Tuesday , September 21 2021
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Three Things I Think I Think – Everything Goes to Zero in the Long Run

Summary:
Here are some things I think I am thinking about: 1) Crypto All Going To Zero? John Paulson of subprime mortgage fame has some negative thoughts on cryptocurrencies: “Cryptocurrencies, regardless of where they’re trading today, will eventually prove to be worthless. Once the exuberance wears off, or liquidity dries up, they will go to zero. I wouldn’t recommend anyone invest in cryptocurrencies,” I’m not sure why people need to take such extreme views on so many things financially related. In the crypto space it seems like most people involved in these debates are either crypto maximalists or minimalists. There seem to be very few people in the middle. Paulson obviously is a minimalist. Now, I get his view to some degree. As of today the crypto space is still just 1% of all outstanding

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Here are some things I think I am thinking about:

1) Crypto All Going To Zero?

John Paulson of subprime mortgage fame has some negative thoughts on cryptocurrencies:

“Cryptocurrencies, regardless of where they’re trading today, will eventually prove to be worthless. Once the exuberance wears off, or liquidity dries up, they will go to zero. I wouldn’t recommend anyone invest in cryptocurrencies,”

I’m not sure why people need to take such extreme views on so many things financially related. In the crypto space it seems like most people involved in these debates are either crypto maximalists or minimalists. There seem to be very few people in the middle. Paulson obviously is a minimalist. Now, I get his view to some degree. As of today the crypto space is still just 1% of all outstanding financial assets and doesn’t appear to be doing much of anything useful aside from creating lots of new ways for people to gamble on jpegs and things like that. But it’s still a trillion dollar plus space. And you can’t just shrug off a trillion dollar space. I mean, I think gambling is generally bad. But I am not going to look at a huge and popular industry and just declare that it can’t or shouldn’t exist because it’s a pretty irrational thing for people to do.

But crypto isn’t just gambling. Sure, it might look like that right now, but I think there are real potential use cases for crypto. The one I keep talking about is real estate. The potential that you might one day be able to transfer the title of your house to someone else on the spot via the exchange of a smart contract is not a small thing. We’re talking about the biggest industry in the world. So crypto doesn’t even have to have lots of use cases to be huge. It could literally just have this one use case and it automatically becomes a huge segment of the economy. There are countless other potential use cases as well. It’s a very young industry as a whole and I don’t know how it will all play out, but I don’t think it’s going away any time soon.

Anyhow, I know. I am so boring with my middle ground views and trying to see both sides of the argument. But I can’t help it.

2) The Behavior Gap Revisited.

The theory of a “behavior gap” is the idea that investors underperform the funds they hold because they behave poorly. There are famous studies on this including the DALBAR study and the “Mind the Gap” study by Morningstar. Both of these studies find that investors suffer behaviorally related mistakes that lead to poor performance. Now, I don’t want to get into the details of methodologies. I know there are people who hate the DALBAR study and criticize the Morningstar study. There are, after all, a million ways to study “behavior” and no one knows for sure why this behavior gap appears. But one thing seems pretty damn clear to me – with 60% of assets sitting in higher fee active funds when 80% of them underperform an index fund I think it’s safe to say that the behavior gap is a real thing. I spend almost every single day of my advisory career reviewing other people’s portfolios and finding a never ending parade of super high fee closet indexing portfolios crossing my desk.

I am not going to sit here and argue that the behavior gap is due to this or that. I don’t know the exact cause and I don’t think I really need to. All I know is that the investment world is a mine field of expensive options that the average investor has a very difficult time actually understanding and navigating. Financial literacy is a mindbogglingly huge problem in the USA and around the world. And while people who buy stocks and bonds are probably relatively financially literate there’s still huge amounts of evidence that these investors make bad decisions pretty consistently. I’ve spent my whole life studying this stuff and trying to eliminate mistakes and I still find myself questioning my own judgment consistently.

Anyhow, I thought Morningstar had a bunch of good conclusions regardless of the methods they used to come to their conclusions:

  1. Keep things simple and stick with plain-vanilla, broadly diversified funds.
  2. Automate routine tasks such as setting asset-allocation targets and periodically rebalancing.
  3. Avoid narrowly focused funds, as well as those with higher volatility.
  4. Embrace techniques that put investment decisions on autopilot, such as dollar-cost averaging.

Amen to that.

3) The Fed is Gonna Save the Planet!

There was this article about some politicians who don’t like Jerome Powell and want to replace him with someone who is more environmentally friendly. I’m not kidding. They want to replace a Central Banker with someone who might be able to solve climate change. I don’t want to sound snarky, but it’s probably impossible here because this has to be one of the silliest things I’ve ever read. Ignoring the fact that Jerome Powell has done a pretty good job, I think it’s just absurd to think that an entity that can’t even meet its primary mandate of full employment consistently, might be able to meaningfully influence climate change. We’re really bringing a whole new meaning to the idea of a “blunt instrument”. The Fed printed countless dollars in the last 10 years and we’re barely seeing 4% inflation. And regular readers know that’s mostly because the Treasury spent trillions during the pandemic.

In all seriousness, I just don’t see how the Fed can really influence climate change. I guess they can push the needle a little through regulation and whatnot, but this is a job that Congress really needs to do. The Fed is just a big clearinghouse with a bunch of super blunt economic instruments that don’t even seem to work nearly as well as most people thought they did. So let’s let the climate change fighting get done in Congress rather than using the Fed and Powell as a scapegoat for something they really can’t influence much.

NB – You might ask – how has the Fed done a good job if they haven’t met their mandates? In my opinion, the Fed doesn’t really have precise tools to achieve full employment and price stability. More importantly, the Fed is really just a big bank that supports banks and ensures they’re operating smoothly. As far as that’s concerned, the Fed has done a good job supporting and ensuring the banking system is operating normally. And as for their specific mandates – they’ve done what they can with what they have. 

Cullen Roche
Former mail delivery boy turned multi-asset investment manager, author, Ironman & chicken farmer. Probably should have stayed with mail delivery....

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