The Investor’s Dilemma


August was another month during which asset markets continued to brush off the seemingly ubiquitous geopolitical and other risks facing the global economy. Many markets hit new highs, and virtually every downdraft was met with a wall of buyers eager to join the party.  Japan registered phenomenal growthChina’s economy seemed to be accelerating, and many commodities (as well as shipping rates) pointed to a steady global economy.

Within America, the August jobs report, released on last Friday, captured the dynamic quite efficiently: an apparently disappointing jobs report was cheered by investors that felt the “weakness” may delay the Federal Reserve from raising rates or tightening monetary conditions. Many commentators suggested the employment slowdown was further evidence of a goldilocks economy that was growing steadily without a noticeable risk of overheating.

Japan registered phenomenal growth,  China’s economy seemed to be accelerating, and many commodities (as well as shipping rates) pointed to a steady global economy...

But at the same time, the list of risks continues to grow and intensify, obviously led by North Korea, the rogue regime that has dramatically escalated tensions by firing a missile over Japan and detonating a hydrogen bomb. Disturbingly, North Korea’s state news agency also warned that the weapon could be attached to a missile and “detonated even at high altitudes for super-powerful EMP attack.”

An EMP attack is a risk I’ve previously discussed, and one that I specifically feared might even enter the North Korean arsenal of threats. For a sobering view as to how an EMP attack might impact the world, I’d encourage you to read One Second After. And despite (Ambassador?) Dennis Rodman’s praise of Kim Jong Un's forward-looking leadership approach, the Hermit Kingdom's recent actions suggest the threat is worth taking seriously.

Last month, I paid a visit to the NORAD Command Center and also went into Cheyenne Mountain Air Force Station, entering the bunker through two sets of 25-ton blast doors, designed to protect the facility from a nuclear bomb. I also had a chance to meet with the leadership team of NORAD at Peterson Air Force Base during a briefing with General Lori Robinson, the four-star Air Force general running the place (and the highest ranking female service member in US history), and her team.

Sure, asking the NORAD team what worries them is a bit like asking a gathering of hypochondriacs about their health, but I found it useful to hear what they chose to focus on. Unsurprisingly, North Korea was a top worry, but General Robinson also expressed concern about the militarization of the Arcticfiscal constraints, a resurgent Russia, an assertive China, Iran, natural disasters, space and cyber-related risks, and CBRN risks. Note that this briefing was before Hurricane Harvey dumped biblical amounts of rain onto the Houston area…or before the recent round of threat escalation from Pyongyang.

And lest you think this is a comprehensive risk list, a seemingly irrelevant mountain pass recently pushed India and China to the brink of war. Although 3 months of rising tensions appear to be resolved, the Doklam pass border dispute in the Himalayan mountains raised the possibility of a full-blown war between the two nations. Even if tensions have abated, I’m not convinced the risk of conflict is entirely gone.

Meanwhile, in Europe, last week's Brexit negotiations were grossly unproductive and suggested a very disruptive process. (To get a sense of how recent discussions have gone, read Politico’s summary.) Bottom line: little, if any, progress has been made in recent negotiations, and worse, it seems a contentious process may be in the cards.

And within asset markets themselves, headline highs may be masking a shaky foundation. Market breadth, historically seen as a measure of market health, has gotten narrower and narrower, as fewer and fewer stocks are drive index performance. Weakness is brewing under the surface of market strength, which combined with elevated valuations, suggest a fragility to asset prices. While markets could of course go higher, headwinds are building as tailwinds dissipate.

So what is an investor to make of these dynamics? Those seeking to navigate the cross-currents of asset markets are certain to make errors. It’s simply not possible to invest error-free. But it is possible to choose what type of error one makes, and in this regard, I’d suggest it’s time to make errors of omission rather than errors of commission.

Risks are by definition probabilistic, and many never materialize. Nevertheless, rather than chasing returns, it may be prudent to forego gains if they are accompanied by elevated risks. While we can’t know for certain which spark might ignite the tinderbox, Goldilocks appears to be playing with matches.

UPDATE: Since drafting this note, US Secretary of Defense General James Mattis warned Kim Jong Un about the “many military options” available to the United States; the Chinese indicated that US threats of halting trade with countries that do business with North Korea was unacceptable; and South Korea warned that North Korea is preparing to imminently launch a long-range ICBM.

The Great Disconnect


The world seems very fragile right now. In the past week, North Korea claimed its missiles could reach the United States, spurring some in Congress to run through the calculus of striking the rogue nation before it attacks us. Pakistani courts ruled against Nawaz Sharif, the sitting prime minister, thereby forcing him to resign; Venezuela created an authoritarian regime that started cracking down on opposition leaders; Polish citizens were marching in the streets to protest proposed changes to the judiciaryHBO announced it had been the victim of a cyber attack that had stolen proprietary information; Russia began seizing American property and evicting US diplomats; and White House turnover continued unabated.

Oh, and Australian authorities stated they had thwarted a terrorist attempt to bring down a passenger aircraft. Last, but definitely not least, India and China flirted with military conflict over an unpaved road in a mountain pass in disputed territory in the Himalayan mountains.

And that was just in the past week!

Earlier in July, Brazil threw it’s ex-president Lula de Silva in prison, Saudi Arabia “reorganized” and installed the young and ambitious Mohammed bin Salman as Crown Prince, and Qatar’s airline was banned from flying in Egyptian, Saudi Arabian or Emirati airspace. Protests threatened instability in Morocco, Nigeria’s president Muhammadu Buhari has been absent for months, and South African president Jacob Zuma is facing a no-confidence vote this month.

Meanwhile, there are early warning signs that the world’s largest economy may be slowing. GM reported a 15% drop in US auto sales (with Ford and Chrysler also disappointing), and Fitch noted that credit card losses have been rising and recently hit a four-year high. And in an effort to address unemployment, Canada announced it’s experimenting with basic income programs. And China’s most recent manufacturing PMI came in below expectations, hinting at the possibility that China may be slowing down (although the country did just open a cinema on a disputed island in the South China Sea).

But despite these facts, financial markets have marched forward. Sure, corporate profits have been generally quite good, but does that justify today’s nonchalant attitude towards these risks? Just look at the CBOE Volatility Index (known among financial types as the “VIX”) hitting new lows. Believed by many to be a measure of fear among investors, the VIX recently fell below 10, a level rarely seen in the past few decades. The implication: investors are not generally worried.

Further, the investment community appears more willing to pay handsomely for the profits companies produce. Consider the cyclically-adjusted price-to-earnings ratio (aka the “CAPE” ratio), an admittedly imperfect, but useful, measure of valuation. The CAPE ratio recently crossed 30x, a level it rarely reaches.

And lastly, we have notable exuberance driving a formidable crypto-currency bubble, eloquently and persuasively documented by Laura Shin in a recent Forbes piece entitled “The Emperor’s New Coins.” Further, according to Coincap, there are currently more than 600 digital coins that in aggregate are supposedly worth more than $100 billion. And while blockchain technology will likely disrupt many businesses in the years to come, Shin’s article sheds light on the alarming speculative instincts that are thriving in the crypto-coin domain. If you haven’t read her article, I encourage you to do so.

So what am I missing?

The world seems to be precariously balanced on the edge, with instability lurking in almost every region of the globe, but financial markets seem not to care. Speculative instincts are running high and valuations today leave little margin of safety. It reminds of the 1980s song “It’s The End of The World As We Know It (and I Feel Fine)” by REM.

But surely there is a reason for the seeming disconnect, no? Might it be the devout faith in market efficiency? Could it be that the developments I’ve mentioned are fully factored-in to market prices? Might it be the powerful and undying love of passive investing that has led to a world in which more and more money is doing less and less analysis? Or does the explanation lie, as eloquently noted by Keynes ("Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally"), in the risk-averse career-driven decision making of those controlling financial assets?  Or perhaps, to use four words that makes anyone who thinks of bubbles shudder, it’s different this time?



Jack Bogle has had an absolutely enormous impact on the world of investing. Earlier this year, Warren Buffett wrote about Jack in his annual letter to investors (see page 24): "If a statue is ever erected to honor the person who has done the most for American investors, the hands-down choice should be Jack Bogle." Buffett went on to praise how Jack helped "millions of investors realize far better returns on their savings than they otherwise would have earned."

While undoubtedly true, there's another side of Jack Bogle that merits attention - one that has personally affected me. Jack is a philanthropic man who has helped lots of people in much more profound ways than merely enhancing their investment results. In fact, I owe many of the opportunities I've had in life to his generosity.

To make a long story short, Jack funded my high school education at Blair Academy, and in so doing, provided me the foundations that led to my successes in college and graduate school. Without Jack's help, I wouldn't have gone to Blair. Without Blair, I'm not sure I would have ended up at Yale, or MIT, or Harvard.

It all began because Blair changed my life. It taught me the power of hard work, both in and out of the classroom. I learned to manage time, developing an ability to semi-successfully balance the competing obligations of academics, sports, family, extra-curricular activities, and friendships. And most importantly, Blair gave me the personal confidence to take on intimidating challenges.

Last month, while visiting Blair for my 25th high school reunion, I had the opportunity to reconnect with Jack and again convey my gratitude. He was as genuinely interested in my activities today as he was 25+ years ago! And while I believe my thankfulness was well received, it actually made me feel great to thank him.

Separately, June 30 was my last day on the Yale faculty. Since 2009, I've had the pleasure of teaching and learning from some of the most curious and engaging young minds on this planet. It's been a privilege and an honor to teach at Yale, and like my time at Blair, one that would not have been possible without the help and support of many people. In fact, earlier today I sent off thank you emails to three individuals who were especially helpful during my time at Yale. Again, the mere act of giving thanks and expressing gratitude actually had a positive impact on me.

The opportunity to spend some time with Jack and reflect on my time at Yale led me to think about the many other people that have helped me along in life. From my parents to my ever-patient wife, from professors to supportive colleagues, from clients to employees, there have been literally hundreds of people who have been helpful over the years. In the weeks ahead, I'm going to make a point of trying to thank some of them.

My suspicion is that there are many people who have helped you along in your life or career. I want to encourage you to reach out to them and thank them. Sure, the traditional day of giving thanks in America is not until late November, but why wait? Fire off a note or two thanking people who helped you at some point over the next few days! The power of gratitude is stunning, both in its ability to generate joy in its recipient, but also in the emotional impact on the thanks-giver. As the oft-quoted saying goes, "it is not happy people who are thankful, but thankful people who are happy."

Student Papers Pointing Towards Technology Exuberance?


May is always an intense month for me. It usually begins with a thick stack of student papers that I have to read and grade in a two week window. And while I start off the month intimidated by the sheer volume of reading I have ahead of me, I always end the month having learned a great deal from my students' papers. This year was no exception.

Because I taught two courses this year, one at Yale on financial bubbles and another at Harvard on systems thinking, I sat down in early May with around 500 pages of students papers to read, all of which had to be graded by the middle of the month. And unlike some of my colleagues in education, I insist on reading each and every paper myself.

While there are obviously exceptions, the papers were fascinating and covered a broad range of topics. And because I don't assign specific topics, the topics students choose to address reveal the interests and curiosities of some bright young minds.

While I don't have room to tell you about each paper, I found it interesting that 30% of the papers in my financial bubbles class were about internet and technology bubbles. (Yes, the class was small...but I still find this noteworthy!).  Given one of the papers even suggested "it's different this time," perhaps it's time to be more wary of the technology sector? I suspect that student didn't read my piece on Naked Unicorns in Subprime Valley... but have no fear, he did well in the class.

Given the course I taught at Harvard was a bit broader, it's unsurprising that students in that class wrote about a wider array of subjects, ranging from educational inequity to migration pressures and food systems. But here again, one topic attracted more attention. Almost 25% of the students touched on the ethics of algorithms and artificial intelligence. Another indicator of popular sentiment overly-focused on one domain, namely technology? Might it be that technology is actually different this time?  Even if the sheer scale of technology's impact is in fact greater than in the past, does that justify irrational exuberance?

Relatedly, if you haven't been paying attention to what's happening with crypto-currencies such as Bitcoin, you should. The digital currency has more than doubled in the last three months and has a market capitalization approaching $40 billion. But there's also been lots of exuberance for other digital currencies. In fact, at the time of this writing, there are seven crypto-currencies with a market cap greater than $1 billion, 31 with market caps larger than $100 million,  and more than 90 with more than $10 million of value. If you haven't read my article titled Bitcoin: Boom or Bust?, I'd encourage you to do so.

Lesson Learned On The Road To Boston


Last month, I joined more than 30,000 others to travel the 26.2 miles from Hopkinton to Boston on foot. Unlike the many experienced runners who qualify to run in the Boston Marathon, I was part of a large group of charity runners supporting non-profit organizations. In fact, prior to running the race last month, I probably wouldn’t have even called myself a runner. You see, I don’t particularly like running…and 26.2 miles, heck, I’m not a fan of even driving that far.

Nevertheless, on April 17, I successfully made the journey on foot, crossing the Boylston Street finish line 4 hours, 51 minutes and 22 seconds after leaving Hopkinton. And while one of the main reasons I ran the race was to show my kids that hard work and preparation can overcome many challenges, I learned a great deal more than I taught them. I can confidently say it was one of the most powerful experiences I’ve had during the 520 months I’ve been on this planet.

The race reminded me that life is an unending series of tradeoffs. During the almost five hours of time I had to think about them on Marathon Monday, I was constantly reminded that one’s approach to these tradeoffs matters. And as any decision-making theorist will remind you, our perspective is always biased. Having now had a few weeks to recover (it took me a week before I could walk down stairs!) and think about my entire marathon experience – from initial training through recovery, I wanted to share 26 lessons I (re) learned on the road to Boston:

  1.  Social pressures and verbal commitment are powerful forces. I initially refused to tell anyone I was running the race, always wanting the option of dropping out without embarrassment. But once I started telling people, I trained more intensely and consistently.
  2. While I had at first thought of my friends, family, and fans as there to support me, I realized the race came to represent some of their own challenges, goals and hopes. It brought me closer to almost everyone I told. Many thanked me for including them, and the interactions brought additional meaning to my efforts.
  3. It takes a village to organize a marathon. Over 9,000 volunteers helped race organizers pull off this year’s event…and they’re all supportive, encouraging, and smiling. I tip my hat to the folks at the Boston Athletic Association for their efforts.
  4. The 26.2 miles of cheering fans are a powerful force for good. Signs such as “If Trump can run…” to “Run like United Airlines security is chasing you!” provided much needed smiles and motivation. And of course, what’s not to love about hundreds of Wellesley students holding “Kiss me!” signs?
  5. Given there was zero chance of my winning the race, the competition really became one of me vs. me.  The discipline of running one’s own race is a skill worth honing, both on and off the marathon course. Every person should determine their own definition of success.
  6. All marathoners, regardless of citizenship, are Bostonians on Patriots day…and if you doubt this, try listening to hundreds of runners from around the world sing “Sweet Caroline” in unison while running through Framingham; it will remove any doubts.
  7. Temperature matters. Running intensely can add ~20 degrees to the temperature you perceive. The relative heat on Marathon Monday was a shock to me, and many other first-timers.  Yet another reminder to think through various scenarios and conditions when preparing for an uncertain environment!
  8. Heartbreak Hill is misleading. It should be plural. There are several heartbreaking hills.
  9. Almost anyone can train their body to run 26.2 miles. Barring medical complications, the training really is about putting in the miles. I’m living proof you don’t have to be a stellar athlete to finish the race.
  10. It’s important to see the big picture. When my ankle started bugging me along the race, I caught a glimpse of a veteran with one leg running on a prosthetic. When my glasses fogged up and my contact lenses bothered me, I noticed a blind runner.  Perspective matters, and our own perspective is never objective.
  11. David Ortiz said what Boston has always believed: “This is our f&*ck&ng city! And no one is going to dictate our freedom.” Not the King of England. Not Islamic terrorists from Watertown. Boston has always been strong; Patriots Day makes this crystal clear.
  12. For slower runners like me, the risk of drinking too much fluid is greater than drinking too little.  And drinking too much can be dangerous, possibly even fatal, if your sodium levels drop too low. Who knew?
  13. As a first-time marathoner, I found Boston’s underdog mentality overwhelming and empowering. One fan held a poster with “Patriots 3, Falcons 28” at the base of Heartbreak Hill. Other fans blasted Toby Keith’s “How do you like me now?” from speakers alongside the course.
  14. Self-nudging works. There were several times between Boston College and Boylston Street that I doubted my ability to finish the race. But knowing my kids were at the finish line meant I couldn’t not finish. How could I face them if I didn’t get there?
  15. To witness the best of human determination, visit the finish line area after the grandstands are gone, the roads are open, and some runners are still working on getting to the finish line. It’s among the purest forms of grit and persistence I’ve ever witnessed; while elite runners are impressive, these runners are inspiring.
  16. The charity runner program is brilliant. It raises tens of millions of dollars for local Boston charities and helps beginning runners participate in the storied race. It has the added benefit of creating deep psychological obligations for those runners to finish… (One of my donors indicated his gift would be prorated for miles covered!)
  17. The body knows best. I developed an ability to listen to my body that proved essential to deciding when to “work through the pain” rather than taking time off. No doctor, book, or website can develop that judgment.  Sometimes it’s best to ignore the rules and follow your instinct.
  18. Age matters less than you might think. At one point when I was felt I could go no further, a 70-something woman put her hand on my shoulder and said “You got this…let’s go…I’ll run with you for a bit” and got me moving again.
  19. Thank god for Marathon Sports on Boylston Street. The specialized knowledge and experience that every staff member has is amazing. And not just for shoes…but when and where to use BodyGlide, how to run on packed snow vs. icy slush, what to wear when, which hydration strategy works best in various conditions, and many other topics.
  20. Not all endurance gels are the same. The salted watermelon GU is pretty good, as is Jet Blackberry. And the ROCTANE GUs are particularly useful for squeezing in much needed amino acids and sodium, with a bonus bit of caffeine. Also, in case you’re wondering, taking multiple GUs does not make you go faster!
  21. Sometimes it’s best to keep things simple.You might think the relative lack of equipment in running means preparing for a marathon is a streamlined, low-cost endeavor. Not true. It’s easy to get distracted by gear. GPS watches that might be able to identify ovulation cycles, flux-capacitor inspired running shoes, and high tech jackets that breathe but are also safe in outer space are all eager to take a bite out of your wallet. Almost all market to “spending more will make you faster” hopes.
  22. My college squash coach David Talbott once reminded me to “get in shape to play squash, don’t play squash to get in shape.” Also true for marathoning. Get in shape to run a marathon, don’t run a marathon to get in shape. But the training can kick-start a virtuous fitness cycle; I no longer dislike running.
  23. Prior to the soreness-inducing long training runs, I had never fully-appreciated the power of foam rollers to release muscle tension. It made a ton of difference in my ability to recover enough to keep training. And an ice bath, which provides sheer joy to children tasked with dumping ice into a tub containing a parent, can reduce inflammation and soreness.
  24. Reactions matter as much, if not more, than challenges. How people respond to unexpected adversity tells a great deal about their character. Mike Tyson had it right when he said “Everyone has a plan until they get punched in the face.” Along the course, I saw hundreds of people getting “punched in the face.” And I saw hundreds regroup, set a new plan, and persist. Many runners had overcome serious life challenges before the race and shared their stories on their shirts.
  25. As the movie Patriot’s Day makes clear, love may be the only thing that can overcome hate, especially in matters of potential violence against innocent masses. This spirit of support literally oozes from everywhere on Patriots Day and smothers marathoners and fans alike. If you’ve never experienced it, try to run or watch next year.
  26. There’s dignity and power in acknowledging mistakes, even decades after making them. Kathrine Switzer, the first woman to run the Boston Marathon, had officials literally trying to rip her bib off during the 1967 race.  Last month, race officials welcomed Switzer’s return 50 years later by giving her the same bib number they had previously tried to confiscate.

Vikram Mansharamani is a Lecturer at the Harvard John A. Paulson School of Engineering and Applied Sciences and a Lecturer at Yale University. He is the author of BOOMBUSTOLOGY: Spotting Financial Bubbles Before They Burst (Wiley, 2011). Visit his website for more information or to subscribe to his mailing list. He can also be followed on Twitter or by liking his Page on Facebook.

Our Bizarro World


In the 1960s, DC Comics introduced a fictional cube-shaped planet into American comic books known as htraE (“Earth” spelled backwards). Everything on the planet was the opposite of what one might normally expect on Earth. On the Bizarro World, as htraE was known, good was bad, up was down, right was wrong. The main characters on the planet were awkwardly inverted versions of Superman (known as Bizarro) and his companions. This concept of a backward world was later popularized in a Seinfeld episode that included Kramer working as a professional, George dating gorgeous women, and Jerry acting irresponsibly.

The comic series even profiled a salesman marketing Bizarro bonds that were “guaranteed to lose money.” And while it was funny at the time the comic was written precisely because it was laughably unrealistic, it’s actually not uncommon today. There are trillions of dollars of debt in the world yielding negative interest rates.  Bizarro debt? Sure seems so.

But it’s not just bonds that have gone Bizarro. Think of the global economic rhetoric. The United States, long a champion of open markets and free trade, has been increasingly adopting nationalist and protectionist policies. Meanwhile, the communist Chinese have begun preaching the benefits of trade and globalization, as typified by Xi Jinping’s speech at Davos earlier this year. What?!? Bizarro indeed.

Just yesterday I had the pleasure of interviewing Bain Capital founder Josh Bekenstein on stage at the Yale Private Equity and Venture Capital conference. During our conversation, he noted that despite being illiquid and highly leveraged, private equity outperformed the less leveraged public equity markets during the financial crisis. I had to pause and reflect: more leverage going into a crisis resulted in better returns? Yup.

And lest you think this Bizarro World of ours has only infiltrated financial domains, think again. It’s creeping into many walks of life, and the classrooms at Yale are not immune. Last month, a friend forwarded me an online documentary (“What Has Yale Become?”) about the dynamics of expression in New Haven. The short video does a good job of explaining what’s been happening since the 2015 Halloween emails that generated national attention.

I’ve been discussing the topic of free expression with students of mine at Yale…and what some have said is both shocking and disappointing. Several students state they do not feel safe expressing controversial perspectives in classes or even with peers. Sure, it's conceivable that the students who take my classes are a self-selected conservative bunch (they are, after all, studying financial bubbles and are therefore concerned with finance...) that don't represent the student body. But even students not in my class that I've gotten to know over the years have suggested it's risky to engage in debate on topics for which there is an accepted politically correct answer. One student noted his reluctance to speak freely if his thoughts differ from the prevailing classroom dynamic: “There is no upside in doing so…I’ll be socially shamed and called out as insensitive.”

It’s particularly ironic, nay Bizarro, that this environment might be emerging on the very campus that drafted the definitive blueprint for intellectual inquiry and expression on university campuses. The Report of the Committee on Freedom of Expression at Yale, also known as The Woodward Report, was quickly adopted in spirit by many American institutions of higher education in the 1970s and beyond. The first paragraph of the 31-page document captures the essence of the report: 

The primary function of a university is to discover and disseminate knowledge by means of research and teaching...The history of intellectual growth and discovery clearly demonstrates the need for unfettered freedom, the right to think the unthinkable, discuss the unmentionable, and challenge the unchallengeable.

Several paragraphs later, the report notes the critical role that free speech plays as means to protect minority opinion:

...value freedom of expression precisely because it provides a forum for the new, the provocative, the disturbing, and the unorthodox. Free speech is a barrier to the tyranny of authoritarian or even majority opinion as to the rightness or wrongness of particular doctrines or thoughts.

Compare the sentiments conveyed in these paragraphs with those that emerge from the video documentary. Could the current attempts at creating an environment of free expression at Yale instead be creating a culture of self-censorship? Bizarro indeed.

What this Bizarro world of ours has taught me is that we must constantly think about the unexpected developments that can derail our most cherished plans. What assumptions have we made that may not be valid? In the current environment of radical uncertainty, it's critical we explore multiple scenarios and consider outcomes that, regardless of how likely (or unlikely) they may seem, can meaningfully impact us.

Bitcoin: Boom or Bust?


The rapidly rising price of bitcoin is leading many to question if the digital currency’s boom is about to bust. Strategist Peter Schiff, for instance, recently warned “today’s bitcoin could be tomorrow’s beanie babies.” As of this writing, bitcoin is up almost 30% in the past month and over 100% in the past year. It has been hitting new highs on an almost daily basis and recently crossed the $1200 mark. So is there a bitcoin bubble about to burst?

To try to answer this question, let’s apply the framework for spotting bubbles that I articulated in my 2011 book Boombustology: Spotting Financial Bubbles Before They Burst. The approach is based on the application of five lenses and generates a probabilistic assessment of a forthcoming bust.

Most mainstream economic theories utilize a supply and demand driven price determination model that generally results in prices tending towards equilibrium. I say “tending” because most serious scholars admit that behavioral and informational issues can distort the price at any one point in time, but there exists an overarching belief that such distortions are rapidly ironed out. Markets are, according to this view, basically efficient. Higher prices dampen demand, and lower prices dis-incentivize supply.

But what if that’s not true? What if higher prices increase demand? Such a dynamic might arise for many reasons, but one eloquent explanation is the Theory of Reflexivity, as proposed by George Soros. Although it has many subtleties beyond the “self-fulfilling” logic that many ascribe to it, the underlying implication is that prices can and do tend away from equilibrium. The result: booms and busts.

Prices can and do tend away from equilibrium...

So has the higher bitcoin price been accompanied by higher demand? It’s unclear. The evidence is mixed. On the one hand, it sure seems that as news about and interest in bitcoin rises, so does its price. It’s seen a safe-haven asset during times of elevated geopolitical, financial, or regulatory risk and may even attract price-insensitive buyers at those times. But on the other hand, the volume of trading has not gone up as prices have. And while volume is at best a crude proxy for demand, it tells us about the general activity level.  Lens 1: half-check.

Another telltale sign of a bubble is the presence of significant leverage supporting lofty prices. And while it’s unclear if bitcoin prices are bubbly or not, I don't see any evidence that leverage is fueling the potentially elevated prices. There are no futures contracts that enable large exposures with minimal collateral. There are no options that provide de facto leverage. Sure, some investors may be utilizing other collateral to secure credit that is in turn used to buy bitcoin, but this is impossible to track.

Another telltale sign of a bubble is the presence of significant leverage supporting lofty prices.

But more importantly, perhaps, we can look at the amount of debt (it’s not a small number!) that has been holding up many of the countries that back traditional fiat currencies. In addition, the fact that printing presses around the world continue to print more and more money implies that traditional currencies are being debased at an alarming rate. With a fixed algorithmic release of additional bitcoins into the market and a cap on the total number that will ultimately be issued, the crypto-currency represents a non-printable currency (similar in this respect to gold). Lens 2: blank.

Overconfidence and new era thinking are the hallmarks of my third lens, psychology. Whenever individuals develop a devout belief that “it’s different this time,” buyers beware. It is rarely different and asset prices have never risen indefinitely. Rather, they generally go up and down, and in this regard, bitcoin prices are no different.

It’s also clear that there is increasing agreement that cryptocurrencies are the “new new thing” and offer the promise of freedom from authoritarian manipulation of monetary instruments. Even investor Peter Thiel noted the promise of bitcoin by highlighting his own failure: “Paypal had these goals of starting a new currency. We failed at that, and we just created a new payment system. I think bitcoin has succeeded on level of new currency.”

And like gold bugs, bitcoin believers tend to exhibit religious conviction in the cryptocurrency’s ability to store value. They often go further, suggesting the amazing upside potential they exhibit. Internet analyst Henry Blodget has even suggested bitcoins could be worth $1 million per coin. In fact, CNBC’s Brian Kelly described bitcoin as “not just digital gold…it is a once-in-a-generation investment opportunity, similar to the internet, growing just as fast, if not faster…it’s the internet of money.” Lens 3: check. 

My fourth lens is politics, broadly defined to include both regulations and moral hazards. As with any asset, regulations can distort prices by either artificially increasing or dampening supply or demand.

Just think of what happened when political motivations to increase home ownership in the United States nudged more and more people into houses. Without the political incentives, prices may not have risen as handsomely as they did during the housing bubble. Further, the moral hazard endemic in the use of government sponsored mortgage finance enabled lenders to play a game of “heads I win, tails you lose.” If loans worked out, the lender profited. If it didn’t, Fannie Mae or Freddie Mac bore the losses.

When it comes to bitcoin, are there any artificial government interventions that are supporting bitcoin prices? No. On the contrary, regulators are trying to discourage interest in bitcoin. Just look to China, where its major bitcoin exchanges were effectively shut down last month by government officials. But as noted by Elaine Ou in Bloomberg View, “even China can’t kill bitcoin.” Bitcoin prices briefly fell upon the news, but quickly recovered and marched higher. They’re up more than 25% in the three weeks since China tried to control trading.

And when it comes to moral hazard, there are no signs of it in bitcoin land. No one bailed out those who lost millions when bitcoin exchange Mt. Gox filed for bankruptcy. No regulator prevented or intervened to manage the governance disputes that arose on the bitcoin algorithm. Many bitcoin market participants are transacting with open eyes, fully aware of the risks of doing so. There is no FDIC protection, no Federal Reserve put. Lens 4: blank.

An application of epidemic logic to the study of financial bubbles can help gauge the relative maturity of manias. If we analogize an investment hysteria to a fever or flu spreading through a population, the variables of concern to us would include the infection rate, the removal rate, and perhaps most importantly, the percentage of the population not (yet) affected. The last metric can be thought of as the fuel available to keep the fire burning. Once we run out of people to infect, so to say, the party’s over. New demand will disappear. Prices will fall.

When it comes to bitcoin, the number of potential buyers (i.e. those still vulnerable to infection) is very large indeed. To begin, it’s not particularly easy to buy Bitcoin and that’s deterred institutional investors. Specialized exchanges, online wallets, and the need to protect private keys create huge friction in transactions, keeping many potential bitcoin buyers away. There isn’t an ETF, at least not yet. Stay tuned, however, as an ETF is in the works. And if approved (we’ll know more later this month), the Wall Street Journal notes it might generate a buying frenzy with up to $300 million of inflows during the first week alone, a volume that dwarfs the currently traded daily value of any bitcoin exchange.

Specialized exchanges, online wallets, and the need to protect private keys create huge friction in transactions, keeping many potential bitcoin buyers away.

And with a current market capitalization of around $20 billion, the bitcoin market is miniscule relative to its potential. Consider that the value of privately held gold is in the trillion of dollars. Or that the global remittances (a potential use for cryptocurrencies like bitcoin) currently tally into the hundreds of billions of dollars. The bottom line is that bitcoin just isn’t as widely held or used as it could be. There is still a enormous population of potential buyers waiting on the sidelines. And in a recent twitter poll conducted by investor Mark Hart, only 22% of respondents indicated that they were “Max Long” bitcoin, with 49% “Planning to buy/add” or “Curious.” Lens 5: blank.

So on my five point scale, with five being a “virtually certain bubble likely to burst imminently,” bitcoin only registers one and half points. On the margin, this means that the stage may be set for it to become a bubble, but it doesn’t appear to be one yet. It may one day become a full-blown bubble with high bursting risk, but the evidence doesn’t suggest we’re there yet. Recall that government attempts to contain bitcoin have failed, anointing the cryptocurrency with a “forbidden fruit” status and driving new demand.  Or that the possibility of an ETF or other investment instrument may emerge to ease the frictions of purchasing bitcoin.

And the promise of smart contracts inspires visions of unprecedented demand for digital currencies. In fact, just yesterday, a collection of large companies including Microsoft and JP Morgan announced they would be forming the Enterprise Ethereum Alliance. Ethereum is a distributed computing platform based on blockchain technologies that features the ability to design smart contracts. The cryptocurrency native to Ethereum is ether, and it’s been called “the hottest new thing in digital currency.” As the standard-bearer for cryptocurrencies, bitcoin will benefits from any attention ether generates..

While short-term price corrections are always possible, there are compelling reasons to believe the long-term outlook for blockchain-enabled currencies like bitcoin is bright. If you’re looking for beanie babies, you best look elsewhere.

An Endless Hunger for Power


Our hunger for power seems insatiable...and this is not just true in the United States, but also in Russia, China and many other nations. The world is filled with power-hungry people from all walks of life. Leaders and ordinary citizens alike are seeking more and more power. And no matter how you analyze the data (and there's tons of it), this trend is likely to intensify in the weeks, months, and years ahead.

While this dynamic may in fact also be true for individuals seeking to impose their will upon those with whom they disagree, I'm actually referring to our insatiable appetite for electric powerA rapidly growing global middle class is generating rising demand for refrigerators, computers, televisions, air conditioners, smartphones, and many other power-hungry goods. Further, because fossil fuels are used to generate a large portion of the power produced in the world, many are justifiably concerned about the impact of power-generation on the environment.

Alternative energies like solar and wind offer some hope, but they're fundamentally unreliable. The sun doesn't always shine; the wind doesn't always blow. To make alternative energies a truly viable source of power production, the world needs a robust, cost-effective means of storing energy. And while there are many different approaches to power storage, battery technology is among the more promising of the options. Sure, we're all aware of the batteries in our smartphones and our laptops, but the possibility of batteries storing enough energy to power thousands of homes is not particularly intuitive.

To make alternative energies a truly viable source of power production, the world needs a robust, cost-effective means of storing energy.

Yet that's exactly what began this week in California. On Monday, Tesla launched a project near Los Angeles that takes excess power generated from solar during the day and stores it until the evening, when it can be used to offset production that's less green. Batteries offer a path to viability for alternative energies.

Batteries are heavy users of lithium, an ingredient that can be accessed from subsurface brines or via hard-rock mineral ores. According to the US Geological Survey, Chile has the world's largest reserves of lithium, followed by China, Argentina and Australia. Lithium demand is poised to skyrocket, driven by growth in the electric vehicle market. Just think about the fact that one electric car uses roughly the same amount of lithium as 10,000 mobile phones. Yowser!

Last month, I was in Chile to address the country's Mining Council. Given my fascination with energy storage and lithium, I took a trip to Salar de Atacama, the country's largest salt flat and site of the world's lowest cost lithium producers. I met with managers at Sociedad Química y Minera de Chile S.A. (SQM) who showed me around the company's operations. Over the course of my 3 hour visit, I developed a deep appreciation for the complexities and scale of the business as well as a respect for how thoughtful SQM had been about protecting the environment.

While touring the operations, I couldn't help but note the amazing global supply chain that had taken the lithium containing salt brine I had run through my fingers from below the world's driest non-polar desert over to Asian battery factories and eventually into an affordable smartphone that was so fundamental to my day-to-day existence. Globalization and trade, I realized, works.

But it clearly doesn't work for everyone -- hence the current backlash against free trade, open borders, and global markets. What if the backlash works, however? World trade reverses; the lithium battery supply chain breaks. Is there any likelihood that robotics and automation won't continue to replace human jobs? And how likely is it that the world's leaders will adopt more inclusive policies, stronger safety nets, and more progressive approaches to helping those left behind by globalization and technology?

Not doing so may lead to an unappetizing outcome: the hunger for power will drop as economies sputter, demand for appliances falls, and the forthcoming middle class boom remains indefinitely forthcoming.

17 Developments To Watch Over The Next Five Years


What a year we just completed! Slow growth and widening inequality spurred populist uprisings around the world. Globalization is in retreat. Europe continued to crumble and the US Dollar strengthened, dampening the price of gold and other commodities. Bitcoin rose as the global scramble for non-printable currencies accelerated. And of course, it’s impossible to talk about 2016 without discussing the unprecedented US election. On the back of Donald Trump’s ascension as the 45th president of the United States, pundits now describe a “post-fact” world in which every possible idea, no matter how preposterous, can find validation somewhere.

Radical uncertainty abounds, conflicting realities are everywhere, and seemingly structural trends appear to have reversed on a dime. How can we possibly navigate this chaotic world? As I mentioned in last year’s version of this post, some use a Magic 8 ball, while others turn to Ouija boards. I strive to be more self-reliant. Despite the inherent uncertainty, I believe that if one considers scenarios on a five-year view, it is easier to accurately predict change. Analyzing structural signals offers hope. In January 2015, I made 15 Predictions for 2015-2020. And in January 2016, I made 16 Predictions for 2016-2021. It’s too early to tell how these predictions have fared. But as noted by the late Yogi Berra, “The future ain’t what it used to be!” So although I’ve kept a handful of my predictions from the last two years, I’ve also updated some and added others.

2017-2022 Predictions

  1. As inequality increases, the global wealthy voluntarily adopt massive redistribution policies (socialism lite) in a quest to keep capitalism alive. Labor markets remain stubbornly stagnant in the face of continued technological progress, leading to discussion of when and how to implement basic income schemes. After years of retreating, globalization returns with a vengeance as citizens everywhere learn it’s hard to lift one’s boat when the tide is going out.
  2. The Fed continues to raise rates, driving the US dollar to disruptive heights and tipping the US economy into a recession. (That's because higher rates draw more investors to put their money into dollar-denominated assets like US bonds and stocks.) The recession ends when the Trump-promised infrastructure boom takes hold in the United States, funded by global capital. But as capital heads to America, it leaves several emerging market in crises and lowers global growth. US multinationals report disappointing earnings and profitability sputters, revealing overly optimistic stock market valuations. European financial systems are tested.
  3. The Defense Industry booms as tensions mount in the Middle East, the South China Sea, Turkey, and the Arctic. The militarization of space accelerates as China deploys increasingly capable anti-satellite technologies; the US Navy is seen as prophetic for having retaught celestial navigation to its officers. North Korea’s supposedly primitive missile technology proves adequate for threatening an EMP attack on Japan, China, or the United States.
  4. Global warming reveals toxic and potentially lethal pathogens (such as anthrax, the Spanish flu, smallpox, or the bubonic plague) from a prior era as long-frozen permafrost melts. Water wars spur the development of a multi-billion dollar commercial freshwater-gathering industry that uses Siberia, Canada, and the Antarctic as their primary sources of supply. Desalination alleviates some pressure, but only for those countries with plentiful access to cheap energy.
  5. Animal protein demand skyrockets as an emerging global middle class adopts increasingly Western diets. For economic reasons, edible insects, lab-produced meats, and genetically engineered animals become a part of global diets. The combination of growing developing market protein consumption and an aging developed world population drives cardiovascular disease and diabetes rates ever higher, leading to a flood of medical tourists.
  6. Saudi Arabia teeters on the edge of instability as Mohammed bin Salman attempts to wean the kingdom off of oil. Domestic unrest and regional conflict lead to an increasingly militaristic approach to both internal and external matters. The country’s military budget, which was larger than Russia’s in 2015, contracts briefly before again expanding.
  7. Cyber risks become the top concern for global boardrooms. Financial regulators mandate independent information audits comparable to today’s financial audits. Mass consolidation takes place in the cyber security market and several dominant players emerge, focused not just on prevention, but also on quick identification and rapid containment of cyber breaches.
  8. In the face of persistently anemic economic growth, governments everywhere begin relying on fiscal stimulus to drive their economies. Debt levels skyrocket, leading to increasingly unsustainable debt levels. The fiscal gap in the United States rises above $215 trillion. Ratings agencies downgrade the United States, paradoxically leading to buying binge of US treasuries as investors scramble for “safe” assets.
  9. South Africa endures a multi-year economic recession that generates domestic unrest and a political crisis that removes the once dominant ANC from powerPlatinum markets are disrupted, sending prices to all-time highs. Capital leaves South Africa for Zimbabwe, where economic reforms in the post-Mugabe era lead to 10%+ annual economic growth.
  10. Currency wars intensify, leading to a global investor stampede for non-printable currencies like gold and Bitcoin, both of which surge to all-time highs. The Chinese yuan plunges against the dollar while the Japanese yen steadily depreciates. Italy reintroduces the lira.
  11. Latin America rebounds on the back of a boom in agricultural commodities. As the global population exceeds 8 billion, the Pacific Alliance, a trading bloc centered on Colombia, Chile, Mexico, and Peru, emerges as Asia’s preferred economic entry into Latin America. The ending of Colombia’s 50+ year civil war spurs an infrastructure and tourist boom, while Chile’s economy rebalances as the demand for fishlithium, and wine outpace copper markets.
  12. Technological innovation accelerates. The sharing economy vertically integrates as Uber builds a fleet of driverless cars, Facebook begins producing content, and AirBNB buys buildings. Drones become commonplace. Virtual and augmented realityled by Florida startup Magic Leap, enters the mainstream, destroying demand for physical goods. As a result of cyber security concerns, the Internet of Things grows more slowly than expected.
  13. China’s economy continues to decelerate while the fragility of its financial system gains increasing global attention. The One Belt, One Road development programfails to fully utilize the extra capacity in China’s steelmaking and construction sectors, but it does provide strong support to industrial commodities such as iron ore, lead, copper, and zinc. Domestically, decreased economic opportunity generates increasing labor unrest, creating an existential threat to the Chinese communist party.
  14. Superbugs are acknowledged as the single most serious threat to global health, representing a $100 trillion risk. Public health officials mandate doctors to explore treatments other than antibiotics (including diligent monitoring) before prescribing them. Consumers begin demanding livestock be raised without the use of antibiotics.
  15. Rapidly rising populations in Africa and India threaten to derail per capita economic gains. Despite widespread beliefs that a democratic nation would never do so, India implements demographic constraints (a one-child policy?) to contain its runaway population, while some African governments mandate family planning education in elementary schools. The rapidly shrinking population of Japan, however, enables the rapid adoption of automation without displacing workers.
  16. OPEC agrees to again cut oil production, and tensions escalate in the Arctic over seemingly large resources. Fusion emerges as a viable niche-application alternative energy source, and the rapidly plunging cost of accessing methane hydrates presents the possibility of energy prices staying low for hundreds of years.
  17. The meteoric rise of passive investing strategies continues to unsustainable heights. Passively managed assets under management exceed those that are actively managed. Asset prices move in lockstep with fund flows, negating the very price mechanism upon which passive strategies rely. Passive investing begins losing its appeal as active managers take advantage of these distortions to outperform indices.

A final word of caution, however.  Every time I make predictions, I recall the prescient words of John Kenneth Galbraith: “There are two types of forecasters: those who don’t know and those who don’t know they don’t know.” I’ll let you decide which I am, but if nothing else, I do hope the very act of considering possibilities helps generate thought!

Our Fishy Future


Global food demand is on the verge of rising rapidly. One driver, of course, is the continued expansion of the population. As noted by the UN Population Division, the world’s population will exceed 11.2 billion by the year 2100, meaningfully above the current estimate of 7.4 billion. This means that between now and the end of the century, we will, on average, add 125,000 people to the planet’s population every day. More mouths, more food.

And what people are putting into their mouths is changing. As incomes have risen and the global middle class has grown, demand for animal protein is rising. But as food writer Michael Pollan notes, “You are what you eat eats.” Before you can consume your steak, the cow itself had to eat. As did the pig that provided your bacon…and the chicken, your drumstick. In fact, it’s estimated that livestock themselves eat a third or more of the world’s food. Richer planet, more calories.

Apologies to animal lovers that may find my analogy distasteful, but one way to think of livestock is as a converter of lower value raw materials (feed) into higher value outputs (protein). Consider beef. A cow, according to Tyson Foods, must consume somewhere between 7 and 9 pounds of inputs to produce one pound of output (a feed conversion ratio of about 8). Not very efficient! Meanwhile, the ratio for pigs is slightly above 3 and for chickens is around 2.2.

The combination of more mouths to feed and more protein in each mouth threatens to generate exponential demand growth for food. While this dynamic is alarming unto itself, it’s even more concerning when we factor in the headwinds of climate change that will likely hurt agricultural yields. Lester Brown of the Earth Policy Institute has noted that a 1 degree Celsius rise in average temperatures has the potential to reduce agricultural yields by 10%. Warmer planet, less food.

And while climate change can affect food supplies, meat production is proving equally capable of affecting the climate. Note, for instance, that livestock are currently responsible for between 35% and 50% of greenhouse gas emissions, largely by way of their own emissions (a fact that delights six year old boys).  But the total also includes carbon associated with energy used for transportation, livestock respiration, and the processing and handling of meat. Incorporating these factors leads to some startling conclusions. A cow, for instance, produces up to 30 pounds of carbon for each pound of edible meat; a pig, almost 6. Animals also need water, and lots of it. One kilogram of edible chicken uses 4,300 liters of freshwater, while a kilogram of pork uses around 6,000. Beef? 15,400 liters per kilogram of edible meat! More people, richer people, changing climate.

These dynamics suggest our current food system will struggle to keep up with the growing appetite of a crowded and warming planet.  Food riots and unrest risks are rising. What, if anything, can be done?

Technology does offer some hope. Genetic technology has tremendous potential to improve agricultural productivity and lab-grown meat may alleviate some of the environmental footprint from livestock. But there’s an under-exploited strategy at our fingertips that deserves much greater attention. We could shift the mix of proteins the world consumes towards more fish. Fish as a means to fight famine and combat climate change? Yes, fish.

While climate change can affect food supplies, meat production is proving equally capable of affecting the climate.

The bottom line is fish are more efficient protein producers that leave a smaller carbon wake and consume less freshwater. Shifting diets towards fish has the potential to meaningfully reduce the growing pressures on the global food system.

For ease of comparison (i.e. livestock to livestock), let’s take a look at farm-raised Atlantic salmon. To begin, the fish has a feed conversion ratio of 1.2, meaning it needs significantly less food to produce edible meat. It also uses less freshwater and produces fewer greenhouse gases. According to Marine Harvest, one kilogram of salmon uses 2,000 liters of water and produces 2.9 kilograms of carbon dioxide equivalent, approximately one-sixth that of beef.

To be fair, farming fish is not entirely sustainable either. As noted in The Perfect Protein, a book by Oceana CEO Andy Sharpless, poorly managed aquaculture has been quite harmful to ocean ecosystems. Specifically, he describes the rapid rise of Chile’s salmon industry and how it led to massive disease outbreaks in 2008 and concentrated fish pens generated deadzones as fish waste accumulated. And scientists from the Scripps Institution of Oceanography have identified varying levels of toxic pollutants in almost every fish they studied.

Fish farming may not be the perfect long-term solution to address the world’s forthcoming boom in animal protein demand, but it might buy us much needed time to build out the infrastructure needed to safely transport food from where it is to where it’s needed and to reduce waste. It also offers the prospect of generating new local economies in regions of the world – such as Africa – that have yet to fully exploit the possibilities of aquaculture.

For most of human history, life was characterized by scarcity. Yet today we live in a world of abundance. Think about the fact that there are more obese people than hungry people in the world today. But as the world’s population bulges and diets shift, short-term wants will generate cross-currents against long-term needs. The future has always been uncertain, but in this case, the future looks pretty fishy to me.

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