARR. Similarly, from '70 to '80 stocks delivered a 0.47% ARR. Considering inflation, real returns were negative for both decades. These were also very volatile periods accompanied by severe market crashes and major monetary developments. In 1913, President Woodrow Wilson signed the Federal Reserve Act into law. While President Richard Nixon announced the end the dollar convertibility to gold in 1971. Now, with today’s mix of: - QE to infinity - Helicopter money policies -“not even thinking about thinking about raising rates” - WWII sized deficits Our base case is that this is the dawn of another long-term inflationary cycle. Just to emphasize: Even though equities did not perform as well during the 10s and 70s, commodities did exceptionally well. By hoarding hard assets, investors create a self-reinforcing loop where higher prices of tangible assets lead to higher inflation expectations that then result in higher consumer good and service prices. The Fed’s policy tools were originally designed to control money supply at times when economic conditions were either accelerating or decelerating. The issue is: Today’s 5-year inflation expectation is reaching a 13-year high, but every monetary and fiscal policy in place is still pedal to the metal. In the meantime, the overarching message from policy makers is that inflationary forces are just “transitory”. For the sixth week straight, the Fed exceeded its minimum QE program amount of $120B, which consists of $80B of Treasuries plus $40B of mortgage-backed securities. Now, regarding the equity market: There is a high probability that the same disconnect between financial markets and the economy we had last year might redevelop in 2021. However, the roles will likely be reversed. We believe most of the good news about the reopening of the economy is already priced in. Wall Street analysts are now estimating that small cap earnings for 2021 will be almost 40% higher than the previous highs in 2018. Also, like it or not, fiscal excess leads to higher income taxes. The Fed will not be able to pay for this wall of debt alone. Tax rates are set to rise. But because this not official yet, most Wall St estimates have not factored it, leaving them too optimistic. To sum it up: We think commodities will outperform equities in the following years. As a fund, we are long high-quality gold & silver high-quality miners. With exceptionally strong fundamentals, this is where the real growth/value opportunity lies ahead. [Otavio (Tavi) Costa]


Anonymous said...

Greetings CBS,

Is there a source you trust that writes about Palantir?

CP said...

Not that I can think of.

What is it that you want to know exactly?

JP said...

That early retirement article illustrates a basic problem of FIRE: that it's very easy to do as a single man but almost impossible if you're married. Women are far more materialistic than men, and if you marry one who's anything like the typical broad, she'll be obsessed with spending your money on things that you don't need or value so that she can win pointless status competitions with other women. That guy's genetic disorder ended his FIRE dream, but even without that, his wife would have eventually blown it up.

Anonymous said...

Just wanted to know where Palantir fits in.

Is it the anti_Google?

Not looking for investment analysis.

CP said...

The early retirement one really seemed to interest people.

Poet: I want to FIRE. FIREguy: but you never did any saving or investing.
FIREguy: I want to be a writer. Poet: but you never did any reading or thinking.

CP said...

Another early retirement perspective:

Read 17 books, of which favorites included Lifespan: Why We Age and Why We Don’t Have To (great intro to longevity research for non-scientists), The Silmarillion (incredible worldbuilding from the master), Disarming (a fun novella exploring the political problems of a libertarian society), and, surprisingly, the dark fantasy Chronicles of the Black Company (I’m not usually into dark edgy stuff, but this was written in the 80s so it’s not dark like the stuff today is), plus ~7 comics and graphic novels including re-reads of several Foxtrot and Calvin and Hobbes collections.

Allan Folz said...

Time away from work is great. If he had a functioning civic society instead of this Boomer-hellscape that would be in our national psyche as one of the definitions of success, instead of exponentially consooming sh*t you don't need and importing people you don't want to make & maintaine it.

Of course on a personal level we still can. Don't call it early retirement because that sets one up for failure. Call it a sabbatical or walk-about or some similar thing where the journey (process) is the goal, rather than the end point (goal). (processes >> goals H/T Scott Adams)

"Retirement" is an end point, and a relatively new one at that, which, again, Boomers f-ed up the meaning of. You can do pretty good in life simply by internalizing the opposite of whatever Boomers popularized.