(4 critical questions that need to be answered TODAY)
I hate being scared. I hate being anxious. This is 2001 and 2008 rolled together and times ten.
Both those years I fell apart. Emotionally, financially, family, health, everything. I wanted to learn from my mistakes so that’s been my focus and, knock on wood, I’m stressed but surviving and I hope others are as well.
Now for some ‘frequently asked BIG questions’: What if elections are delayed? Why the market is disconnected from economy, Will we have hyperinflation?
AND WHAT THE HECK SHOULD I DO?
WHAT HAPPENS IF ELECTIONS ARE DELAYED?
Trump has stated that if there is a hint of election fraud then he might delay the elections.
What the heck? But wait, before you panic:
There is always a good reason and a real reason
Don’t forget that words are like 3D chess.
(a simple search on “elections” in Google shows that the entire discussion is now being set by Trump’s “hint”. Was this his plan? To dominate the discussion?)
The sheep listen with one dimensional ears. The newspaper says something, and people believe it. But you are not sheep. 3D chess is to ask, “why did someone say that? What is their real objective?” Even if we don’t know the answers, it’s good to ask the question.
Words are the tip of the iceberg and you have to figure out the real story under that word.
I always try to remember this: “There’s always a good reason and a REAL reason”.
Example: If my daughter wants to ‘study at the library’ the good reason is ‘I’m trying to get good grades, daddy!’ and the real reason might be, ‘boys are at the library right now!’
Both reasons are correct. But the real reason is the ‘story’. And the way to navigate the world is to understand people’s real incentives and stories.
Second example: Kanye is running for President. He might have a lot of good reasons. Like being disappointed in Trump or Biden or whatever. But his real reason might be that he was dropping a new album the next week.
By the way, I like the name of his political party, “The Birthday Party”.
There’s a persuasion lesson there. It stands out: It’s visual and it feels good. I feel like cakes and gifts and hugs and wishes. And I feel like laughing. So it makes me feel good, I get the joke, and I’ll listen to the album. Real reason wins.
In business, politics, relationships, use words that are visual, that are unique, that make people feel what you want them to feel. Nobody has ever used “The Birthday Party” before to describe a political party. I honestly love it. I want a birthday party!
Trump’s real reason for stating he might delay elections might be to take an extreme position and back off from that later. He’s done that often. Or he might simply want to be in the headlines whenever anyone types “election”.
Remember: he seldom says a strategy in advance and yet this time he’s doing it so we should figure out what the real reason is. To be honest, I don’t know it.
But here’s what WE NEED TO KNOW: the 20th (and the12th) Amendment to the Constitution.
The 20th Amendment (section 4) specifically states that if there’s no President or Vice President elected by Inauguration Day, January 20 of 2021 in this case, then the House gets to choose a President.
Boom! That’s all you need to know. Trump knows this. Democrats know this. The Supreme Court knows this. But the media doesn’t seem to be sharing this. This is why I always ask: what’s really going on here?
3D thinking has never been more important than now. You cannot trust the usual sources, no matter what your politics or beliefs look like.
So election delay or not, January 20 we will have a new President.
WHY IS THE STOCK MARKET DISCONNECTED FROM ECONOMY?
First, important to address the news this week that the economy declined “32.9% in Q2”. The media acted like they were in shock. Again, don’t believe the hype.
Some notes on that:
a. Everyone already knew. Q2 was a clusterF. Tens of millions of businesses were closed. Everyone knew the economy was going to be the worst ever.
b. The headline said “32.9% down” but people forgot to mention that’s an “annualized” number. It was about 9% down for the quarter.
c. 9% down is about $500 billion. Guess what: the direct stimulus payments equaled $500 billion. That’s not a coincidence. The stimulus package was designed to replace the money that was lost in the economy.
So the news yesterday was like reading the headlines from three months ago. Ignore it.
55 million people in total have applied for unemployment insurance. Tens of millions in storefront businesses have already gone out of business. The economy feels horrible so why is the “stock market” up?
Is it disconnected from the economy?
Of course it is! The market is correlated to the economy in the very long run. But never in the short run. How come?
There’s several theories and they all work but the final theory I present is the “most” correct.
Theory 1: The market loathes uncertainty.
In late February, early March, up until March 23, the market collapsed huge.
That’s because uncertainty was great. People were saying that there would be anywhere from 10,000,000 deaths to 140,000,000 deaths around the world. At the time I was even saying on my podcast this is insane (for reasons I’ll get into in another post), but the media was trying to scare people.
And the reality was, we had no idea. If the fatality rate was 2% and everyone in the world got it then 140,000,000 was scary and possible. That’s where the NY Times got that number.
But this is mathematical modeling at its worst. And yet….it scared a lot of people.
Also, with all factories shut down in China and the US locking down the economy and there was yet no stimulus then who knows?
Too much uncertainty. The market collapsed.
The worst day was March 23. The day the Congress voted against a stimulus package. Now the uncertainty was at scary levels.
But the next day Congress passed a stimulus package and the market went straight up forever. Back to all time highs.
So theory 1 is part of the story, particularly in the first month or two.
Theory 2: The market is anticipating a good economy.
There’s a saying, “Don’t fight the Fed”. This means, if the Federal Reserve really wants people to invest in the stock market (or leave the stock market) then the Fed will get what it wants.
This approach has NEVER failed.
Even in the Great Depression. The Federal Reserve was scared about the speculation of the 1920s. So rather than lower interest rates, which gives people less reason to save money and more reasons to invest it (either in the market or entrepreneurship), the Federal Reserve RAISED interest rates, hoping that banks and people would save money and that would save the economy.
It did the reverse, and plunged the country into deflation and a Depression.
A young man named Ben Bernanke wrote his PhD thesis on this. Many years later, Bernanke was running the Federal Reserve during the Great Recession of 2008. He cut rates faster than anyone had before.
This stimulus got us out of the worst financial collapse since 1931 and we started a ten year bull market.
I won’t get into everything the Federal Reserve is doing right now. But when I spoke to the Deputy Chairman of the St. Louis Federal Reserve (see my podcast), he mentioned they are doing everything they can too A) avoid deflation and B) replace the money that the economy was losing by being shut down.
Which means the Federal Reserve is lowering interest rates to zero, buying corporate bonds (which are almost like buying stocks) and many more things.
BUT, it normally takes 12–18 months for Federal Reserve stimulus to truly kick in. Which means we haven’t even felt the effects of this in the economy.
That said, the market has learned its lessons from the past. It anticipates what will happen and is going up. This is a decent theory.
Theory 3: the market truly is DISCONNECTED and here’s why:
When you say “the stock market”, what do you mean? You usually mean the S&P 500 or the Nasdaq. Both are at all time highs.
But the stock market has over 8,000 stocks in it. Do those indices represent the market?
The Nasdaq and the S&P 500 are “market cap weighted”. Which means small stocks don’t make a dent in how the S&P 500 index is calculated.
Instead, the top 10 stocks make up almost all of the movement in the index. The other 490 stocks in the S&P 500 hardly influence the index at all.
The top 10: MSFT, AAPL, AMZN, FB, GOOG (A and C shares), JNJ, BRK, Visa, PG, make up over 25% of the entire S&P 500.
That ‘s why the EQUAL-WEIGHTED S&P 500 is DOWN about 1% over the past 12 months. But the S&P 500 is UP 12% over the past 12 months. It’s only because the top 10 stocks are up in the high double digits, and the other 490 are DOWN as a whole.
THAT MEANS: 49 of the 50 bottom companies of the S&P 500 (which, more or less, represents the 500 biggest companies in the United States) were NEGATIVE while the five largest were up in double digits.
So what’s “the market”? Is the market up or down? It just depends on the headline and what you look at.
This theory is the best theory so far but there’s another much more dangerous theory.
Theory 4: The market is up BECAUSE the economy is bad.
Between my house and the nearest Starbucks there are 3 “mom and pop” cafes. I used to go to them every day.
I’d stop going to one when they had my regular order waiting for me as soon as I walked in. I get awkward and shy and feel like I need to have a conversation. So I’ll switch around. But I NEVER went to Starbucks.
Because all three mom and pop shops are closed down. PPP didn’t help. Stimulus didn’t help. Rent relief didn’t help. They are out of business. “For Lease” signs are on the windows and they won’t be replaced for a long time.
But the much bigger, much better financed, Starbucks is doing fine. The line is out the door now.
20 million storefront businesses are going down during this period.
Who wins? The big , well-financed, public, companies. Starbucks, Amazon, Netflix, Walmart, etc. And guess what? Those are the companies that most move the market-cap-weighted stock market.
So it’s precisely because so many small businesses are having problems and so many people are unemployed that the biggest companies are doing well, which is leading to the stock market doing so well.
WILL THERE BE HYPER-INFLATION OR…DEFLATION?
Both are really bad. I don’t think either will happen.
Hyper inflation is what led to World War II. The Germans, in order to pay back their World War I debts, had to start printing large amounts of their currency, the Mark (sound familiar?).
But nobody wanted any Marks. So Germany couldn’t borrow from other countries in order to “pay themselves back” for printing up so much. So the value of the Mark (like anything that depends on supply and demand) had too much supply and no demand so the value plummeted.
If a banana cost 1 Mark one week, it might cost 100 Marks the next week, and a million Marks the week after.
This is hyperinflation. Imagine if you work all your life to save $500,000. You’re proud of yourself and you rest easy. But what if a month later, that $500,000 doesn’t even buy a can of soup?
That’s hyperinflation. It’s brought down German, Russia, Argentina, all of South America , all of Asia, Zimbabwe, and on and on. Will it bring us down?
When I spoke to the Deputy Chairman of the St. Louis Federal Reserve he basically said, “no way. “ There’s too much demand for the dollar. What other currency is there? Foreign governments that are looking to diversify their currency have huge demand for the dollar.
Remember, value is a function of supply and demand.
Anyone who says, “But they are printing too much money!” and then starts crying like a little baby is only looking at one side of the equation. The supply side. The demand side is important and there is huge demand right now.
Here are some recent headlines:
“…Global rush into the dollar…”
“, investors the world over rushed to get their hands on U.S. dollars:”
The Fed would LOVE inflation right now.
Because here’s the problem with Deflation.
If you and I want to buy a house in NYC but we think prices will be down (deflation) next week, we’ll wait. And that will make the owner of the price panic and list his price lower.
So next week we’ll look and we’ll say, “I think I’ll wait again”. And so on. That’s called a deflationary spiral.
THAT is what leads to a Depression. Nobody buys anything. So no businesses make money. So more people get fired. So less money gets spent. So prices go down. And so on.
We are dealing with massive deflation at the moment and nobody is talking about it. Apartment rentals are down 30–40% in NYC. When you get an email that says, “20% off in weekend-only sale!” from your local stores, it’s not just a sale. THAT IS the new price.
The Federal Reserve is desperately trying to stop this. I think they will succeed “Don’t fight the Fed”. As for hyperinflation, let’s get to inflation first. But in a few years, if the US doesn’t continue it’s leadership in innovation (product potential always has to be greater than the market in order for people to invest money into dollars) then there will be hyperinflation three or four years out, give or take.
This leads to Gold and Bitcoin. But I’ll save that for next time.
WHAT DOES THIS MEAN FOR ME? WHAT DOES THIS MEAN FOR THE ECONOMY AND STOCK MARKET? WHAT SHOULD I DO?
This is not really predictable. More stimulus is coming from Congress. And the Federal Reserve stimulus has not even kicked in.
But there’s a lot of uncertainty: election, virus, protests, commercial real estate, state deficits, etc.
Here’s what I am personally doing:
A) not really in the stock market. I own three or four stocks because companies I’ve invested in when they are private have gone public. That’s it.
B) FOR THE FIRST TIME, I’M INVESTING IN MYSELF:
I hate being an entrepreneur. Ugh. Every day there are worries. Are my competitors better than me? Is my idea awful? Are my employees having sex with each other? Am I managing my anxiety ok?
But there’s trillions of dollars floating around in the economy because of the stimulus so now is the time to be an entrepreneur. When you’re an entrepreneur it’s a way of owning something other than dollars. You convert your ideas into assets that can be priced in dollars. So if there is inflation, you win big.
For the first time in 15 years I’m excited to try different entrepreneurial ideas. I’ve actually become kind of obsessed with all the new business models out there. Like when I got obsessed with standup comedy in 2015, or chess when I was 17 years old, or poker when I was 30, I’m obsessed with entrepreneurship now.
I never enjoyed entrepreneurship before even though I’ve started a ton of companies. Blech! I’ve lost everything because of being an entrepreneur. Friends, family, money. Sometimes I did ok but most of the time it ruined my life.
But I was never excited before. Now I am. I feel like an old guy to be starting new things.
But it’s never too late. Ever.
On my podcast I just started a series, “Side Hustle Fridays”. Where I describe, step-by-step, how to start very specific businesses. I’ll also eventually describe these ideas in this newsletter.
WHAT THE FAQ?
I’m starting to hate the word “Side hustle”. Nobody wants to make $8 an hour walking dogs. That’s not a side hustle.
I’m covering (and I will also cover here in this newsletter), specific ideas that can, at first, create a nice living, and in the best case scale into a multi million dollar business. I won’t cover an idea unless it has the potential to scale into the millions. The first “side hustle Friday” is today on my podcast.
But eventually I will cover some of those ideas here in this newsletter.
Given the uncertainty, better to invest in yourself than in the market. I am more certain about me and my ideas than I am about Procter & Gamble and Microsoft.
Next week, I’ll also cover some more “30 day book challenges”. Books you can write in 30 days. People have been sending me their “30 day books” and they are great! Will make a collection of all of them.
And, please provide any feedback, subscriber, share, ask questions in comments, or whatever, because it helps me to know I’m going in the right direction here. Thank you so much.
IDEAS ARE THE CURRENCY OF ‘THE GREAT RESET’
There is no “new normal”.
Someone asked me yesterday, “When will life be back to how it was in 2019?”
Answer: Never. And that’s a good thing. That era is OVER. It’s the GREAT RESET.