A limited book recommending investing in commodities and gold while warning of inflation and dollar weakness. Much less insightful and less interesting than it should have been.
This book could have (and probably should have) been reduced to a four-page brokerage report, but author Larry McDonald fluffs it out to book length with stories and poorly organized financial history. You can save yourself several hours and simply read Chapter 9, the final chapter.
The author also has moments of laziness and unrigorousness. He almost certainly exaggerates the accuracy and profitability of his market calls during the COVID crisis, he calls Nassim Taleb "an avid dead-lifter" (not realizing Taleb quit deadlifting and hasn't done it in years), and he inserts charts into the book that have nothing to do with the ongoing discussion. This last trick is one way to punch up the apparent rigor of your book, and unfortunately it usually works.
Admittedly, this book will get you thinking about how to deal with certain likely structural changes in the coming years: structurally higher inflation, structurally higher commodity prices, structural supply shortages of many important commodities, etc. But even these themes, useful as they are, are far better and more interestingly explained in Jim Rogers' excellent and underappreciated 2004 book Hot Commodities.
I'll also warn readers: when you're investing in raw materials, oil and gas, precious and PGM metals and other commodities, you have to have high pain tolerance, you have to enjoy suffering, and you have to have tremendous patience. Keep this meme in mind, from an oil investor I respect for his rigor and insightfulness:
Finally, a brief word on blurbs, and why having certain people blurb your book can be fatal to your credibility. Unfortunately, widely-exposed cryptowhore Raoul Pal is a prominent blurber on this book's back cover. Note that How to Listen When Markets Speak came out in 2024, which means the author probably reached out for blurbs at the earliest by 2023--a least a year after Pal put the final fork into his reputation by luring his viewers into the infamous Terra/Luna scam, calling it "basically risk free", and then (way worse) denying he did so. [*] You have to think carefully about who blurbs you, and at the very least you must know the basics on the credibility of those you ask for blurbs. Here it signals several important things the author should know, but does not--including to avoid association with certain ethically or intellectually compromised public figures. Be warned as a reader and a writer: blurbs can be a tell, good or bad.
[*] I could go on and on about what a dangerous imbecile Raoul Pal is, but it is satisfying sometimes to see imbeciles taken to school. See here where Michael Saylor explains to him, as if he were five years old, the difference between a digital commodity and an illegal unregistered security, a critically important distinction many cryptocurrency shills like Pal had to learn the hard way.
[Readers, as always, read no further. Life is short! What follows are just my notes and reactions to the book, all of which are just to help me order and remember what I read. Even skimming the bolded parts is likely a waste of your time.]
Notes:
Author's Note
xi Interesting comment here on losing everything, and recovering. "When Lehman Brothers failed, I thought I had lost everything. Like a bird thrown out of the nest, I had to reinvent myself. On that long, sometimes lonely road, publishing the inside story of Lehman's collapse and giving lectures on the economy throughout the world, I somehow amassed a team of brilliant minds who became my brain trust in the coming years." [If I'm doing my math correctly this author was about 41 (or maybe 42) and working at Lehman Brothers when it collapsed in 2008. This is "old" for a Wall Street guy, an age from which it would difficult to recover: much respect to a guy who took both a career hit and obviously a huge hit to his net worth, most of which was likely in soon-to-be-worthless Lehman stock.]
Foreward by Niall Ferguson
xiii Quick summary of the book here: on looking at financial world as a sort of fourth turning, the end of a 40-year boom from the early 80s until today, driven by globalization and disinflation from Asian labor markets as well as the technology boom. Then, five factors: 1) central bankers who cut rates and expanded their balance sheets during crises from 1998 to 2020, 2) China hollowing out the US manufacturing marketplace, 3) the US war on terror and covid policies driving debt to GDP in the US to World War II level heights, 4) political backlash against China and for protectionism, and 5) a global campaign to discourage investment in fossil fuels in favor of renewables. The author argues that we're going to see consistent inflation, a weaker dollar and a boom in various metals precious as well as in value stocks. [NOTE: Most readers should stop right here. You've just ingested 90% of the book in 1% of the time.]
Introduction: A Banquet of Consequences
xviii "In the coming decade, we'll witness a new era of persistent inflation, an escalation in global conflict, a multipolar world teaming up against the United States, the horror of a weakening dollar, a series of sovereign debt crises, and a thundering of capital out of financial assets into hard assets." [I'd be curious what he means exactly by the "horror" of a weakening dollar, it is interesting to see bombastic language like this, it's the type of language an anti-predictive permabear would use in a handwaving argument.]
xviii On "catastrophic shortages of natural resources," demand for oil and other fossil fuels skyrocketing as the developing world grows richer, etc. [These are not earth-shattering arguments, lots of people are calling for this out there.]
xviii On capital being allocated to what's been true over the past three decades, not what's coming.
xix The author comments on how he was one of the most profitable traders at Lehman Brothers, trading high yield, distressed debt and converts. [Then why was he unable to see the problems at the firm?] And after it was all over he wrote a book about Lehman's collapse!] Then he dedicates himself to identifying early signals of economic danger and founds The Bear Traps Report.
Chapter 1: The End of an Era
3ff Ronald Reagan's "Evil Empire" speech in 1983, the author follows this by regurgitating a very, very consensus Western narrative of Gorbachev and what happened in the years that followed, "He may have been only five feet nine inches tall, but history would remember him as a giant of democracy."
5ff On the shift of the world "from a multipolar to a unipolar order." On the disinflationary forces unlocked from the big boom in global trade; tremendous declines in US interest rates, which peaked at 15% in 1981 to less than 1% in the 2010s, the epic bull market that followed, as the S&P500 went from 323 in 1992 to 4800 in 2021, a 14 bagger.
7ff On the 1980s-era petrodollar agreement with Saudi Arabia, the author seems to think that the USA and Saudis collectively drove down the oil price in order to harm the USSR, I'm not sure it actually worked that way.
8 He meets with James Baker III, was Secretary of the Treasury under Reagan as well as Secretary of State under George Bush Sr.; "Larry, you don't ever want to live in a multi-polar world... I hope you never experience it."
10ff The author is trying to summarize some economic trends here: offshoring and its impact on inflation; using Dell Computer and its supply chain management as a metaphor; this chapter is so far kind of all over the place. He leaps from discussing China's entry into the WTO and the disinflationary effect of offshoring to China to then discuss interest rates, with a very loose and strange explanation of how China uses its currency to keep its exports competitive; then he goes on to the 1990s technology boom and its detritus (like Dr. Koop.com, WorldCom, Enron, etc.). The author is trying and failing to boil down the 1980s and 1990s into something digestible but it isn't really digestible in this way. The chapter instead massively oversimplifies reality.
13ff Also the author seems to imagine a sort of a binary situation: either offshoring to China where China gets all our manufacturing, or we bring it all back to the US, which the author believes will create all kinds of inflation. The scenarios are not binary like that: there are many, many other countries that could take on the industrial output that China is doing for the US, countries like Indonesia, Vietnam, Malaysia, etc., have huge populations with even lower labor costs. The author doesn't discuss this at all however.
17 The author tells about an interview he had with Andre Estevez, founder of the largest investment bank in Latin America. "We [bankers in Brazil] live with inflation and have done so for many years. But I think, now America will have a similar problem. And you have no idea how to handle it."
19 This Brazilian guy goes on to talk about how deflationary just-in-time supply chain models, like those typical from 1990 to 2020 will not look the same in a multi-polar world; instead there's going to be near-shoring, friend-shoring, backup supply chains; all of these things are inflationary.
20 Note that in this conversation all of the discussion seems to be cost-driven or onshoring-driven inflation, there is zero discussion of the money supply so far. The conclusion so far is: multipolar world, more inflation, ergo lower P/E multiples. "As for its implications, this book lays out, chapter by chapter, exactly how investors must be positioned for the coming storm."
Chapter 2: America Crosses the Rubicon
22ff This chapter discusses the "colossal asset bubbles of the modern era" thanks to a new era of "unprecedented Federal Reserve activism"; we also see this author's first use of the word "hyperinflation" here; discussion of Japan's 1980s bubble that the author blames on the Bank of Japan slashing interest rates; the author re-tells the standard factoid from the Japan/Nikkei bubble: "the grounds of the Imperial Palace of Tokyo were worth as much as the entire State of California."
27 On Fed monetary policy under Bernanke; the playbook for avoding the deflationary trap of the Japanese economy; this was the Fed's blueprint after 2008, and they used it again during COVID.
28 Background on Long-Term Capital Management; per the author, "Anyone knowledgeable in financial history knows its story, but few make the connection between it and the asset price inflation that came to define the early twenty-first century." Basically he argue here that the US and its central bank "crossed the Rubicon" in deciding to bail out LTCM; as a result this led to all the bailouts that followed, normalizing them.
38 "After the LTCM bailout, we entered an era of government accommodation, which...changed the landscape of business forever." Then the tech market collapsed, then 9/11 happened: in 2001 the FED took rates from 6% to 1.75%, and then cut them still further after September 11th.
40ff Before the 1983 bull market, most capital was in the real economy: in the early 80s the S&P500 consisted of energy (27%), industrials (12%), materials (10%), while financials were only (6%); in 2007 financials were (24%) of the S&P, energy was only (12%), likewise information technology went from 10% in 1980 to 35% at the dot-com peak. Note that now $20 trillion of wealth sits in just 100 stocks in the NASDAQ 100; also the author doesn't say this, but the "Magnificent Seven" stocks would be an even better example to use. [I know it is standard procedure to make a bearish argument by saying there isn't enough "real stuff" in the stock market and then to quote how low the percentage of the stock market is XYZ sector compared to the past. I think it might be arbitrary. The stock market reflects merchandise that can be sold; it reflects also a sort of zeitgeist of the time, many companies and industries continue to represent a lot of value but they may not by publicly traded for whatever reason, etc. I'm not sure the "pie chart" of the S&P500 says as much as people think it says.]
Chapter 3: The Dazzling Obamas--and the Dying of the Light
43 "...our longtime friend Doug Kass." Uh-oh.
43ff On Bernanke and the Federal Reserve stepping in to do quantitative easing and asset buying to a little never conceived before; on Bernanke's terror of having a deflationary event like in the 1930s; on how the market rallied enormously by the end of 2009 but also most of the wealth only went to the wealthiest. [Whenever equities go higher, of course their owners get richer; stocks are pareto distributed. Thus you can always say this with any central bank intervention! I think true understanding of the system and how to survive it comes once you understand that this is a feature not a bug.]
46ff A half-assed history here of what happened to manufacturing jobs after China joined the WTO in 2001; then a discussion of how this trend accelerated after the 2008 financial crisis; a brief discussion of the notorious General Motors cram-down [this was an infamous and illegal abrogation of property rights, but it would take a tangential chapter alone just to explain it, and nobody seems to care anymore anyway...]; then a discussion of auto industry jobs leaving the US; then inexplicably a graph of online retail sales versus department store retail sales in a section that has nothing to do with this at all. [This appears to be a lazier book than I realized.]
48 Interesting sidebar here on how bonds do well when there's gridlock in DC, because Congress loses the power of the purse; the author cites "our top strategist" Robbert van Batenburg, who cites Obama's midterm elections; there's a chart here that is a good example of curve fitting; also this chart only shows the 10-year treasury--that's just one piece of paper! [We'd also need to see what's happening with short rates, money market rates, the Fed Funds rate. I think there may be a number of contra-examples to the argument that "bonds do well during gridlock."]
50 On 2011's "operation twist" where the Fed buys long bonds and sells short bonds; all of this just made stock prices go higher; how the Fed cut rates to extremely low levels to give banks and businesses time to rebuild their balance sheets; on the trade-offs involved here: basically this long-term rate-cutting experiment basically destroyed anyone who lived on interest income, it was basically it was a wealth transfer from savers to borrowers. [The author misses a tremendous opportunity here to scratch at this insight and its implications for surviving, and even thriving, across an inflationary cycle.]
54 Another example here of where this book is all over the place: after a brief discussion of how quantitative easing works, the author starts talking about the opioid crisis, and then jumps to talking about iPhones made in Chinese plants powered by coal.
55-7 Discussion of how large corporations get access to much lower interest rates when the fed keeps rates artificially low, likewise how they can use the capital to buy back stock, expand, etc., on the credit advantage that large established companies have over small companies, this was already a big advantage as it is, but Fed rate policy makes it an even bigger advantage. [Unfortunately the author talks about this problem but never addresses the solution, which is to make sure you invest in large companies with scale advantages.]
Chapter 4: The New Washington Consensus
59ff Strange discussion here on shark attacks off Cape Cod to illustrate unintended consequences. [I'd argue this is misread of the audience of a book like this: if you don't know what unintended consequences are and can't easily come up with many examples of them, you have no business investing. You've got a lot to learn first.]
61ff More padding here where the author discusses stock market volatility, but for some reason feels a need to tells it in the context of a masturbatory story about lunch in a fancy Manhattan restaurant. "A platter of fresh oysters on crushed ice was placed in front of us. It included lemons and mignonette, but I never use either of them. I like the brine, the ocean scent, the cream of the shellfish. For me, oysters have always been a liqueur from the sea. No acid required."
62-3 On long volatility VIX products: the VXX ETN; the VIX futures ETF UVXY, and then the short/inverse VIX products like SVXY and SVIX (when market volatility goes down these ETNs go up); [Please note that these products have "roll costs" and thus they grind lower over time because of this! They should just be used to hedge or for short-term positions, or better yet, not used at all.]
64ff On VIX levels normally being between 10 and 15, but hitting 90 during Lehman's collapse. And then it took almost six years for that volatility level to calm down, which meant "Nirvana" for options traders. Over their oysters [this masturbatory restaurant scene took place allegedly in 2017] these two guys talk about how "shorting volatility is now one of the most crowded trades on earth." Extended discussion of how it's all going to blow up.
68 Then January 22nd, 2018: "Volmageddon day"
72ff The section of the book is somewhat embarrassing: the author is trying to show how his firm (sort of) predicted the severity of the COVID crash; he even says that he spoke to an FT reporter, saying "Our indicators tell us we're very close to a Lehman-like drawdown" [thus implying a stock market selloff analogous to what happened when Lehman collapsed]. But in reality these guys (as well as everyone else) failed to appreciate the Central Bank response, which caused stock prices recover everything within months. Thus it was the wrong call to sell at this point, simply because you'd have to be able to get back in right away and you wouldn't have time to do so because this crash was a V-bottom! This author and his firm actually look unrigorous here.]
76ff He quotes another colleague, a fund manager friend, who told him about junk bonds outperforming equities in Q2 of 2020; using this to claim that equities would go up a lot; the author effectively quote-mines his experience and gives the impression that he nailed both the sell and the buy of the COVID V-bottom. [This is a good example of an investment writer where I don't care what somebody thinks--or more unrigorously, what they claim they claimed at the time--what I want to know is what precisely was in his portfolio at the time and what specific trades did he make going in and coming out of this sell-off/V-bottom rebound. All the rest is just bullshitting and pretending you got it right.]
81-2 "The COVID-19 pandemic also shifted the balance of power in American business from ownership to labor." A strange comment here where the author claims that unions forced Starbucks to change its dividend policy. [I don't see where Starbucks changed its dividend policy to start with, and I certainly don't see where unions forced this. I'm not sure, maybe I'm misremembering this situation, but I do not remember this happening at all.]
Chapter 5: Fossil Fuels Paving the Way to the Green Meadow
84 This chapter opens with a scenelet of Aubrey McClendon, about to go broke (and notoriously commit suicide) after crossing ethical lines, including staging land auctions for drilling plots with Chesapeake Energy in 2016;
84ff A blurb here on Nassim Taleb. [The author unfortunately calls Taleb "an avid dead-lifter" clearly not realizing he hasn't deadlifted in years. You might call this a minor factual miss, which it is, but it is also another example of authorial laziness.]
88 On the thesis that we still need lots of fossil fuels for global use and to bridge to renewables, right when supply of energy production is flattening out. [Again, this is a consensus thesis, it's important to realize that lots of investors already think this.]
89ff Quoting somebody named "Rafi" (we never learn his last name?) a manager at Canoe Financial, a $2b firm, criticizing Trudeau for his war on Canada's oil industry, articulating stats on India's energy use, etc. "...an energy shortage in the West means a cold shower. Maybe not such good coffee. But in emerging markets, you've got carnage...perhaps a civil war on your hands."
92ff Leigh Goehring and Adam Rozencwajg and their findings that once a country's GDP per capita hits $2,500 a year commodity consumption increases exponentially, then leveling off at GDP of $20,000 a year. People want to eat meat, use AC, drive, etc. "...there is simply no way the oil industry can meet this expected demand growth."
95ff Blurb on nuclear here: green activists have come around to support nuclear, there's a shortage of uranium production, note this is a teaser for Chapter 9 where the author says he will go through this theme.
98ff The author calls for a coming wave of mergers and acquisitions in the oil industry, [again the author is all over the place, jumping from nuclear back to oil here, the reader is left to try and follow the thread!]. Also calling for higher oil prices [again these are logical but yet consensus themes, and at the same time oil is strangely priced lower than one would expect given the supply/demand backdrop. Maybe this means the theme is a legit theme to play, for the record this is how I am playing it personally.]
99-100 A reasonable look at renewables: thinking about the amount of material, cabling, plastic, fiberglass, steel, maintenance expenses, batteries, the environmental degradation caused in mining the rare earths and other metals required, etc., all of this stuff means a huge carbon footprint as well as huge fossil energy use for wind and solar energy to become meaningful.
102ff On energy prices driving inflation: "the following may be the most important sentence in this book: if inflation normalizes in this cycle at 3 to 4 percent instead of 1 to 2 percent as in previous decades, trillions of dollars are misallocated across the investment asset ecosystem, as most portfolios are still massively overweight growth stocks." [Presumably the author is looking at the 1970s-era inflation and the delta in performance between growth and value during that period; I'm not sure if a future inflationary period will look the same given the Mag 7 companies and their structural dominance, structurally high profit margins, structural cash generation capacity. I'm also wondering if maybe these companies can easily pass through price increases (Apple) or in some cases these companies don't have customers paying "prices" at all (see Google, Facebook)! The profit margins of these companies are far higher than even the richest growth stocks of the seventies. Thus I don't know if it's appropriate to use this lens to think about the problem. I could be wrong obviously. I think it's too simplistic to just say inflation is bad for growth stocks and good for value stocks. It will be more complex and nuanced than that. Inflations are always confusing because they harm some entities and help others and it isn't always clear who is who ahead of time.]
104ff On copper demand: the author claims 40% of future demand growth comes from green technologies, bringing about a supply gap due to the lack of new copper mining projects. Likewise: lithium, nickel.
104-5 Sidebar here on reasons for sticky inflation, like cost of living adjustments; also an interesting blurb here on Walmart citing SNAP payment cycles as an impact on the company's earnings. "In 2020, Walmart captured nearly 26 percent of SNAP grocery dollars."
106 Comments here in the American electric grid infrastructure: it's more than 50 years old, increasingly unstable and needs to be significantly expanded to handle major EV demand. [The question of course is whether there actually will be EV demand because these have been in some ways disappointing cars for a lot of consumers. Time will tell.]
106-7 Blurb here on a power generation grid operator in Germany having to shut its grid down for an hour, like a third world country, because there was no wind at the time.
107 The conclusion here: "Get long oil." Mentioning Exxon's new reserves in Guyana which may reach 25% of Exxon's worldwide production. [This brings to mind another point: there have been some interesting "whale" deposits found in the past several years, Guyana is just one, but you can do a quick Google search and come up with quite a lot of very large oil discoveries in Africa, the Middle East, etc. What about the argument that there's too much supply??]
108ff On sector rotation shifts like energy being 49% of the S&P 500 in 1981, then falling to 12% in 2021. Financial assets, growth stocks and technology all grew as percentages, with technology now 43% of the S&P 500. "We believe higher energy and metals prices will be sustained for the next decade, and they're already forging the greatest migration of capital we have seen in our lifetime." Oil stocks "are still in the early innings."
110ff Disappointing and nearly content-free discussion with David Tepper who runs Appaloosa Management ["Remember one thing, Larry: stay alert to the risks in the market. Watch for the noise--that's always a key indicator. It was great to meet you. Thanks for coming out."] Worse, the author pads this useless part of the book with an even more useless huge paragraph on the geography of New Jersey and then a comment about how great he is golf. This is as bad as the cringey oyster comments two chapters ago]. "It had taken seventeen emails and twelve phone calls to land this appointment." "Buying right never, ever feels good, Larry." [Note: while it's true that Appaloosa has had tremendous, tremendous performance over the decades, it's also interesting to see David Tepper go through a very typical rich hedge fund manager experience: buying an NFL team, running it like a complete moron and ruining much of his credibility in the process.]
114 On looking at the number of stocks trading at 52-week lows: of the 2,800 stocks on the NYSE, when you see more than 800 (or especially more than 1,000) hitting a 52-week low this marks "just about every local bottom" per Tepper. Another of his "buy signals" is a very low number of stocks closing above their 200-day moving average. In March 2020 for example, 4% of stocks were above their 200-day moving average.
Chapter 6: The Dark Side of Passive Investing
117 "Market crashes are caused by forced selling. Period." Driven by margin, leverage and now passive investors. [I argue think about the other way around: when index funds and ETFs drive stocks down, use it as a chance to pick up a cheaper-than-it-should-be stock because of index selling pressure.] "What few realize is that the dominance of all these passive investors has created a terrifying misrepresentation of risk in the market, and one day this could lead to a catastrophic drawdown similar to what happened during COVID, Lehman, and Volmageddon, as we'll unpack in this chapter." [Note: one way to drastically overstate your insightfulness is to claim "few realize" the thing you're claiming. Everybody is already talking about this problem.]
120 Mechanics of ETFs: in reality this is the culprit more than the standard index fund like the Vanguard. [Again, the problem with the author's argument, which is a true argument, is that everybody has known about this for a long time! Even back as early as the 1990s you could see the SOX Index whip around various semiconductor names "irrationally." You had to be ready to take advantage and you had to know that the index would sometimes drive your stocks, not the other way around.]
122ff The author attempts to explain some of the idiosyncrasies of ETFs, but the explanation is not done well and there's nothing actionable from it. I also think the author may not fully understand the overarching function of arbitrage in a marketplace. Arbitrageurs are not interested in company fundamentals at all: the author says this as if it's a bad thing when it is usually definitional of arb activity. Arbs are interested in pricing discrepancies, which as a collective they root out of the system.
127ff Here the author attempts to make a (rather unrigorous) connection between passive indexing and other market participants, like trend-followers, investors using technical indicators, volatility targeting and risk parity funds, option sellers, etc., all of whom he claims pile in, join in on a self-reinforcing process as well. The author doesn't explain why this happens, or how it happens--just that it happens--and then he concludes that a speculative mania will build up driving all kinds of crazy things like GameStop and Dogecoin. [It's odd, many financial writers often just sound like grumpy old men: they point to things that go up that they think shouldn't, claim it's all a bubble and consider it to be a rigorous argument.]
128 Comments on the CBOE introducing zero days to expiration options, or "dailies": the author thinks this is another thing causing options volumes to explode, making the volatility problem even worse. I'm not sure there's a real connection between these things, also keep in mind that every third Friday has always been (technically speaking) a "daily" and now that there are weekly options, every Friday is a "daily." Were there extremes of volatility during these periods, that are now present all the time, because of the existence of dailies?
131ff Here the author goes through the Baby Boomer "end of the wall of money"/"demographic time bomb" bear argument. [This is an unfortunate and unrigorous argument, but it basically holds that the past few decades of stock market increases have been driven by Boomers entering their peak earnings years and thus a "wall of money" entered the stock market, which is now going to exit the market or at least end as an upward driver. What's weird about this claim, and many people make it, is how during this allegedly bullish "wall of money" era we saw tremendous periods of underperformance! See for example the 1999-2013 period where the S&P500 ended up flat (!) over a 14 year period.] The author argues here that an "endless bid" of Baby Boomer buying will turn into becomes an "endless offer" of Baby Boomer selling. [Note that these types of demographic arguments for long term stock returns tend to be anti-predictive.]
132 "But what will happen when another really big shock hits the markets? When $25 trillion unwinds in a reckless panic, without any professional portfolio managers to guide us through the chaos? It could cause a cascade of uncontrolled selling of proportions that have never been seen before." [This is emblematic of the unrigorous thinking of this writer. Just consider a couple of nested fallacies here: first of all professional portfolio managers are often even worst ninnies than individual investors. Second, anyone can imagine a shock of any size happening to the market. But what happens if such a shock doesn't happen? What happens if a shock happens but it is far smaller? What happens if the world ends/doesn't end? We might as well ask what happens if a monkey flies out of the writer's ass at the same time a "$25 trillion" shock happens? That would be really bad, wouldn't it?]
133ff Interview with David Einhorn, who runs Greenlight Capital; worth noting that Einhorn has been kind of mailing it in for the last several years: his fund's performance has been disappointing, for years he's been charging 2-and-20 in order to underperform the S&P500. "Its reception area was immaculate, with pristine carpeting and fresh bouquets of flowers in what I assumed were Lalique vases." [See also the notes above on p64 and p110; readers have now been treated, gratuitously, to the author's skills at oyster eating, golf, and now his eye for fine "vahs" recognition.]
135 Einhorn: "The largest shareholders in most companies are passives [index funds]. If you own the whole market and you don't really care how any particular stock does, you can subvert yourself to other agendas: ESG, diversity, or other kinds of check-the-box types agendas that don't have to do with making good capital allocation decisions for corporations." [This is a good point.]
135-136 On how passive index funds have gone from price-takers to price-makers because the fund flows are so significant that they're actually driving the price of stocks and thus making the market less efficient. [Note however that passive investing is logical if I assume the market is smarter than I am and I know I can't outthink and outwit everyone: I just accept what the market is, and I accept whatever its performance will be. The problem emerges, howeer, if this perspective collectively drives the index prices higher than they otherwise should be.]
139 Strange coda to this chapter here where he talks about Green Brick Partners and Einhorn's investment in it, and the fact that Einhorn he bought still more of it in 2022 even though it was already one of his largest positions. This has nothing to do with the general topic of the book, it's a tangent attempting to illustrate that when you see a major holding for a great investor go on sale "it can be an attractive entry point."
Chapter 7: The Psychology of Bubbles and the Mania of Crypto
140 On Jane Street, the quant trading firm; note here that Sam Bankman-Fried got his start there (allegedly).
142ff Brief discussion of asset price bubbles, on the fact that you need both irrationality but also loose money conditions.
144 "We first heard about Bitcoin in 2009." [It becomes very clear, quickly and painfully, that this author does not understand Bitcoin properly, although he does understand the dollar-as-melting-ice-cube phenomenon, he understands the fact that the dollar was diluted by some 40% from just 2020-2022 for example, and why Bitcoin is attractive to many as a lifeboat to escape inflation/currency debasement. Also, if you make a point of saying "when you first heard about it" a reasonable reader would want then to know why don't you already own a lot of it, and more importantly, why don't you own enough of it to be rich?]
148ff On Sam Bankman-Fried starting Alameda and FTX, how it became huge, and how Marc Cohodes saw through it. "Who the fuck is this goofball?" On Cohodes' wig indicator, on the idea that nobody comes out of the blue and spontaneously "arrives" on Wall Street, everyone comes from somewhere; but yet Sam Bankman-Fried came out of nowhere.
153ff Now on to Cathie Wood, her firm Ark Asset Management, on her "flagship ETF" ARKK, and the self-fulfilling phenomenon of money pouring into the ETF and self-reinforcing the increased prices of the stocks in the fund; this is the same thing that happened with the largest stocks during the tech boom in the 2000 NASDAQ bubble; back then lots and lots of funds all trafficked in the same garden-variety tech stocks like CSCO, ORCL, LU, JDSU, etc.
155 The author now goes through a whole list of different scams and bubbles from various periods including Theranos, rhetorically he is trying to lump the Ark ETF into the same mental category. [To try to make some practical use out of this book let's look at this ETF problem in a way that might be investible: take Coinbase [COIN] as an example: if you had a belief that Coinbase was a real company, that it would make it and be successful, you could also see that during the last downcycle when ARK was experiencing huge outflows, say in 2022-3, you could make an argument that this ETF drove a self-reinforcing selling feedback loop was driving this company unsustainably down, and thus this could be an opportunity to acquire a stock at a much lower price than you would otherwise pay. This would be my way of attempting to apply second-order thinking to the ETF feedback loop problem to try and find opportunities.]
162ff On looking at bubbles as an opportunity to make money but recognizing that Fed activity can confound things, as the Fed's may play a role in helping inflate these bubbles, it may play a role in loose policy to stem the deflation of bubbles, etc. [This is actually a healthy way to think about things and I'm pleased to see this author see it too! Typically the grizzled permabear approach (Bill Fleckenstein and Doug Kass would be standard examples) is to wring your hands, call nearly everything a bubble, get mad at the fact that bubbles exist, get mad at the fact that all these other stupid investors out there are fools for not owning the things I think they should own, etc. Instead, a savvy investor may recognize a bubble, but may also recognize, humbly, that he may not know the timing or duration of it; he may ride the bubble partway up but yet recognize he won't catch all of it, or that he may experience part of the selloff too. It's not like they asterisk profits and don't count them because they happened, allegedly, in a bubble! And yet another way to think about it is to vastly extend your time horizon and just accept that you will invest through and across many bull, bear and even bubble markets over your career, and try to find companies that you will be willing to own regardless of the overall market backdrop.]
163 On George Soros: "he runs to [bubbles] when he spots them but he makes sure to get out of them before they pop." [I can't imagine Soros wringing his hands at a market.]
163 On "listening": When does the asset stop going up on good news? What is the driver of the bubble (the Fed), and is it about to change its stance?"
Chapter 8: The Decline of the U.S. Dollar
166 On the temporary nature of democracy and how it always evolves into dictatorship.
167ff The author unfortunately swallowed regime narrative about the Ukraine conflict, he doesn't appear understand the actual reality of it. Also he writes here an imagined scene as if he's on the inside with Presidential advisors trying to figure out what to do against Putin and hold him "hostage financially": Note though the author is correct about the incredibly negative second-order consequences of the foolish decision to weaponizing the dollar; the disaster of the Biden administration's decision to aggressively sanction and seize Russian assets [which was a catastrophic strategic mistake, and we're killing our dollar-based golden goose as a result. One of the worst self-owns in American history. Fortunately the other seems to see this.]
172ff Discussion here of the potential "ways out" for overleveraged Western countries and their unbelievably large unfunded liabilities: a debt jubilee, a default cycle, governments inflating their way out; Also financial repression: running inflation higher than government debt interest rates, this can be done by mandating banks and insurance companies and other financial institutions to hold US debt. "Slow-walk financial repression"; "it's a fifteen-year program, not a fifteen-month program."
179ff On the gradual breaking down of the petrodollar system; on Saudi Arabia accepting payment now in other currencies, not just dollars for its oil. See also natural gas and non-dollar trading blocs among Russia, Iran and Qatar, etc.; this is clearly indicating a structural decline of the dollar over time, as more and more countries begin to move away from it.
183ff Discussion here of who are the key holders of US Treasuries: 60% of the $33 trillion federal debt is held by the Fed, Social Security, and foreigners collectively; future buyers like the Social Security "trust fund" may reverse and turn the other way as the demographics change. Also interesting that Japan is not buying that much US debt any more. So the question is where does future demand for Treasuries come from? [One thing the author doesn't talk about--and probably doesn't know about--is global stablecoin demand, which already is a tremendous buyer of Treasurys, and could be a significant force multiplier of dollar power, as 99% of stablecoins are dollar denominated.]
186ff More discussion here on how the US government's constant sanctioning and threatening has driven away many of its most important Treasury buyers. Also discussion on yield curve control, see for example how the bank of a Japan keeps its government long term debt yields at 1% despite having significantly higher deficits and total debt to GDP than the USA.
187ff All this to arrive at advising the reader to buy gold.
188 The author makes an argument that US M2 money supply of $20.6 trillion should roughly be equivalent to the total value of gold; this would work out to $3,330 an ounce (note that this compares to the current price of $2,700-ish, thus the market cap of gold is around $17 trillion). [It's deeply unfortunate the author doesn't really see Bitcoin for what it is--like gold, but way better: uncensorable, far easily transportable, weightless, cryptographically protected, permissionless, easy to self-custody, etc.). Further the author doesn't talk at all about how the gold price is almost certainly rigged/suppressed by global central banks, that the supply of gold held at central banks is not audited and never has been, particularly in the USA, and so there's likely inefficiencies in gold that investors should be aware of.]
189 Other plays: precious metals, silver, platinum, palladium; companies like Barrick, Newmont, Hecla Mining, Sibanye, Impala Platinum, as well as "paper gold" like the GLD ETF. [Note that there's no discussion (or even acknowledgement!) here of the "ETF problem" with gold ETFs that he cites as such a big risk factor with the ARKK ETF (see page 153 above, where he claims ETFs like this produce mindless, self-reinforcing buying). Why wouldn't this be an equal problem with any gold ETF too?]
189ff Note also that PGMs (platinum group metals) are used in hydrogen purification, fuel cells and other industrial uses, the author's argument here is industrial uses just from fuel cells and global automotive demand is far larger than current mining output, driving a large structural shortage. "This is why we are so bullish on major PGM miners such as Sibanye-Stillwater and Impala Platinum." [Admittedly so am I with Sibanye, but holy cow has it been a disappointing stock so far.]
192ff Section here talking about how the US regional banking system is in intensive care; also very bearish discussion on the commercial real estate sector. [I don't know this for sure but I suspect these are both bottom ticks and it's unfortunate that they appeared in this book in print at the time it did. I guess we can check back in five years and see who is right!]
Chapter 9: Cold, Hard Assets--the Portfolio for the Next Decade
197ff Discussion of the Democratic Republic of Congo and its cobalt mining industry and the horrendous conditions there.
198ff Charlie Munger wanted to meet with the author after reading his book A Colossal Failure of Common Sense (his post-mortem on Lehman Brothers); he got a private meeting with him at the 2013 Berkshire Hathaway shareholder's meeting.
200-1 Munger: "'Human nature,' said Charlie, 'is your greatest enemy at market lows. At your absolute climax of fear, you must do the exact opposite of what you want to do. And once you've done that, leave it alone. Because the real money is in the waiting. Larry, the hardest thing to do is stare at a screen all day and do nothing.'" [Holy cow is this ever right.]
201-2 On how inflation drives up the value of commodities but it also drives down P/Es on stocks, thus typically you'll want to rotate from high P/E growth companies into commodity-based or value companies during these cycles. [This is what is weird about the current period: this has been the exact wrong thing to do for a few years now, just as inflation is rearing its head. Why? What could this be signaling to us?]
202 Couple of problems worth noting here: the author claims that Charlie Munger is essentially holding the gate open and welcoming investors to the world of commodity investing, but in reality Munger typically avoids gold, and avoids asset heavy mining companies, and instead looks for "great businesses" with moats, stable cash flows, etc. And many of these are often high P/E stocks!
202 The author also says the 60/40 (60% stocks 40% bonds) portfolio is dead; instead to be replaced by 40% stocks, 30% bonds, 20% commodities and 10% cash. [As if that kind of delta even moves the needle at all! Such an asset mix isn't all that much different from a 60/40 traditional portfolio. This is one of the problems with market strategy type recommendations like this: if you're really making a big call on commodities, then why only 20%?]
204ff A number of pages here about the different risks that can happen to miners including political problems, expropriation, corruption, etc. Yep. See the above ferris wheel image!
208-9 Superficial, entry-level discussion of mining companies; addressing "byproduct metals" (tin, lead, etc.) that can lower the effective extraction cost of the more valuable metal you're really mining [note that this can also really screw with the pricing and supply/demand dynamics of the byproduct metal]; on miner efficiency, cash cost per troy ounce; also a light discussion of royalty companies like Wheaton or Franco Nevada that don't have operating risk and therefore can sometimes have better performance.
208ff On renting gold companies not marrying them; when short rates are 5% [by the way, they very nearly are right now], this is a headwind for this sector that you want to think about when the rate hikes cycle begins and ends, when it's not clear when the terminal rate will be hit gold stocks tend to do poorly; in other words, when rates are rising and you don't know how much longer they're going to be rising avoid gold. "Once the terminal rate comes into view and investors can see the end of the hiking cycle, gold miners start to outperform gold... And stocks in general." Also generally the biggest and best companies do the best in the early part of a cycle, and then quality starts to decline afterwards [this is typical of any asset cycle]. The author cites Barrick Gold, as well as Newmont Gold and the GDX gold mining ETF. [Once again, we see how this book could be a four page or even four paragraph report, not a full book.]
211ff Discussion here of copper: the driver here is EVs and additional capacity needed on the grid and charging stations; not to mention the US grid is aging in the first place, thus copper could be in a long-term bull market per the author. Tesla's manufacturing projections alone will require 80 percent of the world's copper." [What? Is this possibly true?] See also emerging market demand in china, etc. Note also there is a 5 to 10 year runway before any kind of major mine gets started producing fresh copper. [This is a huge part of the story with any commodity: the sometimes decade or longer lag between new demand and supply to meet it. This is why you can get monster moves during a commodity cycle.]
213 The author cites ticker COPX, the copper miners ETF, also aluminum as a substitution play for copper, with Alcoa cited here is the key dominant player, it has improved its balance sheet in recent years; see also copper minor Teck Resources.
214ff Lithium and rare Earth element plays, Cobalt, note a discussion here about how Freeport McMoRan had to sell its large copper and cobalt mines in Congo to the Chinese miner CMOC Group Limited, and then later Freeport also unloaded another major copper/cobalt project in the DRC during a period when the price of copper crashed and Freeport had a stressed balance sheet; this was in 2016 during the last commodity downcycle. [No mention of Albemarle Corp. here as a key lithium play?]
216 The author says "we love" REMX, the Van Eck Rare Earth Strategic Metals ETF. See also XME, the SPDR metals and Mining ETF.
216 On steel as a major driver behind wind turbines, solar panels, etc. "...a megawatt of solar power requires between 35 and 45 tons of steel, and each new megawatt of wind power requires 120 to 180 tons of steel."
218ff Discussion here of the uranium market; see Mike Elkins of Lloyd Harbor Capital describing uranium as a 100-year storm in a 14-year bear market, the author cites 15 to 30 million pounds undersupply annually. Names he gives here are CCJ, NXE. Interesting point here after a 14-year bear market (the last spike in uranium prices happened in 2007-2008 and it was killed off by the financial crisis) there's a brain drain across the industry as talent leaves the sector, and this extends the recovery, as it should take even longer to increase production capacity.
221 Random sidebar block quote here on investment leaders in the value and hard asset space: Greenlight Capital, Kopernik Global All-Cap Fund [KGGIX], Alpha Architect U.S. Quantitative Value ETF [QVAL], Alpha Architect International Quantitative Value ETF [IVAL], Pacer US Cash Cows 100 ETF [COWZ], Pacer US Small Cap Cash Cows 100 ETF [CALF], Pacer Developed Markets International Cash Cows 100 ETF ICOW], Goehring & Rozencwajg Resources Fund [GRHIX].
222 "Are you long because you like it, or do you like it because you're long?" On the volatility of a theme like uranium, it is a 5-10 year play, thus the author warns readers about the volatility in the short run. "Keep in mind, with the miners, every few years the tourists are always coming on and off the bus." On using capitulation from shorter-term investors to your advantage.
223 Interesting blurb here on how Twitter changed technical analysis forever according to the author, because it has all these clueless people and pretenders using the same stops and indicators; thus you're better off trading against indicators than with them; also capitulation in the 21st century means that the capitulation process can take minutes if not hours, rather than weeks as before.
To Read:
Doyle Brunson: Poker Wisdom of a Champion
Doyle Brunson: The Godfather of Poker: The Doyle Brunson Story
David Einhorn: Fooling Some of the People All of the Time
Sigmund Freud: Group Psychology and the Analysis of the Ego