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BA Deere
Honored Advisor

Warning from Chamath Palihapitiya

Modern monetary theory is going to be tested over the next 18 months.  The Fed printed $35 Trillion too much and will have to be clawed back in some fashion.  This bogles the mind, but Chamath says for every $1 the Fed printed, the stock market went up 90¢.  Now, I`ve been saying for 40 years that the stock market is too high and gonna crash since Paul Harvey said the Dow broke 1,000, on the radio while Dad and I were hauling hogs to Wilsons.   I`ve missed out on the 40 years of gains, every once in a while a broken clock gives the correct time.  However, I might be wrong another 40 years and the Dow will break 100,000 😀

Chamath says Facebook sold off in the opposite direction of the rest of the market, so he inquired about the and he discovered certain funds own Facebook because of their price to earnings. How many companies are traded they have plenty "P" but not enough "E"?  😀

This could lead to "contagion in commodities"  I have been straining to see where the Achilles Heel is in the farmland market, well that could be it.  Chamath is worth the listen, here is the link:

https://www.youtube.com/watch?v=dkncOaZh--M   

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10 Replies
rsbs
Senior Advisor

Re: Warning from Chamath Palihapitiya

if you keep one third of your assets in stocks, one third in interest bearing accounts/cds...etc, and one third in hard assets such as land or apartment buildings, and rebalance when one segment gets out of whack.....you are going to be a stellar investor by rule since you will be forced to buy low and sell high.

the problem, as a farmer, is that we are all conditioned to want farmland, and invest accordingly.

and right now, land is overvalued, stocks are overvalued, and * and DJT both printed money like drunken sailors. So did the zero and shrub.

So it basically is a two asset class mix....dollars are being printed into the stratosphere.....land or stocks?

BA Deere
Honored Advisor

Re: Warning from Chamath Palihapitiya

Hey Red, this $35 Trillion that was printed into the economy shouldn`t have happened and what Chamath argues (he could be wrong) is that it will have to one way or another come out.  Which will of course be painful and if accurate 90¢ on the dollar was put in the stock market .... I would argue that every bit of the remaining 10¢ or more ended up in farmland 😀

But what you have to remember is I`ve been wrong about "this can`t keep going up, up up" for 40 years now and who`s to say I won`t be wrong for 40 more?  😀  To be honest, I hope Chamath and I am wrong and the universe really can be created from nothing  😀   Because just living off the crumbs hasn`t been too bad of a gig, it could`ve been a lot worse and fear it might. 

There are stories of some banks may not borrow you money to buy non-electric cars in the near future.   You could extrapolate that ag banks will require you to farm a certain way (cover crops, no-til, ect) or not qualify for loans (or charge higher rates to non-cooperators) .   With farmland, my concern is as the government looks for money (to pay off student loans and such) they will push services down to the state and local levels.  Property tax is too juicy of fruit to not be picked.  Therefore it will become clearer clearer that us landowners are actually "renters" and our landlords the tax assessor will jack our rents.

Those paying $29,000/acre for land didn`t purchase it with "sweat money" from stacking hay bales in a 99° barn, pitching manure with a fork or staying up with until 3am pulling pigs from a farrowing sow.  That $29,000 land got there at least indirectly from Federal Reserve money creation.   The magician might have an endless supply of rabbits that will come out of his hat, of course I said that 20 years ago  😀

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erikjohnson61y
Senior Advisor

Re: Warning from Chamath Palihapitiya

My 2cents is that there are two reasons it appeared that MMT was viable over the last 20-40 years.

1 - China. Offshoring manufacturing to obtain (very) cheap labor offset the inflationary effect of printing money/chronic deficit spending

2 - The interest rate cycle. Rates bottomed in 1946, then rose through 1981. Most of the '60' and '70's were characterized by bear markets and inflation. Once interest rates turned to declining, the ability to refinance debts and lower and lower rates also countered the inflationary effect of MMT (aka reckless spending).

Now we are at the bottom in interest rates, and China doesn't have much more ultra-cheap labor. Maybe India will supplant them, but India is already way ahead of where China was 40 years ago. 

If we have turned the corner and interest rates will now be rising for the next 40 years, the era of 'cheap and plentiful' may be over.  Interestingly, NO fiat currency has survived a complete interest rate cycle from bottom (1946) to top (1981) to bottom (2022) to top (??? ~2060??) again. If the US Dollar is to survive, Congress will have to go on a severe diet. The debt subject to interest is about 25 trillion.  At just over 2%, the cost to service this debt has been about 580 Billion - about 13% of tax revenues.  The Federal debt is mostly short term instruments, meaning it turns over rapidly (as you would want in a declining rate environment).  If the effective rate the Treasury pays goes to 5%, and with ongoing trillion dollar deficits, debt service could go to 1.35 Trillion by the end of Biden's term - nearly 30% of taxes.  

The problem is entitlements - Congress stupidly mandates that money MUST be spent if certain conditions exist, regardless of total cost.  If interest rates go to 5% for the Treasury, there will NOT be any discretionary epenses left to cut in order to balance the budget.  Then one of three things happens:

1 - Taxes go up (a lot) to cover the shortfall. (not likely - raising taxes is death to politicians)

2 - Congress severely cuts federal spending to balance the budget (OK, you can stop laughing now)

3 - When congress fails to balance the budget and the Fed has to raise rates to 8-10% to curb inflation, US Federal debt starts to spiral out of control, and we get a Dollar crisis due to runaway inflation as a result of all that Federal spending.

That said, the US debt is about 1.25x the economy, and about 6x annual tax revenues.  But that is only #2 among developed countries. Japan's debt is over 2.5x the economy, and they seem to keep chugging along. So what seems like it should happen doesn't always happen, or takes a lot longer to happen that one would think.

So right now my investment philosophy is "how bad would it be if I'm wrong???" I'm more focused on the potential downside, so for now I own a few energy stocks and one biotech stock and that's it. Someone whose opinion I respect said that when you can buy the Dow Jones Industrials for 5 ounces of gold, go all-in on stocks.  Right now the ratio is 18-ish, so some combination of much higher gold prices and much lower stock prices would have to happen before he jumps back in, at which time you should be able to buy great companies like Apple at cheap prices. He thinks we are at the start of a long-term bear market, and that the Dow could drop to about 18,000 before it's done.  If gold is $3600 by then, it will be time to jump in!

Oh, there is one other thing I'm doing - Series I Savings Bonds!  Buy in November after the new base rate takes effect and it will likely pay over 10%. 

BA Deere
Honored Advisor

Re: Warning from Chamath Palihapitiya

Last week Swiss Bank UBS backed out of a thought to be slam dunk acquisition of robo advisor Wealth Front.  That isn`t above the fold news, but I`m wondering if that isn`t the Canary in the coal mine getting the sniffles.  What`s been working for the last 10 years, may not in the next 10 years.

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sdholloway56
Senior Advisor

Re: Warning from Chamath Palihapitiya

Yawn.

 

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rsbs
Senior Advisor

Re: Warning from Chamath Palihapitiya

Eric, sometimes the age old adages don't work.

Land should trade for five times the gross value of an acre of corn. $7 corn, if you can get that, 200bpa acre yield, if you can average that, five times $7 times 200 equals $7000.

Good luck finding any land at that price.

These are not regular times.

BA Deere
Honored Advisor

Re: Warning from Chamath Palihapitiya

Land going for $20,000 to $29,000 is rapidly approaching $1 per square foot, $43,560 we`re about halfway.  Not too far from "Picasso territory" ($10 of paint and canvas and it sells for $3 million 😀 )  ... sure why not.   Trouble is all these car dealership, chemical sales, construction company, movie business and You Tube video revenue is chasing too few acres.

Like they say down in Texas, if ya got it, flaunt it   😀

BADeere_0-1662636293629.jpeg

 

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Wind
Advisor

Re: Warning from Chamath Palihapitiya

Certainly not regular times - we are in perilous times.

A few BTO farmers have started harvest here but most will be 10 days or more away.  50 to 100 bu per A less than last year.  Beans will fare a little better but less than last year.

A big rain event is shaping up for Iowa this weekend.  We shall see.

Land the past few months has sold for $16,000 to $18,000 here in central IA.   There is a chunk next to me on the auction block this month.  I'm not even going to see who buys.  I will hear soon enough.

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rsbs
Senior Advisor

Re: Warning from Chamath Palihapitiya

one thing about the land market....it is not uniform, and there actually are some "deals" out there from private sales or poorly advertised sales, but it is hard to find any that make sense right now, just like housing. I know of a few sales in the last 12 months around the $9000 per acre amount for 200 bushel type land, and more than a few at $10000 where the seller wanted someone they knew to be the next owner, and didn't care for an auction. We purchased a house that way, where the retired owner wanted to know that a good family was living in her dream home, and not just the high bidder. It is not always about money.

I bought a 160 square piece bordered by a river, and with a couple of spent gravel pits on it for less than $4000 per acre and should realize a pretty good percentage return each year that will beat CD rates. The real estate taxes on this quarter were at $9000 before the sale, but they now will be in the $3000-$4000 range, which makes it all work well.

Going forward, with government budgets busting, owning real estate may end up being an anchor around one's neck, though, as you have limited ability to control how it gets taxed, and the beavis and butthead crew will lick their chops at taxing you out of ownership. Just wait for them to weigh in on that here. ( heh heh hehe....we spent all of our money on frivalous stuff, don't have a pot to p in, but heh heh heh......let's tax YOU!!!)

This , my friends, is why America was set up the way it was, and this is why changes have led us to where we are.