Risky Business

2022 hasn’t exactly been a banner year for cryptocurrency. In the spring, the crypto markets experienced a spectacular crash, and last week a leading crypto exchange platform, FTX, slid abruptly into bankruptcy amid questions about its operations, liquidity, and use of funds. The SEC and Department of Justice are reportedly investigating whether the company’s sudden collapse involved criminal activity or violations of the federal securities laws.

The demise of FTX was so quick and catastrophic that the company’s founder and CEO, Sam Bankman-Fried, is reported to have lost 94 percent of his net worth in a single day. The rise and sudden fall of FTX may well rank right up there with Enron in the riches-to-rags business bust category. But there’s an even more ironic twist to the FTX failure: only a few months ago, during the 2022 Super Bowl, FTX ran a commercial where a skeptical Larry David, with a record of rejecting inventions like the wheel and the light bulb, also rejects the idea of investing with FTX, which is presented as “a safe and easy way to get into crypto.”

As is always the case when a high-flying entity suddenly crashes and burns, there are ripple effects from FTX’s spectacular failure. For example, the Ontario Teachers Pension Plan, the third-largest pension plan in Canada, disclosed last week that it had invested $95 million in FTX entities. (Fortunately for Ontario teachers, the investment apparently represents only a tiny fraction of the money invested by the Plan.) Other entities also had investments in FTX. One of them, a venture capital firm called Sequoia Capital, announced that it will mark down its $214 million investment in FTX to zero. Sequoia told its investors: “We are in the business of taking risk,” and “[s]ome investments will surprise to the upside, and some will surprise to the downside.”

Sequoia’s observation is, of course, true–if the investor understands, as Sequoia did, that cryptocurrency is a risky investment. The problem is that crypto advocates keep trying to present it as something else, as FTX tried to do with that in retrospect hilarious Larry David commercial. If the everyday investor is paying attention, the FTX collapse will make it harder to sell cryptocurrency as the next best thing to the light bulb. And we might want to check to make sure that our pension plans or mutual funds have learned that lesson, too.

Investing In Space

Let’s say your modest portfolio in the stock market has had a good run over the past year or so, and you’re looking for a new investment opportunity.  Let’s posit, further, that you think Bitcoin is a curious bubble that’s going to burst someday, and that you’d rather put your money into a company that produces something more tangible and more futuristic.

Well, what about space?

SpaceX is racking up a number of impressive accomplishments.  Last month SpaceX successfully tested its Falcon Heavy Rocket, and it is moving forward on launching what it calls the most powerful operational rocket in the world.  The Falcon Heavy launch is set for next week, on February 6, from the Kennedy Space Center in Florida.  The successful launch of the Falcon Heavy would join other stellar (pun intended) SpaceX accomplishments, like being the first company to launch a rocket with payload into space and then land the rocket back on Earth, and being the first company to relaunch an already used rocket.  SpaceX also built the first private spacecraft to dock with the international space station, and it’s shown it can reuse the spacecraft, too.  If you’re trying to make space a commercially viable enterprise, developing reusable rocket technology and reusable spacecraft technology, to hold down the cost, is a crucial first step — and SpaceX looks like the leader in taking that step.

But here’s the thing:  you can’t invest directly in SpaceX.  It’s a private company, and its founder Elon Musk has said he won’t take it public until the company has started to make flights to Mars.  Why?  Because Musk is afraid that if the company goes public before then, there’s a chance that the stockholders will pressure the board to focus on things other than colonizing Mars — which is Musk’s goal and is bound to be more expensive and difficult than, say, establishing Moon exploration bases or mining asteroids for precious metals.  It’s not an unreasonable fear on Musk’s part.  So if you want to own a piece of SpaceX, you can only do so indirectly, by investing in Alphabet, which owns a piece of SpaceX as well as parts of Google, YouTube, and other things.

Okay, so SpaceX isn’t currently available for the intrepid investor who wants to get into the space exploration game.  Are there other options?  It’s not easy to determine, because a lot of the companies that are touching upon space issues — like Boeing, for example — are better known for producing other objects.  But you can start to get a sense of what’s out there by looking for lists like this one, on potential investment opportunities involving space, or looking for articles about company announcements related to space activities and then figuring out whether they are publicly traded.

It’s not easy for the casual investor.  What we really need is for one of the stock exchanges to create a “space index,” just like there’s a Dow Jones “transportation index.”  The index would identify the space-related public companies, mutual funds would be established to invest in each of the space index companies, and those of us who’d like to put our money in the heavens could buy into the mutual funds.

Hey stockbrokers!  How about giving investors interested in space some help here?

Bye-Bye, Bacon

At dinner tonight, a friend mentioned that  a world-wide bacon shortage is in the offing.  An unfortunate and tasteless jest, I thought — but it turns out to be true.

That’s right: the British National Pig Association is forecasting a world-wide shortage of pork and bacon next year.  They attribute the lack of porcine product and the declining numbers of swine to the increased cost of maize and soya and the other foodstuffs that allow cute little piglets to grow up to be huge, beautiful, bacon-larded hogs.

Horrors!  We’ve put up with a lot in this country:  high unemployment, a crappy economy, even Emmy Awards being presented to shows that no one has ever heard of.  But . . . a bacon shortage???  Isn’t that asking a lot of mainstream America?  How are we going to have state and country fairs without bacon to contribute to deep-fried bacon, chocolate-covered bacon, and bacon ice cream?  What are we supposed to eat for breakfast?  What other foodstuff tastes as succulent wrapped around a scallop, served with scrambled eggs, or covered with brown sugar?

Forget about investing in gold, silver, or other precious metals — it’s time for the savvy investor to go long, long, long in pork bellies.  America runs on bacon!

Market Jitters

Yesterday’s wild ride on Wall Street is one of those incidents that is profoundly unnerving to the average investor.  It is hard to believe that the Dow Jones Average sank more than 1000 points, from high to low, before rebounding somewhat.  Weeks of slow gains were wiped out in the blink of an eye, for unknown reasons.  And who knows what today will bring?

The news stories about the event have questioned whether there was some trading mistake, whether there was market manipulation, whether some robo-trading programs were inadvertently triggered, or whether someone actually hacked into the New York Stock Exchange.  Anything is possible, I suppose, but I think the more likely scenario is that investors are extremely skittish — and they have a lot to be skittish about.  The Greek debt crisis continues to be a huge problem, other debt-ridden EU countries may not be far behind, and their more solvent EU partners may be balking at more bailouts.  In America, after months of bland assurances that the economy is on the upswing, we aren’t seeing much real job growth or signs of significantly stronger economic activity.  In the meantime, America seems to be piling up its own debt at an astonishing pace, as if the country were bidding to outdo Greece.  With this kind of national and international context, is it any wonder that markets are jittery?

Not Smart (Cont.)

I’ve written before on the enormous losses Harvard recently sustained as a result of the investments of its endowment funds and capital accounts.   The Boston Globe has now published an article on how the losses happened.  It’s a familiar story and good lesson for anyone managing their 401(k) account.  People made aggressive investments notwithstanding cautions about risks, the aggressive investments produced very strong returns for a time, and the investment decisionmakers overlooked the risks, focused on the returns, and then took an uppercut when the markets went south.  They forgot the basic questions all investors should ask:  what am I looking to achieve with my account, and how much risk am I willing to take to try to achieve that goal?  These questions should be asked regularly — not just when the markets experience a downturn.

Not Smart

Harvard University has announced that it paid hundreds of millions of dollars to get out of interest rate swaps.  The school also said that its General Operating Account, which is the principal account that funds the schools’ operations, lost close to half its value in the last fiscal year, falling from $6.6 billion to $3.7 billion.  The value of the school’s endowment fund, on the other hand, dropped from $36.9 billion to $26 billion during the fiscal year.

What’s interesting about this story is not that Harvard’s investment accounts lost value — virtually all investment portfolios, except those invested exclusively in gold, have declined in value since the economy and the credit markets hit the wall last fall — but how much Harvard has lost and the nature of its investments.  Any kind of swap investment is risky; you really have to know what you are doing and what the potential downside risks are to make a properly informed investment decision.  It is curious that Harvard would invest hundreds of millions in interest rate swaps.  You have to wonder if its investment advisors really described the risks to the university body that oversees investments and, if so, whether that body really understood those risks.  As for Harvard’s endowment, losing more than $10 billion in one year is extraordinary.

Many colleges and universities have been aggressively raising money to up their endowments, and it appears that they have been investing those funds with, perhaps, even more aggressiveness.  That seems to defeat the traditional purpose of an endowment fund, which is to provide a financial cushion and regular investment income for the institution.  Given that purpose, you would expect endowment funds to be invested more conservatively, and not in a way in which the endowment fund could conceivably lose more than 25 percent of its value in one year.

If you have been a contributor to a university’s endowment fund, only to see the value of your contribution go poof in the past year, what do you say when the college comes back to you this year to ask for help?

A Pretty Good Investment

The normally separate worlds of modern technology and Renaissance art intersected recently, and the result was confirmation that a heretofore obscure painting was the work of Leonardo da Vinci.  Multispectral images of a painting thought to be that of a 19th century German painter has allowed art historians to determine that a fingerprint on the painting matched that of the great Leonardo, who apparently frequently used his hands in creating his masterpieces.

What does it mean for the owner of the piece?  Well, he bought the painting two years ago for $19,000, and now it is estimated to be worth more than $100 million.  For the mathematically challenged, that means the value of the investment increased 5,000 times in just two years.

Russell, be sure to leave a few telltale fingerprints on your artwork!

What Price Gold?

Gold has hit a new all-time high price, above $1,035 per ounce. The run-up in gold prices has been striking — five years ago, the trading price of gold was slight above $400 an ounce, and since last November gold has increased from less than $750 an ounce to its current record level.

Why has the price of gold increased so dramatically? Historically, gold has been viewed as the safest investment in times of uncertainty and potential inflation. If you thought your government was going to collapse, or our currency was going to be undercut by dramatic inflation, you didn’t want worthless paper or coins, you wanted gold because it would retain its value under any circumstances or regime. (Ask any citizen of the Confederate States of America or the Weimar Republic if you don’t believe me.) I think the increasing price of gold signals that many investors, worldwide, are not convinced that the current economic woes are behind us and they therefore are hedging their bets retreating to an investment that dates from the earliest days of capitalism and commerce — even though the unprecedented price of gold makes buying at this point a significant risk.

Surveys of consumer confidence are fine, but whether people are willing to pay more than $1000 for an ounce of gold says a lot more to me about confidence in the economy than any survey ever could.