The latest news and articles from Financial Poise, plus a new free webinar every week.
Executive summary of this edition:
NFTs are stupid (well, they’re not but you are if you “invest” in them)
Inflation sucks (and isn’t going away soon) but there are ways to profit from it
A (very limited) trip back to Econ-101
Risk-free (unless the U.S. fails) returns of nearly 10%
“Investing” in a “Collectible” NFT is Not Possible
An NFT, short for nonfungible token, is a unique computer code. Boiled down, NFTs have two basic broad use cases: one, discussed below, is that they can be used to represent and prove ownership of a real world asset. This use has the potential to do great good. The other use is the creation of a digital asset - like digital artwork. This use is not bad by definition but it is going to cause a lot of people to lose a lot of money.
People have long been willing to pay thousands, even millions, of dollars for vintage wine they’ll never drink, rare books they’ll never read, and antique furniture they will never sit on.
Collectible NFTs are different, and better! If you buy one, you can look at it all you want. You can even make copies of it and look at them too. And with NFTs, one doesn’t have to worry about provenance or forgery. Way better than the Beanie Babies rotting away in your basement or Pokeman Cards still at the bottom of your now-25 year old’s closet.
Right? No. No. No. No. No. No.
Purveyors of NFTs and their cheerleaders make arguments like these:
NFTs are valuable digital assets, largely because they cannot be copied.
Think of NFTs art as similar to Monet paintings and other highly idiosyncratic items that collectors and investors desire as a component of their portfolio. Add in the fact that NFTs look cool and they have that much more appeal.
Investors should think of NFTs as a modern, digital form of art that have the potential to exponentially increase in value as society rapidly transitions to a digital way of life.
History also tells us to be careful about dismissing NFTs as a passing fad, since the importance of technological innovations often becomes clearer once the hype dies down. Many commentators dismissed the influx of tech companies around the dotcom bubble of the late 1990s, and the first wave of mass cryptocurrency enthusiasm in 2017, only to be proven hopelessly wrong when Amazon and bitcoin re-emerged.
Though most NFTs do not sell for millions of dollars, some are selling for tens of millions. It is quite possible an NFT you buy for hundreds or thousands of dollars will exponentially appreciate in price as time progresses.
The scarcity of these digital items is part of their appeal. An NFT cannot be copied, meaning it is scarce. The rarity of an NFT heightens interest all the more, potentially to the point that it is worth a considerable sum of money. The fact that only one owner can claim ownership of an NFT makes it that much more scarce.
What nonsense. One cannot invest in NFTs. One can collect them. One can speculate in them. One can gamble with them. But one cannot invest in them.
Here’s what we are saying: if you buy an NFT on the hope that someone else will pay you more for it later, you are gambling. You might get lucky. And you might not. And before you believe the hype from people who have bought low and sold high, read Crime and NFTs: Chainalysis Detects Significant Wash Trading and Some NFT Money Laundering In this Emerging Asset Class, a report by blockchain data platform Chainalysis. The report, which was widely reported in February, investigated the pratice of “wash trading” (the pactice of parties repeatedly selling themselves their own NFTs in an attempt to artificially inflate prices), which had been speculated by many to be a key reason for the explosion of the NFT market in 2021.
Here’s a fun fact to hammer home our point about the riskiness of “investing” in NFTs: about a year ago, an NFT of the first tweet ever posted on Twitter sold for $2.9 million. As of a week ago, the highest price offered in an online auction for that NFT is $6,800 (not just far less than what the seller paid for it, but also far short of the approximately $52,000 floor price the seller set for the sale). But, to be fair, the auction does not end until August 22nd.
Investing in a High-Inflation Environment
We don’t enjoy saying we told you so, but we started warning our readers about inflation more than a year ago (here is evidence of that). Now that the inevitable (and it was inevitable even then) has happened, what can you do? Real estate can be part of the answer. Indeed, a number of Financial Poise Contributors have reported seeing price wars erupt on everything from raw land to commercial buildings.
The basic hypothesis is that real estate should be a haven during high inflationary times because it uniquely combines increasing income, appreciating value, and depreciating debt. Plus, one gets an added bump from the “psychology of the crowd.” But does the popular acceptance of “real estate” as a hedge against inflation really hold water? And assuming the answer is generally yes, that doesn't mean you should plunge into a real estate investment without properly reflecting on the fundamental characteristics of the particular property. Read Real Estate as an Inflation Hedge? Bidders Beware! by Joshua Olshin to find out more.
“If you think inflation is bad, wait until the rest of the commodity markets really heat up. Although prices for basic materials like copper, aluminum, nickel and steel—used to build everything—have already inflated, they haven’t yet escalated as much as fuels and energy-driven commodities like food. But they will if European and U.S. policy makers have their way. Buckle up.” This is how Mark P. Mills began his commentary, The Coming Green-Energy Inflation, in this past Sunday’s Wall Street Journal. Just one example, also cited by Mills: the average electric vehicle “contains about 400 pounds more aluminum and about 150 pounds more copper than a conventional car.”
The takeaways? First, the Green movement in the short term will contribute to inflation. Second, you may want to invest in copper, aluminum, and the other natural resources that are essential to making the world more Green. Think: cobalt, graphite, iron, lithium, manganese, nickel, polycrystalline silicon and steel. These are the things needed to manufacture EVs, solar panels, and wind turbines.
Another Link Between Energy & Inflation
Remember Ted Koppel? He’s not just one of America’s all time most trusted news anchors. He is also the author of Lights Out: A Cyberattack, A Nation Unprepared, Surviving the Aftermath. Published in 2016, it was Koppel’s warning to us that the fragility of the U.S. Power Grid. And it’s more scary than a Jordan Peele movie that isn’t intended to be a comedy.
From the Amazon summary: “a well-designed attack on just one of the nation’s three electric power grids could cripple much of our infrastructure—and in the age of cyberwarfare, a laptop has become the only necessary weapon. Several nations hostile to the United States could launch such an assault at any time. In fact, as a former chief scientist of the NSA reveals, China and Russia have already penetrated the grid. And a cybersecurity advisor to President Obama believes that independent actors—from “hacktivists” to terrorists—have the capability as well. “It’s not a question of if,” says Centcom Commander General Lloyd Austin, “it’s a question of when.”
It’s no more true than it has been for years. It’s just more in the news today because of Ukraine. Even if you leave aside the little detail that "[w]ithout a single bullet, bomb, or missile, a foreign enemy can now launch a devastating attack on the United States,” as noted by Eric Schlosse in his review of Lights Out, one doesn’t need to look beyond last year’s power crisis in Texas or California’s continuing problems to understand the sad state of the U.S. Power Grid. According to the Department of Energy, power outages cost the U.S. economy up to $70 billion annually.
(Fun bonus fact: Lights Out was also the name of a popular radio show considered by many to be the forerunner to, and an inspiration for, Rod Serling’s The Twilight Zone.)
The good news? The Infrastructure Investment and Jobs Act’s more than $65 billion investment includes the largest investment in clean energy transmission and grid in American history. It will upgrade our power infrastructure, by building thousands of miles of new, resilient transmission lines to facilitate the expansion of renewables and clean energy, while lowering costs. And it will fund new programs to support the development, demonstration, and deployment of cutting-edge clean energy technologies to accelerate our transition to a zero-emission economy.
According to Edison Electric Institute, the association that represents all U.S. investor-owned electric companies and whose members provide electricity for more than 220 million Americans, the Industry spent $143.3 billion in 2021 to improve the Grid. And according to Industry news leader, UtilityDrive, the Industry will make similar capital investments in at least each of 2022 and 2023.
All of this is great in the long term and if you can think about how this money will be spent, the information may help you think about where to invest your money in the short term. In the short term, however, this massive investment is just another force at work that will continue to drive the tailwinds that will fuel inflation.
It Might Be Obvious But… It’s All About Pricing Power
Karen Langley, in the Wall Street Journal on April 17th, wrote, “With consumer prices rising at their fastest pace in 40 years and stocks wobbly over the Federal Reserve’s plans to raise interest rates, investors are putting a premium on firms whose customers will accept price increases, happily or otherwise. They are trawling through an unsettled market, with the S&P 500 down 7.8% to start 2022 and the tech-heavy Nasdaq Composite off 15%.”
Langley’s article focuses on airline stocks and the energy sectors, but we have concerns about both. First, history. And, no, we’re not going to elaborate, except to say that both industries are full of C-Suites that have corporate bankruptcy attorneys on speed dial. Second, extrinsic factors like, oh, we don’t know… say war and epidemics are hard to plan around. So, we like the thesis but not the examples.
Demand for a good is said to be “elastic” if a small change in price causes people to demand a lot more or a lot less of the good. Demand for a good is “inelastic” if a small change in prices causes people to make no change or almost no change in how much they demand of that good…
Usually economists describe demand as either relatively elastic or relatively inelastic when compared to an imaginary neutral amount of elasticity. That is, if a 10% increase in price results in a 10% decrease in the amount of the good demanded, we think of that as a neutral elasticity of demand. If we know demand for gas is relatively inelastic, we can estimate that when the price of gas goes up by 10% people will not change their buying habits very much, buying almost the same amount of gas as before–that is, reducing their gas purchases by less than 10%. If we know demand for gas is relatively elastic, we can estimate that a 10% increase in the price of gas will cause the quantity of gas demanded at the pump to fall by over 10%...
So, to say a company has “pricing power” is the same thing as saying its goods or services enjoy demand that are relatively inelastic.
Taking the lesson a step further, some companies within a given industry may sell more of what it has to sell during inflationary times. For example, as prices go up generally and it becomes too expensive for people to eat at more expensive restaurants, some of them may choose to go to less expensive fast food restaurants.
You Know About Series I Savings Bonds, Right?
Anyone with the cash to do so can buy as little as $25 and as much as $10,000 of Series I Savings Bonds each year (plus up to $5,000 using one’s federal income tax refund).
So what? Well, it’s a good deal, especially for someone who who cannot afford to lose any of the principal amount invested or who is otherwise risk adverse (since I bonds are debt obligations of the U.S. Government and are thus backed by its full faith and credit).
The interest rate pays combination of a fixed rate that stays the same for the life of the bond and an inflation rate that is set twice a year. For bonds issued from November 2021 through April 2022, the combined rate is 7.12%.
I bonds earn interest for 30 years unless you cash them first. You can cash them after one year. But if you cash them before five years, however, you lose the previous three months of interest. For example, if you cash an I bond after 18 months, you get the first 15 months of interest.
Interest is earned on the I bond every month and is compounded twice each year. And twice a year, the interest the bond earned in the previous six months is added to the bond's principal value. Then, interest for the next six months is calculated using this adjusted principal. You get paid both your principal back and all the interest earned when you cash the I bond. You have to pay federal income tax on the interest, but not state or local income taxes.
If you’re looking for the perfect (big) gift, you may want to consider the I bond and can give it to as many people as you like, since the purchase amount of a gift bond counts toward the annual limit of the recipient, not the giver. So, in a calendar year, you can buy up to $10,000 in electronic bonds and up to $5,000 in paper bonds for each person you buy for.