Dana Blankenhorn

Catching Up

I have missed the last two weeks because we finally took a vacation, one we had been promising ourselves for 3 years.

Nothing was going to stop us. Not this time.

You probably feel the same way. That’s the problem. We’ve all been feeling the same way for years now.

In a normal economy, we feel differently. We’re of different ages, with different incomes, different interests, and different lifestyles. Usually, it balances out.

Not these last two years.

First, we were all in lockdown.

Then we all learned about Zoom.

We all saved together, and last year we started demanding things together. The same things at the same time. This brought big raises and labor shortages, especially in scut jobs. Supply chains couldn’t adjust because demand exploded, and China wasn’t ready for it. (They’re still not completely ready.)

Then came the war. We cut off Russia, OPEC took advantage, and Texas knew it had a good thing, so U.S. supplies didn’t jump either.

The result has been a hit of double-digit inflation, the same kind I lived with through the 1970s. Markets are reacting just as they did then. When money costs money, you need an immediate return to pay it back. Equity grows scarce as investors rush for safety. The stock market was crap in the 1970s.

We’ve been whipsawed, and it’s natural to feel upset about that. Our spending patterns changed faster than the economy could. Stock market analysts were months behind these changes. Policymakers were even further behind. They still are. That’s why the national mood is sour. We’re headed for a crash, and it seems there’s nothing we can do about it.

But there is something we can do about it. Our collective common sense will get us through if we just believe in it and act as though our neighbors aren’t all idiots. They’re not. Most aren’t, anyway. That’s why democracy works.

Thanks to Moore’s Law, the speed of adapting to change will increase, too. We have the technology to beat inflation now. If tech companies want to abandon the coasts and find cheaper labor that just means fatter returns sooner.

You want your money in the long term trends, those I identified three years ago. The end of oil. The Machine Internet. DNA as a programming language. 

The problem is that, since we’re early in this new boom, the winners are hard to identify. Winners that look obvious, like Tesla and Enphase, are still overpriced. Look first to the Cloud Czars that will lead the Machine Internet forward. As to DNA, I’d buy an ETF like iShares Biotechnology (IBB) or the S&P SPDR Biotech ETF (XBI) until we know more.

Bear markets end. If you can wait three years, and if you’re investing instead of speculating you should be able to, you’ll mostly be whole and have a clearer idea of what will rise further, especially if you invest in real companies with real earnings. Now is a time to be thankful for diversification and cash.

This too shall pass. In a year or two, we won’t all be thinking the same things, doing the same things. I may be retired. You may be getting started on a family. Our interests and economic patterns will be different. That’s when we’ll find out what the “new normal” really means.

Unless Putin goes nuclear, in which case it doesn’t matter what you’re in because we’re all dead anyway.

How to Adapt to Accelerating Change

The chief theme of my working life has been the pace of change accelerating, under Moore’s Law.

We’ve all had to get used to it, but until this decade economists didn’t.

Now they must.

The pandemic has shown just how quickly economic behavior can change, and how inadequate our tools are for adjusting to it.

Just since the start of 2021, we’ve seen a tech-driven work-from-home economy replaced by a great reopening, followed by huge demand for goods, then workers, and now a giant stop sign as markets have saturated. But fears of recession may be overdone as services are replacing goods in the family shopping cart.

Inflation and the Bear Market

Inflation has created a bear market in U.S. stocks.

Inflation this time is a global phenomenon. It’s caused by Russia’s war, China’s lockdown, and the impacts of climate change. The Administration can’t beat it. The Fed can’t beat it. Technology can fight it, the high dollar can offset its impact, and a little belt-tightening won’t go amiss either. But in the end we’re at the mercy of global events.

In a bear market, fear replaces greed. There is fear this morning that the Ukraine war will drag on and force concessions. There is fear that China will invade Taiwan.

I believe the fear is misplaced. American aid should let Ukraine go on the offensive next month. I don’t think China will invade Taiwan.

What To Buy Today

If you have money to invest, here’s an obvious truth.

We’re at or near the bottom of a bear market.

Everything is down. Some stuff has been crushed. Some of my stuff has been crushed.

But don’t despair, friend Investor. Bear markets end. Even with the worst of them, the average stock has gotten back to even in just a few years.

If you have taxable income you want to hide, and a taxable investment account, then feel free to dump your garbage. Anything that won’t come good in 3-4 years – take the loss. Dump the SPACs, dump the crypto, dump the stuff that’s losing money faster than it’s growing, or that lacks the cash to wait 2 years for another injection of money.

Now, because I write for Investorplace I’m going to tell you what to buy.

American Bear, Global Crash

I’m not a millionaire right now.

My retirement account is down 25%. I was heavily into tech stocks like Amazon, Microsoft, Apple, and Google. They’re all down. My more speculative investments, companies like Fubo and Cloudflare, are worth less every day.

But I’m lucky. If you’re an American, you’re lucky too. Because what’s really happening is a global market crash.

The best investment for an investor in China, in Europe or in the global south today is the American dollar. Government bonds at 3% look good because the value of the dollar itself is rising.

Why No Dividends? Today’s Economics Lesson

A few years ago, when I started writing for InvestorPlace, lots of stocks offered fat dividends. Yields of 3% were not uncommon. With interest rates near 2%, it was a bargain.

Today dividends are rare, and low. This doesn’t mean companies have found better things to do with shareholders’ money.

It means they read the tax laws.

Under current tax law dividends come out of a company’s net income, which means they’re subject to corporate income tax. Then they’re part of the recipients’ net income, where they’re also subject to tax. Critics like to say they’re taxed twice.

If the same company takes the same money and buys back its stock, as Google is now buying back $70 billion of its stock, it’s not income to the recipients. But if it raises the value of Google by just 3%, it has the same effect. And it’s likely to do just that. The benefit also comes to shareholders as capital gains, which is taxed at a lower rate than dividend income. 

There’s another reason to do this. Many top management contracts are tied to increasing a stock’s value. If the stock goes up because of buybacks, management collects. That collection may be in the form of stock, which is why a lot of buybacks don’t reduce the number of shares outstanding. The company hands out stock and options to managers, the buyouts maintain the price of the stock, and the managers collect more stock.

Stockholders aren’t benefitting from stock buybacks nearly as much as managers and other insiders. It’s a situation ripe for reform.

The Way to Wealth is Tolerance

There’s nothing wrong with wealth.

Wealth is supposed to create a sense of responsibility. Andrew Carnegie understood this after he sold his Carnegie Steel in 1901.  Thereafter he devoted himself to giving all his money away. MacKenzie Scott, formerly Mrs. Jeff Bezos, is doing that today. Bill Gates and Warren Buffett have promised to do that.

They do it to protect the system. In The Wealth of Nations, Adam Smith defended capitalism by positing that wealthy people would be inclined toward the common good. Some are. Others are not.

For every Carnegie there’s a Vanderbilt. The good news is that, after a few generations of profligacy, even a Vanderbilt fortune can run dry. Anderson Cooper is the son of Gloria Vanderbilt but he’s not a rich man. That’s a hopeful story.

The good news is that, so far, 2022 is giving me an 1898 feeling. David Traxel’s book on 1898  describes a nation facing a Populist uprising amid a progressive ferment. It describes a war that was blissfully short, a turning point because it brought to power a man who would get along with Wall Street.

The Progressive movement and Wall Street’s self-interest lined up perfectly. Few people understand this, even today. Utilities for electricity, telephony, for transport, for water and for natural gas, could only be created through regulated monopolies. The late 19^th century’s efforts to create them in other ways failed. J.P. Morgan portrayed the evil trust king in the popular imagination, and Theodore Roosevelt the benevolent trust-buster. But they were working toward the same end. The result was today’s American cities.

The Biotech Cathedral and the Bazaar

We have become accustomed, in the first decades of the 21^st century, to thinking of technology as providing the highest value-add.

Software, made by hand but scaled instantly over cloud networks, is where the money is today.

But that will not be the case a decade from now.

The next revolution, in biotechnology, is already underway. I’ve described it as “DNA as a Programming Language.” While I made my life in computing, mostly as an observer, my son is now making his way into biotech, as a participant.

COVID-19 provided the “Visicalc moment” for this revolution, the giant “ah-ha” that created the mass market. Moderna, BionTech, and mRNA technology, gave the west vaccines against the disease long before older technologies. Moderna developed its vaccine within days of getting the DNA map of the COVID-19 genome.

This Ain’t the 70s

I came up in the 1970s, the era of stagflation.

I was fortunate to be spared the worst of it. I lived most of the decade around Rice University. While everyone else in America was suffering, Houston enjoyed a boom. I didn’t drive regularly until I got a job that paid for it, in 1978. Even then I was young enough to bike everywhere. Houston is flat and youth can dodge cars.

Despite my penny-pinching, and that of my dear wife, the house we eventually found was less affordable than houses are today. This was because money cost money, a lot of money. We paid 12% interest, adjustable every 6 months. We half-expected to be paying 15% in three years.

By the 1980s inflationary expectations were built-in to the economy. Everything was expected to cost more because raw materials, starting with oil, were so dear. Stagflation meant a stagnant economy wracked by inflation.

There Is No Housing Shortage

Today’s “housing shortage” or “affordability crisis” is artificial.

There are three primary causes.

First is private equity. Seeing big gains in prices over the last few decades, huge private investors have been piling into the market. They’re buying up the cheapest houses en masses and becoming slumlords. An example is Atlanta, where a huge part of the south side has been taken up. What makes it worse are tax breaks, meant to encourage affordable housing, which let private equity hide its profits.

There are two possible solutions, what should be done and what will happen. What should be done is that the tax breaks need to be reduced, slowly. As a matter of policy, we should be encouraging owner-occupied housing, and discouraging corporate-owned housing. What will happen is that interest rates will rise, increasing carrying costs, reducing profits, and causing some private equity owners to sell.

The second problem is technology. Technology has made houses more liquid than before. You still pay a fortune to move, up to 15% of equity. But costs for finding homes, choosing them, and transacting them continue to decline. Sadly, most of these gains are again going to big buyers. The move by OpenDoor to become a house-flipper rather than remain a tech outfit shows what is happening. Margins will decline once prices hit a ceiling, and again that depends on interest rates.