The Wizards of The Federal Reserve

  
0:00
-6:06

This installment of The Pomp Letter is free for everyone. I send this email to our investors daily. If you would also like to receive it every morning, join the 50,000 other investors today.


To investors,

The movie Wizard of Oz can teach us a lot about life. In the film, there is ruler of the Land of Oz that is highly respected by all of his subjects. The various characters in the movie believe that this prophetic ruler, the Wizard of Oz, can solve all of their problems, so they travel a long distance to speak with him.

As you would expect, this all turns out to be a sham. According to the Wikipedia description, “it is revealed that Oz is actually none of these things, but rather an ordinary conman from Omaha, Nebraska, who has been using elaborate magic tricks and props to make himself seem "great and powerful". Working as a magician for a circus, he wrote OZ (the initials of his first two forenames, Oscar being his first, and Zoroaster being the first of his seven middle names) on the side of his hot air balloon for promotional purposes. One day his balloon sailed into the Land of Oz and he found himself worshipped as a great sorcerer. As Oz had no leadership at the time, he became Supreme Ruler of the kingdom and did his best to sustain the myth.

History has taught us over and over again that the “great and powerful” organizations and people tend to be something different. Nowhere is this more obvious in real life than at the Federal Reserve. I thought of the Wizard of Oz this morning, while reading an article in CNBC titled “The Fed is expected to make a major commitment to ramping up inflation soon.

As you read through the piece, you realize that the Federal Reserve actually believes they are similar to the Wizard of Oz. The central bankers are finalizing a year-long policy review that is likely to end in a set of policy recommendations to keep interest rates artificially low for a number of years as they attempt to increase inflation and decrease joblessness. There is one major problem though — the Federal Reserve has been horrible at hitting their targets in the past.

The Federal Reserve has held a 2% inflation target for many years, yet they have only come within +/- 10% of that target 3 of the last 10 years.

This lack of accuracy and effectiveness around the inflation target is not necessarily because the Federal Reserve is clueless. In fact, there are an incredible number of highly intelligent people that work there. The challenge is that a large economy like the United States is a complex system that is nearly impossible to manipulate with nuanced control.

Due to this complexity and lack of control, I am worried that the Federal Reserve is about to embark on a path that could end disastrously. The general premise is that the organization will keep rates artificially low for an extended period of time. This should increase inflation and lead to less joblessness. Jeff Cox eloquently outlined the scary part though when he wrote:

“The Fed and other global central banks have been trying to gin up inflation for years under the reasoning that a low level of price appreciation is healthy for a growing economy. They also worry that low inflation is a problem that feeds on itself, keeping interest rates low and giving policymakers little wiggle room to ease policy during downturns.

In the latest shot at getting inflation going, the Fed would commit to enhanced “forward guidance,” or a commitment not to raise rates until its benchmarks are hit and, in the case of inflation, perhaps exceeded.

In recent days, Fed regional presidents Robert Kaplan of Dallas and Charles Evans of Chicago have expressed varying levels of support for enhanced guidance. Evans in particular said he would like to keep rates where they are until inflation gets up around 2.5%, which it has not been for most of the past decade.”

That is right — the Federal Reserve is talking about keeping interest rates low (probably at 0%) until we see inflation over 2% and potentially even higher than 2.5%. This is absolute madness for a number of reasons:

  1. The Federal Reserve believing that they have nuanced control of inflation and an economy makes little sense. They are batting .300 over the last decade, so they don’t exactly have the best track record with hitting their targets, nor being able to effectively manipulate various aspects of the system.

  2. Higher levels of inflation means that the wealth inequality gap will continue to widen. The rich will get richer and the poor will get poorer. Quite literally, this policy decision is a direct attack on the bottom 50% of Americans and their wealth.

  3. Every socioeconomic class experiences different levels of inflation. There are plenty of people who believe that coming out of the 2008 crisis the lowest socioeconomic classes saw inflation reach 6-10%, while the official numbers remained below 2%. If that is true (and I tend to believe that it is), than we could see the lowest socioeconomic classes experiencing 10-20% inflation with these new inflation targets and policies.

  4. Asset prices are already detached from economic reality, so a continued pursuit of higher inflation will only pump the asset prices higher. This extended detachment is the equivalent of kicking the can down the road. As I continue to warn, you can only do that for so long until you have to pay for your sins. The further the difference between prices and reality, the more painful the day of reckoning will be.

The worst case scenario would be a situation where the Federal Reserve overshoots their inflation target, we have continued economic issues, and they are caught in a situation where they can’t increase rates quickly and they are forced to print more stimulus. If that were to happen, the Federal Reserve would be accelerating inflation at the exact moment that they should be reigning it in.

I wish that I could argue that this scenario would be hard to see coming, but rather I think it is actually likely. We have seen time and again that the economy will start to gyrate and experience issues when the government stops printing money and tries to raise interest rates. By allowing inflation to overshoot in such a dramatic way (some analysts are predicting as high as 4% in the official numbers), we could be staring at an absolute decimation of the middle and lower class.

Just as the Wizard of Oz ended up being a regular Joe with no special powers, I believe the Federal Reserve will eventually be shown to be without magical powers as well. This means that investors can not blindly trust the government and Fed to protect their wealth, nor can they continue to believe that the decisions being made are in their best interest. Instead, investors must realize that low interest rates, massive quantitative easing, and artificially high inflation are all signs that asset prices are going to skyrocket.

My anticipation is that real estate, gold, Bitcoin and stocks are all going to run much, much higher than they already have. Bitcoin is going to be the largest winner out of all assets since it is the most volatile. Or as Paul Tudor Jones said, it will be the fastest horse. Regardless of how you invest your capital, just don’t get caught holding cash while the Federal Reserve is systematically devaluing the asset under the guise of creating economic activity.

The financial system is based on 50% of people not understanding how money works. Get yourself educated and position yourself to not only be protected from what is coming, but also benefit from it. The wealthiest people in the world aren’t sitting in cash when the Fed is aggressively going to work on rates and inflation. It probably makes sense for you to follow suit.

Talk tomorrow.

-Pomp


This installment of The Pomp Letter is free for everyone. I send this email to our investors daily. If you would also like to receive it every morning, join the 50,000 other investors today.


THE RUNDOWN:

Bitcoin’s Pause May Serve as Consolidation Before Push Higher: Bitcoin’s surge over the past week got a lot of hearts pumping. Now technical indicators suggest enthusiasts could see it make another major move higher soon. Based on its recent price trend, Bitcoin appears to be consolidating before its next jump, which could take it back to $12,000, a resistance level dating back to last August. Read more.

Anthony Levandowski Sentenced to 18 Months in Prison: Anthony Levandowski, the former Google engineer and serial entrepreneur who was at the center of a lawsuit between Uber and Waymo, has been sentenced to 18 months on one count of stealing trade secrets. Judge Alsup said that home confinement would “[give] a green light to every future brilliant engineer to steal trade secrets. Prison time is the answer to that.” Read more.

SEC Seeking ‘Smart Contract’ Tracing Tool That Can Spot Security Vulnerabilities: The U.S. Securities and Exchange Commission wants to procure a blockchain forensics tool that can analyze smart contracts and, preferably, highlight their security issues. Read more.

INX Scales Down US IPO Target to $117M – Still Set to Be Crypto’s Largest: Cryptocurrency and security token exchange INX has shifted its sights for a planned initial public offering in the U.S. The Gibraltar-based trading group filed an F-1 Form – a securities registration for non-U.S. issuers – with the Securities and Exchange Commission on Monday. Originally slated for Q2 2020, the sale is now expected to take place before the end of the year, according to the revised prospectus. Read more.

SpaceX Successfully Flies Its Starship Prototype to a Height of Around 500 Feet: SpaceX  has been developing Starship, its next-generation spacecraft, at its site in Boca Chica, Texas. The company has built a number of different Starship prototypes to date, include one prior version called the Starhopper that was essentially just the bottom portion of the rocket. Today, the company flew its first full-scale prototype (minus the domed cap that will appear on the final version, and without the control fins that will appear lower down on its sides), achieving an initial flight of around 150 m (just under 500 feet). Read more.


LISTEN TO THIS EPISODE OF THE POMP PODCAST HERE


Caleb Pressley is one of the most electric people on the internet. He currently works at Barstool Sports, runs the @thinker account on Instagram, and previously played football at the University of North Carolina. We had a blast recording this episode and I think people will find it entertaining.

In this conversation, Caleb and I discuss:

  • College football

  • Pro athletes creating content and building audiences

  • Social media trends

  • Default digital value of assets

  • Volatility as Bitcoin's PR team

  • Many behind the scenes stories of Caleb's escapades

I really enjoyed this conversation with Caleb. Hopefully you enjoy it too.

LISTEN TO THIS EPISODE OF THE POMP PODCAST HERE


We have started a new show exclusive to YouTube called Lunch Money. The goal is to cover current events in business, finance, and technology from the perspective of the every day citizen, rather than the talking heads on television. It is just as funny and entertaining as it is educational. Hope you enjoy it and make sure you go subscribe to the YouTube channel!


Podcast Sponsors

These companies make the podcast possible, so go check them out and thank them for their support!

  1. Choice is a new self-directed IRA product that allows you to buy Bitcoin with tax-advantaged dollars, while still holding your private keys. You can go to retirewithchoice.com/pomp to sign up today.

  2. Helium Hotspots allow you to earn cryptocurrency by building a new wireless network for the Internet of Things and creating a more connected future in your city. Get $50 off your Helium Hotspot by going to helium.com and using my special code POMP at checkout.

  3. Unstoppable Domains is working to make the internet operate how it was originally intended, which means anyone can publish anything from anywhere. You can go to unstoppabledomains.com and claim your censorship resistant domain today.

  4. BlockFi allows you to keep your crypto, put it up as collateral, and receive a USD loan funded directly to your bank account. They do loans ranging from $2,000 to $10,000,000, and they're perfect for helping you reach your financial goals of all sizes. Visit BlockFi.com/Pomp to learn more about putting your crypto to work without having to sell it by getting a loan or earning interest in their interest bearing accounts.

  5. Crypto.com allows you to buy, sell, store, earn, loan, and invest various cryptocurrencies in an user friendly mobile app. Join over one million users today. You can download and earn $50 USD with my code “pomp2020” when you sign up for one of their metal cards today.

  6. Blockset by BRD is your hosted blockchain infrastructure. Blockset enables enterprises and developers around the globe to deliver high-quality blockchain-based applications in a fraction of the time, at a fraction of the cost.

  7. WSOT is the biggest trading competition in the crypto space, with a massive 200 BTC prize pool and bonuses of 9,400 USDT up for grabs!  


If you enjoy reading “The Pomp Letter,” click here to tweet to tell others about it.

Nothing in this email is intended to serve as financial advice. Do your own research.


Why The Financial Media Got The Bitcoin Halving Wrong & How Bloggers Are Infiltrating These Organizations

  
0:00
-9:25

This installment of The Pomp Letter is free for everyone. I send this email to our investors daily. If you would also like to receive it every morning, join the 50,000 other investors today.


To investors,

It seems that everyone has an opinion when it comes to financial assets and markets. There are two very different groups of people who provide commentary though. One group has significant skin in the game and the other group does not. 

The issue historically is that the commentary provided by those without skin in the game has been more widely available than the commentary that originates from the actual market participants. This is all changing with the adoption of social media, email newsletters, blogs, and various other content platforms. 

In fact, I anticipate that we will see the individuals who have skin in the game acquire larger audiences than those without skin in the game within the next 12-24 months. While this should be a net positive for content consumers, it doesn't solve the problems that we are facing today. 

Future of news media: 10 takeaways from Media Rumble | Deccan Herald

Currently, there are three types of content producers in the financial industry — journalists, bloggers, and market participants. The journalists investigate, ask questions, interview, report facts, and hold market participants accountable. The bloggers analyze and opine on the market sometimes even without speaking to market participants for their pieces. The market participants are the people who consider their full-time job to be that of an investor, yet create content as an auxiliary activity.

One of the issues with finance information today is that a plethora of bloggers are now masquerading as financial journalists. Many people will associate negative connotations with the term "blogger," but that is not what my intention is. Instead, I am using "blogger" and "journalist" as categorizations for two different types of content production. 

A journalist has specific ethics, process, and requirements to meet before publishing an article. A blogger has different ethics, process, and requirements to meet before publishing an article. I'll leave others to debate the merits of which is better.

In an overgeneralization, journalists have historically reported on the facts. What happened? When? Who was involved? What are those people saying? Why is this happening? Bloggers have pursued a different path. They are much more opinionated. Their focus leans toward their opinion on why this happened, and they often try to answer, “what will happen next?” Neither is right or wrong, but there is a clear difference between objective reporting and opinion-based blogging.

This leads us to the infiltration of bloggers in legacy media organizations. The incumbents realized they were losing the battle for attention on the internet, so they sought out those people who were best at capturing and holding attention (ex: clickbait, opinion, etc). Additionally, the bloggers desired legitimization, and they gladly answered the call when the incumbent organizations came calling.

When one of these individuals was hired at a well known publication in 2014, another media company wrotehe brings an altogether different voice: Over-the-top, all-caps headlines, hyperactive tweeting, and outspoken opinions about who is on the right and wrong side of contentious economic debates.” The piece goes on to describe an inherent problem with bringing together bloggers and journalists:

“The Bloomberg Way also insists on ample documentation and sourcing for any assertions or heavy-handed characterizations. "A story is incomplete and untrustworthy when it includes unsupported assertions," Winkler writes. "The best reporters assemble the details, anecdotes, and comments and then let the readers decide who's right, wrong, guilty or innocent.”

The writer then hammers home the point by saying “"If you tried to make [redacted person’s name] follow The Bloomberg Way to the letter, it would destroy what makes him effective as a writer.” The transition from strict, traditional journalism to internet-friendly, blogger-centric coverage is well documented. It is not about one person or one organization. This has played out at almost every publication, while also materially altering the type of content.

This evolution of content on the internet opened the door for financial market participants. They have always understood markets and assets better than anyone, but they previously only had a voice when a journalist or media organization lent a platform to them. The internet now provides the tools for these market participants to communicate directly with the audience and cut out the middle man (ex: media organizations).

This is obviously not exclusive to the finance industry, so why is this important?

There is a big difference in the quality of information being shared by the three groups of content creators that we have identified. Journalists continue to adhere to the highest standards and focus on unbiased reporting. Bloggers and market participants are more opinion-oriented. Sounds good, right?

Wrong. There is one major difference between the bloggers and market participants — skin in the game. The blogging crowd spends their time pontificating on markets and asset prices, but there is no penalty when they are wrong. Market participants stand to lose millions of dollars when their opinions are inaccurate or ill-timed. This difference between bloggers and market participants is one of the most important things a reader needs to identify to ensure they are consuming the highest quality content.

Quite literally, the market participants are not only sharing their opinions, but they are also betting millions of dollars on the idea that they are right. When they are wrong, they lose money. When they are right, they stand to make a lot of money. This idea of content creation by market participants does not come without issue (ex: bias, investors marrying their assets, etc), but I will leave those issues for analysis on another day.

To make my point clear, I will use the coverage of the Bitcoin halving as an example. There were plenty of journalists who merely reported on past halvings and/or compiled commentary from market participants. As expected, the bloggers took a different angle. They continuously shared their personal opinions and analysis about what would happen. The market participants did the exact same thing.

The quality of analysis was quite different though. Most of the "what will happen next"-style content from the bloggers revolved around “the Bitcoin halving is priced in” or “the price will go up or down after the halving.” Their analysis lacked the intellectual rigor needed to make investment decisions. This isn’t a bad thing — the bloggers aren’t investing any money, so it would make sense that they would not need deep analysis.

The market participants were a different story though. Much of their writing included specific aspects that highlight the rigor needed to make an investment decision. They included macro and micro events, an understanding of how the system works holistically, specific price movements or targets, and time frame predictions.

A simple way to think about the difference between the two content creators is that bloggers use academic theory for analysis, while the market participants use experience and expertise that can only be gained by being a practitioner. Here are a few examples.

In May 2019, I wrote about the need for interest rate cuts and quantitative easing, while also explaining the impact of the overlap with the Bitcoin halving:

“It looks like central banks are going to be forced to make hard decisions in the first half of next year, which will coincide with Bitcoin’s block reward being cut in half. As a reminder, the block reward is the amount of Bitcoin that is distributed to the network’s miners approximately every 10 minutes.

The potential scenario is that interest rates will get slashed, fiat printing will explode, and Bitcoin will get more scarce all around the same time — this is like taking a forest fire and accidentally dropping thousands of gallons of gasoline on it, instead of dropping water. Whoops!

While I believe strongly in Bitcoin’s future prospects, it would be intellectually dishonest if I didn’t mention that the scenario that I’m laying out would be incredibly painful. Average Americans (and people around the world) would get hurt by the ramifications of this type of market scenario. Hopefully it won’t come to fruition, but unfortunately I don’t think we have anyone awake at the wheel to stop it.”

In July 2019, I wrote again about the relationship between the macro environment and the Bitcoin halving:

“That means that the monetary stimulus impact will hit within 90 days of the 50% reduction in the Bitcoin monetary supply schedule. Think about that for a minute. We are going to see traditional assets being artificially pumped at the exact same time that the stock-to-flow ratio of Bitcoin becomes drastically more attractive. Incredible.

Now don’t anticipate Bitcoin’s price to see an immediate increase that causes price charts to look like they are going vertical. Instead, it will take time for the confluence of events to reveal itself in price. Regardless of the timing, Bitcoin’s value proposition is about to become painfully obvious to the world.”

And finally, on March 12th of this year I wrote about the monetary stimulus and the incoming Bitcoin halving:

“The interest rate cuts and quantitative easing is market manipulation. They are trying to bail out the economy. When they do this, investors have historically weathered the liquidity crisis and then sought out (a) sound money and (b) safe haven assets. Both gold and Bitcoin should do incredibly well during this time period.

But Bitcoin has one other other aspect to it than gold — the upcoming supply shock (Bitcoin halving in May 2020). Right when Bitcoin is about to become super attractive to people because the US government / central bank begin incredible monetary stimulus efforts, the digital asset is going to see the incoming supply cut in half. One of the scarcest assets in the world is about to become even more scarce. (This would be the equivalent of investors seeking gold because of inflation, but half the gold mines in the world shutting down at the same time)”

In order to effectively manage capital in this industry, an investor needs to understand event-based movements like the Bitcoin halving, but also possess an understanding of the macro environment and a range of other inputs. This is not an academic exercise. You can’t simply pontificate on whether “the Bitcoin halving is priced in.” That type of opinion-based, single-issue content lacks the intellectual rigor necessary to be successful in the arena of financial markets.

So as you would expect, the bloggers who were claiming the Bitcoin halving was priced in were wrong. On May 9th through May 12th, the Bitcoin price ranged between $9,600 and $8,800. Today it sits at almost $11,200. There will be people who yell and scream that the price increase had nothing to do with the halving, but it would be intellectually dishonest to believe that a supply shock of this magnitude would have zero impact on the price of such a small market cap asset.

My point in writing this letter today is to highlight two things — first, be very careful the content you consume. Journalists are an incredibly important staple of American democracy. They hold people accountable and they focus on reporting the facts. Market participants have a deep belief in what they are saying because they are willing to stake millions of dollars on those opinions. The same cannot be said about bloggers — these individuals make a living by driving attention to their publications, but they have no repercussions for when they are wrong.

Want to identify the sources of content that you should consume? Ask yourself two questions — is this person writing an unbiased piece that contains facts and commentary from an array of experts? If yes, then that is a good source. If no, then ask yourself, “Does this person have skin in the game for what they are saying?” If yes, then that is a good source.

Unfortunately, if you answer no to both of those questions, you will be better off moving on. Remember, you focus on your food diet. What you put in your body ends up determining how physically healthy you are. Your content diet is not much different. What you put into your head ends up determining how mentally healthy and financially wealthy you are. Proceed accordingly.

-Pomp


This installment of The Pomp Letter is free for everyone. I send this email to our investors daily. If you would also like to receive it every morning, join the 50,000 other investors today.


THE RUNDOWN:

Microsoft Confirms Talks to Buy TikTok in U.S: Microsoft on Sunday confirmed that it has held talks with Chinese technology company ByteDance to acquire its trendy social app TikTok in the U.S. Microsoft said in a statement that it will keep working with the U.S. government on a deal and that it intends to conclude talks by September 15.Read more.

Bank of Japan Puts Top Economist in Charge of Digital Yen Initiative: The Bank of Japan has moved its most senior economist to lead the department responsible for research and development into central bank digital currencies. Kazushige Kamiyama, formerly director-general of the BoJ's Research and Statistics Department, has moved to the Payments and Settlements Systems Department, Reuters reported Friday. Read more.

White House, Dems Still Agree on $1,200 Checks But Deadlocked on Unemployment Assistance: While the White House has come out in favor of reducing the federal assistance to $200 a week, Democrats have called for keeping it at the $600 level. During an interview on ABC’s “This Week” on Sunday, Pelosi said that Trump was standing in the way of an agreement. “We’ve been for the $600. They have a $200 proposal, which does not meet the needs of America’s working families, and it’s a condescension, quite frankly,” Pelosi said. Read more.

SpaceX Says Starlink Internet Has ‘Extraordinary Demand:’ SpaceX said Starlink, its nascent satellite internet service, has already seen “extraordinary demand” from potential customers, with “nearly 700,000 individuals” across the United States indicating they are interested in the company’s coming service. Due to the greater-than-expected interest, SpaceX filed a request with the Federal Communications Commission on Friday — asking to increase the number of authorized user terminals to 5 million from 1 million. Read more.

Bitcoin Ends July at Highest Monthly Close Since 2017 Peak: Bitcoin closed the month of July at $11,351, its highest monthly close since the bellwether cryptocurrency’s all-time high nearly two-and-a-half years ago. Prior to this month, Bitcoin had closed below $11,000 every month since nearly reaching $20,000 in December 2017. Bitcoin futures on CME closed July at $11,620. Read more.


LISTEN TO THIS EPISODE OF THE POMP PODCAST HERE


Congressman Tom Emmer has served the people of Minnesota as their elected official in the US House of Representatives since 2015. He also currently sits on the House Financial Services Committee and is one of the leading voices for blockchain technology in the US government.

In this conversation, Congressman Emmer and I discuss:

  • Wealth vs debt

  • Sound money

  • The Federal Reserve

  • Issues with centralization

  • The current economic situation

  • A digital dollar

  • The stimulus bills

  • Technology trends

  • Bitcoin

I really enjoyed this conversation with Congressman Emmer. Hopefully you enjoy it too.

LISTEN TO THIS EPISODE OF THE POMP PODCAST HERE


We have started a new show exclusive to YouTube called Lunch Money. The goal is to cover current events in business, finance, and technology from the perspective of the every day citizen, rather than the talking heads on television. It is just as funny and entertaining as it is educational. Hope you enjoy it and make sure you go subscribe to the YouTube channel!


Podcast Sponsors

These companies make the podcast possible, so go check them out and thank them for their support!

  1. Choice is a new self-directed IRA product that allows you to buy Bitcoin with tax-advantaged dollars, while still holding your private keys. You can go to retirewithchoice.com/pomp to sign up today.

  2. Helium Hotspots allow you to earn cryptocurrency by building a new wireless network for the Internet of Things and creating a more connected future in your city. Get $50 off your Helium Hotspot by going to helium.com and using my special code POMP at checkout.

  3. Unstoppable Domains is working to make the internet operate how it was originally intended, which means anyone can publish anything from anywhere. You can go to unstoppabledomains.com and claim your censorship resistant domain today.

  4. BlockFi allows you to keep your crypto, put it up as collateral, and receive a USD loan funded directly to your bank account. They do loans ranging from $2,000 to $10,000,000, and they're perfect for helping you reach your financial goals of all sizes. Visit BlockFi.com/Pomp to learn more about putting your crypto to work without having to sell it by getting a loan or earning interest in their interest bearing accounts.

  5. Crypto.com allows you to buy, sell, store, earn, loan, and invest various cryptocurrencies in an user friendly mobile app. Join over one million users today. You can download and earn $50 USD with my code “pomp2020” when you sign up for one of their metal cards today.

  6. Blockset by BRD is your hosted blockchain infrastructure. Blockset enables enterprises and developers around the globe to deliver high-quality blockchain-based applications in a fraction of the time, at a fraction of the cost.

  7. WSOT is the biggest trading competition in the crypto space, with a massive 200 BTC prize pool and bonuses of 9,400 USDT up for grabs!  


If you enjoy reading “The Pomp Letter,” click here to tweet to tell others about it.

Nothing in this email is intended to serve as financial advice. Do your own research.


Loading more posts…