A Subscription for Everything

I am subscribed to a few strange things that I don’t use anymore and probably won’t use ever again. Thirty years ago, this first-world conundrum was probably a little less common. To subscribe, you paid with cash or by mailing out a check before the deadline. The whole process was harder. You had to really want a subscription.

I think back to when I was a ye’ young lad who subscribed to magazines. When my subscription to Sports Illustrated For Kids was about to end, my mailbox, the physical one in my front yard, would get bombarded with daily reminders. “Send your check in now if you want to keep reading about Ken Griffey Jr!”

Subscription Tech Changed The Game

Subscription services today have never been easier to run and manage. That’s true from a payment perspective and a bill collector perspective. I mean, there are automated platforms that run everything for you in seconds and show cool charts and graphics about your account as you go. Poof money gone! Ka-ching money deposited! You get notifications in real-time like it’s a video game.

Subscription technology has come a long way since my day, and probably yours. The ease of creating a subscription, maintaining it, and delivering it is seen everywhere. The biggest company on our planet, Apple, is squeezing itself into the subscription economy with music, cloud storage, and now a TV network of sorts. Something tells me, more of this is coming.

Subscription Competition On The Rise

As most of you know, I spend my time in financial markets. So naturally, when I’m standing between eight other people on a Manhattan subway, I find myself in deep thought, “What exactly is going on with all these subscriptions?”

I recently read that 3 of every 4 Americans now have a subscription to something. And the numbers are trending up for those who have multiple subscriptions. Most subscription services right now are doing great, especially when you consider what many of these services offer and their price point. Maybe it’s we’re living in a subscription enlightenment, not a bubble.

Perfectly timing a bubble call is hard. Probably impossible. I have tried a few times, even with my own money on the line. In each instance, I was wrong. The thing about bubbles is no one ever really knows there’s a bubble until after the fact.

I currently think the subscription economy is trending toward more competitive times. And no one is considering the implications of that. The subscription economy’s explosive growth has entered all stages of our day-to-life. I see it on the enterprise side, the consumer side, the health side, and the entertainment side with no signs of slowing down.

The Unraveling Risks

Economists like to tell a joke. A cheesy one. It goes like this:

“A hundred-dollar bill is lying on the ground. An economist walks past it. A friend asks: “Didn’t you see the money there?” The economist replies: “I thought I saw something, but I must’ve imagined it. If there had been $100 on the ground, someone would’ve picked it up.”

Economists believe the world is so efficient, large, and random that there’s no likely scenario where they would find free money. Over the last 10 years, several subscription companies have proved their joke wrong. Netflix, while enjoying a first-mover advantage, was once the only digital video subscription service in the world. They were the game changer picking up bags of $100 bills. Today, I can barely fit all the subscription based digital video companies into a single tweet.

The subscription economy, in its current form, is perplexing because of its understated maturity. There also seems to be double and triple counting happening when subscription-based companies make forecasts and then sell those forecasts to investors. It’s one reason why I still don’t fully understand certain subscription companies and their valuations – everyone is counting the same potential subscriber into their model! But people don’t have infinite money. With each passing day, more potential customers are spending on new competing subscription-based companies coming to market. The customer base in the subscription world is spreading thin over time. That once $100 bill on the ground that Netflix was picking up daily is gone.

The subscription economy has yet to be tested by a real slow down. Its resiliency should remain questionable. For one, it’s really easy to cancel a subscription. You go to your account and press cancel. It’s one thing that actually made their success in the first place – the ease to cancel was so friendly. However, that may also be the downfall if groups of people ever need to suddenly mass cancel their subscription to a service or because they are squeezed for money. A company could disappear overnight.

Final Thoughts: Let’s See What Happens

If the day ever comes, where markets or money gets tight on a macro level, it will be interesting to see the subscription services that make it out unscathed. Going forward, I’ll be keeping a close eye on the subscription economy and its growth.

It’s All About Assets

I think people have this idea in their minds about what wealth inequality means. I have come to believe that they think, what it means, is that these super rich people have bank accounts stuffed with cash. That these people have millions and billions just floating around for quick and easy spending. While yes, it’s very possible that is true for some, for the majority of wealthy people, it is a different form of wealth. It’s paper wealth.

Wealthy people tend to be investors and shareholders. It’s where most of their wealth comes from – the perceived value of the shares they own in something. If you could somehow view the world through a lens where asset holdings could *not* be counted, wealth inequality would be subdued. The richest have a lot of shares in things, the poorest have no shares in anything.

Of course, this post is not making any crazy statement about assets, whether they are good or bad. More-so, this post is meant to highlight that financial markets have been the outsized wealth creator for the last 10+ years. And the issue at hand, the proverbial elephant in the room, is that the stock market has enjoyed preferential treatment from Government organizations while others who have no exposure or access to markets, quite frankly, have received none.

Our Fed Officials Should Visit The Bronx More

The Federal Reserve is a lovely entity that saved us from the abysses in 2009. And I have championed them for many years reading books from Geithner and Mishkin to Bernanke and Volcker. However, in my time studying them and watching their rescue missions, I have been unable to ignore their advantageous treatment of certain demographics. They have backstopped the exotic world of finance over, and over, and over. They have been there each step of the way for more than a decade. Yo bro, you need liquidity? We got you. What’s up dog, you need some low margin to buy stocks? Rate cuts coming.

I often joke the Federal Reserve should take their asses to the Bronx and spend a day at PS 178. They should learn what these kids come from and how their families generally have no liquidity whatsoever. After that they should get an Amtrak, not an Acela, and go to North Philly. I write this because I think it’s very possible our Federal Reserve officials have spent too much time roaming in Wall Street circles. Private dinners, meetings, and exclusive events in Wall Street and DC towers will close your mind.

Liquidity Demographics

Our current Federal Reserve Chairman, Jerome Powell, was a partner at the private equity firm Carlyle before he was nominated. Ben Bernanke, the Fed Chairman from the Financial Crisis, is now an advisor to the market makers of Citadel. Tim Geithner is currently a President at Warburg Pincus. These former hard-working Government officials in control of who gets liquidity and when sure sound devoted to solving problems on behalf of society…

I often think about what the Federal Reserve actually does for a lower income people who have no access to financial markets and no assets. Maybe they live near a pay-day lender or know a loan shark. People who are day-to-day, cash only, or checking accounts have not once been bailed out or been given any assistance 10+ years into this economic expansion. Actually, to some degree, they have lost. Because their checking accounts and cash under a mattress now earn LESS than they ever did. They don’t keep up with the inflation rate and the Fed keeps cutting rates at every chance they get.

On the other hand, those who hold most of their wealth in financial markets, are supported with each moment of risk. When rates are low, when liquidity is high, when the Fed is always there, the investor class benefits from rising asset prices. But if you have no assets, you don’t benefit at all. That’s the problem – the Federal Reserve’s response to financial markets disproportionately benefits one class of people more than all others. It made sense at one point in time, I don’t believe the same policies make much sense any more.

So How Do You Fix It?

I should be clear, I do not want markets to go down. I have no problem with the assets you hold whether they are stocks, bonds, real estate or anything else. I think it’s great. Free markets, free trade, and free choices are essential to living well and creating great things. But, what I do stand against is unfairness. More importantly, I think you have to fight for the underdog when you can. And the underdog right now is getting destroyed out there.

So how do you make it fair? Our policy makers, especially at the Fed, could benefit from creativity. More outside the box thinking. Perhaps the Fed could start a program that specifically targets community banks in low-income areas. Perhaps the Fed could work with them, give them unique liquidity preferences, and encourage them to get out there with this new fire power and support.

Or maybe they could give a bigger savings rate to those with less than $25k in savings or checking accounts. Maybe these people can, somehow, be given a rate higher than the Fed funds rate so they can actually earn interest higher than the inflation rate. I mean, does anyone realize that poor people who have to hold cash are actually losing money each day? The Fed wants 2% inflation, but checking and savings account rates are less than that. That means if you hold cash, even if you need to because of your circumstances, your cash is melting each day because of an inflation rate greater than your savings rate.

Traditional methods of cutting rates and supporting markets with asset purchases has proven to work, but today, they are exhaustive measures with very little impact on the people who we really need to be helping and an outsized impact on the people who, at the end of the day, don’t really need much more.

That Is All For Now

It’s funny to watch my philosophical beliefs change over time.

Several years ago, I was in complete support of the Fed. I thought they saved markets, and more. Today, my tone has slightly soured.

But in a free market and country, that is a beautiful thing and it’s how change is made. Being critical of something, taking feedback and sharing your thoughts is how people build and create things that solve problems.

I was surprised to read something about Fidelity the other day. It was a fact they decided to leak out to the public. What they said was, based on all the 401k accounts on their platform, they’ve set a new record for millionaires within their customer base.

That’s just Fidelity. And that’s just 401k accounts. There is probably a record number of millionaires in America today, in general.

Yet, it still seems no one is happy. I don’t know why that is or what’s underneath it. I do worry, though, and what I worry about is our growing obsession with markets and the ways it benefits a particularly small demographic.

The other day I was watching our Treasury Secretary, Steven Mnuchin, talk about the Trade War. He was asked a question about the stock market. His response? He smiled and looked at the reporter, “The stock market is always right.”

90% of Americans own 6.8% of all stocks. The other 10% of Americans own the other 93.2% of all stocks. I don’t find that stat encouraging. It’s even less encouraging when you consider our Government officials speak of financial markets as a barometer for everything they do. Each day it is becoming their new god. And their new god represents a small percentage of the actual population.

In a prior era, we spoke about the middle class with admiration and focus. It was all about lifting up the middle classes. That was the secret to America’s success. Education, wage growth, savings, and increased productivity – that’s how the middle class got going. That’s how we went from one stage of wealth to the next.

Today, it seems we’ve moved on from those years. Today, we’ve graduated to the investor class.

While walking Bryant Park with a good friend several months ago, I explained to him my concerns about this scenario: a roaring market with very little participation from the general public. He said to me, “that’s just how it’s going right now and that’s all the people in this administration care about so either get on board or wait for the election.” I appreciated his bluntness.

The market is up almost 15% since we had that conversation. He was right.

I wrote this post not to be political, but actually to be introspective. As someone who has followed markets all these years, I’ve been fortunate to enjoy the ride. But I also know when something is tilting in a direction that no longer feels “right.” Or more importantly, feels equitable. Even if that means calling myself out.

The simple fact is that a large percentage of the population is missing out on the excess and appreciation of wealth that come with access to financial markets. In other parts of the country, things seem to be going differently. So far this year, it’s been reported that farmers are going bankrupt at a near record. We live in a time where my brokerage account can do more for me than a plot of land, machine equipment, and the production of food can do for those farmers.

Margin matters most right now. In times of stress, people will sing Cash Rules Everything Around Me. Lately, it’s more like Leverage Rules Everything Around Me. I often joke that I can get a margin loan for 3%, but a college loan will take me up near 10% even though it’s essentially protected by default.

If you really think about it, the investing class has probably received more benefits, backing, and support than any other group in America over the last 10 years. The Fed has been there every step of the way. This is not gloom and doom or gold bug or an end the Fed rant. It’s just a post calling it like it is.

One of the more sobering things ever said about the stock market is, “don’t confuse brains with a bull market.”

When markets are rising, money is flowing, and capital is pouring into the lands of finance, it is easy to get carried away. Look over there! That is a genius investor. Or over there! That trader is a millionaire. And that one? That’s the best stock picker alive!

It is literally a challenge to invest your money poorly in a market that is popping off with excitement, with opportunity around every corner, and with never ending stories of growth. The punch bowl is full and money dances best when it’s drunk.

The real skill is found when you can invest successfully and with a sane mind in a market that is flat or declining. When viscous moves are thundering through the market or prices are grinding sideways in a storm-like manner, how do you perform? There are very few who have proven they are capable in these environments. Even the most diversified investors can get exhausted. At a certain point, the relief of having cash begins to exceed the mental capacity to continue onward. Sometimes, hanging in there, dodging swing after swing, is all that matters and it takes great skill to do.

The problem with making money from other people’s money, which is what financial markets are at the end of the day, is that generally someone, at some point, wants their money back. It’s at that time when gains can turn out to be not as real as once thought. I remember when I was suffering my worst draw down ever, the first time my stomach felt uneasy just looking at my portfolio, and a mentor of mine pulled me aside. He said, “You aren’t down as much as you think you are. Because you never actually had that money.”

What he meant was, while yes my paper value looked wonderful in the months before, it was not exactly mine for the taking. I had no right marking my draw down from that high point. I never saw the cash actually deposited. In the famous monologue from Blade Runner, when Roy Batty is grasping on to his last words of reality, he comes to realize how fast what he saw as reality can wash away:

“I’ve seen things you people wouldn’t believe. Attack ships on fire off the shoulder of Orion. I watched C-beams glitter in the dark near the Tannhäuser Gate. All those moments will be lost in time, like tears in rain.”

Blade Runner, Tears in Rain from Roy Batty

All markets eventually get tested and when they do, what you thought you had and saw, in the words of Batty, become lost in time like tears in rain. There is no easy answer or solution or article that explains what it means to go through these periods of time as a full-time investor. The only way is to go through it first hand. When it rains in markets, we learn the most about how good we really are.

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I think a lot of us have noticed this wave of people who keep saying things like, “the world is so much crazier today.” Or slightly different variations of that, but similar in meaning. Like, “politics are the craziest they’ve ever been.” Another one is, “it was so much simpler when I was younger.”

I’ve been thinking about these phrases a lot lately.

The other night I found myself hanging out in upstate New York. I was at a small restaurant, the kind that has four or five tables, not fancy or anything, but very dim lighting. I noticed a picture hanging on the wall. I don’t know why I noticed it, but I did. The picture showed a lady on a beach wrapped in a blanket. She was smiling. It was a black and white photo. Geez, it really did look like simpler times back then. Behind her was a sprawling row of sand dunes and on top of them sat two modest houses, spread out by a few hundred yards.

I could not stop thinking about that – only two houses on that beautiful beach? How? Where? Then it made sense. This picture was probably taken in another time. So of course there was an undiscovered beach like that. Not only was there less economic development, less infrastructure, less money invested, but the population was also less than half of what it is now and something like the iPhone was incomprehensible.

What I’m saying is that it really was simpler then and it really is crazier now. But, that makes perfect sense.

Imagine taking a record number of people, giving them the most powerful computing device ever invented, one that fits in their pocket, and then sending them off into a free country where almost anything is possible. That is literally what’s going on. The possibilities, good and bad, are endless.

In the 1970s and 1980s, the population in the US was about 205 million. While quite a few people had color TVs, an even smaller number of people had a computer. Most people at these times had phones, but these were rotary phones, those giant phones that attached to a wall. Some young people reading this today will have to research what a rotary phone is. That’s how far we’ve come.

In the 1930s, there were 122 million people living in America. No one had TVs and pretty much no one had a telephone.

Today, in America, there are nearly 330 million people. And everyone has a phone that’s more powerful and dynamic than any consumer electronic device ever built prior to it. As the population grows, as technology gets better, it will only get crazier. With more people and more technology the probabilities of something happening that’s even more outlandish than what happened before naturally increases. So to does the combination of the way they can happen.

I wrote this post not to try to make excuses for some of the worst things that have happened over the last decade, but more-so as a way to understand that it should not be as mysterious or alarming as we make it. The craziness should be expected. I wonder what will happen in 150 years when little Timmy accidentally finds his parents Star Trek food device that creates fake meat using the particles around him:

I’m not sure if this post will resonate with anyone, but it was something I had to put down in digital ink. Things are getting crazier and maybe rather than fighting that, resenting it, finding excuses for it, it’s actually something we should be ready for.

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I have only bet against the market once in my 10+ years. I tried to go net short when the Federal Reserve first started reducing their balance sheet. Well, that was two years ago and the market is up about 30% since.

I often joke with the people around me that, “what’s the point of following markets all the time if I don’t ever try to call a top?” Sometimes, as they say, you aren’t taking four balls during this at bat.

While thinking through all of this, I was reminded of something a well-known short seller once said. I’m not exactly advocating his brilliance or highlighting this short seller. I think most of you already know him and his quote is just that good. I haven’t forgotten it all these years. Here’s what Jim Chanos says about being short:

“What I like to point out is that almost everybody that will view this is the beneficiary of a positive reinforcement cycle in their life.

That is they were told to study hard by their parents, go to good schools, get good grades, go to better schools, get a good job, work hard, get promoted, and be paid well. This is the so-called virtuous cycle.

Studies have shown that most rational people, including people that fit the virtuous cycle profile, find that their decision making breaks down in an environment of negative reinforcement. The ultimate example of which would be interrogation, where your ability to withhold information is broken down by various physical or mental techniques.

If you think of Wall Street, it’s a giant positive reinforcement machine. Basically, I come in every morning, flip on my phone and check Bloomberg at 5:00 AM. Of the hundred short ideas that we have in our global fund, I can pretty much predict at any moment that there’s going to be about 20% to 25% each day where there is some sort of commentary, research report, analyst buy recommendation, estimates raised, or CEO on Bloomberg or CNBC. And generally, it’s noise. Generally there’s not much information or content in that, but it’s nonetheless a noise representative of positive reinforcement. It’s why you should be investing in company “A,” “B,” or “C.”

Most people don’t notice this because they’re in the business of going long securities. I like to say, however, that this is the music that plays in the background of the investment world. If you’re a short seller, this music is negative reinforcement. You’re essentially being told that a quarter of your portfolio every morning is wrong and here’s why. For most people, that becomes a difficult environment in which they continue to think clearly about their investments. There’s a constant drum beat of just negative reinforcement saying you’re incorrect, you’re incorrect.”

Jim Chanos
Interview from Opalesque TV

I’m sure if you tried shorting before, you can relate.

It’s a grind, it is hard, but it is a thrilling challenge to take on. You basically are saying you know better than everyone at an exact moment. It’s a little arrogant, actually. You’re betting against the war drum most other people are playing.

It can be both the worst and the best thing you can do. It’s the worst if you actually wage a significant and risky sum of money. It can also be bad if it takes you over as a person. It does not have to become your life. I think we have seen what’s happened to those people, the permabears who spend their career on such a view. You don’t have to go all in like that ever. There are ways to express your opinion while also defining your risk, or how much you’re willing to lose, from the start (but see the meme at the bottom of this post).

I like to hold myself accountable to what I am seeing and doing by making it open. That’s partly what I use my blog for. I let everyone know what I’m up to. Everyone can share their feedback or criticism or trolly mctroll ways with me. In my new podcast, I actually talk about why this is so important. To some degree, it’s also why I am short stocks from mainland China, because, not only of their strange accounting ways, but also the regime they are operated and controlled by. It’s a dictatorship that stands in opposition to the most basic fundamental freedoms like free speech.

On my blog, all the free speech you want is welcome. You can come at me however you like.

Obviously, if the market keeps ripping I will go down with a swing and a miss, but you can catch up on why I am betting against Chinese VIEs in a Trade War and my latest podcast about what it all means.

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