Wall St Gone Wild! (Part II)

Hello, hello. At long last, we are back. Breaking the Dollar has been on hiatus for about two months, but we are now back on track. There was quite a bit of movement in the gold and silver market that I had to tend to. We just had a presidential election, so needless to say, it's been pretty busy over here at Gainesville Coins, but I, Everett Millman, am back for part two of our podcast about Wall Street Gone Wild. So let me briefly recap what we talked about in the first episode.

I basically gave a rundown of a lot of accounting shenanigans and at times outright fraudulent behavior that we're beginning to see in the financial industry. I'll add that a lot of this improper behavior is not isolated to one thing or one tactic. We see it popping up in the debt markets, we see it with companies issuing stock. It takes a lot of different forms. We see it with, again, how companies are doing their financial accounting, how they're reporting their balance sheets. So my point is that this is obviously part of a larger trend. And for those who are not old enough to remember, this really isn't the first time that we've seen this type of thing happen in Wall Street. I'm a big believer, having learned about some of the things in financial history, I'm a big believer in cyclicality: that a lot of things happen in cycles. And it really only takes one generation for the public's memory of something to fade. And then we get a repeat performance. And on Wall Street, we have seen this act before at various junctures in the past 40 years, every seven to 12 years or so. We tend to get rampant speculation as part of the character of the financial markets. So that's what we addressed last time.

This time I want to talk about how this discussion is being framed and what we can do about it. Because what is always fascinating to me about the media is that sometimes the media is blissfully or purposely unaware of how it comes off or the ramifications of some of the ways it reports things.But specifically in the financial news media, they're very self aware that there has been some funny business, that there have been some pretty bad headlines coming out of the financial districts. And what strikes me about their response or sort of the reporting on this broader trend is that the media has been very quick to lay the blame on speculators and specifically lay the blame at a new crop of retail speculators who are using platforms like Robinhood. In effect, the news has been saying that, oh, it's all of these small investors, these first time investors who don't really know what they're doing. They're very susceptible to penny stocks scams and things being overhyped and that this is causing an uptick in speculation and that this is a threat to the normal functioning of markets.

Now, although there is truth that uninformed investors can not only make bad decisions, but have those bad decisions have a broader impact on the trading markets in general, there is a bit of truth there. But it's kind of funny to me that the media would blame the Robinhooders. By and large these are small investors. Granted, there may be many hundreds of thousands or even millions of them. Yes.But even millions of small sized retail investors, they can't push and move the broader financial markets on their own. They don't have the kind of weight to throw around to actually move prices or influence markets in the way that big hedge funds, that large institutions, that all of the big players in the markets can have that effect. So in my opinion, this focus on Robinhood and on speculators, it really is a smoke screen. It's a diversion from where the blame should actually go. And I think there are two obvious places where that blame should be placed.

I will get to that, but first I would like to point out there really is an obvious flaw in this line of thinking that we can write off all of the shenanigans on Wall Street as happening as a result of small time speculators coming in. It doesn't make sense to me to make this a debate about the individual responsibility of those small, perhaps uninformed investors. When the much more compelling argument is that this is a systemic issue, this is a problem with the framework of how financial markets work right now, not about the small participants who are simply engaging in this game for all intents and purposes. Even the most uninformed speculator is still following the rules. Speculating on stocks is not against the law, provided of course that that speculation does not lead to manipulation of the markets and prices. And once again, my point being only the big guns can engage in that type of market manipulation. Perhaps the biggest issue that really has led up to all of this isn't merely the cyclical nature of our short term memories as a society. It also comes down to the fact that our financial education is lacking. In fact, that's one of the reasons that I do this podcast is, listen, I thought I was a pretty smart person growing up. I thought I was pretty smart when I was in school. It wasn't until I had worked in the precious metals industry for several years. It wasn't until I had gotten my feet wet and observed financial markets and invested my own money and seen the results.Not until all of that did I learn any of this.

Financial literacy is simply not a big part of our education system in this country. And I imagine it's largely similar in most other places in the world.These things are simply not taught to people. And I get it. It's mundane, it's wonky and technical. More than anything, it's very arcane. It's sort of a hidden secret, right? Only the initiated are allowed to understand how financial markets work.And I think that that's a very, very bad trend. In my view, when people are armed with the correct information, they do make prudent financial decisions by and large. So again, it's a bit ridiculous to me for all of this to be written off as the work of Robin Hood speculators, that all of these small accounts that are investing in many cases, $100 or less, that somehow this is what ills the financial markets, that this is what's causing all the problems and instability and downright criminal activity with certain companies or certain institutions. So if not them, then who am I laying the blame on?

The first culprit is one of my favorite targets and that is sort of the powers that be, the institutional framework of our policymakers, our central banks, especially the Federal Reserve being the most powerful among them, and simply the systems and framework that have been built up around our financial markets. You could of course include the banking system in all of this. Essentially, what I'm saying is that it's not the people trying to play by the rules who are the problem. It's the really big powerful interests that basically make the rules. And I did have to admit that they are one of my favorite targets. This discussion does harken back to an earlier podcast episode that we did on financialization and how as so much more of our economy, the US economy I'm speaking of, comes under the purview of finance that this encourages a lot of this bad behavior. It creates moral hazard. You never want a system that in essence incentivizes companies and institutions to engage in a lot of the nonsense that we've seen on Wall Street. On an even more basic level, you could just take this as an admission that Wall Street has too much power relative to what it does within America and with respect to America's role in the world. You will often hear correctly so that rather than manufacturing things and exporting that all around the world, what the United States of America does is it exports its culture and beliefs and its systems of governance around the world. That is largely accurate.

But over the past 20 or 30 years, the export of our financialization is taking up the lion's share of what America presents the world.So as I said at the top, this is a concerning trend that has been brewing for decades and every seven to 12 years or so, it crops up again and we have problems to address. The second entity or group that I would have to lay some blame at the feet of is of course the media because of the way the business model is structured for our media now and the way that they generate most of their revenue through advertising and just trying to get eyeballs on the screen or clicks on the article. That is one of the main reasons that financial education is such; that financial education is in such a poor and sorry state in the world right now.

The media really doesn't do a great job of explaining or educating these things to people. They just like covering the horse race. They just want to know why things have gone up or down or other kind of surface level things that will draw viewers. Again, this is all my opinion. I'm not saying that every media outlet or everyone who works in the financial news media is bad. That's obviously not true. I respect a lot of the people in the media that I've interacted with and worked with, but by and large, anyone who watches CNBC or Fox Business, you know what I'm talking about. You know that it's more for entertainment purposes than it is to inform you as an investor. One quick example that comes to mind from about a month ago or a couple months ago was Jim Cramer who, Mad Money, he has been kind of the rock star of financial news for better part of 20 years. And as a result, he has a very dedicated following. You know what this man says on the air influences people. It matters to the people who watch his show and listen to his advice and explanations about what's going on in the markets.

So not too long ago before the presidential election, Jim Cramer was interviewing the Speaker of the House, Nancy Pelosi, by many accounts, the most powerful politician in the United States who does not occupy the White House. And before I even get into this, let me point out that I am no fan of Nancy Pelosi. If you're expecting me to defend her here, you're probably going to be disappointed because that is not the point of this story. So Jim Cramer interviewing Speaker Pelosi, obviously there has to be some sort of economic or financial slant to his questions because this is not a politics show. He's not a political figure. He's speaking to a powerful politician, presumably to find out some things about markets and the economy, what they can expect from Congress. If I recall correctly, it was right at the time when the country thought we'd be getting a second stimulus check. And obviously that was not forthcoming, but it was still up in the air and being debated in Congress at the time. So having said all of that, Jim Cramer decided to refer to Speaker Pelosi as quote unquote Crazy Nancy. And he later explained that he was merely quoting the president. So he was trying to give himself some wiggle room and deniability there. You know, oh, I'm not calling you Crazy Nancy, but hey, people are calling you Crazy Nancy. And obviously this caused some political uproar and many observers and viewers thought he was being disrespectful. Meanwhile, people on the other side of the political aisle were cheering and thought he was doing a great job of, I don't know, calling a spade a spade or, you know, attacking their favorite enemy politician, whatever. But as I said, it kind of blew up in the news. And that's all I remember from that interview, from that conversation. In my opinion, that's quite a disservice to the viewers who, hey, if they want political coverage, if they want to see the back and forth and the name calling, you can turn on any number of news networks and get that right at your fingertips. But again, I assume people who are watching a financial news program, that's not what they're there for. Ideally, they should be there to learn to educate themselves, to stay informed, you know, to stay on top of market trends.

And instead, what product are they given? They're given something controversial to stir people's attention. I can't believe that anyone walked away from watching that interview with any greater understanding of the present state of the economy or whether or not there was going to be a stimulus bill passed. You didn't learn anything material. And I apologize for kind of picking on Jim Cramer. Like I pointed out, he is sort of the most well-known or popular figure. But this wasn't an isolated incident. He's not the only one doing this, Cramer, nor is this the first time he's done it. It has simply become a common feature of our financial news media. So we have to blame how the news covers these things. We have to blame the systemic structure, the framework of our financial markets. And perhaps most importantly, I think we have to look at what can we glean from all of this. I made a comment in Part One of this episode about how sure sometimes keeping up with all of this can be kind of entertaining. It's a little bit of a comedy hour. But unless you are unfathomably rich, I don't think anybody is really looking for chuckles or laughs when they're trying to figure out what to do with their money, how to invest and grow their money.

So what can we glean from all of this? In my view, with the idea of cycles, especially in financial markets, in mind, in my view, what we're seeing is some very obvious signs that we are nearing a top in this cycle. What I mean by that is things are getting frothy. Financial markets are kind of running hot. The whole point of the Wall Street Gone Wild framing is that these things have always happened to some extent. You're never going to have a system with 0% fraud or 0% mistakes or nobody taking risks. There's always going to be risk. That's how free markets work. But we can observe when some of these bad signs are cropping up more and more and more. From a cyclical sense, it's not all that dissimilar from what we saw right before the housing bubble popped in 2007, 2008, from right before the dot com bubble popped in 2000, 2001. There is a tendency for all of these underlying problems not to really crop up or be a concern until you hit the top of the cycle. Eventually, you always hit a threshold where one downturn in the economy or one unforeseen black swan event like COVID for instance, pricks the bubble and starts a domino effect of all of these other underlying issues that have been building up. Now they all come to the surface. I'm always reminded of the quote from Warren Buffett where he says, it's not until low tide that you find out everyone who was swimming naked. So when the stock market is doing great and the economy seems to be running hot, you can get away with a lot of this stuff for a while. No one is going to notice. It's not until a recession or a black swan event that triggers a downturn. Even if it's brief, it's not until these moments where it becomes clear that something has been amiss the entire time. So I really do think that this is all culminating in an inflection point that we will see in the next two years, three years, five years, sometime soon. We are going to hit that inflection point at the top of the cycle and certain things will come crashing down.

What bothers me the most about the whole, “let's blame the Robinhood investors and speculators” angle is that those are always the people who end up hurt the worst in these situations. They're always the ones who end up holding the bag, so to speak. Those people are not insiders. They generally are not going to sell their assets and get out of the market before a crash happens. They're the ones who buy in when everybody else, the insiders know the end is near. They just want to get as much as they can before the party is over. And unfortunately, that's what happened in 2008 and it's likely what's going to happen again. There is, of course, always more to say about these things. I do have some pretty strong convictions in that respect. But I think that's a fairly good stopping point and we will move on to our questions from the listeners.

I'm going to do two email questions this week because we have a bit of a backlog. So our first one comes from David S. in Orlando and David asks, I trade Bitcoin and Ethereum. Oh, excuse me, says I trade Bitcoin and Ethereum options. What patterns and trends do you see happening? I've been hurt by big spikes in the five minute. Okay. So, based on this question is cryptocurrency question about Bitcoin and Ethereum. One thing I will say is that just like all other paper assets, whether that's a stock or an option or an ETF, all of these come with a certain amount of risk. I'm not sure from this question, but I would imagine if someone is trading cryptocurrency, they're probably doing so on margin. If you're unfamiliar, margin basically means you're getting a loan to risk more money than you even have. So you can think of it sometimes. You get 3X margin or 10X margin. That means that if you have $100 to invest, that means you can risk a thousand if you have 10X margin. So I bring this up because David, if you're listening, I hope you understand how that works and you're very careful.

The cryptocurrency market has been on quite a tear lately. It is up quite a bit from the last time that I made any purchases. And something I want to point out that relates back to this whole episode is that when it comes to investing, your smartest bet is always to buy and hold whatever it is you think is going to be more valuable in the future. Nothing happens overnight and you get your best returns when you can weather the storm and hold something for several years. That's when you make the most money. It's not always easy to do, but that's what distinguishes investing for the future from trading and not that there's I do know plenty of people who make a pretty steady passive income off of their trading strategies, but you always have to understand that it is a riskier proposition. It can be very emotional as opposed to when you buy and hold something, you just ideally kind of forget about it until it's time to sell. That's not how trading works. Trading is a constant process and there are a lot more moving parts to be aware of, like understanding margin or understanding the tax implications of when you execute a trade. So that might be a long rambling way to say I don't have a specific answer to your question about how to trade Bitcoin and Ethereum. I just think you need to do your due diligence and stay on top of understanding what you're doing.

Okay. So the question here comes from Mel in Sydney, Australia. And Mel asks, what are your views on the mining sector? Do you recommend any companies? So the way I get this, I get asked this a lot because most people when they think of gold and silver, their first thought is mining companies, you know, rather than buy the actual metal themselves, they want to buy companies that mine the metal and make money off of it. So with that being said, I do keep some tabs on the mining sector. It is always good to know what's going on with the major miners and even some trends with the junior miners, which are the smaller ones. My understanding of how you should think about mining stocks or shares in mining companies is that under good conditions in a bull market for the precious metals, the miners should generally outperform the prices of the metals themselves. And everything is good.

And for instance, gold prices are rising. That means that the gold miners are really positioned to make money hand over fist. They can just ramp up production and try and pump out as much gold as they can, especially if they have economies of scale where they have many mines and they're active. But notice that I said ideally or under ideal circumstances, not all mining companies have the same financial health. They have different debt loads. They have mining projects that are of different quality because as good as our geologists and scientists are, they can make some very good educated guesses about how much gold or silver is in an individual deposit. When they find a little bit under the ground, they can do some analysis and figure out or estimate how much gold, more gold, they think is there. But that is far from a perfect science. So sometimes the deposit will be less than they expected and in some cases it's actually much more. So I say all this to point out that there's a lot of different factors that go into the value of a mining company. It's far more complicated than a straightforward investment in physical precious metals. So kind of the best way I can frame it for you is that mining stocks have a greater upside. They could return a much greater percentage than just how much the gold price goes up. But with that, they also come with the greater downside that they could underperform the appreciation in the metal price. And in some cases, vastly.

So that's particularly true during bear markets for the precious metals. So from about 2013 to 2017, when gold and silver were in a bear market, the miners did really poorly. For very good reasons, I will always recommend the benefits of holding physical metals more than buying mining stocks. But as always, those are excellent questions. Hope everybody enjoyed the show. Be sure to check out Gainesville Coins on Facebook, Twitter, Instagram, LinkedIn, all the social medias. And I am pretty excited to tease our next episode. It will be about a medieval African king who had so much gold, he is still considered the wealthiest person in history. And it's not something that I learned in school. Really fascinating stuff. So be sure to tune in next time.