Ample Liquidity and Productive Assets
October 2008
I was sitting in my villa, sweat-drenched flame retardant coveralls zipped down to my waist, just finished another 15 hour day in Qatar. The cold air of the wall mounted AC above the TV blew directly on me as I watched CNBC.
Working on a rocky peninsula jutting out into the Persian Gulf meant unrelenting heat most of the year once the sun rose out of the desert haze in the morning. I’d sweat through my boots by lunch, lay on the floor of my office for a half hour on the really brutal days, pound water and electrolytes, then go back to work, repeat for 6-7 days a week. Each payday I would throw most of my paycheck into what felt like a bottomless black hole of $60,000 in student loan debt.
That would be my life for years still to come, but today I was watching the stock market drop 700 points live on TV as President Bush said he had to abandon the free market system to save the free market system.
I almost kicked the TV over in rage seeing no consequences for bad decisions, but instead changed clothes and went to do deadlifts.
Fast forward to March 2020 and we got to relive this trauma and insult with QE Infinity.
Instead of banks it was overleveraged, poorly run large corporations with not enough cash on their balance sheets who received free money while small business imploded.
We are told to have an emergency fund in case unexpected bad things happen in life, but the CEO of Boeing can’t figure it out for $11 million a year.
By continuing to reward irresponsible behavior, feels like the Federal Reserve is trying to finish the job the Taliban tried to do.
Instead of an AK, The Federal Reserve slips low interest rates and monetary easing over my head to suffocate the value of my labor, stealing years of my life like a necromancer as they drive the prices of real assets higher to prevent any volatility or deflation happening.
Even more unforgivable is politicians and the Fed know geopolitics of the world are trending to more volatile and tech is trending towards deflation, so by continuing to ease and keep interest rates low, they are setting all of us up to be ruined by future deflationary shocks.
I have zero doubt that when deflationary shocks happen, we will be back to QE Infinity immediately because there is NO appetite for deflation that I can see anywhere in the world among central bankers or politicians.
So in this reality, what is the real value of money?
Money
I have been doing a lot of reading on money, and Anthony Deden’s writings at the Edelweiss Journal really resonate with me. I would like to share a few quotes from Issue 4, January 2012 - almost a decade ago - which among other things is making me think about how to best be productive in my path forward in life.
“It comes as no surprise to anyone that the setting in which we employ our capital is utterly corrupt. The hopes and dreams of a new era have been destroyed…The official statistics are all phony. All we have is ever-increasing intervention and manipulation by central planners around the world…if dishonest money begets dishonest accounting, it also begets dishonesty and corruption in every aspect of life - from the boardrooms of the big bankers down to the lowest economic agent.”
“Money is one of the primary measures of value in any society, perhaps the primary one, the principal repository of value. As such, money is a central source of stability, continuity, and coherence in any community. Hence to tamper with the basic money supply is to tamper with a community’s sense of value. This is precisely the reason for the underlying moral crisis of our times…one cannot escape the consequences of so much misbehavior nor dismiss the inescapable impact. From country to country and region to region, in small or large measure, and sooner or later, we consider the eventual consequences. The list is daunting: political instability, stagnation, rebellion, social unrest, hunger, protectionism, nationalism, more intervention, regulation, confiscatory taxes, oppression, joblessness, insecurity, class warfare, limits to competition, greater government control in more aspects of daily life, the bankruptcy of pensions and the impoverishment of billions. Perhaps even revolution and war.”
“Most financial and investment professionals fail to make the crucial distinction between what is economic and what is purely financial…We have become accustomed to seeing higher asset prices, more money, and greater financial activity and counting it all as desirable growth. As a consequence, we have long been used to viewing our investments as a means of ‘making money’ rather than with the eyes of owners intent on accumulating capital and productive assets.
For the sake of conviction and boldness, I see our investment practice forward having just two simple and distinct pillars: first, ample liquidity, and second, a collection of permanent and productive assets which we can add opportunistically.”
“If we are going to have cash or liquid assets for the purpose of waiting out the uncertainty or as a means of acquiring more productive assets, we cannot afford to have the kind of cash that is merely the promise of an insolvent government - thus lacking value of its own - no matter how popular it may be and no matter the relative trust people assign to it from time to time…viewed as cash, precious metals provide us the freedom from the immoral banking system that envelops us. Most people have cash in some variety of paper. That’s fine, but in reality, they don’t quite have it. They think it is in the bank because it says so in their monthly statement, but the bank doesn’t really have it either. I don’t see the merit in having money that requires me to trust someone…Our own liquidity is not subject to credit risk, liquidity risk, counterparty risk, rating risk, interest rate risk or duration risk. Furthermore, it is not subject to political risk…lastly, with gold, there is no possibility of betrayal.”
“The whole of inflationary policy depends on the confusion in any system of indirect exchange between money and capital - the illusion that pieces of paper are somehow wealth. If so, seeking to find ‘value’ while defining it by using the very illusory paper in which it is expressed, is sheer nonsense. This is not to say that I am against the idea of investing in the securities of exceptional companies. On the contrary, I have greater trust in the ability and character of some entrepreneurs than in the promises of the state and its bankers. My point is that we must define what is exceptional without relying solely on the existing yardsticks of ‘value’ since they are generally based on money price inputs that are plain false. Investing in the securities of companies demands a complete re-thinking of what is value - to us.”
Ample Liquidity and Productive Assets
The last three pieces I have written, WSB and Credit Markets, Decentralized Future, and The Strait of Malacca have been examining what I think are different facets of risk and trends happening today as I try to piece together how all these factors fit in an investment practice focused on ample liquidity and productive assets.
To summarize the risks:
Our politicians and Fed will not stop easing and keeping interest rates low. After reading Lords of Finance I understand why. They are so terrified of a deflationary depression and the political consequences, they have a near zero pain tolerance for any deflation. In addition they are like a struggling Atlas trying desperately to meet the world’s liquidity requirements for dollars during any event which spooks global markets and causes a sudden rush for the safety of the dollar.
It is not an enviable position to be in, but since they refuse to tell the truth, continued to reward bad behavior, and have stolen years of my life from me, I have no sympathy for them.
Now add in the geopolitical backdrop of the US continuing to be more inwardly focused and countries grappling with how to navigate a world where American Hegemony is being replaced with American Disinterest. This presents very real problems for a world which depends on the oceans staying peaceful under American hegemony for their food and energy imports as well as manufacturing imports and exports.
As Peter Zeihan lays out, with America having most of their trade deals done, Mexico by far being our most important trade partner, and a lot of us war veterans more interested in buying a house and taking a hunting trip than reenlisting to defend Taiwan, countries will realize the world is suddenly a very cold place with an uncaring Hegemon who won’t hesitate to turn foreign generals into grease spots with drones when it feels like it because the US is food and energy secure, but no longer cares about keeping the world safe for everyone else who is not.
When the EU tells America to go home and does a trade deal with a government genociding part of their own population, hope the EU won’t be surprised when they ask for help in the world and the only response they get back from the Hegemon is,
“We told you not to do this and you said you could take care of yourself. Thank you for the invitation, but unfortunately we must decline.”
The Age of the Disinterested Hegemon (TM) will be real.
When the world catches up to this new reality, we will see if there is a deflationary event where everyone rushes to the safety of the dollar initially followed by inflation as shipping, commodities, and energy prices rise as countries now realize they have to factor geopolitical uncertainty into the equation.
Will be normal for almost everything to be more expensive in that world.
To summarize the trends:
I was fairly lukewarm about decentralized finance until GameStop and Wall Street Bets. What happened with Robinhood and Citadel exposed weaknesses in the existing financial plumbing, plus the response from young people who are now used to having the ability to trade 24/7 without every being throttled on trades for cryptocurrencies was interesting. They were outraged at there being limits and didn’t care what the reasons were.
I think the weakness in financial plumbing and the reaction will fuel the move to decentralized finance (DeFi), and expect it to be worth trillions now.
Which leads to bitcoin. I have friends who can articulate why they have serious concerns about bitcoin and effects on society and global order, and friends who can articulate why it is important as a counter to a Federal Reserve which feels like it has done nothing but steal years of my life from me.
The more I read history, study risks and trends I see in the world, and think deep on the path I want to walk in the future, the less the differences matter to me between currencies, gold, and bitcoin.
I am starting to look them all as just liquidity on my balance sheet which I want to use to invest in productive assets run by prudent individuals who are trustworthy and honorable. That is where all this writing, studying, and reading has lead to for me.
Whether I find those individuals in my local area and I can make my community stronger, or anywhere in the world where the business is scarce, durable, and independent run by likeminded people, that is what I am really looking forward to now and focused on.
I don’t think we can avoid volatility in the future and this has happened before. The 15th century was not pleasant for a lot of people as trade was decentralized, just payments are catching up in modern centralized world now.
The Decentralized Future colliding with the Age of the Disinterested Hegemon doesn’t sound very tranquil.
So for me, the importance of building an investment practice grounded on ample liquidity and productive assets is the key for me to navigate whatever the world decides to give me, whether tranquil or volatile.
Dollars, gold, and bitcoin, it is all just liquidity which I can use to invest in productive assets run by other prudent men who are honorable and I can trust, because working in decentralized societies taught me personal honor becomes more important, not less, so that is where my focus will be going forward.
I hope I am explaining that in a way which makes sense and is reasonable.
I am convinced the right path for me, not just to take care of myself and my future family, but to continue to serve others, is to share what I am doing. I am currently working on a portfolio thesis built on the pillars of ample liquidity and productive assets which I will share with everyone.
Gerald Morrison, PhD has been extremely generous with his time in helping me model asset correlation and portfolio performance with machine learning on the basis of ample liquidity and productive assets, so it won’t just be me saying hey I think this will work, and you can thank Chris Dorsey for telling me I needed to share what we were working on with everyone.
If you want to know more on how machine learning is used for testing portfolio construction, Gerald lays it out in this video.
I am calling it the Florentine Portfolio and it is next.
So you know what to expect, the entire point of all this for me is to build wealth and live well.
What that looks like to me is a portfolio which is tax efficient and I only need to rebalance once a year, preferably with additional capital.
I know not everyone is an accredited investor so I am working on two ways this can be done.
It will be possible to express this view using ETFs, or the way that I am going to focus on in the Fortress, by investing in individual companies and as an LP in other investments with GPs who are prudent, honorable men, that I trust with capital. This will take a bit more work, but it is enjoyable work to me.
And as King Solomon said, a man can do no better in life than to be content in his work and have a good meal with friends.
Best Regards, Radigan