Portuguese stock picks

If you want some insurance against future Europe-US travel restrictions, want your children to have the flexibility to study/work/live in the EU, or just want to be like Eric Schmidt (support Biden and the Democrats’ plan to re-make U.S. society and the U.S. economy, but have the Gulfstream fueled and that second passport handy just in case!), the Portuguese Golden Visa program is an inexpensive path to an EU passport (less than $100,000 in fees and travel expenses). One requirement of the program is investing in real estate, which the Portuguese love and which I personally hate, or stocks, which the Portuguese hate and I love. The stock purchase approach requires more capital (1 million euro, versus as little as 280,000 for real estate that needs renovation), but is virtually guaranteed to be liquid.

(see Portuguese stocks or Lisbon real estate for the next five years? for some backgrond)

Friends of friends manage money or work in investment banking over in Europe. The general consensus was that Portuguese stocks aren’t mispriced and therefore there is no reason to expect them to do worse (or better) than German or U.S. stocks. That said, the stock market isn’t very developed in Portugal and it is perhaps easier for a management team to loot from shareholders.

Here are some notes from a guy who grew up in Portugal, but has spent his career as an investment banker in London and Spain….

Don’t buy real estate unless you want to use it. He bought in the center because he is fanatical about capital preservation. It took a long time to unload an apartment in Lisbon after the last crash.

Why has PSI-20 done so badly? Had same problems in 2001 and 2008 as everyone else. Bank blew up in 2014. Should be correctly priced now. They’ve survived hell and high water.

The PSI-20 has more exposure to Poland than Brazil or Angola, e.g., through JMT.

You’re in great shape with the large liquid components of the PSI-20.

  • JMT (10, great management, high growth) [the number is a rating from 1 to 10]
  • EDPR (world’s leading wind farm developer, incredibly management)
  • EDP (owns 65% of EDPR, cheapest right way right now to own EDPR)
  • GALP (4, local distribution company for oil, invested some into oil fields in Brazil, Angola, Mozambique, not especially well-managed)
  • BCP (6, only remaining bank, not especially well-managed, dirt cheap, too big to fail for system, largest shareholder is Chinese)
  • RENE (5, just the grid, regulated business, natural monopoly for electricity and gas, yield play)
  • SON (1, conglomerate, screw the minorities every single time, subsidiary is NOS and own that)
  • NVG (integrated paper manufacturer, Europe’s leader, very good management, very well run)
  • COR (10, one of the best companies I’ve ever come across, 50% of good wine[ry?])
  • ALTR (8, indirect way of owning, one of Europe’s most efficient [… something?])
  • CTT (6, post office)
  • SEM (85% of value is navigator, forget about them)
  • EGL (avoid)
  • PHR (avoid)
  • IBS (very nice company, KFC and Pizza Hut, they can grow)
  • Novabase NBA (great company, small IT provider, all software for Vodaphone, half of market cap is cash)
  • RAM (specialized steel and have a forest, properly managed and managed for you).

What if the Portuguese bank holding one’s securities fails? It is just like in the U.S. and the bank is only a custodian.

What did I decide to buy?

CompanySymbolWeight PSI-20Percent portfolio
J. MartinsJMT1325

The above is based on personal prejudice against banks (ruled out BCP), enthusiasm for Poland (overweight JMT), enthusiasm for electricity (overweight EDP; think of all the European douchebags needing to charge their Teslas!), belief that people are too lazy to cook and that table-service restaurants are unsustainable in a world of COVID-19 plus high labor costs (IBS).

Due to prejudice (observing the USPS!), I didn’t buy the post office, which is sad because they have great-looking trucks:

(2017 photo from the Azores)

Readers: Let me know if you need an introduction to attorneys and bankers over there.

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Finally a use case for cryptocurrency? (currency conversion fees)

I did a lot more research after Portuguese stocks or Lisbon real estate for the next five years? (May) and, as part of an EU citizenship project, decided to purchase stocks over in Portugal rather than take on more real estate ownership hassles (one of the big joys of our Florida move has been saying goodbye to homeownership).

Moving money from Bank of America to Bankinter led to some discoveries about international wire transfer costs. If you move a small amount in euros, Bank of America says that they won’t charge you any fees:

But the exchange rate was actually 1.17 on 9/24. So this is a 2.65 percent fee (still only about $31, plus whatever Bankinter will charge to receive the wire (0.05 percent, minimum €5, maximum €30)).

What about for the million euro transfer that is necessary to get the golden visa/passport process kicked off? Compared to the quoted market, the hidden fees within Bank of America were about 0.75 percent (e.g., about $7,500 on $1 million). If sent in USD, however, and converted by Bankinter, the non-hidden cost is 0.5 percent, a little cheaper than BofA, but still about 80X more than the cost of a Bitcoin transaction on the blockchain, right? (right now roughly $60 to the miners?). Given that we supposedly live in a seamless global economy, I’m kind of surprised at how much it costs to change a couple of database records at two banks that are already tightly coupled.

Could this be an argument for cryptocurrency, assuming that just one of the Ponzicoins prevails and becomes a worldwide currency?

(Why is it fair to call these Ponzicoins? Whoever creates a cryptocurrency can mint the first few million or whatever at almost no cost and then they gain value when he/she/ze/they convinces others to buy in.)

Separately, let’s look at the motivational factors from May:

At least to judge by our media, the U.S. is embroiled in white v. Black, white v. Asian, white v. Latinx, and hetero cisgender v. LGBTQIA+ fights. We’re also adding $trillions in debt, welcoming millions of new welfare-dependent citizens, and instituting dramatic changes in government (every day we hear a new and exciting idea for a bigger more powerful central government!). It seems like a good time to ensure that children have the option to study, work, and live in Europe. The Europeans bumped up against the limits of how much government could be responsible for and don’t seem anxious to go back to the 1970s.

There is no way to predict whether Portugal, Italy, Germany, France, or Sweden will be a better place to live than the U.S. in 2030, but keeping only a U.S. passport is essentially a bet that the U.S. will be a better place to live than anywhere in the E.U. Would we want to make that bet?

Now that we’ve had a full summer of rule by Joe Biden and the Democrats, do the above factors still apply to the U.S. as reconceived from Washington, D.C.? Let’s take them one at a time.

embroiled in white v. Black, white v. Asian, white v. Latinx, and hetero cisgender v. LGBTQIA+ fights

The conflicts described in May don’t seem to have been resolved. To these we’ve added roughly half of Americans who now hate Texas and Texans (see “Boycott Texas,” for example, from The Nation, 9/14: “With SB 8 following a crazy new gun law and mandatory mask ban, the Lone Star State has more than earned the cold shoulder”). We also have the hatred of the vaccinated for the unvaccinated, a new-since-May phenomenon.

adding $trillions in debt

“America’s Need to Pay Its Bills Has Spawned a Political Game” (NYT, 9/26): “The Covid-19 pandemic continues to ravage the United States in waves, frequently disrupting economic activity and the taxes the government collects, complicating Treasury’s ability to gauge its cash flow.”

In other words, the U.S. will continue to bury itself more deeply in debt so long as coronapanic continues. And, absent an enormous advance in treatment, we know that coronapanic will continue so long as the virus has the capability of evolving.

(Of course the U.S. also buried itself more deeply in debt before COVID-19 emerged, but at a somewhat slower pace (St. Louis Fed))

welcoming millions of new welfare-dependent citizens

This one might have changed. In order to hit our goal numbers for Americans dependent on government-provided housing, health care, food, and smartphone, we’re no longer relying on immigrants (the “welcoming” part of the headline). We’ve got the new $3,600 per year per child handout, which started in July. Going forward, the NYT tells us that what we used to call “welfare” is our common destiny: “From Cradle to Grave, Democrats Move to Expand Social Safety Net” (9/6, regarding $3.5 trillion in new spending, “a cradle-to-grave reweaving of a social safety net frayed by decades of expanding income inequality, stagnating wealth and depleted governmental resources, capped by the worst public health crisis in a century.”). Tens of millions of additional residents of the U.S. will be dependent on government support (no longer called “welfare”) going forward, but, due to the massive expansion of the welfare state, most of them will be native-born.

On the third hand, once chain migration (wives, cousins, kids, parents, etc.) is mostly complete, we’ll have at least 1 million new citizens from Afghanistan as a result of our spectacular defeat in August and decision to evacuate mostly men mostly at random rather than simply pay the Taliban not to bother people on a list. If these folks are like previous immigrants from Afghanistan to the U.S., they and their descendants will be among the poorest of the poor here, eligible for every form of government assistance for at least three generations. (See “Challenges to the economic integration of Afghan refugees in the U.S.”: “Afghan refugees’ earned incomes are the lowest of seven refugee/immigrant comparison groups”)

instituting dramatic changes in government (every day we hear a new and exciting idea for a bigger more powerful central government!)

Other than the welfare state expansion that the NYT describes above, I can’t think of anything new since May from the Biden administration or Congress.

If an EU passport was a good idea in May 2021, therefore, it seems like it might be an even better idea today. If you want to buy yourself and your children the option to study, work, or live in Europe (or simply travel back and forth during lockdowns), I would recommend acting ASAP. The Portuguese love hardcopy, notarization, etc. and it will take a two months to jump over the bureaucratic hurdles, even with two-day FedEx delivery of signed hardcopies. Email if you need recommendations for a lawyer and bank over there.


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Should investors react to the change in Germany’s government?

After 16 years of rule by Angela Merkel and the Christian Democrats, the government in Germany is changing. I talked to some European bankers and a former hedge fund manager to find out what, if anything, investors should do about this.

The general consensus was that very little would change in Germany. As in the U.S., grand plans from a party can be derailed by an individual member of parliament who thinks that the grand plan will have a negative impact on his/her/zir/their own little corner of the country. For better or worse, this tends to make the German system stable.

Nobody said that Merkel would be missed. One banker pointed out that Merkel was likely voted out by the low-skill welfare-dependent migrants that she was instrumental in bringing to Germany (welfare in Germany is much less generous than in the U.S., but still leads to a better material lifestyle than trying to work for a living in a lot of countries). “They’re betting that the Social Democrats will increase the handouts,” he said. “The conservatives bring them in saying that they’ll work and they turn around and vote for liberals so that they don’t have to work.” (After five years in Germany, about 51 percent of migrants don’t work, which is considered an improvement and a success story by pro-migration Germans.)

Another banker said that Merkel was responsible for the UK leaving the EU. “The British could have just ignored the EU’s demands to accept migrants, as the Eastern European countries did, but they’re too bound up in being law-abiding,” he said. “The Eastern European countries just refuse and dare the EU to throw them out, but there isn’t really a mechanism for kicking a country out of the EU.”

The former hedge fund manager said that Merkel was an unprincipled follower of public opinion. While she initially told Germans that most would be infected with SARS-CoV-2 and therefore most resistance would be futile (e.g., masks and shutdowns would just slightly delay the inevitable), when people demanded lockdowns she locked them down.

How’s Europe doing? “Euro zone inflation hits highest level in 13 years as energy prices soar” (CNBC, October 1, 2021):

Headline inflation came in at 3.4% last month, according to preliminary data from Europe’s statistics office Eurostat. This was the highest level since September 2008 when inflation stood at 3.6%. It comes after German consumer prices rose by 4.1% in September — the highest level in almost 30 years.

The rise has been driven higher by surging energy prices, deepening concern among policymakers. The front-month gas price at the Dutch TTF hub, a European benchmark, has risen almost 400% since the start of the year.

What’s more, this record run in energy prices is not expected to end any time soon, with energy analysts warning market nervousness is likely to persist throughout winter.

France has become the latest country to step up measures to mitigate the costs for consumers. Prime Minister Jean Castex said Thursday the government would be blocking further natural gas price increases as well as rises in electricity tariffs. However, before these measures kick in, gas prices will rise by 12.6% for French consumers as of Friday.

I.e., France is copying Richard Nixon’s wage and price controls and hoping for a different result. (See also “Nixon Taught Us How Not to Fight Inflation” (WSJ): His price controls led to an exponential increase in demand, which caused a shock when they ended.)

I asked the hedge fund manager if the European inflation numbers were cooked like the U.S. numbers (e.g., food and energy costs are excluded from some measures, the cost of buying a house is excluded from all measures (the government comes up with a fictitious world in which people can rent their houses from themselves for a government-determined price)). “Completely fake of course,” he responded. “However, there is one reality of their own making. To ‘save the world’ (read: tax more) they recently yanked up taxes on natural gas and the such. Together with rising oil prices, this has created quite a bit of inflation as you can imagine.”

If the Europeans are inflating away the value of their currency just we are inflating away the value of ours, what is an investor to do? Move money to China, as BlackRock has recently started to do? That’s a bridge too far for a lot of non-Chinese investors. How about “Mining Stocks Offer a Cheap Play on Growth. Dig In.” (Barrons, September 17, 2021), in which we learn that iron and copper miners have P/E ratios of 5-7 (compare to over 30 for the S&P 500):

We have no idea where the euro and dollar will be after the politicians on both sides of the Atlantic are done with their manipulations of the respective economies. I’ve always hated gold as an investment because it isn’t productive. And, in fact, once you factor in dividends paid (“total return”), gold has underperformed U.S. stocks going back to the beginning of our galloping inflation (1971):

(black is the total return; silver is bumping along on the bottom; the S&P (without considering dividends), the Dow Jones, and gold are clustered in the middle)

Could mining iron and copper be considered a hybrid of gold’s inflation hedge and the return to be expected from investing in a productive activity? People will still need steel even if there is a lot of inflation in one or more currencies. On the third hand, aside from the low P/E ratio, why are raw materials miners better investments than upstream manufacturers? And if the P/E is 5 or 7, is that because a company is heavily indebted and can go bust (rather than simply slim down) in the event that demand is reduced?


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Buy Berkshire Hathaway?

With tax law and tax rate changes on the horizon, is it time to buy Berkshire Hathaway? Nobody is better connected to the current rulers than loyal Democrat Warren Buffett (he thinks tax rates are too low, but somehow hasn’t ever found that box on the 1040 return where one can make a voluntary contribution to the U.S. Treasury). The complexities of the current tax code have been awesome for Buffett/Berkshire (see “Warren Buffett’s Nifty Tax Loophole” (Barron’s 2015), allowing for near-infinite deferral of taxes due at the corporate level.

Is it a reasonable bet to assume that Buffett/Berkshire will come through whatever happens in Congress and at the White House with less damage than suffered by the average publicly traded company?

On January 19, 2017, I asked Berkshire Hathaway now that Warren’s friend won’t be in the White House? Under the hated Republican dictator, how did Buffet do? Significant underperformance relative to the S&P 500:

And maybe the situation for Buffet fans is actually worse than the chart suggests because the S&P 500 paid a divided every year during this period while Berkshire Hathaway did not.

How about our friend Toucan Sam?

I sold my share because it is my belief that brk.a has a huge cult of personality with Buffet and he will be dead soon. It is hard to say what premium we are paying for Buffet but my guess is around 30%. It is a certainty he will be dead soon and it is a certainty that it will affect the share price so why risk it? I put the earnings from my brk.a sale into a vanguard fund called VTSMX

How did our favorite bird brain do? (He didn’t say exactly when in 2016 he sold, so I picked June 30)

Again, Toucan Sam did better than the chart suggests because the Vanguard fund pays a dividend.

This underperformance by Buffett calls into question Thomas Piketty’s work on inequality, which rests on the assumption that rich people can get better returns on their money than average people. Hardly anyone is richer than Warren Buffett (though sex-with-the-boss-then-divorce-lawsuit family court entrepreneurs MacKenzie Scott and Melinda Gates are pretty close). He didn’t get a better return than someone who put $10,000 into a 401k S&P 500 index fund.

Toucan Sam might have been wrong about Warren Buffett (now 91) being “dead soon”! Even the mighty coronavirus could not fell this tall oak of finance.

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Best way to invest in Sweden?

As readers may have noticed, I’m a contrarian when it comes to COVID-19 (along with the 60,000 physicians and PhDs who’ve signed the Great Barrington Declaration). To me, the untested “experiment” is locking a country down and closing schools in hopes of winning a war against a respiratory virus. It is not an “experiment” to stay open, as Sweden did (and as the W.H.O. recommended through 2019), and continue to educate children, continue to go to work, continue to hit the gym, continue to socialize with friends and family, etc. I don’t think the U.S., for example, will be better off as a result of shutting down, closing schools, buying and wearing cloth masks that have been shown to be worthless, etc. I do think the Swedes will prosper in the long run due to superior mental health, a focus on something other than COVID-19, their kids having an extra year of in-person school compared to kids in U.S. cities, etc. I want to invest in Sweden with a 10-20-year horizon.

(Based on our devotion to the Vietnam and Afghanistan wars, we could still be fighting the COVID-19 war 10-20 years from now! Even if we aren’t, the misallocation of $trillions from the past 1.5 years, e.g., paying people to stay home for 1.5 years ($800 billion just from federal tax dollars), giving $3,600/year extra per child to successful child support plaintiffs, funding highway repairs in the least efficient states (the new “infrastructure” bill, which builds infrastructure everywhere other than in the states that actually need it due to growing population?), etc., will be a comparative drag on the U.S. economy.)

What’s the best way to invest in Sweden? My usual preference is for common stocks, but apparently a lot of these can’t be purchased in the U.S. There is an ETF that tracks the Swedish market: EWD from iShares. The dividend yield is medium (just under 3%), which I hope means that capital appreciation is expected. Somehow, 77 percent of the yield is classified as “qualified” (I’d thought that this was for U.S. stocks) and therefore subject to a lower federal tax rate (if the Democrats are successful with their latest federal tax increase, the result will be a dividend tax rate of about 50 percent for Californians (fed+state) and this will be on top of higher corporate taxes (i.e., something like 75% of a company’s profits that would have belonged to shareholders will instead go to pay taxes); things are a little less grim for residents of Florida).

The big negative of this iShares fund is a 0.51 percent management fee. They’re just trying to track the index, so it is unclear what you’re paying them for (how hard is it to buy and hold 53 stocks?). The fee for the Vanguard S&P 500 ETF is 0.03 percent, which is also the fee for the corresponding iShares S&P 500 ETF.

The big negative of Sweden as an investment, if you’ve been reading this blog, is that I don’t believe the prevailing American dogma that low-skill migrants make a country richer (if they did, Canada and European nations would be vying for and paying for the opportunity to fly low-skill migrants from our southern border to their respective countries). At 25 percent, Sweden has, I think, the highest percentage of immigrants or children of two immigrant parents, of any country in Europe. If these folks prefer not to work, that could be a drag on the Swedish economy (via welfare costs) for the next 100 years. See “‘New Swedes’ left out as economy powers through pandemic” (Reuters, March 17, 2021):

Sweden has powered through the COVID-19 crisis with an economy set to regain its pre-pandemic size by late-2021, but a surge in unemployment among its foreign-born citizens risks exacerbating social divisions for years to come.

Ajlan came to Sweden as a 17-year-old from Baghdad in 1993. Despite graduating with a degree in Middle Eastern Studies from Lund University – one of the country’s best schools – he only found work as a taxi driver.

A rigid labour market and a lack of low-skilled jobs means Sweden has been poor at integrating waves of immigrants, or “new Swedes”, since the 1970s – a social and economic divide that has been widened further.

Unemployment among foreign-born workers stood at 18% in the fourth quarter of last year, up 3.5 percentage points from a year earlier, according to Statistics Office data. For people born in Sweden, it was 4.1%, up just 1 percentage point.

Immigration has been running at high levels for the past two decades in Sweden, with a record 163,000 asylum seekers arriving in the country of 10 million in 2015.

The government has launched a raft of measures – some of which predate the pandemic – aimed at getting people into work, including subsidized employment, tax breaks for employers, on-the-job training schemes and its “knowledge-lift” programme that offers study opportunities for the unemployed.

In other words, the Swedes don’t have any better idea of what to do with low-skill migrants than we do. They’re on the same “provide free housing, free health care, free food, and then ask people nicely if they would like to work” plan (maybe the Swedes don’t offer an Obamaphone, but mobile phone service in Europe is much cheaper than in what we call our competitive market).

On the third hand, the U.S. and all of Europe are going to be packed with low-skill migrants for the foreseeable future. The only way to short the idea of a migrant-packed welfare state is to invest in Asian countries that are closed to low-skill immigration and that, in any case, don’t offer the multiple generations of free housing, health care, and food that the U.S. offers and that some European countries offer (albeit at a less generous level; see Hartz IV in Germany, of which 55 percent of the recipients are migrants or children of migrants: “According to the Federal Employment Agency … this was due to the migrants lacking either employable skills or knowledge of the language”).

Vaguely related… the Volvo-driving migrants arrive in Stockholm on the ferry from Finland (2016):

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How rich would we be if God had told us about coronapanic in November 2019?

Suppose that you got a letter from God in November 2019 saying that coronapanic would start in March 2020, with unprecedented shutdowns of schools, factories, retail, restaurants, etc. God would have told you that China, Japan, and Taiwan would experience relatively minor shutdowns, that Sweden would have no shutdown, that everyone would try to meet by videoconference, and that most countries and U.S. states would have lengthy shutdowns.

The most obvious response to this as an investor would have been (1) buy China, Japan, and Taiwan, (2) short the U.S., (3) short Europe, (4) buy some individual stocks such as Zoom, and (5) maintain the strategy until a vaccine authorization (not “approval”!) was announced (not because of a belief that COVID-19 vaccines will eliminate COVID-19, but because of a belief that other investors would believe that COVID-19 vaccines will eliminate COVID-19 and therefore coronapanic-related shutdowns).

Let’s see how that would have done. We’ll say that we started the strategy on November 15, 2019 and closed it out on November 10, 2020 a day after Pfizer celebrated the defeat of Big Pharma’s nemesis (Donald J. Trump) by finally disclosing Phase 3 vaccine trial results. We would use 40 percent weight on Asia, 40 percent on the US/Europe short, and a remaining 20 percent on individual stocks.

Let’s first benchmark this against a not-favored-by-God person buying and holding the S&P 500. SPX went from 3120 to 3360 (up 7%).

Element 1 (buy Asia): SSE (Shanghai Index) went from 2911 to 3330 (up 14%). The Nikkei (Japan) went from 23160 to 25087 (up 8%, but this would be called the largest move by far by the journalists writing about COVID in India!). TWSE (Taiwan) went from 52.20 to 61.60 (up 18%).

Element 2 (short the U.S.): as noted above, this would have lost roughly 7% (we’ll ignore dividends since the stuff we bought long would have paid dividends as well).

Element 3 (short Europe): Let’s use the MSCI Europe index. It went from 136 to 127 (down 7%).

Element 4 (buy Zoom, et al): ZM from 68 to 433 (up 536%!), AMZN from 1760 to 3231 (up 83%)

So we’d be up roughly 12% on Asia, flat on the U.S. and Europe (assume equal weight between these two and they moved in opposite directions), and up about 250% on the individual stocks. After transaction costs, given the assumed weights, we’d be up 50-55% for the year.

That’s a lot less than I would have expected!

Above: God creates a Robinhood user.

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Is cryptocurrency the ultimate estate tax avoidance tool?

President Biden has promised to raise estate taxes (but wouldn’t it make more sense to get money from Melinda Gates, MacKenzie Bezos, et al.? See Would limiting charitable deductions raise more than a wealth tax?).

Crytocurrency has become more mainstream.

Could these two be put together?

Let’s go back to the family in Can billionaires marry their children to avoid Joe Biden’s new estate taxes? Jack and Jill have a lot of money that they want to transfer to children. Why can’t they buy cryptocurrency and give their children, Morgan and Parker, the relevant passphrases? After Jack and Jill die, if the IRS asks what happened to a big chunk of money that was wired to a crypto exchange overseas some years earlier, the survivors can say “Jack and Jill must have bought some crypto and lost the password” or “The password died with them.”

Morgan and Parker can quietly spend cryptocurrency for the rest of their lives, so long as they don’t lose the passphrase or spend so much in a short amount of time that they draw IRS attention.

Readers who are experts on crypto: What am I missing?


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Bitcoin has plenty of runway if we look back to the 1960s and 70s and the Great Society

When the U.S. was founded, minimum voting age was 21. A man might start work at age 13 or 14 and therefore a voter would be someone who’d worked for 8 years and who would experience higher taxes and a bigger government as a requirement to work longer hours. Since 1972, however, the 26th Amendment has ensured that 18-year-olds can vote and an 18-year-old may not begin working full time for 10 years (or ever, if he/she/ze/they has figured out that welfare yields a similar spending power). The majority of voters either work for the government or don’t work at all (too young, too old, in “means-tested” living (not “welfare” since it is only housing, health insurance, food, and smartphone that are received rather than cash), collecting alimony or child support from a defendant worker, married to a worker). So the big surprise is that this majority hasn’t voted itself a vastly larger government to be paid for by private sector suckers who will have to work longer hours.

(Imagine how different our government would be if, except for the disabled, 8 years of full-time work history was a requirement to vote!)

There have been three major episodes in U.S. history when the voters hungry for more government benefits prevailed over the beasts of burden (folks for whom the main consequence of bigger government will be longer hours). One was in 1930s (FDR and the New Deal). One was in the 1960s (Lyndon Johnson’s Great Society, though arguably started by JFK). One was in November 2020. If we think that Episode 3 will be a lot like Episode 2, it is worth reading Great Society: A New History a 2019 book by Wall Street Journal reporter turned economic historian Amity Shlaes. I’m just digging into this, but the author seems to have anticipated our current situation (Episode 3). She looks at what happened to last the time that the U.S. decided to “go big” on addressing inequality. The economic and stock market stagnated while the dollar fell and gold surged. If Shlaes is right, every Federal spending initiative is great news for Bitcoin investors.

Some excerpts:

As Stalin was said to have joked, America was the only country in the world that could afford communism.

In a recent book the author had itemized the kinds of reform America needed. Laws that backed up organized labor so it might represent a greater portion of the American workforce, including black Americans or immigrants from Mexico. Higher minimum wages—the current levels were a cruel joke. Minimum wages that covered more workers, even those who did not work in an office or full-time. A dramatic change in the training of bigoted policemen in the big cities. A reinvigoration of the poor so that they became a force in political life. America was a country made of classes, the author thought; it just didn’t know it. The money was simply in the wrong hands. The writer wanted a tax system that captured the elusive wealth of the superrich. The moment had come to level incomes in a systematic fashion. Poverty was the obvious lunch theme. Just days before, the president had tapped the author’s host to lead a new campaign against poverty. In his State of the Union address, the president had told the country he wanted not only to alleviate suffering but to actually “cure poverty.” No American leader had ever taken on poverty in this way before.

The focus of the author’s book was the cycle of poverty in one region, Appalachia. The man had also seen poverty in the city where he grew up, St. Louis. In St. Louis the poverty was in part caused by government plans gone wrong, as in the case of the bulldozing of streets people loved in the name of moving them into public housing slums they didn’t love. America, the author thought, should invest billions to abolish poverty. It was incredible that America knew so much about poverty and had done so little. The state governments could not do this work. State governments were beholden to retrograde conservative legislatures. For systemic change, the author had come to believe, there was “no place to look except toward the federal government.”

Still, as he sat in the makeshift offices, the author kept returning to what he saw as the problem behind the problem, American capitalism. He and his friend took to concluding their memos with a half-serious line: “Of course, there is no real solution to the problem of poverty until we abolish the capitalist system.”3 At one point the author stopped censoring himself and wrote a few lines of what he actually felt: “that the abolition of poverty would require a basic change in how resources are allocated.” The boss actually took this bold call for redistribution to the president, who, the boss reported, proved remarkably friendly. The boss said that the president, a Roosevelt fan, told him that if serious economic redistribution was necessary to realize the long-delayed completion of the New Deal, then redistribution might be worth it.

The president being pitched on what today we might call transferism was Lyndon Johnson and the year was 1964. The author was Michael Harrington, whom Wikipedia describes as a “democratic socialist.”

The economic boom that had preceded JFK’s election gave Americans the confidence that anything was affordable. (I’ve seen this among quite a few folks in my parents’ social circle. Born in the 1930s, they don’t agree with Margaret Thatcher that it is possible to run out of other people’s money. They imagine the U.S. to be so wealthy that no spending proposal could ever exceed Americans’ ability to pay.)

Most Americans shared something else with Harrington: confidence. In the 1930s, the New Deal had failed to reduce unemployment. The prolonged periods of joblessness were what had made the Depression “Great.” But the memory of the New Deal failure had faded just enough that younger people liked the sound of the term. And memories of more recent success fueled Americans’ current ambition. Many men were veterans. They had been among the victorious forces that rolled across Europe and occupied Japan at the end of World War II. Compared with overcoming a Great Depression, or conquering Europe and Japan, eliminating poverty or racial discrimination had to be easy. American society was already so good. To take it to great would be a mere “mopping up action,” as Norman Podhoretz, who had served in Europe, would put it.

First came a campaign, led by President John F. Kennedy, to rehabilitate troubled youth. Soon after, President Johnson led the passage of series of federal civil rights laws. Around the same time came Johnson’s War on Poverty. Next were Johnson’s national housing drive and his health care drive. Richard Nixon followed up with a guaranteed-income campaign and an environmental drive.

When government accomplishes little, how do you persuade the public that enormous achievements are occurring?

Ambitious reforms needed time to succeed. It would be a shame if a project aborted because early results didn’t look good. So, for display purposes, presidents emphasized inputs, not outputs. Congress, too, as the Hoover Institution’s John Cogan has put it, “measured success by labels and dollars attached to legislation”—not by results. The political success of a project mattered more than empirical success. Occasionally, the effort got a new name. The “New Frontier” of Kennedy became Johnson’s “Great Society,” which became the “Great Nation,” and then the “Just and Abundant Society” of Richard Nixon.

We hear a lot about the various $2 trillion spending plans, but we never see a New York Times article on what Americans actually got from the preceding $2 trillion spending program. (exception?)

How did the dreams of the 1960s play out?

… by 1971, for the first time, federal spending on what we now call entitlements—benefits for the aged, the poor, and the unemployed, along with other social programs—outpaced spending on defense.

In 1966, the [Dow Jones Industrial Average] moved tantalizingly close to the 1,000 line, a landmark. Soon after, however, the index stalled, and stayed stuck below the 1,000 line, year in, year out. By the end of the decade, inflation, always present, was expanding to alarming levels. The same period brought another alarm, this time from abroad. Foreign governments started to turn more of their dollars in for gold from the United States’ coffers. The U.S. papers went into denial, quoting a Yale professor, Robert Triffin, who argued that the withdrawals were the result of crossed incentives in the international monetary arrangement, a technical, rectifiable flaw. What came to be known as the Triffin dilemma provided a convenient explanation for the mysterious outflows.

The 1971 run on American gold also, however, reflected foreigners’ insight. Outsiders knew a tipping point when they saw one. America had moved closer to Michael Harrington’s socialism than even Harrington understood. The United States had locked itself into social spending promises that might never be outgrown. Today, interest in Bitcoin and other cryptocurrencies serves as a measure of markets’ and individuals’ distrust of the U.S. dollar. In those days there was no Bitcoin, but gold played a similar role. The dollar was the common stock of America, and foreigners used gold to short it.

The disastrous performance of the U.S. economy in the following years proved the foreigners’ 1971 wager correct. To pay for its Great Society commitments, the U.S. government in the next decade found itself forced to set taxes so high that it further suppressed the commercialization of innovation.

Eventually the market bounces back, right?

The Dow flirted with the 1,000 level throughout the decade, but did not cross the line definitively until 1982, an astonishingly long period to stagnate, nearly a generation.

You just had to wait from 1966 to 1982 to sell a stock for more than you’d paid… in nominal dollars. Shlaes fails to point out that you’d need $3 in June 1982 to have the same spending power as $1 in 1966. On an inflation-adjusted basis (chart), the DJIA didn’t exceed its 1966 high until 1996, i.e., 30 years later.

What about all the great stuff that happened in the 1960s? Going to war in Vietnam was a terrible decision, of course, but continuing Eisenhower’s work in desegregation wasn’t, surely. The author says “Well…”:

The early civil rights laws, as important as they were, set a precedent for federal supremacy over states to an extent some of the Constitution’s authors would have likened to tyranny. The later civil rights laws, with their emphasis on group rights, pitted Americans against one another. Both Johnson and Nixon conducted domestic policy as if they were domestic commanders in chief.

Already I can see some stuff that seems wrong or at least not supported.

For today, the contest between capitalism and socialism is on again. Markets do promise strong growth; we do live in a creative society, the most creative in the world, creative enough to lift the nation to new heights. Yet new, progressive proposals bearing a strong resemblance to those of Michael Harrington’s and his peers’, from redistribution via taxation to student debt relief to a universal guaranteed income, are sought yet again. Once again, many Americans rate socialism as the generous philosophy. But the results of our socialism were not generous. May this book serve as a cautionary tale of lovable people who, despite themselves, hurt those they loved. Nothing is new. It is just forgotten.

How does the author know that the U.S. is “the most creative in the world”? Why isn’t it equally plausible that our wealth was built on stealing a huge chunk of land from the Native Americans rather than on some sort of unique creativity? If it was the land that made us comparatively rich, combined with the wars and Communism consuming our competitors in the 20th century, then we aren’t guaranteed to get richer going forward. Taking the long view, it is the Chinese and Europeans who have

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The silver (and gold) lining of COVID-19

COVID-19 isn’t necessarily bad. From the NYT:

Lenox Hill, one of the city’s oldest and best-known hospitals, repeatedly billed patients more than $3,000 for the routine nasal swab test, about 30 times the test’s typical cost.

“It was shocking to see a number like that, when I’ve gotten tested before for about $135,” said Ana Roa, who was billed $3,358 for a test at Lenox Hill last month.

Ms. Roa’s coronavirus test bill is among 16 that The New York Times reviewed from the site. They show that Lenox Hill arrives at its unusually high prices by charging a large fee for the test itself — about six times the typical charge — and by billing the encounter as a “moderately complex” emergency room visit.

In one case, a family accrued $39,314 in charges for 12 tests this winter, all taken to fulfill requirements for returning to work or school. In another, an asymptomatic patient walked in because she saw the banner outside and wanted a test after traveling. Her insurance was charged $2,963.

Patient bills show that at least one additional hospital owned by Lenox Hill’s parent group, Northwell Health, has charged emergency room fees to patients at a mass testing site.

Overall, a system in which a river of cash flows from Washington, D.C. favors those already big enough to hire the smartest people to navigate the system. “Some of America’s wealthiest hospital systems ended up even richer, thanks to federal bailouts” (Washington Post):

As the crisis crushed smaller providers, some of the nation’s richest health systems thrived, reporting hundreds of millions of dollars in surpluses after accepting huge grants for pandemic relief

Last May, Baylor Scott & White Health, the largest nonprofit hospital system in Texas, laid off 1,200 employees and furloughed others as it braced for the then-novel coronavirus to spread. The cancellation of lucrative elective procedures as the hospital pivoted to treat a new and less profitable infectious disease presaged financial distress, if not ruin. The federal government rushed $454 million in relief funds to help shore up its operations.

But Baylor not only weathered the crisis, it thrived. By the end of 2020, Baylor had accumulated an $815 million surplus, $20 million more than it had in 2019, creating a 7.5 percent operating margin that would be higher than most hospitals’ profits in the flushest of eras, a KHN examination of financial statements shows.

Like Baylor, some of the nation’s richest hospitals and health systems recorded hundreds of millions of dollars in surpluses after accepting a substantial share of the federal health-care bailout grants, their records show. Those included the Mayo Clinic, Pittsburgh’s UPMC and NYU Langone Health. But poorer hospitals — many serving rural and minority populations — got a tinier slice of the pie and limped through the year with deficits, downgrades of their bond ratings and bleak fiscal futures.

Wealthy hospitals also benefited because HHS used a broad definition of lost revenue. If a hospital earned less than in the year before, or simply less revenue than it had budgeted for, it could chalk up that difference to the pandemic and apply the relief funds to it.

When government gets bigger, only the big can thrive? If so, that’s a good argument for buying the S&P 500. If Congress adopts all of Presidents Biden and Harris’s proposals, government is on track to consume more than 50 percent of GDP. A big publicly traded company is going to be able to tap into the new veins of taxpayer gold much more effectively than a small business. Even if the U.S. economy stagnates, the big companies can thrive as they get a larger share of the fixed or shrinking pie.

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Short Snowflake?

Snowflake (SNOW) is valued at $62 billion and had 2020 revenue of $265 million with losses of $348 million (i.e., they lost more than 100 percent of revenue!). The company was at one time worth more than IBM (now at $120 billion).

How can a startup data warehousing company be worth a substantial fraction of Oracle’s $200 billion market cap? Oracle’s 2020 revenue (admittedly flat compared to 2019) was $39 billion with $10 billion in profit. Data warehousing is a small fraction of Oracle’s business; the company competes with SAP in the ERP market and sells its core RDBMS for transaction processing. Data warehousing is sometimes useful, but if a company’s Oracle systems were shut down the company wouldn’t be able to take orders, manufacture widgets, pay employees, pay vendors, etc. The actual operation of a business (which is what Oracle supports) has to be worth way more than sifting through data to learn that customers buy more alcohol after they’ve been locked down by state governors (what you can learn in a data warehouse).

Snowflake says that they’re doing something exciting layered on top of Amazon Web Services, but what if a lot of their customers are motivated by the fact that Snowflake is selling services to them at a loss? If Snowflake buys storage and computer from Amazon, then marks it down by 30 percent, plainly it is better to buy from Snowflake until and unless the party with investors’ money ends.

This guy liked Snowflake in 2018, but notes that it competes with a native Amazon offering: Redshift. The Gartner folks picked traditional data warehousing leader Teradata as superior to Snowflake in four out of four use cases. This mid-2020 comparison shows that AWS Redshift has substantially more customers, but Snowflake is growing rapidly:

The author does not come out strongly in favor of Brand A, G, or S:

Ultimately, in the world of cloud-based data warehouses, Redshift, BigQuery and Snowflake are similar in that they provide the scale and cost savings of a cloud solution. The main difference you will likely want to consider is the way that the services are billed, especially in terms of how this billing style will work out with your style of workflow. If you have very large data, but a spiky workload (i.e. you’re running lots of queries occasionally, with high idle time), BigQuery will probably be cheaper and easier for you. If you have a steadier, more continuous usage pattern when it comes to queries and the data you’re working with, it may be more cost-effective to go with Snowflake, since you’ll be able to cram more queries into the hours you’re paying for. Or if you have system engineers to tune the infrastructure according to your needs Redshift might just give you the flexibility to do so.

If “the main difference … is the way that the services are billed,” how can Snowflake be worth $60+ billion? Amazon and/or Google could simply change the way that they bill their services.

Readers: What am I missing? I hate to think that markets are wrong, but I can’t figure out how SNOW is worth $60 billion. In our current bubble, the average P/E ratio for the S&P 500 is 40 (15 is normal and Oracle is only at 17 right now). So SNOW would need $1.5 billion in annual profit to justify its current market cap. If the company settles in at Oracle’s fabulous 25 percent profitability, that would correspond to $6 billion in required revenue. Teradata (TDC), after 42 years in this business, has annual revenues of $1.83 billion, with profits of only $129 million. TDC’s market cap is $4.2 billion. If SNOW has not come up with new and better algorithms for analyzing data, how can they be worth more than the database warehousing businesses of IBM, Oracle, Teradata, Microsoft, Amazon, and Google combined?

Happy April Fools’ Day again and remember that nobody is more foolish than an investor in a bull market! (Also remember that nearly all of my investment instincts, including refraining from buying Bitcoin, have proved to be wrong!)


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