Debt levels in the U.S. have increased at a large amount since 2000.
In 2000, the average debt per taxpayer was $55,750 meanwhile the average debt per taxpayer today is $222,191.
Despite the quadrupling in debt, real median personal income hasn't even doubled and the interest expense per citizen is based on interest rates that are suppressed downwards toward 0% due to the Federal Reserve's bond buying program.
This debt can weigh down growth in GDP in the future and will probably be difficult to pay back other than through inflation.
Source: Horizon Kinetics; National Debt Clock; St. Louis Fed
This picture piggybacks on the image below that shows annual inflation in the US per year going back to 1960.
The focus on this picture is the devastating effect that inflation can have on financial assets like stocks if the annual inflation rate exceeds the nominal return of the asset.
From 1973-1982, when the annual rate of inflation had certain years during that period of double digits, the S&P 500 had an annual return of 1.8% before inflation or a cumulative return during this period of 19.1% before inflation.
But after inflation was factored in the annual return was -6.5% per year and the cumulative return for this period after inflation was -48.8%.
Real estate on the other hand did much better than the S&P 500 with a 9% annual increase for home prices and a 7.4% annual increase for rentals.
Source: Horizon Kinetics; St. Louis Fed, Bloomberg, Factset
The average inflation rate per year for the US from 1960 to 2021 has been 3.64% despite being much higher and much lower in certain years.
The 1970's saw the highest rates of inflation as inflation reached levels as high of 13% until Paul Volker raised the fed funds rate to 20%.
This worked to bring down inflation where it reached its lowest levels since the early 1960's.
Source: Horizon Kinetics; St. Louis Fed Consumer Price Index
This shows the biggest bubbles over the last 400 years according to Deutsche Bank.
The 2 biggest were the Tulip Mania in 1637 and the Mississippi Company in 1729 and the 3rd biggest is still going on as I'm writing this on February 21, 2021 - Bitcoin.
A bubble that probably wasn't thought of that much was US radio stocks in 1929 since all stocks during that time period had large drops for the next 3 years so I rarely see anybody focus on a particular equity sector when referring to the Great Depression.
The NYFANG index consists of Alibaba, Amazon, Apple, Baidu, Facebook, Google, Netflix, NVIDIA, Tesla and Twitter and is an interesting inclusion in the image because it is also still going on today.
Source: Absolute Return Partners; Deutsche Bank
This picture summarizes the different roles for various companies in the semiconductor market.
There are 5 parts which are chip design, equipment, fabless, foundry and IDM.
IDM stands for integrated device manufacturer and are the companies that do design, manufacturing and selling.
The foundries, which are the manufacturers of chips, currently have one of the biggest roles in the industry today because there are so few foundries and they are so concentrated in one area of the globe.
The fabless companies design their chips but don't make them; instead they contract a foundry to produce them and that foundry is most often TSMC.
A lot more attention has been focused toward the semi-industry due to geopolitics and because of the huge role that semis have in our daily lives today since so much of the tech that we use and will be using in the future has semi-chips in them (computers, phones, autonomous cars, TVs, robots and many others).
In his article titled "What's an API?", Justin Gage defines APIs by writing, "Applications are just a bunch of functions that get things done: APIs wrap those functions in easy to use interfaces so you can work with them without being an expert.
Packy McCormick goes on to mention that APIs are what allows software to interact with other software.
An example that I like to use when trying to explain APIs is part of Uber's tech stack.
Uber has many functions in their app such as payments, text/call and GPS but Uber didn't create the code for these functions because it would take a lot of time and work to do this from scratch.
What they do instead is use APIs built by other companies such as Google Maps for GPS, Twilio for text/call and Stripe for payments.
The image on the left shows a bunch of the leading APIs today categorized by their function and with software being such a critical component of our daily lives these days, I view APIs as one of the most interesting opportunities from a tech stack standpoint and from an investment standpoint.
Source: APIs All The Way Down by Packy Mccormick
The picture on the left shows a list of some of the biggest empires in the world going back to 600 AD written by Ray Dalio.
The length of time of the empires aren't exact and the list tries to capture the point from rising global power to the point of declining global influence.
The longest empire in length was
the Abbasid Caliphate empire which ran from 750 AD to 1258 AD or 508 years.
The current empire of the US started in 1776 and is still going on which put its length at almost 245 years as I'm writing this.
Source: The Changing World Order by Ray Dalio
This chart measures the amount of debt, inequality, and income for each state.
The most indebted state is Illinois when pensions are included and results in a 73% state and local debt plus pension liabilities as a percent of GDP.
The least indebted state is Wisconsin.
New York is the the most unequal state based on income when dividing the income of the top 5% of the state by the income of the bottom 20% which results in a multiple of 41.4 and the least unequal state is Utah with a multiple of 20.
The highest earning state is Connecticut with $66,978 per capita income in 2012 dollars and adjusted for inflation.
The lowest earning state is Illinois with $40,927 in real per capita income (2012$).
It will be very interesting to see how this plays out over the next decade since the coronavirus has wreaked havoc on many local and state budgets causing large deficits that will need to be fixed through spending cuts, increased revenues, more borrowing, restructuring or some combination.
Source: The Changing World Order by Ray Dalio
The top chart on the left shows the monopoly power of Big Tech and the bottom chart shows the monopoly power of many other industries ranging from washer and driers to peanut butter to domestic airlines.
The chart shows that there are many industries that are a lot more concentrated in the hands of fewer companies than you probably originally thought.
For example, 87% of the mayonnaise market is concentrated between just 2 companies, Kraft and Unilever.
The monopoly power of big tech today is pretty well known as they are currently facing lots of scrutiny from the Department of Justice as I write this on 10/17/20 of being broken up.
The industries in the bottom chart are seeing some disruption in many areas since it's gotten easier to access distribution for products because of the internet and it's much easier and cost effective to market a product directly to the consumer on social media.
Therefore, the bottom industries aren't seeing that much scrutiny from the Department of Justice but Big Tech's monopoly power is unlikely to be disrupted over the next decade or two unless there is some sort of antitrust regulation which breaks them up or evens out the playing field.
The majority of U.S. debt is owned by U.S investors at 41.7%.
Coming in second is the Federal Reserve and Social Security Insurance.
China is believed by most to be the biggest holder of U.S. debt but only holds $1.1 trillion which is less than Japan and the Department of Defense.
Source: US Treasury; Blomberg; Logoslp
Advanced economies appear to currently be in the late stages of their debt cycles.
When exactly their cycles will end isn't known and could last longer than expected as central banks around the world engage in different forms of monetary theory to try and help their economies.
The last debt cycle ended right after World War II and debt levels reached around 125% of GDP at the time.
Debt-to-GDP has currently passed 125%.
The highest debt-to-GDP ratio right now is Japan and they are around 200% debt-to-GDP.
There are some benefits that Japan has with their high debt ratio like having their debt being owned internally in Japan as opposed to the US who has their debt owned externally in other countries around the world.
Whether the U.S. can grow GDP fast enough through innovative industries such as robotics, AI, 3D printing and others to bring this ratio down or continue on their current path at the risk of hurting the dollar as the world's reserve currency remains to be seen.
This chart shows what the 10 year return has been for the S&P 500 based on its starting P/E multiple.
The starting multiple has been one of the most reliable predictors of how the index will do over the next 10 years.
The scatter plot shows that once the starting P/E multiple hits 25 or higher the 10 year return becomes negative.
It's hard to predict what earnings are today because of coronavirus but it is estimated that the P/E ratio is over 30.
Therefore, the 10 year return for the S&P 500 over the next 10 years isn't very promising right now.
When the US dollar was backed by gold the US couldn't run huge deficits because gold backing created an adjustment mechanism to balance out trade.
There were a couple exceptions since 1900 which were World War I and World War 2 where the US had huge surpluses as they exported a lot of supplies to their allies and the other exception was during the Great Depression where the US ran a deficit but this eventually adjusted.
Since the early 1980's the US learned they could run huge deficits with other countries since the US dollar stopped being backed by gold which got rid of the adjustment mechanism that forced trade to balance.
The numbers on the y axis in black numbers are savings rate percentages and each bar (blue, red or grey) represents an income distribution.
The chart depicts an unpleasant glimpse of income inequality as the bottom 90% of income earners have a negative savings rate over the last 3 decades.
Meanwhile the top 10% have been able to save money each decade allowing them to accumulate income producing assets and further increase income inequality.
Source: Deutsche Bank Research; https://www.arpinvestments.com/arl/five-lessons-from-history-5-5
This image was created by Ray Dalio and depicts the typical stages that an empire goes through as they rise and fall.
The United States was in the first stage "New World Order" in the late 1940's after World War II.
The world then experienced mostly peace and prosperity up with a few hiccups in between until the late 2000's when there was a debt bubble mostly related to real estate.
My guess is the US is currently somewhere between where the image shows "Debt Bubble and Big Wealth Gap" and "Printing Money and Credit".
For the first time ever the price of oil went negative.
The main reason besides a huge drop in demand due to coronavirus was because speculators who buy oil futures contracts in hopes that they can sell it to a buyer at a higher price in the future and funds like USO who buy oil futures contracts to track the price of oil dumped their futures contracts on the market all at the same time.
If the holder of a futures contract holds them until expiration then they have to take delivery of the oil but they would then have to store the oil and that cost money in addition to finding a place to store it.
Since speculators and funds didn't want to take delivery of the oil and demand was so low, they had to pay buyers to take the contracts off their hands and this caused the price to crash into negative territory.
Carl Icahn on Bloomberg in response to the price said, "We'll never see that again."
Source: Deutsche Bank, Globa Financial Data, Marketwatch
This graph shows a noticeable disparity in US wealth over the last 40 years.
Both the middle income and lower income's share of the wealth in the United States has almost been cut in half.
Meanwhile the upper income's wealth has increased by 33% from 1983 to 2016.
Source: Pew Research Center Analysis; https://www.profgalloway.com/capitalists-or-cronyists?mc_cid=4b4a63309c&mc_eid=5edaac4958
The graph on the left represents the US wealth-to-GDP ratio through the 2nd quarter of 2019.
The ratio was at 530% compared to its long term average of 380% last year so in other words wealth has been outpacing growth in GDP for a while now.
The most common forms of wealth are equity holdings, pension savings, bond holdings, property, private businesses, and cash.
This graph was in Niels Clemen Jenson's Absolute Return Partner's April 2020 letter where he wrote, "Total wealth in society cannot grow faster than nominal GDP over the long-term, and that every country has a well-defined mean value in terms of the wealth-to-GDP ratio. In the US, that mean value is 380%. In other words, when the actual wealth-to-GDP ratio deviates too much from 380%, you know that the ratio will mean revert at some point. You just don’t when."
Niels mentions that the wealth statistics published by the Federal Reserve Bank are delayed by almost a quarters delay so this ratio may already be falling due to the coronavirus disrupting both the numerator and the denominator of this equation pretty substantially.
Source: The Wall Street Journal (the Daily Shot); April 2020 Absolute Return Partners Letter
OpenTable is a popular online restaurant reservation service.
The number of U.S. restaurant reservations on OpenTable saw a year over year growth rate of -100% due to the corona virus pandemic.
In other words, the number of reservations went to 0.
I don't think any American predicted in early March that in 2 weeks the whole restaurant industry in major cities of the U.S. would only be open for delivery and take out.
Source: OpenTable, Wall Street Journal, @SoberLook
DNA (Deoxyribunocleic acid) is present in almost all living organisms. It is the self-replicating material that is the carrier of genetic information and is a part of chromosomes.
Chromosomes are threadlike structures of nucleic acids and protein found in the nucleus of most living cells which carry genetic information in the form of genes.
The average human body contains around 37.2 trillion cells and inside those cells is a nucleus where chromosomes reside.
Each chromosomes is made of protein and a single molecule of DNA.
The earliest finds of homo sapien ( the only human species living today) skeletons show that humans first appeared in Africa around 150,000-200,000 years ago.
This picture shows how humans migrated around the globe after they first appeared in Africa.
As you can see from the map, they started out in Africa (far left of the map) and then migrated toward Asia and Eastern Europe, then Western Europe and then to the Americas.
The numbers on the map depicts in years how long ago that humans migrated to each continent.
Technology wasn't advanced tens of thousands of years ago so travel was done on foot for a long time which created barriers to where homo sapiens could travel to.
For example, the first homo sapiens to travel to the Americas did it by a land bridge on foot but that bridge eventually melted as climates on the planet got warmer causing these humans to be isolated from Europe and Asia and fall behind technologically from the rest of the world.
Source: Ian Morris, Why the West Rules - For Now; Li Lu - A Discussion of Modernization
The proportion of BBB - the lowest investment grade rating before junk - bonds has surged in proportion to total U.S. corporate debt from the mid-to-late 2000's.
Frank K. Martin points out that investors putting more money into BBB bonds represents their willingness to take on more risk in search of return due to Central Bank policies around the globe to push down interest rates.
He also points out that rating agencies have become more lacks in their rating standards.
In 2000, net leverage of BBB bond was 1.7x on average based on Net Debt/EBITDA but in 2017 it was 2.9.
80% of entrepreneurs make the same amount of money they would if they were employed.
So a lot of entrepreneurs are really just starting a company so they can create a job for themselves and be their own boss.
The median revenue of an owner-managed firm is $90,000 and 81% of founders have no desire to grow their business since most founders are just trying to make a living and not trying to become the next Facebook or Google.
Source: Reactionwheel.net by Jerry Neumann; The illusions of Entrepreneurship by Scott Shane
Regulators require banks to set a certain amount of capital aside and hold it in reserve.
Central Bank authorities in the U.S. set the amount required by commercial banks to be held in reserve.
Excess reserves are the amount of reserves that are above the required amount.
As shown in this image, excess reserves surged after the financial crisis in 2008 to help make the banking system safer.
In September 2019, rates in the overnight lending market surged to 10% despite interest rates being in low single digits.
Why the big banks were unwilling to lend out their excess reserves despite the 10% interest rate being so much higher than alternative opportunities to invest in is unknown but part of the reason could be due to regulation stemming from the Dodd Frank Act which was created in response to the financial crisis.
Source: Bloomberg; Grant's Interest Rate Observer
Niels Jenson, the author of the investment letter where I found this graph, wrote the following right before inserting this graph, "And to all those of you who think climate change is a storm in a teacup, I suggest you take a long look at exhibit 3 below."
Carbon dioxide levels are currently at there highest level during the last 3 glacial cycles.
In order to decrease the level of greenhouse gasses to better cope with climate change, there will very likely be a continuation of switching transportation from fossil fuels to electric ushering in what Niels Jenson refers to as one of the mega trends he sees playing out in the future - the electrification of everything.
Source: BlackRock; ARP Investments
The chart on the left shows the biggest percentage declines in the S&P 500 going back to 1928.
The biggest drop was during the Great Depression and the second biggest drop was during the 2008 Global Financial Crisis.
This chart points out that if you're holding cash waiting for a 50% drop in the market to occur, the probability isn't on your side since this rarely occurs.
Since the market rarely drops over 50%, it makes much more sense to be invested for the long term and to not try to time the market.
Source: Eyes on the Market by Michael Cembalest
S&P 500 Annual Nominal Returns from 1928-2019.
Majority of the years have positive returns.
Over a 10-year investing period 94% of the returns in the S&P 500 were positive.
Over a 20-year and 30-year investing period 100% of the returns in the S&P 500 were positive.
This is despite the Great Depression, World War II, Vietnam War, Terrorist Attacks, Assassination of JFK, and many others.
Source: Charlie Bilello Twitter (9/23/19)
16,242 new condos have been built in New York City since the beginning of 2013.
More than 25% of these new condos haven't been sold.
New condos are still being built which will add to this inventory glut.
There are also more than 5,617 total units that have listings on StreetEasy but haven't finished construction yet.
The majority of these condos are high-priced and out of reach for the average buyer.
Robots have been increasingly replacing humans in the workforce.
The graph on the left shows the annual supply of industrial robots worldwide.
In 2008 there was an annual supply of a little bit more than 100,000 industrial robots.
In 2016 there were 300,000 and that number was estimated to increase the annual supply in 2008 by 5 times in 2020.
Source: ARP Investments, Pictet Asset Management, IFR
Most divide the world in to two categories: developing and developed. In Han’s view the world has progressed a lot from when these two categories were first drawn up. Hans separates the world into 4 categories based on 4 different levels of income.
They are as follows:
Level 1: $0–2 a day
Level 2: $3–8 a day
Level 3: $9 to $32 a day
Level 4: More than $32 a day
Level 1: No shoes to walk with so they travel everywhere by foot. People on this income level have to walk about an hour just to get water because the well is a far walk away. They are mostly farmers and only have a small amount of food each day to eat.
Level 2: People on this level have a bike so it takes them only 30 minutes to get water from the water well. They have shoes and a small amount of electricity.
Level 3: Have a motorcycle and have enough income to have savings which can provide healthcare if they get income a motorcycle accident. The problem is that this money is mostly saved up for kids education and if they get into a motorcycle accident then they will have no money left for the kid’s education.
Level 4: People on level 4 have access to a car and have clean water in their homes. They also have reliable electricity which allows the kids to do their homework at night with a lightbulb. They also have a stove.
Source: Factfulness by Hans Rosling and Gapminder (2018)
The image on the left shows real returns by decade for various asset classes.
It also shows economic activity, interest rates, nominal debt growth, and real debt growth all divided up into decade.
Source: Paradigm Shifts by Ray Dalio
There has been a steep drop in the effective corporate tax rate in the USA since the 1940's to the present.
The highest the effective corporate tax rate was in the mid 50's percent during the 1940's.
Today that rate is close to 10%.
Source: Paradigm Shifts by Ray Dalio
In the business cycle leading up to 2000 we were in a tech bubble, in the cycle from 2002-2008 we were in a housing bubble, are we now in a bond bubble?
It looks like it to me as negative yielding debt has reached a record high of $13 Trillion.
Negative yielding means that investors have to pay the issuer to have their money stored.
85% of government bonds in Germany are negative yielding
Negative yielding debt has caused investors to reach for yield in more risky assets.
This is an image of how the United States uses its land.
The majority of the land is used in the Midwest for cow pasture and ranges.
Other notable big areas are land used for timberland which is divided up into private family, federal/state, and corporate.
Total debt not including financial institutions has soared since 2002 and since the financial crisis in 2008.
Since 2008, non-financial debt has risen by $59 trillion
The largest increase came from China with an increase of $27 trillion since 2nd quarter 2008 and the U.S. was second with an increase of $15.9 trillion.
Source: Haver Analytics
Housing starts for privately owned homes are down and haven't fully recovered.
Shane Phillips made an interesting observation regarding this chart, "The country’s worst homebuilding year from 1993 to 2007 (1.292 million homes) was better than the best homebuilding year from 2008 to 2018 (1.250 million homes). There are nearly 70 million more people living in the U.S. today than there were in 1993."
Source: U.S. Census Bureau
The United States has seen a large drop in the number of publicly listed companies.
At the peak in the United States there were 7,322 publicly-listed companies but at the end of 2017 there were only 3,439.
This is a decline of 53%.
Meanwhile the number of private companies has increased a large amount.
And this isn't just in the United States. The largest decline based on percentage was the Netherlands with a 74% decline from its peak.
Some of the reasons for these declines could be due to managers deciding to not want to deal with the pressure of public markets, more regulatory requirements, and the heavy focus of the markets to spend too much focus on the short term aspects of a business instead of long term.
Source: Thinking Beyond the Cycle by Jason M. Thomas
Guy Spier has been a very influential investment manager for numerous investors including myself.
In his most recent investment partnership letter from 2018 he discusses more than just his fund's performance but also his principles and what he is trying to accomplish as an investor.
I've reread his investment principles a couple of times now in order to try and understand them.
In his 2018 annual report, Guy discusses each principle in more depth.
Source: 2018 Aquamarine Fund 2018 Report
A country's monetary base is the total amount of bank notes and coins circulating in the economy. This includes: the total currency circulating in the public, plus the currency that is physically held in the vaults of commercial banks, plus the commercial banks' reserves held in the central bank. (Wikipedia)
From Feb 1986 the monetary base grew from a little more than $182 billion to a little more than $850 billion in August of 2008.
From August 2008 to September 2014 it went to $4 trillion which is an increase of 3.2 trillion in just 6 years.
It stayed at $4 trillion for most of 2014 until it started to decrease in 2015.
The monetary base is now at a little more than $3.2 trillion as of May 22, 2019.
This expansion of the monetary base was due to the weakening economy during the Great recession of 2008 and was necessary to restore the economy.
This extraordinary expansion of the money supply has still been considered by some as the biggest experiment in financial history.
Monaco had the highest wealth per person measured in US dollars in 2018 with $2,114,000.
This is mostly due to Monaco's good tax structures, location, popular spot for yacht owners, and high real estate prices.
Following Monaco is Lichtenstein at #2, then Switzerland, Luxembourg and Australia.
Source: New World Health
Debt and credit are different sides of the same coin.
When someone lends you $100, that $100 is your debt and the other person's credit.
The United States economy has been very dependent on debt (credit) to grow.
In 1964, there was $1 trillion in debt and from 1964 to 2018 it went up 72x to $72 trillion in 2018.
The economy wouldn't be the same today if debt hadn't grown so much.
What caused debt to grow so much?
The US dollar used to be backed by gold which put a limit on how much debt and credit that could exist in the economy.
When Richard Nixon closed the gold window on August 15, 1971 that allowed the US government to create as many dollars as they could.
The printing of dollars means more debt.
Source: Richard Duncan https://twitter.com/PaperMoneyEcon/status/1128257424836710400
Peak oil? Doesn't look that way.
On the left is a picture showing US crude oil exports over the last 95 years.
The shale oil boom has allowed the US to export 2 million barrels of oil per day.
On the right, is monthly crude oil production for three of the biggest producers.
In 2018 the US passed Russia and Saudi Arabia for the most monthly crude oil produced.
In 1804, there were 1 billion people in the world.
In 1927, there were 2 billion people in the world.
In 1999 (less than 100 years later), there were 6 billion people in the world.
This graph is the most amazing one I've seen because it illustrates to me a lot more than just a large increase in the amount of humans on Earth.
I think it tells a deeper story. It illustrates the enormous increases we have experienced in technology, agriculture, medicine, education, and nutrition.
Source: United Nations World Population Prospects, Deutsche
In 2000, 2 billion gigabytes of information existed.
In 2001, 6 billion gigabytes of information existed.
Then in 2002, 12 billion gigabytes of information existed.
"More information was generated in 2001 than in all the previous existence of our species on earth."
Source: Revolt of the Public
The damaging effects of climate change:
The number of floods has increased 15 times when measured over 4 different time periods (1950-1966, 1967-1983, 1984-2000, and 2001-2017).
The number of deaths in droughts has increased 10 times when measured between 1996-2005 and 2006-2015.
The number of wildfires has increased 7 times when measured between 1950-1983 and 1984-2017.
The number of extreme temperature events has increased 20 times when measured over three different time periods (1950-1972, 1973-1995, and 1996-2017).
Source: EM-DAT database;