What's The Plural Of Crisis? Asking For A Friend.
This chart looks weird. The volume is high on Tuesday when markets fall 1%, but then volume is only a third as high on Wednesday when markets go up 1.5%. Volume is the amount of stocks being traded, so how would fewer stocks be traded while the markets move more? Yeah… this chart is weird.
World Energy Crises Inbound
Energy production (gasoline, natural gas, renewable, etc.) declined in 2020 and 2021 as the world shifted from in-person to remote. Though a particularly cold 2020 winter, especially in the southern states and the UK, has highlighted a need for energy reserves. Energy production still has not climbed nearly enough across the world, and now multiple regions of the world, including Europe and China, face severe energy crises.
The world cannot shift quickly enough to renewable, carbon-zero sources of energy. The transition is happening at a particularly challenging time, as global energy usage is predicted to rise 60% by 2050, according to Bloomberg.
What's Happening? The world needs to shift from “bad energy” to “good energy” as quickly as possible, and the transition will cause a lot of volatility in the price of energy. Some days it might cost $10 to heat a house for the day, other days it might cost $20 or $30. That uncertainty is a problem, and shortages can quickly become wide-scale outages, such as Texas last Winter.
Who Will This Impact? Currently, Europe and China are facing the most drastic effects. Shortages have caused drastic price increases in the UK and Europe. In China, the problem is slightly different since the government controls the price its people must pay for things like energy and water, so energy producers have stopped increasing production because they can’t absorb the cost. If they produce more energy, they’ll lose more money because they can’t increase the price their customers pay.
Will The United States Face A Severe Energy Shortage? Maybe. The US is a large exporter of energy, and the country has deep reserves that will last a long time. This winter could be extremely cold, and the more that people need energy the higher the price will go, which will make it much more difficult to get when needed.
The Big Picture: The world’s supply chain is deeply flawed. Pre-Covid, the system was intentionally fragile because it was the cheapest way to operate. Post-Covid, a minor shock in the system can cause week-long delays. And if people are waiting a matter of weeks for energy during a harsh winter, they may not survive.
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Chinese Real Estate Companies Keep Missing Their Debt Payments
Fantasia Holdings missed a $206 million (USD) payment on Tuesday and other real estate developers in China said they plan to do the same. This avalanche of unpaid debt will inevitably spill into the stock market.
Why Could This Affect The Stock Market? Somebody only misses a payment when they don’t have the cash to afford the payment. And in the debt markets, investors use the money they make from one bond to pay the person they owe at the same time. Like if you owed someone $20, but you aren’t worried because someone owes you $25. Well, if the person who’s supposed to pay you can’t pay, and you don’t have any cash lying around, then you won’t be able to pay the person that you owe.
When investors face this problem, they sell their stocks. Stocks are super easy to sell, so they’re usually the first thing sold when investors need money in a pinch.
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Facebook is currently dealing with the fallout from a whistleblower who stated the company knew it was negatively affecting the mental health of young adults. It’s stock price has fallen 13% in the past month, after gaining 125% since March 2020.
Why Should I Buy Facebook? Facebook has been planning to launch its own cryptocurrency payment system to go along with its online marketplace. It’s a key strategic advantage that no other company in the US has. A key Facebook competitor in China has been using a similar system for years and this payment system allowed it to become an even bigger Goliath.
The question becomes will anything inhibit Facebook’s ability to unveil this payment system? And if the answer is: “well, lawmakers look angry that Facebook hid really bad stuff, and they’ll probably enforce strict regulations to prevent the company from doing anything cool for a while”, then don’t invest.
But if your answer is, “these lawmakers are heavily invested in Facebook stock so they’re not going to do anything to inhibit the company in any way”, then the fact that Facebook stock has fallen 13% over this whistleblower news is heavenly. The price fell, but the company hasn’t changed at all, so an investor would be essentially buying at a discount. No need to cut coupons out of the newspaper, this one’s on sale.
Should Everyone Buy Facebook? Absolutely not, go ask a professional if the investment is right for you. All people are different, so all investment portfolios are different.
What Makes Something A Good Investment?
Something is a good investment when it has three things: its existence solves a problem, it’s run by a good manager, and its price is less than the value that we believe it has.
Its Existence Should Solve A Problem: The investment itself (whether a company, real estate, crypto, etc.) should have a fundamental purpose. If it solves a problem, then it will have some kind of usefulness in society. Who is using it, and what are they using it for?
It’s Run By A Good Manager: Any investment is only as good as the person who manages it. The key here is to make sure the incentives of the manager are aligned with the value of the investment. So if the investment is doing well, then the manager gets paid more, that way the manager will try their best to ensure the investment continues to do well in the future. CEOs being paid in stock options is a great example. If the company does really well, then the CEO will make a lot of money because the company will be worth more. If the company does poorly and the CEO still makes a lot of money, then they aren’t incentivized to do what’s best for the company, which would mean it’s a bad investment.
Its Price Is Less Than Its Value: There are dozens of free services online that can build financial models to show price vs. value. Truthfully, the price is the least important thing to look at when making an investment because numbers can always be manipulated. The value of an investment is generated by using financial models, and these models can be skewed one way or another based on the bias of the person making them. The value from the investment comes from its fundamental purpose (its existence, “what does it do?”), the numbers are much less meaningful.
🤷 What To Watch For…
Jamie Dimon, CEO of JP Morgan, openly stated that Bitcoin is a “fraud” and “fool’s gold”. Meanwhile his bank has been investing heavily in crypto-related services and opened crypto trading to its clients. (Read More Here)
Democrats are in-fighting over the details of a $3.5 trillion bill. Senator Manchin from West Virginia stands in the way demanding social protections be taken out; he says he doesn’t want to promote an “entitlement society”. (Read More Here)
A US default on its debt would mean Social Security payments are halted. Millions of Americans are at risk. (Read More Here)