Investing Small Business Work

The Great Wealth Transfer to Big Tech

Apple, Amazon, Facebook and Alphabet all reported blowout quarterly results this evening, with all beating analyst revenue expectations by billions of dollars. The market completely underestimated the growing market power these companies command.

This momentum – at a time when GDP declined by 32.9% – suggests the recent massive stock market out-performance of these companies vs most other companies might be justified. The economy has rapidly shifted from “face-to-face” to “virtual” and a relatively small proportion of companies are benefiting at the expense of the rest.

Much of this shift is permanent. I mean, virus or no virus, is anyone really excited about going to a fucking mall again? Or take the crowded bus? Even meetings are more tolerable now.

Nah, I’ll spend my commute time on doing something pointless on my phone, possibly even spending money. And when I’m working I’ll use MS Teams instead of airplanes to meet people. People and businesses have discovered cost savings they should have known existed.

And the companies that don’t benefit? Commercial real estate. Travel. Restaurants. All the places that sell the things we realized we didn’t need while under quarantine. Many are small businesses. Maybe eventually these businesses will recover, but until then it’s big tech’s time to gather all the nuts.

Is it any wonder why Amazon, Apple, Facebook and Alphabet have done so well? We’re witnessing a great wealth transfer to big tech.






Visualizing the Billionaire Class

I believe people deserve to get rich if they work hard.

But there comes a point at which wealth is so obscenely huge that you have to wonder if it is really deserved. Can a single human really earn $150 billion without it coming at the expense of other humans?

While history has shown that humanity’s wealth pie can be expanded over the long run through productive innovation, over the short term it’s likely that hyper competitive behaviour is a zero sum game.

Today, Amazon is rapidly growing at the expense of small independent retailers. This has never been more clear than during the Covid-19 crisis, as lockdowns shut almost all of Amazon’s brick-and-mortar competition. While Amazon is probably creating long term wealth for society, right now it is succeeding at the expense of others.

The chief beneficiary is Jeff Bezos, Amazon CEO and founder, who is now worth over $150 billion. Amazon has added a ton of efficiency to our lives and Jeff Bezos deserves to be rich, but $150 billion is obscene.

At what point does genuine wealth creation transition into exploitation and hoarding? It’s not an easy question to answer, but that’s not the point. If wealth anomalies like Bezos don’t pass society’s smell test, action must be taken.

Society makes judgment on the scale of wealth differences between ordinary people and the 1%, deserved or not.

Ordinary people earn in the tens of thousands and can barely save for retirement. To most, millionaires are considered rich. Once you start talking about $ billions the sheer scale of wealth is baffling.

I recently saw an article that highlights how ridiculously wealthy billionaires really are. Below is a graphic visually comparing the difference between various wealth levels. Remember, Bezos is worth 150x the largest box below.

While ordinary people struggle to pay back their college debts, billionaires have to work hard to spend their money:

  • Elon Musk can spend a MILLION dollars EVERY DAY for 65 years
  • The Koch brothers can spend a MILLION dollars EVERY DAY for 242 years.
  • Bill Gates can spend a MILLION dollars EVERY DAY for 247 years.
  • Jeff Bezos can spend a MILLION dollars EVERY DAY for 306 years.

Anyone arguing that billionaires are created because they help generate societal wealth, should look at the following chart. While worker productivity has risen, average wages have stagnated. Meanwhile, income going to the top 1% (aka the billionaire class) has skyrocketed. In other words, billionaires are built off the backs of the average worker.

The top 1% has captured a growing share of societal wealth partly because the tax system has changed to favour the rich. The two charts below compare tax rates by income level in 1950 and 2018. In 1950 the top tax rate was 70%. In 2018 it was just over 20%.

While Amazon shares hit new highs and Jeff Bezos gets richer, 40% of US renters face the risk of eviction. Those are families and children and hardworking people, many of whom will soon be homeless.

For many the American dream has become the American tragedy. Gone are the days of collecting a paycheque and a comfortable retirement pension. Loyalty is irrelevant. You are on your own to build wealth for you and your family. For some this means building a bulletproof portfolio. For others it means constructing multiple sources of income.

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5 Must See Gold Charts

In over night trading on July 27th, gold broke through its all time high reaching over $1940 per ounce before retreating. We are in the middle of a dangerous monetary experiment and the world is waking up.

Gold could be in the middle of a monster move. I recently wrote an article on Seeking Alpha showing how gold could go as high as $3465 based on its relationship with M2 money supply.

The recent rise in gold is a mirror image of the dramatic decline in the US dollar.

What really drives the price of gold? Real yields. The following chart plots real yields (inverse) against the price of gold. As real yields decline (show by a rise on the chart) gold prices rise. (Read more about it here.)

Annual purchases of gold ETFs highest in 15 years. And 2020 is only half over.

Still think gold is a barbarous relic that has nothing to do with the monetary system? Well, central banks around the world have been accumulating gold reserves since the 2008 Global Financial Crisis.

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Real Estate Wealth

Gail Vaz-Oxlade Gets Candid on Home Ownership

People dive into home ownership with eyes half shut. Many do rough budgets and rely on their mortgage providers to tell them what they can afford. But few are prepared for the realities of home ownership.

People step into the housing market with the minimum deposit and the assumption that they’ll soon grow equity. They believe real estate prices always rise, they’ll always have a job and the sun always shines. Few plan for unexpected expenses like leaky roofs and busted appliances. Even fewer plan for unemployment.

Instead, they binge on house porn and the orthodoxy of marble finishes. This sets an extremely high bar for interior design, squeezing the final drops of their borrowing capacity to renovate otherwise perfectly functional living spaces.

All this has worked in the past as house price appreciation created equity that helped people turn their houses into ATMs.

Today, however, incomes have been gutted and about 16% of Canadian mortgages are being deferred.

New buyers entered home ownership with zero bandwidth for financial trouble. Even those who owned for a while, benefiting from the tail-end of a housing boom, have pissed away their gains by keeping up with their friends and neighbours. New cars, travel, outings. Nothing was sacrificed to pay down debts.

The people behind these mortgage deferrals are on financial life support. They effectively can no longer afford their homes and are depending on government handouts and the ‘kindness’ of creditors. While some are victims of bad timing, many of the wounds are self-induced.

Below, in a rare interview (she is retired) money maven Gail Vaz-Oxlade provides her candid, in-depth thoughts on the current housing situation. In it, she discusses with John Pasalis (President of Realosophy Realty) the following and more:

  • Is it time to buy a house?
  • When is the right time to buy a house?
  • How does home ownership change your life?
  • How do you know you’re financially ready for home ownership?



Americans are Nowhere Near Prepared for Retirement

Americans haven’t been saving the recommended 10-20% of their incomes and simply aren’t prepared for retirement.

The median 401k for someone aged 55-64 (i.e. pre-retirement years) is only $61,738. Even the most frugal spender could only make that last a couple years in retirement.

In other words, for most Americans a comfortable retirement simply is out of the question. Instead they will continue to work, depend on social security and rely on family.

The dream of sailing through the Mediterranean or hiking in the Alps will remain a dream for most, as they work double-shifts as Wal-Mart greeters.

I get it. Life happens when you’re in your 20s, 30s and 40s.

There are bills to pay, things to buy, life to live. At that age, many people feel like they can’t save for retirement and believe they can make up for it later. However, people need to understand that when they spend money they’re making a tradeoff. Do they want that extra vacation or do they want to retire a year earlier? Do they want to upgrade their Toyota to a Lexus or retire 5 years earlier? When compounding is considered, those are real tradeoffs.

Most people I know don’t want to work forever. People want to stay busy and contribute to society, but they also want the freedom to pick and choose what they do. That requires money.

Unfortunately, as you can see by the tables below (source: Vanguard) most retirements are quite underfunded.

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ETFs and Funds Investing

Ignore Your Canadian Fund Manager’s Historical Performance

The number one gimmick investment fund marketers use to sell their products is a strong performance track record. Historical performance is considered a staple piece of information by fund marketers and unitholders, as it makes the product appear more tangible.

Unfortunately, historical performance is useless when evaluating a fund.

You’ve probably seen the following disclaimer along in most investment funds marketing:

“Historical performance are not indicative of expected future returns and may not be repeated.”

This disclaimer is there for a reason. It is added to marketing materials because the regulators know that funds are sold based on historical returns, so they want it to be clear that past performance has nothing to do with future performance.

Even if all aspects of the fund – the manager, the style, the investment policy guidelines – remain the same, the vast majority of strong performance is fleeting in nature and cannot be repeated. Managers can get lucky streaks that result in periods of outperformance. However, few have genuine skill and are unable to repeat this outperformance consistently.

The empirical evidence supports this.

In its report called “Persistence Scorecard”, Standard and Poors regularly provides data on the persistence of investment manager outperformance. On July 15, 2020, for the first time, S&P has calculated this for the Canadian market.

The Persistence Scorecard attempts to distinguish luck from skill by measuring the consistency of active managers’ success. The inaugural Canada Persistence Scorecard shows that, regardless of asset class or style focus, few Canadian fund managers have consistently outperformed their peers.

For example, across all seven categories we track, none of the equity funds in their category’s top quartile in 2015 maintained that status annually through 2019. If we consider funds in the top half of 2015’s performance distribution, in six of the seven categories fewer than 5% of funds maintained their performance over the next four years. Coin flippers had higher odds of success.

In general, very few Canadian investment managers have demonstrated that periods of outperformance were due to skill and could be repeated.

Lengthening the horizon to consider performance over two consecutive five-year periods, the top-quartile domestic equity funds of 2010-2014 had little luck maintaining their top-quartile status during the 2015-2019 period. Only 30% of them managed to beat the median while 23% ended up in liquidation or had a style change.

While there may be a handful of investment managers that possess the skill to consistently outperform the market, it is impossible to identify these people in advance. The evidence shows that the vast majority of investment managers cannot repeat periods of outperformance. Yet these active investment managers charge 2.5% for the pleasure of their underperformance.

Consequently, investors would do much better by using low cost index funds and instead focusing on managing their investing behaviour, savings rate, debt, taxes and asset allocation.

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Real Estate

Charts: Real Estate in the Crapper

Businesses are closed or operating at reduced capacity. Millions of people are unemployed. Mortgages are deferred. The need for office space is being questioned.

To put it lightly, both retail and commercial real estate is experiencing one of the most transformative moments in history. While malls and brick-and-mortar retail has been under pressure for years, Covid-19 compressed a decade’s worth of change into a couple months.

The charts below highlight the current state the real estate market.

With the huge surge in unemployment and minuscule savings, Americans are suddenly unable to pay their bills. 32% of Americans missed (either fully or partially) their July mortgage payment.

Delinquency rates vary by property type (overall delinquencies approaching decade highs) but are rising rapidly.

New York is the most stressed area at the moment, likely due to its concentration of people/businesses, real estate valuations and the severity of regional lock-downs.

Toronto-area housing has remained strong through the downturn, with prices actually increasing.

Although Toronto has experienced a resilient housing market, it could face increasing pressure over the next several months as rental supply rises (driving down the price of rent). The decline in condos leased combined with the surge in listings has pushed the condo rental inventory from 1.5 Months of Inventory (MOI) at the end of March to nearly 4 months at the end of April.

How is Canadian real estate holding together? Government handouts. Approximately 20% of the Canadian population is receiving CERB – a $2000/mth support payment from the Federal Government.

If and when CERB benefits are taken away, Canadian real estate will likely face growing pressure. Not only is the supply of rentals growing rapidly, immigration is plummeting. This combination could tip Canadian real estate into negative territory. Of course, there’s always the possibility that immigration once again picks up in the future, but it’s debatable whether this will be enough to absorb the rise in housing supply.

The Coronavirus Economic Depression:


Don’t Send That Angry Email!

I suppose I’m a bitter person. Twenty years in the investments business will do that.

I’ve seen all the same bullshit over and over again. After a while you just grow tired of bending over and taking it. Sometimes it takes the strength of Zeus to stop yourself from telling some idiot at work to shut the fuck up.

But if you want to keep your job, you don’t do that. Even if you don’t want to keep your job, the world is small and word travels fast. So don’t do that.

I’m not saying you need to be a ‘yes’ man or woman. Have opinions, provide criticism and strive to improve your business. But there’s a point where an opinion becomes an argument and an argument becomes an attack.

I’ve spent a lot of time whining, complaining, moaning, attacking in emails. HOURS! I’ve perfected these emails. Some of my emails read like Col. Nathan R. Jessep’s testimony in A Few Good Men. I know how to make an great case.

But do you know why I still have a career? Because I never sent those wicked emails.

Do you know why I still have a career?

Because I never sent those wicked emails.

If I had sent those emails, at best they would generate tacit agreement with no action. Some would position me as a ‘complainer’, limiting my prospects. Others would put me on ‘the list’.

You don’t want to be on the list. The list – whether official or not – includes disgruntled employees that don’t necessarily cause problems but are generally unhappy. Unhappy employees don’t get raises or promotions. Unhappy employees also don’t get packaged out. If your employer thinks there’s any chance you might quit on your own, they’ll just put you in the corner and ask you to shovel shit until you do.

Other than personal satisfaction, those emails wouldn’t have fixed my problems. In fact, by being the guy who doesn’t unnecessarily complain about the problems everyone already knows exist I probably advanced my likability within the organization.

You think executives aren’t already getting emails from other people venting about problems they already know they can’t fix? They don’t need another jackass making them feel like shit anymore than they already do. So by not sending those emails, you remain a positive force that helps them get through their day.

With that said, you don’t want to be a pushover. You have valuable opinions and are in this to create an imprint. Do this by delivering messages based on facts and evidence.

Instead of sharing opinionated complaints filled with “I think”, provide insights that start with “evidence suggests”. Be a messenger of truth by way of observations and recommendations that are rooted in objective information. Nobody cares about your feelings, but they do care about facts that are observable by anyone astute enough to see them. If you deliver those facts combined with actionable suggestions, you become the smart employee who can help build the business.

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Life Wealth

How Abundance Might Lead to Revolution or War

Why you should watch this interview with tech entrepreneur turned author (“The Price of Tomorrow: Why Deflation is the Key to an Abundant Future”), Jeff Booth:

  • Technology is driving costs lower and productivity up, creating a potential world of abundance. (Think about how many screens you have in your house compared to your parents’ house.) However, it is also creating immense deflationary pressure, which is intensifying.
  • The side effect of improving technology is that many jobs are being automated and made redundant. Your job and your children’s jobs are at risk, while the few at the top reap the benefit.
  • For decades, central banks have attempted to compensate for deflationary pressures by growing money supply by vast amounts. Most of this new money has flowed into financial assets, resulting in asset price inflation. Owners of financial assets gain, but these owners are disproportionately the wealthy. Yes, many people have 401ks, RRSPs and pensions, but their proportion of financial asset ownership is small. However, asset price inflation has not improved the lives of the median household.
  • What we’re left with is a divergent economic experience: “the many” lose because they’re made redundant and don’t own assets to a large extent while “the few” accumulate the gains generated by technology and asset price inflation. This has increased wealth inequality over time and will continue to do so.
  • Society increasingly becomes polarized and susceptible to charismatic leaders who promise solutions without actually addressing the fundamental problem. Often these leaders stoke the smoldering fires, causing people to turn on each other. Then they may turn on ‘outsiders’, however defined. The end result: revolution and war.
Investing Wealth

What Drives Gold Prices?

As a monetary metal, gold has been with humanity for thousands of years. Its role as a safe haven for wealth has been generally understood throughout time. Historically gold was simply another currency – one that couldn’t be debased and could reliably store vast amounts of wealth.

When thinking about gold, one must separate its value from its price. The value of gold is fairly stable. When compared to fiat currency, gold prices will fluctuate over time, but this is not because the value of gold is changing. Rather, it’s because the fiat currencies are appreciating or depreciating. For this reason, it’s important to analyze gold in terms of your home currency, despite it being most frequently quoted in USD. For example, the price of gold in USD might be stable but for a Canadian investor it might be rising because the value of CAD is declining. This relationship to currencies is an important first step to understanding what drives gold prices.

Many people believe inflation drives the price of gold. While this might be partly true (because inflation increases the value of tangible assets), it is inflation’s effect on currencies and investment alternatives that actually makes gold more attractive to investors.

Inflation will cause a country’s currency to depreciate relative to other currencies. As previously explained, in such a circumstance the gold price will rise in relation to a declining currency.

Equally important, inflation erodes the real returns provided by assets like stocks and bonds. In particular, safe havens like US Treasuries may provide a very low or even negative real yield when inflation is high enough relative to nominal yields. (Real yield = nominal yield minus inflation.) Importantly, this condition doesn’t require high inflation. Simply, inflation only needs to be higher than nominal interest rates.

Gold competes in many ways to US Treasuries as a safe haven. If investors can receive a positive real return on US Treasuries they are less likely to use gold – which provides zero yield – as a safe haven. The higher the real yield, the worse non-yielding assets look in comparison.

In contrast, when real yields on US Treasury bonds are negative, investors actually lose by holding them. A zero-yield actually becomes more attractive at that point.

Most gold bull markets have occurred when real yields were falling, low or negative. Gold bear markets tend to occur when real yields are rising, high or positive.

The Chart 1 below compares 1yr US Treasury yields (black line), inflation (red line) and real yields (blue line) going back to 1970. In Chart 2 below shows gold prices over the same period. As you can see in the first chart, real interest rates were falling, low or negative during the 1970s, but then began to rise around 1980. From 1980-2000 real interest rates remained positive and relatively high, until they began to decline at the turn of the century. Between 2000-2011 real interest rates were low and negative for most of the time. Leading into 2011, real interest rates began to rise and peaked around 2015. After 2015 real interest rates moved sideways again spending much time in negative territory.

How did gold perform during these periods?

1970-1980: Gold bull market
1980-2000: Gold bear market
2000-2011: Gold bull market
2011-2015: Gold bear market
2015-Present: Gold bull market

Chart 1: Nominal Yields, Inflation, Real Yields
Chart 2: Gold Price

While negative real yields might seem like an economic rarity, they occur quite frequently. As a matter of policy, negative real yields are often associated with periods of financial repression when governments are attempting to climb out from under the weight of oppressive debt levels. Essentially, when yields on government debt are less than inflation governments are able to ‘inflate’ their way out of debt. Because of inflation, the value of government assets and tax revenues are able to rise faster than the value of government liabilities and interest expense.

What does the future hold for real yields and gold?

While the world is currently working through a deflationary shock due to the Covid-19 shutdowns and collapse of demand, the monetary and fiscal response may push up the inflation rate and push down yields.

Note: I realize that the last time policy makers expanded the Fed balance sheet it failed to create any meaningful inflation. Long story short, I believe this time might be different because the US Treasury is increasingly involved, corporate debt is effectively backstopped by the Treasury and private banks are therefore much more willing to lend (thus increasing the money supply) than during previous crises.

Massive – and quickly growing – public and private sector liabilities have cornered policy makers. The only escape is secular financial repression to erode the real value of debts. Another option – default on debts and entitlements – simply isn’t politically palatable.

Therefore, it is reasonable to expect real yields to remain low-to-negative at least until the economy recovers from the current economic crisis. However, since debt loads are growing massively because of the crisis I can’t see any alternative but financial repression for at least a few years. Using the 2008/2009 global financial crisis as a rough guide, we may be recovering from this for years to come. the current gold bull market could last a few more years and gold prices could double from today’s levels.

Important note: I don’t have a crystal ball. Also, forecasts change as economic circumstances evolve. So don’t read this article and think you can set it and forget it. With an investment like gold that is so fundamentally different from the more traditional long-term asset classes, you must track the changing environment and adjust accordingly.