what the Volcker era teaches us now

When inflation soared 40 years ago, people with patience came out fine.

The cost of living is sky-high, and Jerome H. Powell, the chair of the Federal Reserve, says that battling it is his highest priority. He has raised interest rates to damp down inflation, which hit its highest point in 40 years. Financial markets don’t know quite how to react.

Something similar happened the last time inflation was out of control. Paul A. Volcker was the Fed chair then. He wrung inflation out of the economy, but at a great cost — hurling the nation into not just one recession, but two. Unemployment soared, stocks fell repeatedly, interest rates oscillated and, for a while, bonds looked shaky, too.

It’s worth looking at his era for guidance. 

First, because it had multiple, severe downturns, the Volcker era was disastrous for anyone who traded actively and bet wrong on the direction of the markets. Short-term trading is especially dangerous when the market’s currents are opaque and treacherously strong, as they were back then and may be now.

But, second, the Volcker era was wonderful for those with the patience and resources to ride it out. While Mr. Volcker’s stern treatment of the economy was deliberately disruptive, it ushered in awesome bull markets, in both stocks and bonds.

When Mr. Volcker became Fed chair in 1979, inflation was running above 11 percent annually, and the unemployment rate was almost 6 percent. A bull market in stocks had started in 1974 and it continued months more, even though the Volcker Fed had begun to tighten monetary policy.

On Saturday, Oct. 6, 1979, Mr. Volcker announced that, “No longer would the Federal Reserve set interest rates to guide policy,” Jeremy J. Siegel, the University of Pennsylvania economist, wrote in the book “Stocks for the Long Run.” “Instead, it would exercise control over the supply of money without regard to interest rate movements.”

By reducing the money supply, and letting short-term interest rates float, the Fed was, effectively, letting rates spiral upward.

“Stocks went into a tailspin, falling almost 8 percent on record volume in the 2½ days following the announcement,” Professor Siegel wrote. “Stockholders shuddered at the prospect of sharply higher interest rates that would be necessary to tame inflation.”

By March 1980, the Fed funds rate was an astonishing 17 percent, compared with just 2.5 percent today. It would exceed 19 percent the following year.

The economy slowed so much that it fell into a recession from January through July 1980.

But it wasn’t until Nov. 28, 1980, that a bear market in stocks began.

The S& P 500 lost more than 27 percent during a miserable 20-month period that ended in August 1982. If you were on the wrong side of that move, you lost a ton of money. The second Volcker recession began in July 1981 and lasted until November 1982.

If you hung in during the entire Volcker era, you experienced turmoil but went on to enormous gains in both stocks and bonds. From the day Mr. Volcker took office until the day he left in 1987, shares in the Vanguard S& P 500 stock index fund — the first lowcost broad index fund available to ordinary investors — would have gained 215 percent, according to FactSet data.

An index of the broad bond market, now known as the Bloomberg U.S. Aggregate, would have gained 143 percent in that period. And on the day Mr. Volcker started as Fed chair, the 30-year U.S. Treasury bond provided a yield of more than 9 percent — a guaranteed doubling of your money every eight years, if you had just held onto it. Even better, you could have bought a Treasury bond in September 1981 that paid a guaranteed 15.19 percent for 30 years.

There were big ups and downs in shorter stretches. They scared me away from stocks for a while.

What we’ve been experiencing over the last year is frightening, too. It’s not clear whether the July rally in the stock market was more like an early sucker’s rally in the Volcker era (leading to a recession and bear market) or like the second big rally — the one that became a great bull market. Or, perhaps, it’s another variation.

No one knows. But remember that those long-term bets on stocks and bonds paid off, even in that era of market turmoil.

- Jeff Sommer, New York Times (via Honolulu Star-Advertiser, 8/14/22)

bull rally in a bear market

(Reuters) - The U.S. stock market's rebound in recent weeks has analysts and investors questioning whether 2022's deep downturn has ended, but how to spot an expiring bear market or a new bull market is not something everyone on Wall Street agrees on.

Equities have rebounded thanks to better-than-expected corporate earnings and bets the worst of soaring inflation may be over. The Nasdaq (.IXIC) index's drop of about 0.6% on Thursday left the tech-heavy index up 20% from recent low on June 16, while the S&P 500 (.SPX) has also rebounded in recent weeks, now up 15% from its recent low in June.

The recent gains led analysts at Bespoke Investment Group to declare on Thursday morning the Nasdaq had exited its recent bear market, even though the index remains down about 21% from its record high close last November, with trillions of dollars in stock market value still lost.

On Wall Street, the terms "bull" and "bear" markets are often used to characterize broad upward or downward trends in asset prices.

Both indexes are widely viewed as having been in bear markets in 2022, but not all analysts define bull or bear markets the same way, and many investors use the terms loosely.

"We could write for hours on the semantics of bull and bear markets," Bespoke wrote in its research note, saying a new bull market was now confirmed to have started on June 16.

The Merriam-Webster dictionary defines a bull market simply as "a market in which securities or commodities are persistently rising in value."

Some investors define a bear market more specifically as a decline of at least 20% in a stock or index from its previous peak, with the peak defining the beginning of the bear market, which is only recognized in hindsight following the at-least 20% decline.

Similarly, some define a bull market as a 20% rise from a previous low, and by that measure, used by Bespoke, the Nasdaq could now be viewed as having begun a fresh bull market.

The Securities and Exchange Commission says on its website that, "Generally, a bull market occurs when there is a rise of 20% or more in a broad market index over at least a two-month period."

The Nasdaq's steep declines

S&P Dow Jones Indices, which administers the S&P 500 and Dow Jones Industrial Average (.DJI), has an even more nuanced definition of a bull market.

A drop of 20% or more from a high, followed by a 20% gain from that lower level, would leave an index still below its previous peak, a situation S&P Dow Jones Indices Senior Index Analyst Howard Silverblatt describes as a "bull rally in a bear market".

Analysts warn against relying too much on backward-looking definitions of market cycles that do little to capture current sentiment or predict where stocks will go in the future.

Factors like the velocity of the market’s rise or fall and how much average stocks have changed contribute to whether investors view a major move as a turning point in sentiment or a short-term interruption to an existing bull or bear market.

Indeed, investors can only be sure they are in a new bull market once a new record high has been reached, and at that point, the previous low would mark the end of the bear market and beginning of the new bull market, according to S&P Dow Jones Indices.

For example, during the bear market caused by the 2008 financial crisis, the S&P 500 (.SPX) rallied over 20% from a low in November 2008, raising hopes the stock rout was over. But the S&P 500 tumbled another 28% to even deeper lows in March 2009.

It was not until an all-time high was reached in March 2013 that investors were able to say with certainty that a new bull market had been born four years earlier.

"We retroactively go back and say, 'OK, when did the market hit the bottom?'" Silverblatt said. "That's when the bear would end and the bull starts."

Kevin Roose explains Cryptocurrency

Until fairly recently, if you lived anywhere other than San Francisco, it was possible to go days or even weeks without hearing about cryptocurrency.

Now, suddenly, it’s inescapable. Look one way, and there are Matt Damon and Larry David doing ads for crypto start-ups. Swivel your head — oh, hey, it’s the mayors of Miami and New York City, arguing over who loves Bitcoin more. Two N.B.A. arenas are now named after crypto companies, and it seems as if every corporate marketing team in America has jumped on the NFT — or nonfungible token — bandwagon. (Can I interest you in one of Pepsi’s new “Mic Drop” genesis NFTs? Or maybe something from Applebee’s “Metaverse Meals” NFT collection, inspired by the restaurant chain’s “iconic” menu items?)

Crypto! For years, it seemed like the kind of fleeting tech trend most people could safely ignore, like hoverboards or Google Glass. But its power, both economic and cultural, has become too big to overlook. Twenty percent of American adults, and 36 percent of millennials, own cryptocurrency, according to a recent Morning Consult survey. Coinbase, the crypto trading app, has landed on top of the App Store’s top charts at least twice in the past year. Today, the crypto market is valued at around $1.75 trillion — roughly the size of Google. And in Silicon Valley, engineers and executives are bolting from cushy jobs in droves to join the crypto gold rush.

As it’s gone mainstream, crypto has inspired an unusually polarized discourse. Its biggest fans think it’s saving the world, while its biggest skeptics are convinced it’s all a scam — an environment-killing speculative bubble orchestrated by grifters and sold to greedy dupes, which will probably crash the economy when it bursts.

I’ve been writing about crypto for nearly a decade, a period in which my own views have whipsawed between extreme skepticism and cautious optimism. These days, I usually describe myself as a crypto moderate, although I admit that may be a cop-out.

I agree with the skeptics that much of the crypto market consists of overvalued, overhyped and possibly fraudulent assets, and I am unmoved by the most utopian sentiments shared by pro-crypto zealots (such as the claim by Jack Dorsey, the former Twitter chief, that Bitcoin will usher in world peace).

But as I’ve experimented more with crypto — including accidentally selling an NFT for more than $500,000 in a charity auction last year — I’ve come to accept that it isn’t all a cynical money-grab, and that there are things of actual substance being built. I’ve also learned, in my career as a tech journalist, that when so much money, energy and talent flows toward a new thing, it’s generally a good idea to pay attention, regardless of your views on the thing itself.

My strongest-held belief about crypto, though, is that it is terribly explained.

Recently, I spent several months reading everything I could about crypto. But I found that most beginner’s guides took the form of boring podcasts, thinly researched YouTube videos and blog posts written by hopelessly biased investors. Many anti-crypto takes, on the other hand, were undercut by inaccuracies and outdated arguments, such as the assertion that crypto is good for criminals, notwithstanding the growing evidence that crypto’s traceable ledgers make it a poor fit for illicit activity.

What I couldn’t find was a sober, dispassionate explanation of what crypto actually is — how it works, who it’s for, what’s at stake, where the battle lines are drawn — along with answers to some of the most common questions it raises.

This guide — a mega-F.A.Q., really — is an attempt to fix that. In it, I’ll explain the basic concepts as clearly as I can, doing my best to answer the questions a curious but open-minded skeptic might pose.

Crypto boosters will likely quibble with my explanations, while dug-in opponents may find them too generous. That’s OK. My goal is not to convince you that crypto is good or bad, that it should be outlawed or celebrated, or that investing in it will make you rich or bankrupt you. It is simply to demystify things a bit. And if you want to go deeper, each section has a list of reading suggestions at the end.

CRYPTO WILL BE TRANSFORMATIVE

Understanding crypto now — especially if you’re naturally skeptical — is important for a few reasons.

The first is that crypto wealth and ideology is going to be a transformative force in our society in the coming years.

You’ve heard about the overnight Dogecoin millionaires and Lamborghini-driving Bitcoin bros. But that’s not the half of it. The crypto boom has generated vast new fortunes at a clip we’ve never seen before — the closest comparison is probably the discovery of oil in the Middle East — and has turned its biggest winners into some of the richest people in the world, essentially overnight. Some riches could vanish if the market crashes, but enough has already been cashed out to ensure that crypto’s influence will linger for decades.

Crypto’s madcap, meme-crazed online culture can make it seem frivolous and shallow. It’s not. Cryptocurrencies, even the jokey ones, are part of a robust, well-funded ideological movement that has serious implications for our political and economic future. Bitcoin, which emerged out of the ashes of the 2008 financial crisis, first caught on among libertarians and anti-establishment activists who saw it as the cornerstone of a new, incorruptible monetary system. Since then, other crypto realms have fashioned similarly lofty goals, like building a decentralized, largely unregulated version of Wall Street on the blockchain.

We are already starting to see a swell of crypto money headed toward the U.S. political system. Crypto entrepreneurs are donating millions of dollars to candidates and causes, and lobbying firms have fanned out across the country to win support for pro-crypto legislation. In the coming years, crypto moguls will bankroll the campaigns of crypto-friendly candidates, or run for office themselves. Some will peddle influence in the familiar ways — forming super PACs, funding think tanks, etc. — while others will try to escape partisan gridlock altogether. (Crypto millionaires are already buying up land in the South Pacific to build their own blockchain utopias.)

Crypto is poised to soon become one of a handful of true wedge issues, with politicians all over the world forced to pick a side. Some countries, like El Salvador — whose crypto-loving president, Nayib Bukele, recently announced the development of a “Bitcoin City” at the base of a volcano — will go full crypto. Other governments may decide that crypto is a threat to their sovereignty and crack down, as China did when it outlawed cryptocurrency trading last year. The divide between the world’s pro-crypto and no-crypto zones could end up being at least as big as the divide between the Chinese internet and the American one, and maybe even more consequential.

In America, we have already seen how crypto can scramble the usual partisan allegiances. Former President Donald J. Trump and Senator Elizabeth Warren, the Democrat from Massachusetts, are united in crypto skepticism, for example, while Senator Ted Cruz, Republican from Texas, is in the same bullish camp as Senator Ron Wyden, the Democrat from Oregon. We have also seen what can happen when the crypto community feels politically threatened, as happened last summer, when crypto groups rallied to oppose a crypto-related provision in President Biden’s infrastructure bill.

What I’m saying, I guess, is that despite the goofy veneer, crypto is not just another weird internet phenomenon. It’s an organized technological movement, armed with powerful tools and hordes of wealthy true believers, whose goal is nothing less than a total economic and political revolution.

CRYPTO COULD BE DESTRUCTIVE

The second reason to pay attention to crypto is that understanding it now is the best way to ensure it doesn’t become a destructive force later.

In the early 2010s, the most common knock on social media apps like Facebook and Twitter was that they just wouldn’t work as businesses. Pundits predicted that users would eventually tire of their friends’ vacation photos, that advertisers would flee and that the whole social media industry would collapse. The theory wasn’t so much that social media was dangerous or bad; just that it was boring and corny, a hype-driven fad that would disappear as quickly as it had arrived.

What nobody was asking back then — at least not loudly — were questions like: What if social media is actually insanely successful? What kind of regulations would need to exist in a world where Facebook and Twitter were the dominant communication platforms? How should tech companies with billions of users weigh the trade-offs between free speech and safety? What product features could prevent online hate and misinformation from cascading into offline violence?

By the middle of the decade, when it was clear that these were urgent questions, it was too late. The platform mechanics and ad-based business models were already baked in, and skeptics — who might have steered these apps in a better direction, if they’d taken them more seriously from the start — were stuck trying to contain the damage.

Are we making the same mistake with crypto today? It’s possible. No one knows yet whether crypto will or won’t “work,” in the grandest sense. (Anyone who claims they do is selling something.) But there is real money and energy in it, and many tech veterans I’ve spoken to tell me that today’s crypto scene feels, to them, like 2010 all over again — with tech disrupting money this time, instead of media.

If they’re wrong, they’re wrong. But if they’re right — even partly — the best time to start paying attention is now, before the paths are set and the problems are intractable.

The third reason to study up on crypto is that it can be genuinely fun to learn about.

Sure, a lot of it is dumb, shady or self-refuting. But if you can look past the carnival barkers and parse the convoluted jargon, you’ll find a bottomless well of weird, interesting and thought-provoking projects. The crypto agenda is so huge and multidisciplinary — drawing together elements of economics, engineering, philosophy, law, art, energy policy and more — that it offers lots of footholds for beginners. Want to discuss the influence of Austrian economics in Bitcoin development? There’s probably a Discord server for that. Want to join a DAO that invests in NFTs, or play a video game that pays you in crypto tokens for winning? Dive right in.

CRYPTO IS A GENERATIONAL SKELETON KEY

Mind you, I am not suggesting that the crypto world is diverse, in the demographic sense. Surveys have suggested that high-earning white men make up a large share of crypto owners, and libertarians with dog-eared copies of “Atlas Shrugged” are likely overrepresented among crypto millionaires. But it’s not an intellectual monolith. There are right-wing Bitcoin maximalists who believe that crypto will liberate them from government tyranny; left-wing Ethereum fans who want to overthrow the big banks; and speculators with no ideological attachments who just want to turn a profit and get out. These communities fight with one another constantly, and many have wildly different ideas about what crypto should be. It makes for fascinating study, especially with a bit of emotional distance.

And if you do learn some crypto basics, you might find that a whole world opens up to you. You’ll understand why Jimmy Fallon and Steph Curry are changing their Twitter avatars to cartoon apes, and why Elon Musk, the richest man in the world, spent a decent chunk of last year tweeting about a digital currency named after a dog. Strange words and phrases you encounter on the internet — rug pulls, flippenings, “gm” — will become familiar, and eventually, headlines like “NFT Collector Sells People’s Fursonas for $100K In Right-Click Mindset War” won’t make you wonder if you’re losing your grip on reality.

Crypto can also be a kind of generational skeleton key — maybe the single fastest way to freshen your cultural awareness and decipher the beliefs and actions of today’s young people. And just as knowing a little about New Age mysticism and psychedelics would help someone trying to make sense of youth culture in the 1960s, knowing some crypto basics can help someone perplexed by emerging attitudes about money and power feel more grounded.

Again, I don’t really care whether you emerge from these explainers as a true believer, a devoted skeptic or something in between. Participate or abstain as you wish! All I’m after is understanding — and possibly, a little relief from the question that has consumed my social and professional life for the past several years:

“So … can I ask you a question about crypto?”

Let’s start from the beginning: What is crypto?

A decade or two ago, the word was generally used as shorthand for cryptography. But in recent years, it’s been more closely associated with cryptocurrencies. These days, “crypto” usually refers to the entire universe of technologies that involve blockchains — the distributed ledger systems that power digital currencies like Bitcoin, but also serve as the base layer of technology for things like NFTs, web3 applications and DeFi trading protocols.

Ah yes, blockchains. Can you remind me, without going into too much technical detail, what they are?

At a very basic level, blockchains are shared databases that store and verify information in a cryptographically secure way.

You can think of a blockchain like a Google spreadsheet, except that instead of being hosted on Google’s servers, blockchains are maintained by a network of computers all over the world. These computers (sometimes called miners or validators) are responsible for storing their own copies of the database, adding and verifying new entries, and securing the database against hackers.

So blockchains are … fancy Google spreadsheets?

Sort of! But there are at least three important conceptual differences.

First, a blockchain is decentralized. It doesn’t need a company like Google overseeing it. All of that work is done by the computers on the network, using what’s called a consensus mechanism — basically, a complicated algorithm that allows them to agree on what’s in a database without the need for a neutral referee. This makes blockchains more secure than traditional record-keeping systems, proponents believe, since no single person or company can take down the blockchain or alter its contents, and anyone trying to hack or change the records in the ledger would need to break into many computers simultaneously.

The second major feature of blockchains is that they’re typically public and open source, meaning that unlike a Google spreadsheet, anyone can inspect a public blockchain’s code or see a record of any transaction. (There are private blockchains, but they’re less important than the public ones.)

Third, blockchains are typically append-only and permanent, meaning that unlike with a Google spreadsheet, data that’s added to a blockchain typically can’t be deleted or changed after the fact.

Got it. So blockchains are public, permanent databases that nobody owns?

You’re getting it!

Now remind me: How are blockchains related to cryptocurrencies?

Blockchains didn’t really exist until 2009, when a pseudonymous programmer named Satoshi Nakamoto released the technical documentation for Bitcoin, the first-ever cryptocurrency.

Bitcoin used a blockchain to keep track of transactions. That was notable because, for the first time, it allowed people to send and receive money over the internet without needing to involve a central authority, such as a bank or an app like PayPal or Venmo.

Many blockchains still perform cryptocurrency transactions, and there are now roughly 10,000 different cryptocurrencies in existence, according to CoinMarketCap. But many blockchains can be used to store other kinds of information, too — including NFTs, bits of self-executing code known as smart contracts and full-fledged apps — without the need for a central authority.

OK, but can we back up a second? Weren’t tech people telling us, years ago, that crypto was a new and exciting form of money? And yet, nobody I know pays their rent or buys groceries in Bitcoin. So were those people just … wrong?

Good question. It’s true that today, hardly anyone pays for things in cryptocurrency. In part, that’s because most merchants still don’t accept crypto payments, and hefty transaction fees can make it impractical to spend small amounts of cryptocurrency on daily living expenses. It’s also because the value of popular cryptocurrencies like Bitcoin and Ether has historically gone up, making it somewhat risky to use them for offline purchases. (The counterexamples are usually cited with pity, like the guy who, in 2010, bought two Papa John’s pizzas using Bitcoin that was worth about $40 at the time, but would be worth roughly $400 million today.)

It’s also true that the value of cryptocurrencies has grown enormously since the early Bitcoin days, despite them not being most people’s daily spending money.

Part of that growth is speculation — people buying crypto assets in hopes of selling them for more later on. Part of it is because the blockchains that have emerged since Bitcoin, like Ethereum and Solana, have expanded what can be done with this technology.

And some crypto fans believe that the prices of cryptocurrencies like Bitcoin will eventually stabilize, which could make them more useful as a means of payment.

What are the actual uses of crypto, beyond financial speculation?

Right now, many of the successful applications for crypto technology are in finance or finance-adjacent fields. For example, people are using crypto to send cross-border remittances to family members abroad and Wall Street banks using blockchains to settle foreign transactions.

The crypto boom has also led to an explosion of experiments outside of financial services. There are crypto social clubs, crypto video games, crypto restaurants and even crypto-powered wireless networks.

These non-financial uses are still fairly limited. But crypto fans often make the case that the technology is still young, and that it took the internet decades to mature into what it is today. Investors are pouring billions of dollars into crypto start-ups because they think that someday, blockchains will be used for all kinds of things: storing medical records, tracking streaming music rights, even hosting new social media platforms. And the crypto ecosystem is attracting tons of developers — an auspicious sign for any new technology.

I’ve heard people calling crypto a pyramid scheme or a Ponzi scheme. What do they mean?

Some critics believe that cryptocurrency markets are fundamentally fraudulent, either because early investors get rich at the expense of late investors (a pyramid scheme), or because crypto projects lure in unsuspecting investors with promises of safe returns, then collapse once new money stops coming in (a Ponzi scheme).

There are certainly plenty of examples of pyramid and Ponzi schemes within crypto. They include OneCoin, a fraudulent crypto operation that stole $4 billion from investors from 2014 to 2019; and Virgil Sigma Fund, a $90 million crypto hedge fund run by a 24-year-old investor who pleaded guilty to securities fraud and was sentenced to seven and a half years in prison.

But these cases aren’t usually what critics are talking about. They’re generally arguing that crypto itself is an exploitative scheme, with no real-world value.

And are they right?

Well, let’s try to understand the case they’re making.

Unlike buying stock in, say, Apple, a purchase that (theoretically, at least) reflects a belief that Apple’s underlying business is healthy, buying a cryptocurrency is more like betting on the success of an idea, they say. If people believe in Bitcoin, they buy, and Bitcoin prices go up. If people stop believing in Bitcoin, they sell, and Bitcoin prices go down.

Crypto owners, then, have a rational incentive to convince other people to buy. And if you don’t think that cryptocurrency technology is inherently valuable, you might conclude that the entire thing resembles a pyramid scheme, in which you primarily make money by recruiting others to join.

I’m sensing a “but” coming on.

But! Even though there are scams and frauds within crypto, and crypto investors are certainly fond of trying to recruit other people to buy in, many investors will tell you that they are going in with their eyes wide open.

They believe that crypto technology is inherently valuable, and that the ability to store information and value on a decentralized blockchain will be attractive to all kinds of people and businesses in the future. They would tell you they’re betting on crypto the product, not crypto the idea — which, on some level, isn’t all that different from buying Apple stock because you think the next iPhone is going to be popular.

Matt Huang, a prominent investor, spoke for many crypto fans when he said on Twitter: “Crypto may look like a speculative casino from the outside. But that distracts many from the deeper truth: the casino is a trojan horse with a new financial system hidden inside.”

You can argue with that position, or dispute how much this “new financial system” is actually worth. But crypto investors clearly believe it’s worth something.

Is crypto regulated?

Only slightly. In the United States, certain centralized crypto exchanges, such as Coinbase, are required to register as money transmitters and follow laws like the Bank Secrecy Act, which requires them to collect certain information about their customers. Some countries have passed more stringent regulations, and others, like China, have banned cryptocurrency trading entirely.

But compared with the traditional financial system, crypto is very lightly regulated. There are few rules governing crypto assets like “stablecoins” — coins whose value is pegged to government-backed currencies — or even clear guidance from the Internal Revenue Service about how certain crypto investments should be taxed. And certain areas of crypto, like DeFi (decentralized finance), are almost completely unregulated.

Partly, that’s because it’s still early, and making new rules takes time. But it’s also a property of blockchain technology itself, much of which was designed to be hard for governments to control.

This question comes from the (apparently crypto-curious) rapper Cardi B: Is crypto going to replace the dollar?

Sorry, Cardi. The dollar is the world’s reserve currency, and dislodging it would be a huge, costly project that isn’t likely to happen any time soon. (To give just one small example of the enormity of the task: every financial contract that is denominated in dollars would have to be re-denominated in Bitcoin or Ether or some other cryptocurrency.)

There are also technical hurdles crypto needs to overcome if it’s ever going to displace government-issued currency. Today, the most popular blockchains — Bitcoin and Ethereum — are slow and inefficient compared with traditional payment networks. (The Ethereum blockchain, for example, can process only about 15 transactions per second, whereas Visa says it can process thousands of credit card transactions per second.)

And, of course, for a cryptocurrency like Bitcoin to replace the dollar, you’d need to convince billions of people to use a currency whose value fluctuates wildly, that isn’t backed by a government and that often can’t be retrieved if it’s stolen.

What kind of people are investing in crypto? Is it all — to quote a recent “Curb Your Enthusiasm” episode — “nerds and Nazis”?

It’s hard to say who’s investing in crypto, especially since a lot of activity takes place anonymously or under pseudonyms. But some surveys and studies have suggested that crypto is still dominated by affluent white men.

Gemini, a cryptocurrency exchange, estimated in a recent report that women made up only 26 percent of crypto investors. The average crypto owner, the group found, was a 38-year-old man making approximately $111,000 a year.

But crypto ownership does appear to be diversifying. A 2021 Pew Research Center survey found that Asian, Black and Latino adults were more likely to have used crypto than white adults. Crypto adoption is also growing outside the United States, and some studies have suggested that crypto adoption is growing fastest in countries like Vietnam, India and Pakistan.

My colleague, Tressie McMillan Cottom, has made the case that crypto — because it relies on permanent, irrefutable records of ownership of digital goods and currencies — is particularly attractive to people from marginalized groups, who may have had their property unjustly taken from them in the past.

“If I live in a community where the police absolutely use eminent domain to claim my private property and I cannot do anything about it,” she wrote, “that sense of everyday powerlessness would make the promise of blockchain sound pretty good.”

That said, some recent studies have also found that a small number of people own the vast majority of crypto wealth — so it’s not necessarily an egalitarian paradise.

And what about extremists? Are they into crypto?

Some are. Because you can buy and sell cryptocurrency without using your name or having a bank account, crypto in its early days was a natural fit for people who had reasons to avoid the traditional financial system. They included criminals, tax evaders and people buying and selling illicit goods. They also included political dissidents and extremists, some of whom had been kicked off more mainstream payment services like PayPal and Patreon.

As a result of their well-timed entry into the crypto market, some extremists have gotten rich. A recent investigation by the Southern Poverty Law Center found that several prominent white supremacists have made hundreds of thousands or millions of dollars by investing in crypto.

Of course, there are millions of crypto owners, the vast majority of whom are not white supremacists. And the same properties of anonymity and censorship-resistance that make crypto useful to white supremacists might also make it attractive to, say, Afghan citizens fleeing the Taliban. So labeling the entire crypto movement an extremist group would be overkill. Regardless, it’s safe to say that crypto has become attractive to all kinds of people who would rather not deal (or can’t legally deal) with a traditional bank.

Another criticism I’ve heard is that crypto is bad for the environment. Is that true?

This is a real can of worms — and one of the most frequent objections to crypto.

Let’s start with what we know for sure. It’s true that most crypto activity today takes place on blockchains that require large amounts of energy to store and verify transactions. These networks use a “proof-of-work” consensus mechanism — a process that has been compared to a global guessing game, played by computers all competing to solve cryptographic puzzles in order to add new information to the database and earn a reward in return. Solving these puzzles requires powerful computers, which in turn use lots of energy.

The Bitcoin blockchain, for example, uses an estimated 200 terawatt-hours of energy per year, according to Digiconomist, a website that tracks crypto energy usage. That’s comparable to the annual energy consumption of Thailand. And Bitcoin’s associated carbon emissions have been estimated at roughly 100 megatons per year, which is comparable to the carbon footprint of the Czech Republic.

Holy moly! How do crypto fans justify that kind of environmental impact?

Crypto advocates often quibble with these statistics. They also argue that:

• Our existing financial system also uses a lot of energy, between powering millions of bank branches, A.T.M.s that sit idle for most of the day, gold mines and other energy-intensive infrastructure.

• Many crypto-mining computers are already powered by renewable energy sources, or by energy that would otherwise be wasted.

• Most newer blockchains are built using consensus mechanisms that require much less energy than proof-of-work. (Ethereum, for example, is scheduled to switch to a new type of consensus mechanism called proof-of-stake sometime in 2022, which could reduce its energy usage by as much as 99.5 percent.)

And are those arguments valid?

Partly. It’s true that most newer blockchains are designed in a way that requires considerably less energy than Bitcoin, and that Ethereum’s switch to a proof-of-stake consensus mechanism will greatly shrink its environmental footprint, if and when it happens.

But it’s also a bit convenient to steer attention away from Bitcoin, which is still the most valuable cryptocurrency in the world. Bitcoin’s energy needs aren’t expected to fall significantly anytime soon. And even if every Bitcoin miner ran entirely on renewable energy — which, to be clear, isn’t the case — there would still be an environmental cost associated with maintaining the blockchain.

All told, it’s clear that crypto as we know it today has a significant environmental impact, but it’s hard to measure exactly how significant. Many frequently cited statistics come from industry groups, and it’s hard to find trustworthy, independent data and analysis.

But few crypto fans would dispute that blockchains consume substantially more energy than a traditional, centralized database would — just as 100 refrigerators use more energy than one refrigerator. They just argue that crypto’s environmental impact will shrink over time, and that the benefits of decentralization are worth the costs.

Got it. And those benefits, again, are …

Some crypto proponents will tell you that the biggest benefit of decentralization is the ability to create currencies, apps and virtual economies that are resistant to censorship and top-down control. (Imagine a version of Facebook, they’ll say, in which Mark Zuckerberg couldn’t unilaterally decide to kick people off.)

Others will say that the biggest perk of decentralization is that it allows artists and creators to control their own economic destinies more directly by giving them a way (in the form of NFTs and other crypto assets) to bypass platform gatekeepers like YouTube and Spotify, and sell unique digital works directly to their fans.

Still others will say that crypto is most useful to people who don’t live in countries with stable currencies, or to dissident groups living under authoritarian regimes.

There are a million other hypothetical benefits of decentralization and crypto, some of which are realistic and some of which probably aren’t.

How do you actually use crypto? Is it like sending a payment over Paypal or Venmo?

It can be. The quickest way to get started using cryptocurrencies is to set up an account with a crypto exchange like Coinbase, which can link to your bank account and convert your U.S. dollars (or other government-issued currency) into cryptocurrency.

But many crypto users prefer setting up their own “wallets” — secure places to store the cryptographic keys that unlock their digital assets.

Once you’ve got some crypto in your wallet, the process can be pretty simple — just type in the recipient’s crypto wallet address, pay a transaction fee (if applicable), and wait for the payment to clear.

Other types of crypto transactions, like buying and selling NFTs, can be significantly more complicated, but the basic act of sending a payment to someone typically takes only a few minutes.

I’m ready to dive into the rest of your explainers. But first, I have one final question about crypto’s culture: Why is it so weird and insular?

This is maybe the question I get asked most about crypto. People see their friends, co-workers and relatives diving down the crypto rabbit hole and emerging days or weeks later with a new obsession, new internet friends, a bunch of new jargon and the seeming inability to talk about anything else. (There’s even a word for this — getting “cryptopilled.”) People who believe in crypto tend to really believe in it — to the point that they can appear to the outside world more like evangelists for a new religion than fans of a new technology.

I was a religion reporter once, and I don’t think the comparison is totally inapt. (It’s also not necessarily a bad thing: Plenty of people find meaning and community and intellectual stimulation in religion.) As people like the Bloomberg journalist Joe Weisenthal have pointed out, crypto has similar elements to an emerging religion: an enigmatic founder (the still-anonymous Satoshi Nakamoto), sacred texts (the Bitcoin white paper) and rituals and rites to mark yourself as a believer, such as tweeting “gm” (crypto speak for “good morning”) to your fellow believers, or photoshopping laser eyes onto your profile picture.

It’s fun to laugh at the (often cringeworthy) ways crypto fans try to entertain and inspire each other. But focusing too much on their behavior and customs might mean missing what’s genuinely novel — and, depending on where you sit, either exciting or dangerous — about the technology itself. Which is why, when my friends ask me how to talk to their cryptopilled relatives, I advise them to start by trying to understand what’s gotten them so excited in the first place.

inflation 2022

WASHINGTON (AP) — Last year, it was a nasty surprise. And it wasn’t supposed to last. But now, inflation has become an ongoing financial strain for millions of Americans filling up at the gas station, lined up at a grocery checkout lane, shopping for clothes, bargaining for a car or paying monthly rent.

For the 12 months ending in January, inflation amounted to 7.5% — the fastest year-over-year pace since 1982 — the Labor Department said Thursday. Even if you toss out volatile food and energy prices, so-called core inflation jumped 6% over the past year. That was also the sharpest such jump in four decades.

Consumers felt the price squeeze in everyday routines. Over the past year, prices rose 41% for used cars and trucks, 40% for gasoline, 18% for bacon, 14% for bedroom furniture, 11% for women’s dresses.

The Federal Reserve didn’t anticipate an inflation wave this severe or this persistent. In December 2020, the Fed’s policymakers had forecast that consumer inflation would stay below their 2% annual target and end 2021 at around 1.8%.

But after having been an economic afterthought for decades, high inflation reasserted itself last year with brutal speed. In February 2021, the government’s consumer price index was running just 1.7% ahead of its level a year earlier. From there, the year-over-year price increases accelerated steadily — 2.7% in March, 4.2% in April, 4.9% in May, 5.3% in June.

By October, the figure was 6.2%, by November 6.8%, by December 7.1%.

For months, Fed Chair Jerome Powell and others characterized higher consumer prices as merely a “transitory” problem — the result, mainly, of shipping delays and temporary shortages of supplies and workers as the economy rebounded from the pandemic recession much faster than anyone had anticipated.

Now, many economists expect consumer inflation to remain elevated well into this year, with demand outstripping supplies in numerous areas of the economy.

“Inflation remains the single largest near-term challenge to the economy,″ said Jim Baird, chief investment officer at Plante Moran Financial Advisors. “Although price pressures are expected to ease as the year progresses, inflation will remain above the Fed’s 2% target for some time to come.″

So the Fed has radically changed course. Last month, the central bank signaled that it will begin a series of rate hikes in March. By doing so, the Fed is moving away from the super-low rates that helped revive the economy from 2020′s devastating pandemic recession but that also helped fuel surging consumer prices.

WHAT’S CAUSED THE SPIKE IN INFLATION?

Good news — mostly. When the pandemic paralyzed the economy in the spring of 2020 and lockdowns kicked in, businesses closed or cut hours and consumers stayed home as a health precaution, employers slashed a breathtaking 22 million jobs. Economic output plunged at a record-shattering 31% annual rate in 2020′s April-June quarter.

Everyone braced for more misery. Companies cut investment and postponed restocking. A brutal recession ensued.

But instead of sinking into a prolonged downturn, the economy staged an unexpectedly rousing recovery, fueled by vast infusions of government aid and emergency intervention by the Fed, which slashed interest rates, among other things. By spring of last year, the rollout of vaccines had emboldened consumers to return to restaurants, bars, shops and airports.

Suddenly, businesses had to scramble to meet demand. They couldn’t hire fast enough to fill job openings — a near record 10.9 million in December — or buy enough supplies to meet customer orders. As business roared back, ports and freight yards couldn’t handle the traffic. Global supply chains became seized up.

With demand up and supplies down, costs rose. And companies found that they could pass along those higher costs in the form of higher prices to consumers, many of whom had managed to sock away a ton of savings during the pandemic.

But critics, including former Treasury Secretary Lawrence Summers, blamed in part President Joe Biden’s $1.9 trillion coronavirus relief package, with its $1,400 checks to most households, for overheating an economy that was already sizzling on its own.

The Fed and the federal government had feared an agonizingly slow recovery like the one that followed the Great Recession of 2007-2009.

HOW LONG WILL IT LAST?

Elevated consumer price inflation will likely endure as long as companies struggle to keep up with consumers’ demand for goods and services. A recovering job market — employers added a record 6.7 million jobs last year and tacked on 467,000 more in January — means that many Americans can continue to splurge on everything from lawn furniture to electronics.

Many economists foresee inflation staying well above the Fed’s 2% target this year. But relief from higher prices might be coming. Jammed-up supply chains are beginning to show some signs of improvement, at least in some industries. The Fed’s sharp pivot away from easy-money policies toward a more hawkish, anti-inflationary policy could slow the economy and reduce consumer demand. There will be no repeat of last year’s COVID relief checks from Washington.

Inflation itself is eating into household purchasing power and might force some consumers to shave back spending.

Omicron or other COVID’ variants could cloud the outlook, either by causing outbreaks that force factories and ports to close and disrupt supply chains even more or by keeping people home and reducing demand for goods.

“It’s not going to be an easy climb down,″ said Sarah House, senior economist at Wells Fargo. “We’re expecting CPI to still be roughly 4% at the end of this year. That’s still well above what the Fed would like it to be and, of course, well above what consumers are used to seeing.″

HOW ARE HIGHER PRICES AFFECTING CONSUMERS?

A strong job market is boosting wages, though not enough to compensate for higher prices. The Labor Department says that hourly earnings for all private-sector employees fell 1.7% last month from a year earlier after accounting for higher consumer prices. But there are exceptions: After-inflation wages were up more than 10% for hotel workers and more than 7% for restaurant and bar employees in December from a year earlier.

Partisan politics also colors the way Americans view the inflation threat. With a Democrat in the White House, Republicans were nearly three times as likely as Democrats (45% versus 16%) to say that inflation is having a negative effect last month on their personal finances, according to a University of Michigan survey.

***

This story has been updated to correct that U.S. economic output dropped at a 31% annual rate in 2020′s April-June quarter, not last year’s

Dogbert the financial expert

2/24/22 - where to put your money

2/23/22 - what's the best way to make money in today's market?

2/22/22 - advice for people who are new to investing

2/21/22 - what should investors do in the coming year?

and more

inflation and interest rates

Inflation concerns continue to grip the market.

Some inflation is good. Not too much, but some. As they say, one person's cost increase is another person's profit.

That's why, historically, stocks typically perform well in inflationary environments.

Of course, with inflation just hitting a 40-year high, it's already reached the 'too much' point.

But remember, inflation doesn't tank stocks. High interest rates do.

And while the Fed is expected to raise rates 3-4 times this year, getting to 0.9% by year's end, that would still keep rates at historically low levels.

It's also important to know that over the last 50 years, there's never been a recession (aside from 2020's pandemic-induced plunge), when the Fed Funds rate was under 4%.

And with rates only expected to hit 0.9% by the end of this year, 1.6% by the end of 2023, and 2.1% by the end of 2024, that's a far cry from that 4% level.

So the prospect of 'high' interest rates is literally years and years and years down the road.

And to me, that shows a clear path for strong economic growth for the foreseeable future.

-- Kevin Matras, Weekend Wisdom, February 19, 2022

what are the odds that the stock market will be up this year?

There’s a two-out-of-three chance the U.S. stock market will rise in 2022. A 66% probability of a rising market next year seems downright attractive, given that equities have more than doubled over the past 18 months. What many investors don’t realize is that these market odds stay the same from year to year, regardless of what’s come before.

Investors have a hard time accepting this because they believe the market exhibits trends. They assume that a good year makes it more likely the subsequent year will be rewarding, and a poor year sets up the probability of another disappointing year.

Contrarian investors make a conceptually similar mistake. They think the market regresses to the mean, which would mean that an above-average year would be more likely followed by a below-average year, and vice-versa.

Both investors and contrarians are wrong, because the stock market discounts the future, not the past. As market theoreticians teach us, an efficient market’s level at any given time should reflect all information that is publicly-available. According to Lawrence Tint, the former U.S. CEO of BGI, the organization that created iShares (now part of Blackrock), that means the market will rise or fall according to changes in anticipated future returns. It does “not include history in the calculation,” he said in an interview.

The accompanying chart provides a good illustration of market efficiency. The chart, which is based on the Dow Jones Industrial Average’s DJIA return since its creation in 1896, plots the odds that the Dow will rise in any given year.

... The bottom line: The odds the stock market will rise next year are the same as they would be in any other year.

Your reaction to these statistics will depend on whether you see the glass as half-full or half-empty. If you’re in the former camp, you will celebrate the two-out-of-three odds the market will rise next year, whereas if you’re in the glass-is-half-empty camp you will focus on the one-out-of-three odds of its falling. Regardless, what happens to stocks in 2022 will have nothing to do with how the market has performed this year.

pullbacks and corrections

Stocks closed lower on Friday and for the week. That makes it three weeks in a row.

Rough start to the new year.

The Dow and the S&P remain in 'pullback' territory (-7.27% and -8.73% respectively). And the Nasdaq remains in 'correction' territory (-15.1%).

Pullbacks, which are defined as a decline between -5% and -9.99%, happen on average of 3-4 times a year.

And corrections, which are defined as a decline between -10% and -19.99%, happen roughly once a year.

The Dow and the S&P pulled back 3 times last year. But ultimately gained 18.7% and 26.9% for the year.

The Nasdaq corrected once last year, and finished with a gain of 21.4%.

So what we're seeing right now is not unusual. In fact, pullbacks and corrections are common.

Every bull market has them.

While they're never fun when they're happening, if you know these are commonplace moves, you can instead look at them as opportunities to buy rather than places to sell.

For me, each additional step back means we are getting closer to the pullback/correction being over. Not to mention the opportunity of getting in at even cheaper prices.

And the sooner we can get this over with, the sooner we can get back to the bull market rally.

Kevin Matras

Executive Vice President, Zacks Investment Research

- Profit from the Pros (1/24/22)

Biden leading all presidents in stock market performance (so far)

So far, Joe Biden leads all U.S. Presidents in stock-market performance.

We’re in the early days, of course. Biden hasn’t served a full year yet. And the market slide on Nov. 26, if sustained, could change the numbers rapidly.

But through Nov. 26, the Standard & Poor’s 500 Index has advanced 20.74% under Biden (including dividends). Annualize that and you get a 24.84% rate of return.

Either the raw number or the annualized number would put Biden at the top of the charts. Preceding Biden, Bill Clinton was on top, at 17.49% per year. Barack Obama was second at 16.25% and Donald Trump third with 15.95%.

For these calculations I use the Standard & Poor’s 500 Total Return Index, measured from Inauguration Day to the last full day of a president’s term.

Some people say the starting point isn’t fair, since a new president influences policy and the public mood beginning on Election Day or even sooner.

But I think it’s the best method. After all, if an outgoing president invaded Cuba or imposed wage-and-price controls, that would move the markets, whether the new president agreed with the policy or not.

Presidential rankings

Here’s how Biden and the 15 previous presidents stack up, ranked by annualized stock market returns.

President       Cumulative Annualized

Joe Biden           20.74%   24.84%

Bill Clinton       263.72%   17.49%

Barack Obama       233.71%   16.25%

Donald Trump        80.76%   15.95%

Gerald Ford         42.53%   15.57%

Harry Truman       207.98%   15.56%

Dwight Eisenhower  217.15%   15.51%

Ronald Reagan      207.83%   15.08%

George H.W. Bush    73.13%   14.71%

Jimmy Carter        59.33%   12.40%

Franklin Roosevelt 300.95%   12.15%

Lyndon Johnson      73.17%   11.23%

John Kennedy        30.42%    9.82%

Richard Nixon       -3.50%   -0.64%

George W. Bush     -26.75%   -3.82%

Herbert Hoover     -77.09%  -30.82%

One conclusion that jumps out at you is Republicans and Democrats both have big winners and losers. The top three spots in the table are occupied by Democrats. But Democratic icon John Kennedy ranks near the bottom, as does Lyndon Johnson, architect of the Great Society programs.

Among Republicans, Donald Trump, Gerald Ford and Dwight Eisenhower have terrific numbers. But Richard Nixon, George W. Bush and Herbert Hoover bring up the rear – the only three with negative returns.

Studies by Ned Davis Research Inc. show that stocks have gained 7.98% per year under Democratic presidents, versus only 3.6% per year under Republican ones. However, inflation has been higher (4.22%) under Democrats than under Republicans (1.80%). So the inflation-adjusted gap is more modest.

Why it’s up

Why has Biden done so well, so far? Part of the answer is lucky timing. Scientists brought out a vaccine for Covid-19 shortly after he took office. That was a big plus for the markets.

Passage of an infrastructure bill also gave the stock market a shot in the arm. Spending on roads, bridges and internet superstructure should add to demand for many companies.

Biden’s polling numbers, however, hint that the market’s strength from January to November may not last. His approval rating lately has been near 43%, down from about 55% in the first days of his administration. Markets prefer strong presidents, regardless of party.

Looking ahead

Whether the market continues to perform well depends in part on unclogging the nation’s ports, combatting the current labor shortage and containing the latest variant of the coronavirus.

To tilt the odds in your favor, it may help to try to guess how Biden’s policies will affect the market in the next three years.

I believe Biden will continue to push vigorously for infrastructure spending, following up on passage of the recent infrastructure bill. Possible plays here include Sterling Construction Co. (STRL, Financial), Fluor Corp. (FLR, Financial) and Nucor Corp. (NUE, Financial).

He will, I believe, press for increasing access to health care, though nowhere near as fast as his party’s left wing wants. That bodes sell, I think, for pharmaceutical companies such as Merck & Co. Inc. (MRK, Financial) and Pfizer Inc. (PFE, Financial).

Biden’s reappointment of Jerome Powell as head of the Federal Reserve probably means that interest rates will rise, but slowly. That should help financial stocks, notably banks such as JPMorgan Chase & Co. (JPM, Financial) and Bank of America Corp. (BAC, Financial).

So far, Biden has continued Trump’s hard line on trade with China. Lately, JPMorgan has been writing that a thaw in the frosty U.S.-China trade relationship is less of a long shot than people think.

If they’re right, I think some beneficiaries could be agricultural commodity companies such as Archer Daniels Midland Co. (ADM, Financial), semiconductor makers like Apple Inc. (AAPL, Financial) and the big auto makers, including General Motors Co. (GM, Financial) and Ford Motor Co. (F, Financial).

-- John Dorfman is chairman of Dorfman Value Investments in Boston. His firm of clients may own or trade securities discussed in this column. He can be reached at jdorfman@dorfmanvalue.com.

10 Golden Rules

I[Stacy Johnson]'ve been offering financial advice professionally for many decades. I’m also a millionaire several times over.

During my time in the trenches, I’ve heard every conceivable piece of financial advice, acted on many and offered some of my own.

Following are the best of the best — a few simple sentences you can follow that will absolutely, positively make you richer.

1. Never spend more than you make, ever

When I was 10, I started cutting grass to earn money beyond my meager allowance. Minutes after earning my first buck, Mom was stuffing me in the car for a trip to the bank to open my first passbook savings account.

Fifty years later, priority one is still to put something aside from every paycheck and send out less than I bring in.

Of course, life being what it is, it hasn’t always worked out that way. But in general, getting richer every month is as simple as spending less than you make, and getting poorer is as simple as spending more than you make.

2. Avoid debt like the plague

Most people treat debt as if it’s a normal part of life. They divide it into categories like “good debt” and “bad debt.” They discuss it endlessly, as if it’s some mathematical mystery.

Debt is not complicated. Paying money to temporarily use other people’s money makes you poorer. Charging money to temporarily let other people use yours makes you richer.

Since paying interest makes you poorer, you only do it in two situations:

• When you have to in order to survive
• When you’ll earn more on what you’re financing than what you’ll pay to finance it

Unless borrowing is ultimately going to make you richer, don’t do it.

3. Buy when everyone’s freaking out, and sell when everyone thinks they can’t lose

Rich people ring the register when the economy is booming, but that’s not when they created their wealth.

You get richer by investing when nobody else will: when unemployment is high, the market is tanking, everybody’s freaking out, and there’s nothing but fear and misery on the horizon.

The cyclical nature of our economy all but ensures bad times will periodically occur, and human nature all but ensures that when bad times happen, most people will freeze like a deer in the headlights. But downturns are the time you’ve been saving for.

If you think the world is truly ending, buy canned food and a shotgun. If not, step up. As billionaire investor Warren Buffett famously advised, “Be fearful when others are greedy and greedy when others are fearful.”

4. You can either look rich or be rich

When I worked as a Wall Street investment adviser, I quickly learned that people who have tons of money most often don’t look like it. They don’t have to.

So, who are the big shots wearing the fancy suits and driving the Porsches? Often it’s the people who make a living selling stuff to the rich people.

I can’t remember the last time I wore a fancy suit. I’ve never owned a new car, and I live in a house that’s worth about one-third of what I could afford.

Diverting your investable cash into things like cars, clothing, vacations and houses you can’t afford will make you look rich now, but prevent you from actually becoming rich later.

5. Live like you’ll die tomorrow, but invest like you’ll live forever

You should always strive to get as much out of life as you can each and every day. After all, you could die tomorrow.

But here’s the thing: You probably won’t. Put something aside so you can continue soaking up what life has to offer for as long as possible.

6. There are only 6 ways to get rich

The only ways to get rich:

1. Marry money.
2. Inherit money.
3. Exploit a unique talent.
4. Get exceedingly lucky.
5. Own or lead a successful business.
6. Spend less than you make and invest your savings wisely over long periods of time.

Even as you’re aiming for any of the first five, practice the last one and you’re guaranteed to become rich eventually.

7. The riskiest thing you can do is take no risk

Whether it’s money, love or life in general, if you want rewards, you have to take risks.

When it comes to money, taking risks means investing in things that can go down in value — like stocks, real estate or your own business. Can you get through life without taking risks? Sure, but as my dad was fond of saying, you’ll never get a hit from the dugout.

Riskier investments typically offer the chance for higher returns. And that extra return can make a world of difference to the size of your nest egg. If you invest $200 a month over 30 years and earn 12% annually, you’ll end up with hundreds of thousands of dollars more in retirement savings than if the same investment earns just 2% per year.

Taking a measured amount of risk is the difference between getting rich and getting by.

That being said, making risky bets is simply gambling. Take measured risks. Minimize risk by knowing as much as possible before investing, not putting all your eggs in one basket and learning from your mistakes. Or better yet, learn from someone else’s errors.

8. Never make your well-being someone else’s responsibility

If you need surgery, you have little choice but to trust your fate to a professional. But when it comes to your money, don’t ever turn over complete control to anyone.

Seeking advice is always a good idea. But no matter who that adviser is or how smart they are, your money is more important to you than it is to them. So, if you’re not doing everything yourself, at least understand exactly what’s going on.

Virtually anyone can learn to navigate their finances. If you can’t be bothered to take responsibility for your own money, just keep it in the bank. At least that way you won’t end up ripped off, broke and blaming someone else for your problems.

9. When it comes to information, less can be more

About 15 years ago, I put about $2,000 into Apple stock. I sold half of it a few years ago, then sold a little more a couple of years ago. But as I write this, my remaining shares are worth hundreds of thousands of dollars.

Had I been watching financial news every day and reacting to pundits and market gyrations, I’d have sold it all long ago and been kicking myself today.

If you want to be rich, buy into high-quality stocks and hold on to them for long periods of time. If you want to kick yourself, buy into high-quality stocks, then sell them at the drop of a hat based on something or someone you saw or read.

10. Time isn’t money, money is time

Whoever said “Time is money” had it backward. Time is the one nonrenewable resource you have. Once your time is up, it’s up.

So, the trick is to spend as much of your limited time as possible doing stuff you want to do, rather than working for other people doing stuff you have to do. Money is the resource that allows you to do this.

If you go to the mall and spend $200 on clothes, that’s $200 you could have invested. If you’d earned 12% compounded annually on that $200, in 30 years you’d have accumulated around $6,000. Ignoring inflation and assuming you could live on $3,000 a month in retirement, forgoing those clothes today means retiring two months earlier.

Of course, you must have clothes. But maybe you don’t need $200 worth, or maybe you could have gotten them for less.

It’s your choice: stuff today or time tomorrow. Those who choose the former often stay poor. Those who choose the latter often get rich. Which will you choose?

-- Stacy Johnson / the 5/20/18 version / a bit different from these 10 Golden Rules, though there is some overlap

Grantham forecasts the market

Renowned investor Jeremy Grantham (Trades, Portfolio) is doubling down on his bubble call, telling CNBC’s Wilfred Frost on Tuesday’s “Closing Bell” that the conditions in the stock market right now are even crazier than the periods leading up to the crashes of 1929 and 2000.

As a result, he cautioned that investors should consider “avoid[ing] the U.S. like the plague.”

“The value stocks outside the U.S. are not too bad,” Grantham said. “They are overpriced, but they are going to return over the next 10 years a positive return. Our forecast in the U.S. is for a negative return over the next seven years…I strongly believe that will be accurate.”

During the interview, the guru, who is one of the co-founders of GMO, also commented on the future of the green energy market as well as despaired over meme stocks, calling them a “travesty of serious investing.”

***

Despite his recent advice to “avoid the U.S. like the plague,” as of the end of the second quarter, GuruFocus portfolio data shows the guru’s five largest holdings were Microsoft Corp. (MSFT, Financial), UnitedHealth Group Inc. (UNH, Financial), Apple Inc. (AAPL, Financial), U.S. Bancorp (USB, Financial) and Oracle Corp. (ORCL, Financial).

Songs of Experience: Reminiscences of a Strategist

It was 35 years ago this month that I began my career on Wall Street. In thinking about those three-and-a-half decades, I decided to shift tack with today’s report and ask readers to indulge me as I ruminate about what I’ve learned during these decades. I am often asked about the influences that have shaped me and my career; and they take many forms—including the iconic investors for whom I’ve worked, the memorable books and research I’ve pored over countless times, and the most valuable lessons they’ve imparted along the way.

My favorite quip ever said about the stock market was by Sir John Templeton. I had the great pleasure of meeting John many years ago when he appeared as a guest on Wall $treet Week With Louis Rukeyser (more on that below), when I was a panelist. He perfectly summed up what really drives the stock market—notably not using a single word that isn’t directly tied to investors’ emotional state:

“Bull markets are born on pessimism, they grow on skepticism, they mature on optimism and they die on euphoria.”

Some of the messages imbedded in Templeton’s most famous quote—as well as in those below—are even more important to ponder given today’s lofty valuations and not-so-subtle signs of investor complacency. There is nothing wrong with rejoicing in bull markets; but we must always remember that they do eventually end, so heed the messages from some of the greats of finance.

It was 1986 …

Thanks to admittedly heavy doses of luck and right-place-right-time, I started my career working for the late-great Marty Zweig and his partner Ned Babbitt at Avatar Associates. Within my first week on the job—as a “portfolio assistant” (aka, grunt)—Marty gave me a book that I still have, and still recommend every time someone asks me about my favorite investing books. It’s a must read for anyone, like me, who understands that it’s psychology that best defines market behavior.

Reminiscences of a Stock Operator was written by Edwin LeFevre and was first published in 1923. It is a fictionalized biography of Jesse Livermore, an actual legendary trader and speculator of that era. Below are some of the most memorable passages from that dog-eared book sitting on my shelf:

Edwin LeFevre

“Fear and hope remain the same; therefore the study of the psychology of speculators is as valuable as it ever was. Weapons change, but strategy remains strategy, on the New York Stock Exchange as on the battlefield.”

“The sucker has always tried to get something for nothing, and the appeal in all booms is always frankly to the gambling instinct aroused by cupidity and spurred by a pervasive prosperity. People who look for easy money invariably pay for the privilege of proving conclusively that it cannot be found on this sordid earth.”

“Speculators buy the trend; investors are in for the long haul; ‘they are a different breed of cats.’ One reason that people lose money today is that they have lost sight of this distinction; they profess to have the long term in mind and yet cannot resist following where the hot money has led.”

“Never try to sell at the top. It isn’t wise. Sell after a reaction if there is no rally.”

“…there is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.”

Marty Zweig

When Marty sadly passed away in 2013, I wrote a tribute to him as one of these bi-weekly missives, which long-time readers may remember.

Marty may be most famous for perfectly calling the Crash of ’87 on precisely the Friday night before that fateful Monday, October 19, 1987 (“Black Monday”). He did so on the legendary PBS show Wall $treet Week With Louis Rukeyser—a show I would join as a regular panelist 10 years later. Some readers (let’s just say of the more “seasoned” variety) might remember that prescient conversation between Marty and Lou; and thanks to YouTube, anyone can watch it.

Marty is also famous for coining two phrases that have become ingrained in many investors’ heads: “Don’t fight the Fed” and “Never fight the tape.” Here is what he had to say about both; some of which were in his bestselling 1986 book Winning on Wall Street:

“In the stock market, as with horse racing, money makes the mare go.”

“Big money is made in the stock market by being on the right side of major moves. I don’t believe in swimming against the tide. The idea is to get in harmony with the market. It’s suicidal to fight trends. They have a higher probability of continuing than not.”

“It’s OK to be wrong; it’s unforgivable to stay wrong.”

“I measure what’s going on, and I adapt to it. I try to get my ego out of the way. The market is smarter than I am, so I bend.”

“Patience is one of the most valuable attributes in investing.”

Louis Rukeyser

I miss Marty every day. I also miss Lou Rukeyser, who not only single-handedly introduced me to the world of financial media; but gave me some of the sagest advice I’ve ever received. During the preamble to the very first interview I did with Lou in 1997, he asked about my parents and whether they were “financial folks,” to which I responded no. He then took my hands in his and said, “when you come out on set in 15 minutes to have our interview, get them to understand what you’re talking about.” I try to live those words every single day in my role at Schwab.

Lou was also known for his humorous monologues every Friday night, including some of his most memorable quips:

“In Wall Street, the only thing that’s hard to explain is next week.”

“I never make a prediction that can be proved wrong within 24 hours.”

“The best way to keep money in perspective is to have some.”

But the one I’ll never forget is what Lou said on the Friday immediately following the Crash of ’87:

“It’s just your money. It’s not your life. The figures on a broker’s report mean little compared to that. The people who loved you a week ago still love you today.”

Quintessential investing books

Throughout those early years in my career, I read many a classic investing tome written by true legends. I try to pick each of them up from time to time to separate myself from the often-manic noise of the day-to-day reading and research with which we’re all bombarded. Though not an exhaustive list, they include:

A Random Walk Down Wall Street by Burton G. Malkiel, first published in 1973

The Intelligent Investor by Benjamin Graham, first published in 1949

The Money Game by Adam Smith (pseudonym for George Goodman), first published in 1976

Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay, first published in 1841

Against the Gods by Peter L. Bernstein, first published in 1996

I could fill dozens of pages with memorable quotes from these spectacular books; but in keeping with the themes around speculation, here are some of my favorites:

Burton G. Malkiel

“Forecasts are difficult to make—particularly those about the future.”

“It’s not hard to make money in the market. What is hard to avoid is the alluring temptation to throw your money away on short, get-rich-quick speculative binges. It is an obvious lesson, but one frequently ignored.”

“…there are four factors that create irrational market behavior: overconfidence, biased judgments, herd mentality, and loss aversion.”

“Human nature likes order; people find it hard to accept the notion of randomness. No matter what the laws of chance might tell us, we search for patterns among random events wherever they might occur—not only in the stock market but even in interpreting sporting phenomena.”

Benjamin Graham

“Those who do not remember the past are condemned to repeat it.”

“Abnormally good or abnormally bad conditions do not last forever.”

“You will be much more in control, if you realize how much you are not in control.”

“The investor’s chief problem—and even his worst enemy—is likely to be himself.”

“…while enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street it almost invariably leads to disaster.”

“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”

“If the reason people invest is to make money, then in seeking advice they are asking others to tell them how to make money. That idea has some element of naivete.”

Adam Smith (George Goodman)

“If you don’t know who you are, this is an expensive place to find out.”

“The first thing you have to know is yourself. A man who knows himself can step outside himself and watch his own reactions like an observer.”

“When the Rothschilds got the word about the battle of Waterloo—in the movie it was by carrier pigeon—they didn’t rush down and buy British consols, the government bonds. They rushed in and sold, and then, in the panic, they bought.”

“The irony is that this is a money game and money is the way we keep score. But the real object of the Game is not money, but it is the playing of the Game itself. For the true players, you could take all the trophies away and substitute plastic beads or whales’ teeth; as long as there is a way to keep score, they will play.”

Charles Mackay

“Men, it has been well said, think in herds. It will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”

“Let us not, in the pride of our superior knowledge, turn with contempt from the follies of our predecessors. The study of the errors into which great minds have fallen in the pursuit of truth can never be uninstructive.”

Peter L. Bernstein

“Risk and time are opposite sides of the same coin, for if there were no tomorrow there would be no risk. Time transforms risk, and the nature of risk is shaped by the time horizon: the future is the playing field.”

“Time matters most when decisions are irreversible. And yet many irreversible decisions must be made on the basis of incomplete information.”

“We are prisoners of the future because we will be ensnared by our past.”

“The information you have is not the information you want. The information you want is not the information you need. The information you need is not the information you can obtain. The information you can obtain costs more than you want to pay.”

“You never get poor by taking a profit.”

“Vast ills have followed a belief in certainty.”

Bob Farrell

During my 13 years at Zweig/Avatar, I was on the “buy side” managing money; and was the recipient of most of traditional Wall Street’s vast amount of “sell side” research. I was an admirer of many seasoned investment strategists during that time; and it planted the seed that would eventually grow into the role I’ve had at Schwab for more than two decades. In addition to Marty giving me Reminiscences of a Stock Operator to read; he also pointed me to the work of Bob Farrell; who was Merrill Lynch’s chief stock market analyst and senior investment advisor for 45 years; having studied fundamental analysis under (Benjamin) Gramm and (David L.) Dodd.

Bob is immortalized by his rules of investing that are still quoted widely by investment professionals—and ring as true today as ever:

Markets tend to return to the mean over time.

Excesses in one direction will lead to an opposite excess in the other direction.

There are no new eras—excesses are never permanent.

Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.

The public buys the most at the top and the least at the bottom.

Fear and greed are stronger than long-term resolve.

Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.

Bear markets have three stages—sharp down, reflexive rebound and a drawn-out fundamental downtrend.

When all the experts and forecasts agree—something else is going to happen.

Bull markets are more fun than bear markets

Charles Schwab, the company

I left Zweig/Avatar in mid-1999 to join U.S. Trust, which was acquired by Charles Schwab a short 10 months later. That acquisition was part of the evolution of Schwab away from its discount brokerage heritage to its expansion into a wealth management and brokerage powerhouse. With that acquisition, as I often say, I was figuratively adopted by the parent company, and my role was born.

Chuck Schwab, the man

Chuck has had an extraordinary influence on me personally, and my career. His optimism is infectious, and his character unrivaled in our business. One of my all-time favorite sentiments expressed by Chuck was about his people:

“I consider my ability to arouse enthusiasm among my people the greatest asset I possess, and the way to develop the best that is in a person is by appreciation and encouragement. There is nothing else that so kills the ambitions of a person as criticism from superiors.”

“I have yet to find the person, however great or exalted his station, who did not do better work and put forth greater effort under a spirit of approval than he would ever do under a spirit of criticism.”

I have worked under Chuck’s spirit of approval and encouragement for more than 20 years; for which I’ll be eternally grateful.

Two years ago, Chuck wrote a deeply personal memoir. In Invested Chuck tells a “remarkable story of a company succeeding by challenging norms and conventions through decades of change.” I had the great honor of hitting the road with Chuck on his book tour after it was published. During those conversations on stages around the country—as well as our many conversations over the past two decades—there are facets to his character and beliefs that have always guided me as I’ve traversed my path at Schwab.

One of our shared beliefs is the inability to time markets with any precision. Too many investors believe the key to success is knowing what’s going to happen in the market, and then positioning accordingly. But the reality is that it’s not what we know that makes us successful investors; it’s what we do. In Invested, Chuck wrote:

“If I had learned anything after years in the business, it was how little I could ever know about what the market would do tomorrow.”

I especially loved how Chuck closed the final chapter of Invested:

“Business is a creative process. You move forward into the unknowable future, try new things, make discoveries along the way, and repeat. It’s all about learning and growth. It is why I love it and the free market of ideas that enables it and makes so many great new things possible. I like to say business is organic, like life itself, ever changing. It is the human spirit of curiosity and creativity brought to life, and why I am ever optimistic about the future.”

Well said, Chuck.

Relevance

I’ve written a number of reports recently that detail a growing set of risks with which the market is facing. They include the aforementioned speculative froth at various points this year—concentrated in a rotating crop of non-traditional market segments, like meme stocks, SPACs, non-profitable ‘tech’ stocks, cryptocurrencies, IPOs, etc. Drawdowns this year in those areas have ranged from -30% to -80%. Perhaps because many of these “micro bubbles” sit outside traditional benchmark indexes like the S&P 500 helps explain the relative resiliency of the market.

Other risks include stretched valuations; monetary and fiscal policy concerns; slowing growth and not-yet-transitory inflation; and the recent/ongoing deterioration in the stock market’s “internals” (breadth). In fact, for all the cheering about the S&P 500 not having had even a 5% drawdown this year; it might surprise readers to know that 86% of the index’s constituents have had at least a 10% correction this year.

As highlighted above via the words of investment legends, investors should be cognizant of heightened risks. Heed the risk/reward benefits of diversification (across and within asset classes) and rebalancing. Try to divine whether there is a gap between your financial risk tolerance and your emotional risk tolerance. Those gaps can be surprisingly wide and often only discovered during tumultuous market periods.

“Those who do not remember the past are condemned to repeat it.”

-- Liz Ann Sonders

5 Investing Basics from Ben Graham

The Intelligent Investor is considered to be the best book on value investing every written. The Fourth Edition, which contains Jason Zweig’s additional, more modern, commentary, is about 600 pages long.

It works best when investors dig into just a single chapter.

In the first chapter, Graham and Zweig both lay out 5 investing basics.

1.       A stock is not just a ticker. You actually own a business with underlying value.

2.       The stock market swings between bulls and bears. Have a plan.

3.       The future value of every investment is a function of its present price.

4.       You will be wrong. Have a “margin of safety.”

5.       Develop discipline and courage.

The fifth investing basic sounds so simple. Yet “discipline and courage” is the most difficult part about long-term investing.

-- Tracey Ryniec

add low, trim high

With regard to rebalancing, it’s one of the most beneficial disciplines in that it forces us to do what we know we’re supposed to do — add low, trim high. Notice I adjusted that from the classic “buy low, sell high” adage; which can infer an all-or-nothing strategy. Frankly, investors should never think of investing as either “get in” or “get out.” That is gambling on moments in time; while investing should always be a disciplined process over time.

- Liz Ann Sonders