Inflationary Recession = Buy Hard Assets

Thinking about the $2 Trillion economic package that the US Federal government has recently authorized had me thinking about how that “money” gets used to stimulate the economy. And my first level of analysis was, inflation. That was not a complete analysis; but I could not nail down what I was missing. Then I listened to the #BloombergSurveillance interview with Robert Kaplan, Dallas Fed President, and it became clear to me.

The Federal Reserve will expand their balance sheet across multiple classes of assets, and they will be easing lending restrictions on banks. Those banks will make massive loans available to their largest of commercial clients which tend to be commercial real estate developers. With the massive influx of “money” available, those hard assets will increase in price. This means of adding “money” to the economy is what any political administration would do as it is the quickest way for a government to increase the supply of money into an economy and hopefully stimulate demand. Those who hold a large portion of their wealth in hard assets will benefit from this increase in the prices of those hard assets.

The government is also taking action to help with the consumer economy which is dominated by the services sector. But the government (any government and any political administration) does not have an effective way to quickly stimulate demand in the services industry. Small Business Administration (“SBA”) loans will help, and small cash payouts to households below certain income thresholds will help, but those will take a lot longer to process and to create demand in the consumer economy. And so the consumer/services aspect of the American economy will fall drastically in the short term and take a long time to return. This is what was made clear to me in the interview with Robert Kaplan of the Dallas Fed. He expects unemployment to spike into the high teens by the end of the 2nd Quarter 2020 and only start to ebb beginning in the 4th Quarter of 2020. The Fed will not be able to take actions until 2021 to assist this part of the economy, per the interview. So we are going to see an increase in the prices of hard assets while we see the consumer/services economy stumble badly over the next year.

To this amateur economist, the Fed’s ability to decrease interest rates when it is time to stimulate the consumer/services economy is no longer available. Federal Reserve-controlled Interest rates are as low as they are going to go. So the consumer/services economy will be reliant on fiscal stimulus from the Federal government’s budgetary spending as a means to re-invigorate demand. That would mean more taxes raised to fund those programs.

It is not up to me to predict if a future Administration and Legislators will have the willpower to increase taxes, but what I see clearly now is that investments in hard assets (commercial real estate and equities) for capital gains, is a better investment thesis than investments into cash cow services businesses designed to kick off free cash flow.

Building The Plane While Flying

I’ve got a few projects going on at the moment, as per the norm. There are two particular projects that involve me learning a bit more about coding. I am no developer, but to accomplish what needs to get done, I need to be able to get further down the path of showing and explaining to the coders exactly what I want to accomplish.

I used to just draw a sketch of what I wanted the client interface to look like and I assumed the Dev team would figure it out.

I then learned to show what information was needed to get to the analysis/output that I wanted to show

Soon I realized I need to show where that raw data is, add the formulas that are needed to get to the outcome/analysis, and show the visual of the output.

Now I have learned, get down to the minutia of every step of the process and add as much detail as possible. If I do it correctly and fully, the only thing left for the dev team to do is convert my instructions into the actual code.

Regulators Cut Off Fiat Funding for Crypto Accounts

In another example of how global regulators are using lessons learned from the retail FX & CFD industry, more and more financial institutions are cutting off crypto exchanges (and all crypto service providers) from banking access.  There seems to be few formal rules that are forcing banks to take these step, but there is clearly a behind-the-scenes push.

Similar to CFD’s being outlawed in the US, but Eligible Contract Participants having access to “Total Return Swaps“, retail investors are being restricted from cryptocurrencies, but ECP’s still have easy access.

But I wonder is it just the volatility of cryptocurency trading that is causing concern to regulators?  Is it the fact that they can not easily point to intrinsic value in many ICO’s?  Is it the Anti-Money Laundering aspect?

Tangentially…..there is a bit of a catch 22 going on.  If and as more merchants start to accept cryptocurrency as a form of payment, volatility will drop and intrinsic value will be easier to define.  But cutting off fiat to crypto conversion will slow this acceptance rate due to reduced supply of buyers who have crypto to use in purchases.

As for the AML…I get it.  Crypto’s are real tough to follow and to identify; they are designed that way.  But so is cash.  So if the regulators overarching goal is control of money flow and knowledge of transaction participant ID’s….then they will keep pushing for fewer and fewer, globally connected institutions.  And that is what I do not want to see.

ICO’s – Security Or Commodity?

If I set up a Silver mining operation and sell you a promise that if I extract some silver, you get a percentage of the Silver I extract, then that is pretty clearly a Security.

Many in the ICO community want their ICO’s NOT to be labeled (and regulated) as Securities.  They argue because the underlying asset is some sort of commodity (or a specific, pre-named “thing”), the ICO’s are not Securities but are Commodities.   And therefore the ICO is a lot more like a futures/options contract than a Security.

Options and Futures have a lot less regulations to deal with than Securities.  In fact, Over-The-Counter (“OTC”) derivatives are the last tranche of tradeable instruments that are not executed/reported on an exchange (though many are soon to be reported to a clearing agency post-trade)

But since there is no guaranteed commodity/”thing” to be given to the buyer of the ICO, then is sure sounds like a Security to me.   The buyer of the ICO is taking a risk that the underlying plan will be legally and efficiently executed by the ICO sellers.  Futures contracts are bought and sold on regulated Exchanges which are built and managed on the premise that there could (and sometimes is) an exchange of tangible assets at the expiration of a contract.  Options are similar.

OK.  What if instead of of a tangible commodity/”thing” promised to the ICO buyer, the buyer receives a digital token with it’s own set of rights and claims against the issuer?  Such as, “These GoogleTokens are worth 10 click-throughs anytime in the next 10 years.”  Well then it is really a company (in this fictitious case, Google) that is booking revenues early, not a financing transaction for the company.

There will be some instances of an ICO that could be thought of as a Commodity.  But the vast majority of ICO’s are really just a way to fund a business idea with little oversight.



More from @FredWilson

Legitimate ICO projects have the following characteristics:

  1. A relationship between the amount of money being raised and the complexity of the project.
  2. A very clear use case that requires the decentralization approach brought by blockchain technology.
  3. A reasonable valuation based on the size of the opportunity being pursued.
  4. A credible team.
  5. The technology has been built, at least to a point where it is demonstrable.