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Taking away the punch bowl. But from where? And what can we do about it?

The Fed is taking away the punch bowl. Going for higher interest rates. Stopping the pump-priming, quantitative earning, or bond buying or whatever you call it.

Those two actions freaked the stock market — until late last week. On Friday I headlined here, “The downdraft may not be 100% over. But it sure feels good that our technology stocks are bouncing.

Today it’s bounced even more, which is nice.

There is still money sloshing around. But there will be less. Does this necessarily mean there’ll be less money for things I don’t like:

+ Cryptocurrencies (see below)
+ NFTs.
+ SPACs.
+ IPOs of speculative, non-profit earning ventures.
+ Art
+ Gold, silver, precious minerals, etc.
+ Tulips (just kidding)

And presumably there’ll be more money for conventional assets — like stocks of successful profitable companies?

Such was my thinking over the weekend, as I mulled a continuing downtown. Don’t fight the Feds…

Then today, our tech stocks are up 3.44%. Nasdaq is up 3.41%. Much better than the Dow’s 1.17%.

We’re nowhere out of the woods. It’s been a brutal three months since November — as you can see from this one-year chat of Nasdaq.

One talking head on CNBC said he was only down 1% in the downdraft since November. He did this by hedging. The major hedging I do is diversification — outside of stocks into syndicated real estate and inside stocks outside of solely technology. You can see the results in the portfolio in the right hand column.

I have started some research on hedging. I’ve found basically four ways (none of which I’ve done, yet.)

1. Buy puts.
2. Sell calls against the stocks you hold.
3. Buy a fund or an ETF that claims to do hedging as part of its strategy.
4. Sell short against the box. Just because you own a stock doesn’t mean you can’t also short that stock – all or any part of your position. My friend Ed tells me it’s a way of preserving your long term capital gains while temporarily reducing or removing your exposure. When you go short against the box you are long and short at the same time. You’ve effectively neutralized the position until you either buy to cover the short or sell the long. There are certain tax rules that apply that say when you can cover. Look up the rules on Google.

More on all this tomorrow.

My brother-in-law in Australia has covid

He’s triple vaxed. He says “you never want to get this.” He couldn’t breath. “It’s like drowning.”  He coughed and coughed. He didn’t eat. His throat was red raw and painful. It was impossible to swallow. Severe aches and pains through all joints.” He slept and slept. He says he’s never been this sick in his entire life. He once suffered from double pneumonia. It’s much worse than that.

The docs gave him meds to address the symptoms, like the coughing, but they didn’t help much.

He writes “I am slowly recovering but I feel like I have been run over by a truck.”

He thinks he got it at a crowded indoor restaurant which didn’t check for vaccinations.

Useful Stuff

+ Put sunscreen on your face, your hands and your ears — every day. Whether the sun is out or not.

+ Walking Just 10 Minutes a Day May Lead to a Longer Life. Click here.

+ Live longer: Kris Verburgh, author of “The Longevity Code” advises getting other proteins mostly from fatty fish while moderating your intake of starchy carbohydrates, such as pasta and potatoes. Research has shown that older people who routinely devour such carbs may be more likely to become cognitively impaired. Try to replace them sometimes with foods such as lentils or extra vegetables, which have more fiber and minerals than refined carbs. Click here.

Favorite cartoons

How Crypto Became the New Subprime

I don’t owned crypto. I get the brilliance of the marketing — mining for it in Iceland or wherever. But…

Paul Krugman in the New York Times penned my thoughts on crypto in Friday’s paper:

If the stock market isn’t the economy — which it isn’t — then cryptocurrencies like Bitcoin really, really aren’t the economy. Still, crypto has become a pretty big asset class (and yielded huge capital gains to many buyers); by last fall the combined market value of cryptocurrencies had reached almost $3 trillion.

Since then, however, prices have crashed, wiping out around $1.3 trillion in market capitalization. As of Thursday morning, Bitcoin’s price was almost halfway down from its November peak. So who is being hurt by this crash, and what might it do to the economy?

Well, I’m seeing uncomfortable parallels with the subprime crisis of the 2000s. No, crypto doesn’t threaten the financial system — the numbers aren’t big enough to do that. But there’s growing evidence that the risks of crypto are falling disproportionately on people who don’t know what they are getting into and are poorly positioned to handle the downside.

What’s this crypto thing about? There are many ways to make digital payments, from Apple Pay and Google Pay to Venmo. Mainstream payment schemes, however, rely on a third party — usually your bank — to verify that you actually own the assets you’re transferring. Cryptocurrencies use complex coding to supposedly do away with the need for these third parties.

Skeptics wonder why this is necessary and argue that crypto ends up being an awkward, expensive way to do things you could have done more easily in other ways, which is why cryptocurrencies still have few legal applications 13 years after Bitcoin was introduced. The response, in my experience, tends to take the form of incomprehensible word salad.

Recent developments in El Salvador, which adopted Bitcoin as legal tender a few months ago, seem to bolster the skeptics: Residents attempting to use the currency find themselves facing huge transaction fees. Still, crypto has been effectively marketed: It manages both to seem futuristic and to appeal to old-style goldbug fears that the government will inflate away your savings, and huge past gains have drawn in investors worried about missing out. So crypto has become a large asset class even though nobody can clearly explain what legitimate purpose it’s for.

But now crypto has crashed. Maybe it will recover and soar to new heights, as it has in the past. For now, however, prices are way down. Who are the losers?

As I said, there are disturbing echoes of the subprime crash 15 years ago.

Crypto is unlikely to cause an overall economic crisis. It’s a big world out there, and even $1.3 trillion in losses is only about six percent of U.S. gross domestic product, a hit that’s an order of magnitude smaller than the effects of falling home prices when the housing bubble burst. And activities like Bitcoin mining, while environmentally destructive, are economically trivial compared with home-building, whose plunge played a large role in causing the Great Recession.

Still, some people are being hurt. Who are they?

Investors in crypto seem to be different from investors in other risky assets, like stocks, who consist disproportionately of affluent, college-educated whites. According to a survey by the research organization NORC, 44 percent of crypto investors are nonwhite, and 55 percent don’t have a college degree. This matches up with anecdotal evidence that crypto investing has become remarkably popular among minority groups and the working class.

NORC says that this is great, that “cryptocurrencies are opening up investing opportunities for more diverse investors.” But I remember the days when subprime mortgage lending was similarly celebrated — when it was hailed as a way to open up the benefits of homeownership to previously excluded groups.

It turned out, however, that many borrowers didn’t understand what they were getting into. Ned Gramlich, a Federal Reserve official who famously warned in vain about the growing financial dangers, asked, “Why are the most risky loan products sold to the least sophisticated borrowers?” He then declared, “The question answers itself.” Homeownership dropped sharply once the bubble burst.

And cryptocurrencies, with their huge price fluctuations seemingly unrelated to fundamentals, are about as risky as an asset class can get.

Now, maybe those of us who still can’t see what cryptocurrencies are good for other than money laundering and tax evasion are just missing the picture. Maybe the rising valuation (although not use) of Bitcoin and its rivals represents something more than a bubble, in which people buy an asset simply because other people have made money off that asset in the past. And it’s OK for investors to bet against the skeptics.

But these investors should be people who are both well equipped to make that judgment and financially secure enough to bear the losses if it turns out that the skeptics are right.

Unfortunately, that’s not what is happening. And if you ask me, regulators have made the same mistake they made on subprime: They failed to protect the public against financial products nobody understood, and many vulnerable families may end up paying the price.

All the stuff about health

My 80th birthday is approaching. My shoulder is improving with exercise and rest. But I’m still not back on the tennis court. Hence my obsession with health and living forever. My dermatologist this morning gave me a clean bill of health.

And the stock market exploded. Perhaps a dead cat bounce. I don’t think so. Companies and real estate grow, use neat technologies and throw off earnings and dividends. All the other stuff that looks needs a lots of fantasy, and finding the greater fool.

Susan and I are going for a walk before the sun sets. The temperature is up to 18. The sky is blue. There’s no wind. And the icicles outside my office window are melting.

See you soon. — Harry Newton