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.

Worthless, Worth Less, or Bargain?

There are three types of tech stocks today.

Companies that aren’t doing anything real are worthless. I’m talking about crypto and NFTs, I’m talking about all the metaverse stocks without a business model. For these companies it’s 2000, it’s Gotterdammerung. Just as was the case then, there’s a lot of stuff that was valued based on the assumption of no limits.

It was easy to find the moment it all came crashing down last time. It was January of 2000, when Time Warner “bought” AOL in a deal that gave AOL shareholders more than half the resulting stock. This put an upper limit on the value of Internet stuff. It was all downhill from there.

The big moment this time was the Crypto SuperBowl. Matt Damon read a ridiculous script that equated buying cryptocrap with going to Mars. It was at that moment, during a game played in SoFi Stadium (another name due to crash) that we realized how artificial it all was. Smart people got out.

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.

Cash is Still King

You don’t have a loss until you sell.

I am reminded of that during the current tech wreck.

I have a retirement account, which for a while was worth over $1 million. It’s worth just two-thirds of that now.

But that’s OK. Because the account includes about $140,000 in cash. I can buy some stocks. I don’t have to sell any. I can wait out the bear market.

The stocks I own are all in real companies, most of them profitable. I have some dogs that may not come back, like Cloudflare and Upstart. But Amazon will rise again. So will Google, Microsoft, and Nvidia. Bitcoin won’t come back (I hope), nor the rest of the cryptotrash. There’s still almost $1.22 trillion locked in that garbage. There are losses still to come.

Buy Tech Today

You now have the best opportunity in 13 years to buy technology stocks.

Amazon is now selling for just over three times its annual sales. Paypal is in the toilet. Nvidia is priced below where it was after it split 4:1. Chinese stocks are down for the count.

Now is the time to get in. Here’s why.

The reason tech fell is inflation. Rising prices lead to rising interest rates. Money costs money. That means growth and even earnings are discounted.

But tech can whip inflation now. Tech has been whipping inflation for over 40 years. Wall Street thinks Paul Volcker did it by raising interest rates in the late 1970s.

It was tech.

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 Streaming Crash

A small fall in subscriber numbers sent Netflix stock down 25% overnight in what stock market observers are calling the “streaming crash.”

All the companies involved in streaming crashed in sympathy. Paramount was down 11%. Warner Discovery dropped 5%. Disney was down 4% and even Amazon lost 2%.

As usual I was early to this. I wrote about the streaming crash in 2019.  “The limits to the streaming market are time and, to a lesser extent, money,” I wrote. If you were reading closely, you’d know the most important limit is time.

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.