Episode 20: Recap Episode, Alternative Investment Insights after 20 Episodes

Ben Lakoff, CFA

January 7, 2021

27

MIN

Listen to this episode on your favorite platform!

Macro

January 7, 2021

27

MIN

Episode 20: Recap Episode, Alternative Investment Insights after 20 Episodes

There are over 20 episodes now live of the Alt Asset Allocation Podcast.

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There are over 20 episodes now live of the Alt Asset Allocation Podcast.

All the transcripts and show notes can be found on the website, but in this post I’m going to distill the learnings I’ve learned thus far.

If you’ve gotten any value from the Podcast – then please share, rate and review as it REALLY helps!

Want to watch this episode? You can find it on YouTube.

Interested in Listening? It can be found on all the podcasting platforms as well.

Here are the Time Stamps for the Audio / Video Version:

Time Topic
0:00:09 Intro
0:01:33 “How to invest $x ?”
0:02:50 Alternative v. Traditional Markets
0:04:10 Macro Markets Overview
0:05:01 Macro: Global Debt
0:06:43 Macro: Wealth Inequality
0:07:43 Macro: inflation
0:08:46 Macro: What does it mean?
0:13:15 Public Markets: Mistaken Beliefs
0:14:58 Total Asset Allocation: 60/40 Portfolio
0:15:49 Gold
0:17:19 Cryptocurrency: Bitcoin
0:20:10 Cryptocurrency: Other
0:21:33 Real Estate
0:23:49 Other Alternative Investments
0:25:30 Summary

The Line Up Thus Far

Podcasts are really awesome, and it’s been a really fun process to be in the driver’s seat.

Although I’ve published 20 episodes, there’s another 20+ that have already been recorded and are getting ready to publish.

Loads of amazing conversations with some VERY intelligent and interesting people.

First, the overview, 20 episodes categorized as:

How can you distill 20+ hours of interesting conversations into a single post? Well, we’ll see.

How Should I invest my Money

I often get the question “How should I invest $xxx?” Most people that follow financial markets likely get this as well.

This is a very difficult question, but without any context, it’s actually impossible. There are many prerequisite questions that need to be answered prior to giving any blanket “You should invest in this” advice that can be given.

If you’re looking for that sort of answer with this post, it’s not happening. Sorry.

Each persons’ investment decisions and goals are very different.

Note: This link to see my “Why” personally on why I invest.

But, what I can do is present some key interesting findings I’ve learned from these podcasts, and you can use them to help shape your own investment ideas.

The world is changing right now, and we’re truly in uncharted waters in many different ways. I truly believe that trying to ‘beat’ the PUBLICLY traded Traditional Markets is pretty futile. But i do think that in Alternative Investment markets there do exist opportunities to earn some significant alpha and outperformance.

Hopefully this post and these episodes (and especially the ones that are coming soon) are able to help you understand some of the factors that are changing the investment landscape of today.

A quote I heard Robert Breedlove say that I really liked:

“Always assume the market is more intelligent than you, because it is, the “market” is the sum total of everyone’s intelligence worldwide. So you can never hope to have that much intellect. You can beat the market here and there, but over the long term it’ll catch up – the market is much more intelligent than you.” Robert Breedlove

Macro

Starting on a more macro level. I’ll preface this by saying nobody has a crystal ball, that we are living in ‘unprecedented times’ and that markets can stay irrational for long periods of time.

I’ve had some FANTASTIC more macro-themed episodes with professionals that track these things daily. If you’re looking for a more “overall view” of financial markets – start there.

Here are some key pieces of the puzzle that are shaping my more macro view:

Debt

I couldn’t not start this with Debt.

Debt Levels Globally are insanely high. Indebtedness of the world. Corporate, Household, and this time Government Debt is insanely high.

Global Government Debt is expected to be $277 Trillion Dollars at the end of 2020. That number doesn’t even make sense, if we convert it into seconds, 277 trillion seconds is the equivalent of 8.8 million years.

It’s been estimated that Jeff Bezos increases his net worth by about $321 million a day. At that rate, you’d have to work for close to 863,000 days, or 2,364 years, to reach $277 trillion.

These numbers are staggering, and the repercussions are going to be felt eventually.

So debts are insanely gigantic, so to avoid an interest induced death spiral, rates will basically stay low forever.

In the USA, our Government Debt or money printed in 2020 is near $5 Trillion. From 1776-1996: Government accumulated $5T over this 220 year span.

Debt and Credit have been such a big part of our lives over the past 70 years, things cannot simply continue on the way that they have forever.

Wealth Inequality

Massive Debt Levels have contributed (at least partially) to a pretty dire state of Global Wealth Inequality.

Over the past 30 years, the top 10% have ~⅔ of the Wealth, and the bottom 90% have the remaining ~⅓:

Other

This is definitely not an exhaustive list of the major trends that are happening. Some of the more key ones that have been discussed at length on most of the episodes. A few other key trends include the following.

Pensions are underwater and a massive generation of Baby Boomers is moving toward retirement.

“Inflation” is not present according to the CPI measurement.

Once you look inside this bucket, you can see that deflationary price pressure on Goods – thanks to globalization and cheaper manufacturing costs overseas – is offset by much higher prices on Services – Medical, Schooling for example.

Another fascinating way to look at it was brought up by Vincent Delaurd, the “Boomer CPI” & “Young CPI.” This highlights the major differences in price changes felt in the purchases by “Boomers” and “Young People.”

Inflation has reared its head in Asset Prices, which is exacerbating the wealth inequality. Those with the Assets (Older Generations) have benefited from the price increases and those without (Younger Generations) have ‘missed out’ on the wealth generating impacts of these rising asset prices.

Going Forward

It’s VERY difficult to condense macro trends into a single post. But the key takeaway is that we’re in uncharted territories and it’s difficult to predict where we go from here. Money printing won’t stop. You can’t put this genie back in the bottle.

Think the way that you’ve always invested will work the same way going forward? Likely not.

Some VERY interesting things that once were in the fringes of conversations, now are becoming more possible to ‘give it a shot’:

Modern Monetary Theory (MMT). I’ve been digging into this in much more detail. A reframe of “Government Debt” from “Debt” like a household to more of a “Monetary Creation Event.” As a government we can never run out of money, because we issue the currency and can print as much of it as we’d like.
Universal Basic Income (UBI). The stimulus that started with the COVID fiasco. It’s coming.
Bigger Governments. A more likely scenario. The march toward socialism. Also, Increased Taxes.
Central Bank Digital Currency (CBDC). Ability to push fiscal and monetary policy directly to you in your pocket. I believe the USD is starting to be challenged as a global reserve currency, but the YEN/RMB/EUR won’t replace it. CBDCs will come, whether there’s some sort of global CBDC, this will be interesting to watch.

“Once your worldly reputation is in tatters, the opinion of others hardly matters.”A german saying (translated to english) that was brought up by Ronnie Stöferle

This is so relevant now. Things are broken, why not try something new?

Unfortunately, a lot of these things spell the death of financial privacy, and potentially hurdle us toward the death of Fiat Currency overall. This path we’re treading makes both more likely.

Public Market Picks

Given the Macro Backdrop, we’re in unprecedented times. Looking at historical rates of returns, and questioning those common ‘mistaken beliefs’ about the market are key.

We talk about “Mistaken Beliefs” that support different bubbles a lot in the Jesse Felder Interview (originally he had attributed it to George Soros – every bubble has mistaken beliefs that support it – but I couldn’t find it). Some key (potentially mistaken) beliefs hyper-present during this time:

No matter the price I pay, if I hold long enough I’ll always be made whole.
Mistaken Belief for sure – purchase in the late 1960’s, or buy at the 1929 peak: you lost money for 20+ years of being in the market.
Put money in stocks, no matter what.
Stocks are expense by nearly every valuation metric at this time. Buying now? Well, 20 years from now you could still be underwater.

These beliefs have driven a massive passive investing bubble, and US Equities are overvalued by nearly all measures.

US Equities, Growth and Momentum have dominated the markets. Will we see a return to “Value Investing”? Who knows, but on a relative valuation basis there are a lot of emerging markets, Value, Commodities, Energy have been beaten down beyond belief and may offer some desirable valuations at these levels.

Oil & Energy are interesting plays here. In the episode with Art Berman we go into great detail on why Oil isn’t going anywhere soon and Jesse Felder really makes the case for allocating a bit more of your portfolio to Energy Equities.

Asset Allocation

The 60/40 Asset Allocation is absolutely dead.

This has been the “Standard” for so long, and now bonds have next to no yield (or negative) and don’t offer the protection they once did.

What does this mean? Well, a lower overall allocation to bonds – but where does that capital go?

Highly recommend listening to Vincent Deluard on Death of 60/40 portfolio. Investors must go out on the risk spectrum for diversification. Investors want to replace that bond allocation, which has major implications for markets overall.

Gold

Gold, which I’ve written an entire article dedicated to the yellow metal, likely deserves a small (ish) allocation in most investors’ portfolios. However, in times of economic uncertainty, and with Inflation (likely) on the rise – perhaps it makes more sense now to have a bit more.

It’s been a Store of Value for thousands of years, is under-owned across portfolios, and is relatively undervalued versus other assets.

There’s a great interview with Rob Price on Gold’s place in an investment portfolio and also talk at length at why Bitcoin may offer similar attributes.

I don’t understand how all roads don’t lead to Gold, or at least a more sound version of money, and that we’ll have inflation at some point in the near future.

Cryptocurrency: Bitcoin

I heard Robert Breedlove describe Bitcoin as:

“A non counterparty insurance policy on the legacy central banking system. An insurance policy that becomes more valuable the more dollars they print.”– Robert Breedlove

Bitcoin has outperformed every other asset class on the planet for the last 10 years. What does this say about the confidence in the “current system”?

Painting a broad brush over the entire “Cryptocurrency” ecosystem is difficult. There are so many niches, and sub-niches that are VERY interesting.

In terms of investment. For the wealthy, there are two big things to be scared of – hyperinflation and confiscation of wealth. Judging by the route we’re going, the probability of one, or both of these coming into fruition is getting higher. Bitcoin offers a potential liferaft for both of these.

Bitcoin is a 12 year old asset and highly speculative and volatile, yes, but the stakes have simply gotten too high for an investor to hold absolutely 0 bitcoin in their investment portfolio.

What has happened for Bitcoin lately? In November:

Stanley Druckenmiller Announces Bitcoin Position
Bill Miller Strongly Recommends Bitcoin
Citigroup Research Publishes YE 2021 BTC Price Target as High as $318k
Blackrock Fixed Income CIO Rick Rieder Says Bitcoin Could Replace Gold
Guggenheim Files to Buy Up to 10% GBTC Position in $5.3bn Macro Fund
BTIG Research Publishes YE 2021 BTC Price Target of $50k
AllianceBernstein Recommends Allocation to Crypto
Skybridge Files SEC Amendment to Invest in Bitcoin with $3.6bn Fund
Ray Dalio Says He “Might Be Missing Something” With Bitcoin
Niall Ferguson Writes Bloomberg Opinion “Bitcoin Is Winning the Covid-19 Monetary Revolution”
Square Reports Q3 Bitcoin Revenue and Gross Profit +11x & 15x YoY
Wyoming Elects Bitcoin Bull Cynthia Lummis As US Senator
China Construction Bank to Issue $3bn in Bonds on a Blockchain, Tradeable for Bitcoin and Dollars

Well those certainly are some events. Looking for more information on Bitcoin? Highly recommend these podcast episodes:

Cryptocurrency: Non-Bitcoin

Outside of Bitcoin, there are SO MANY other incredibly interesting (and potentially lucrative from an investment perspective) things going on.

Some examples?

You can purchase Personal Tokens (almost like an income share agreement or ‘investing’ in a person – a la Thiel Fellowship), Invest in Digital Real Estate and bet on the coming Metaverse, Lend your crypto in Decentralized Finance and earn 100%+ APY, or purchase digital art.

Non-Fungible Tokens (NFTs) are VERY fascinating.

I actually believe that Digital Art – facilitated by NFTs – will be very big in the future. There are a few good NFT episodes in the mix, highly recommend listening to the episode with Devin Finzer of Opensea to get a good overview of their potential.

Real Estate

There are many different ways to get “Real Estate” Exposure in a portfolio. Each comes with its own pros and cons. I’ve been a fan of Fundrise for some time now (Publicly Non-Traded REITs), for it’s easy & (relative) liquidity.

I find Agriculture/Farmland investments to be extremely interesting, and think that AcreTrader is really opening a lot of doors with their platforms for investors to get access to this asset class.

I’m still very interested in Single Family Rental Properties, and think that they make sense in many investors’ portfolios. My biggest issue with SFR investments is their lack of passivity. We like to think that they’re ‘passive’ – but they’re really not, even with a good property manager. In my mind, it’s simple: buy a house, put in a tenant and have them pay down your mortgage… Seems easy enough? But unfortunately, it’s just not that passive.

Assuming you can find some nice ~10% CAP rate SFR investments in the US and if you’re ok with some admin work – these likely make a lot of sense for the long term. Looking at “Linear Markets”, ideally in a warmer part of the US would likely be a pretty good investment over the next 20 years. Buying for cash flow, not for much capital appreciation.

International Real Estate is currently and is something that has been VERY interested for me. There are not as many tax advantages for the US investor (versus investing domestically), but I still really like the idea of Geographic / Currency Diversification. I’d love to have a real estate asset and rental income in some foreign currency.

Other Alternative Investments

When Public Market / Traditional Investments look less appealing, alternatives start to appear. These days, there’s more than ever.

I think startups are mostly insanely overvalued, but WeFunder is offering many different forms of Startup Investing. Not only just for equity, there are loads of fun debt options as well. If you’re a founder thinking about Raising Capital (high valuations, you know), definitely check out the podcast with Patrick Henry. He’s a legend in this space and shares lots of great advice on how to think through these different methods.

There’s a niche market in Private Service Businesses, and I think Kingmakers is doing something really cool. You can buy these sorts of businesses (e.g. Roofing / HVAC) for 1-3x EBITDA and have a nice little cash cow. Roll them up together and you could build a pretty nice service-empire.

Private Credit, like that offered by Cadence, is really fascinating. If you’re an accredited investor, highly recommend you check out the platforms. Short-term double digit returns? Sounds great.

Investing in Royalty Rights, like that with Royalty Exchange, is another really fascinating offering.

Summary

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”Mark Twain

In summary, Financial Markets are not easy. There are loads of intricacies and things moving around at any given time. I do know that with markets moving the way that they are, you can invest like you always have (e.g. 60/40 Portfolio) or you can educate yourself and think more broadly about some of these trends.

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Episode Transcript

Ben Lakoff, CFA

Ben Lakoff is an entrepreneur and finance professional. He has developed strong global finance experience through 10 years of international assignments in the US, Brazil, Afghanistan, Southeast Asia, Czech Republic and through the award of his Chartered Financial Analyst (CFA) certification.