The Solarwinds hack that broke into U.S. government agencies, along with hundreds of Fortune 500 companies, is increasingly looking like an “act of war” per various sources in the U.S. government and Congress.

“It’s pretty hard to distinguish this from an act of aggression that rises to the level of an attack that qualifies as war,” Sen. Chris Coons of Delaware told reporter Andrea Mitchell.

“[T]his is as destructive and broad scale an engagement with our military systems, our intelligence systems as has happened in my lifetime,” he added.

The scope of the hack continues to grow. On the government side, the hackers gained access to America’s nuclear stockpile, along with “the departments of Defense, State, Homeland Security, Treasury, Commerce, and Energy and its National Nuclear Security Administration” per Axios — and more.

On the private-sector side, Microsoft reports that customers impacted by the Solarwinds hack spanned more than half a dozen countries beyond the United States, including the U.K., Israel, United Arab Emirates, Canada, Mexico, Belgium, and Spain.

New breaches continue to surface as cyber-investigators hunt for evidence of entry and scan for “back doors,” which are hidden ways to sneak back into the system. As an example of a new finding, dozens of email accounts within the U.S. Treasury department were breached. Bloomberg further reports at least three state governments were hacked.

In a Tweet on Saturday, Dec. 19,  President Trump questioned the seriousness of the attack and whether or not Russia was behind it, saying that “it may be China (it may!).”

But the U.S intelligence community, and Trump’s own cabinet, have confidence Russia is the source.

“This was a very significant effort, and I think it’s the case that now we can say pretty clearly that it was the Russians that engaged in this activity,” Secretary of State Mike Pompeo had already said on Friday, Dec. 18.

“From the information that I have, I agree with Secretary Pompeo’s assessment,” said Attorney General William Barr on the following Monday. “It certainly appears to be the Russians, but I’m not going to discuss it beyond that.”

The intelligence community is confident it was Russia in part because of the creativity and sophistication of the attack, along with various operational clues.

Though aspects of the Solarwinds hack were new, the approach also bore resemblance to a 2017 effort against the country of Ukraine, in which Russian operatives knocked out public and private computer systems in a malware attack that ultimately spanned dozens of countries, causing hundreds of millions of dollars’ worth of damage.

“This is something we have to address as soon as possible,” Sen. Mitt Romney of Utah said on Meet the Press. “They potentially have the capacity to cripple us economically, they went to our businesses. They have the potential to also cripple us with regards to our water and electricity and so forth.”

It isn’t yet clear how the U.S. government should respond. Behind the scenes, an ongoing root-out and clean-up effort will take years. Tech giants like Microsoft and Cisco — let alone cybersecurity firms like Solarwinds and FireEye — may also have to completely review, upgrade, and overhaul their security approach.

“While the Russians did not have the time to gain complete control over every network they hacked, they most certainly did gain it over hundreds of them,” writes Tom Bossert, a former homeland security adviser to President Trump, in a New York Times opinion piece.

“It will take years to know for certain which networks the Russians control and which ones they just occupy,” says Bossert. “The logical conclusion is that we must act as if the Russian government has control of all the networks it has penetrated. But it is unclear what the Russians intend to do next.”

In addition to ongoing security issues, a growing question is: How should Russia be punished for this?

Options include sanctions on Russian financial activity (in addition to the sanctions that already exist); a U.S.-led cyberattack on Russian systems as a form of retaliation; a joint effort between, say, the U.S. and European allies; or something bigger and more intense.

We don’t know where the Solarwinds hack will go next. But we know the dangers won’t go away.

Whether the next shoe to drop is another outright attack on U.S. systems, an escalation of geopolitical conflict between the U.S. and Russia, or a high-profile U.S. retaliation, the greatest cyberattack in history — which many now view as an act of war — is very much a storyline to be continued in 2021. 

Republicans and Democrats finally got their act together and came to agreement on a $900 billion stimulus effort for struggling Americans and small businesses. Congress is rushing to finalize the bill alongside a last-minute effort to fund the U.S. government for the remainder of the fiscal year.

There were compromises galore, and many were disappointed with various aspects of the final result.

Still, at $900 billion or so, it will be the second-largest relief effort in history (behind only the $2.2 trillion of relief authorized in March 2020) and will include lifelines like direct stimulus checks and topped-up unemployment coverage.

The markets had no time to celebrate the stimulus, however, because of VUI-202012/01.

VUI-202012/01 might sound like the vehicle identification number (VIN) for a luxury sedan. But it isn’t.

VUI-202012/01 is an epidemiologist nightmare come to life — a mutated strain of COVID-19 that could be 70% more transmissible than the original version, due to a much higher “viral load” (a measure of how much virus you take in when breathing infected air).

The acronym itself is fairly straightforward:

• VUI stands for “Variant Under Investigation.”
• “202012” marks the month of investigation (December 2020).
• “/01” means it is the first variant of the month (so far).

The U.K. is apparently ground zero for this new and super-transmissible COVID-19 strain. It has been reportedly detected in all parts of the U.K. other than Northern Ireland.

Countries around the world are banning U.K. flights and U.K.-related travel to keep the new variant from reaching their local population. Per Sky News, here is a partial list of countries that have either enacted U.K. travel bans or have preparations to enact them shortly:

India, Russia, the Netherlands, Denmark, Norway, Israel, Belgium, Italy, Austria, Germany, Spain, Portugal, Bulgaria, Switzerland, Lithuania, Latvia, Estonia, France, Malta, Sweden, Greece, Turkey, Hong Kong, Canada, Saudi Arabia, Oman, Kuwait, Jordan, El Salvador, Ireland, the Czech Republic, Colombia, Morocco, Chile, Finland, and Argentina.

The travel ban efforts may be coming too late.

U.K. citizens have been traveling globally for weeks (from early December onward) and variants of the new strain have likely already been found (verification is still underway) in countries as far away as Australia and South Africa.

According to current estimates, the mutated strain has been in the U.K. at least since September. It took time not just to identify the mutation, but to verify the stepped-up rate of spread.

Why does this matter, even with vaccines on the way? Because overwhelmed hospital systems are still the critical danger point in many Western countries. Even in Sweden, which for months had appeared to sidestep the worst of the pandemic, ICU beds in the Stockholm region are full.

If you take a COVID-19 strain that is 70% better at transmission and combine it with pandemic fatigue among weary citizens, coupled with active disinformation campaigns and a sense of complacency based on the nearness of the vaccine rollout, you get a recipe for a kind of COVID-19 tsunami that overwhelms hospital systems to the point of no return (with many already on the brink).

The threat of this new COVID-19 variant explains why oil prices got crushed to start the week, with West Texas Intermediate and Brent Crude oil futures contracts both trading down 4% or more.

The problem here is not just newly enacted travel bans across dozens of countries — which we are already seeing in respect to the U.K. — but the increased possibility of harsh new lockdown measures within various countries as the super-transmissible VUI-202012/01 starts showing up across borders.

If the rate of infection for COVID-19 starts moving higher globally with this new strain, the timeline for global economic recovery will be pushed back. That would be a double negative for energy demand, as the anticipated recovery timeline could be delayed with crude oil stockpiles building up in the meantime.

It remains to be seen how things will play out, and it is possible the widely enacted U.K. travel bans will isolate and contain the new strain in time for most of the world to avoid harsh new lockdown measures.

If not, though, we could see harsh emergency responses eat into recovery activity (or destroy strained hospital systems if no such measures are taken) as the virus opens up a new front in the Covid Winter battle that is now front and center, as the world waits desperately for the vaccine cavalry to roll in.

What are some solid ways to make a lot of money in 2021? Where will the major trading and investing gains be made? What will the themes be that potentially drive large profits?

In answering these questions, a phrase to remember could be “short-duration tangible assets.” We’ll explain what that means in a moment.

First, to quickly look back on 2020, the TradeSmith Decoder got a number of big things right. For the Decoder model portfolio — on which subscribers receive updates every trading day, including live buy and sell recommendations — we did the following:

• Bought a round of pandemic put options shortly before the March 2020 crash, including United Airlines puts within 72 hours of the meltdown.

• Took very large positions in Bitcoin and silver within days of the March 2020 lows (and still hold the core of those positions today).

• Took a large position in call options on GDX (the bellwether gold miner ETF) for triple-digit gains on the rebound off the March 2020 lows.

• Added size in the right places, leading to large gains in Bitcoin and multiple Bitcoin-related equities (very much still ongoing), Amazon.com (still ongoing), various gold and silver miners, a major copper producer, and more.

The main thing we got wrong in 2020 was underestimating, at first, the power of the tech bubble and the Robinhood-driven mania.

That error of judgment led to a handful of summer-vintage put option positions we closed at a loss as soon as we comprehended the awesome, and unprecedented, direct-spending power of trillion-dollar fiscal intervention coupled with a “bored in lockdown” trading craze — think millions of Americans with no pressing need for their $1,200 stimulus check deciding to buy tech stocks.

Now, in the final weeks of 2020, the year is closing strong with our Bitcoin-related holdings taking on a vertical posture (two of the equity plays we hold were up roughly 16% and 13% on Thursday alone).

But the operative question here is, what else looks good for 2021? What are the areas to focus on for the big, bold trading gains that will come outside the Bitcoin space?

As we consider the shape of the landscape, we see:

• Growing regulatory pain for the tech juggernauts (Google and Facebook are facing a legal and regulatory assault — and Amazon’s day is probably coming).

• A renewed emphasis on vaccine-powered global growth (the world bouncing back aggressively as corporations get back to business and emerging markets shine).

• A world in which the bottom half of the U.S. economy continues to struggle mightily, with the government attempting to help, and added stimulus meant to help the bottom 50% flowing into Wall Street’s pocket and enabling the top half of the economy to throw a post-pandemic party.

• A renewed emphasis on inflation concerns and inflation protection plays as demand-driven and cost-driven inflation pressures start to heat up, with central banks keeping monetary policy loose so as not to bruise the recovery.

• High odds of a localized bubble burst, and a series of extreme price declines, in the shares of wildly over-valued tech names (stuff like Tesla, Snowflake, DoorDash, and much of the electric vehicle space). 

• An investor shift away from long-duration intangible assets (tech stocks, basically) and into short-duration tangible assets (think energy, materials, health care, and emerging markets).

So, let’s break down what the phrase “long-duration intangible assets” means.

The term “long duration,” in our use of it here, refers to companies whose cash flow payoff is expected to be far off in the future. Long-duration payoffs are a hallmark of super-speculative technology plays.

To give a hypothetical example, let’s say there is an electric vehicle battery technology play you are super-excited about. The company is losing money hand over fist at the moment — plowing all their funds into research and development — and their technology will take years to fully develop. But they have a shot at making big profits by, say, the year 2030 or so.

These long-duration speculative tech ideas tend to draw in lots of attention, and capital, in environments where funding is cheap and interest rates are close to zero.

Think about what the world looks like when capital is plentiful and interest rates are super-low. That is typically a low-growth environment, with lots of cheap capital in the system because respectable businesses have no need to borrow it.

In such an environment, investors can choose to fund projects with a payoff far, far in the future. The lower the interest rate, the longer you can wait to see a return on investment and still justify putting money into something. If your cost of capital was zero, you could theoretically justify project payoffs that are infinitely far into the future.

This type of environment allows investors to engage in extreme, George Jetson-style, techno-fantasy projections that leave all rational assessments of profit behind, because they can start to live so far into the future that present-day balance sheets don’t matter.

If you can justify investing in Tesla because, say, they will be doing self-driving trips on Mars in the year 2035, who cares if the valuation makes zero sense in the here and now?

Nor is it just speculative technology. The basic idea is that the lower the interest rate goes, the farther the time horizon investors can justify for all kinds of speculative projects, be they tech-related or not. This can be an especially attractive mindset when there are few other things to invest in because, say, the real economy is in a slump.

The intangible assets concept goes hand-in-hand with long-duration assets.

Intangible assets are things like software code and intellectual property and business model advantages and brand value — stuff you can’t see or touch.

Investors love intangible assets because they scale up at minimal cost. One of the reasons the venture capital industry is heavily focused on software is because software code, as an intangible asset, is wildly scalable. With software, it doesn’t take much hardware to go from 1 million users to 100 million users. 

In a low-growth, low-inflation, low-interest-rate environment, long-duration intangible assets are the place to be. That is partly why the tech juggernauts have dominated the market for years upon end.

We’ve been living in a low-growth, low-inflation, low-interest-rate world where the cost of capital is cheap. That’s the perfect environment for investors to fund speculative tech ideas, and live far in the future, and get super excited about intangible assets (software code and future technologies).

Tech plays have also gotten a major boost from the pandemic itself. Think work-from-home, e-commerce, telecommuting, drone delivery, and all of the tech-related trends that were accelerated in their delivery by the realities of lockdowns and social distancing.

But here is the thing: When it comes to winning investment themes, investors are like Homer Simpson with donuts. They just keep gorging until they are full to bursting, at which point the valuations become so bloated it doesn’t take much to send them into reverse. Are companies like Zoom and DoorDash the future? Sure. Do they make sense at current valuations? Not on Earth, they don’t.

In 2021, that whole script could get flipped as genuine economic recovery takes hold.

• With real recovery underway, sensible business models start making sense again. Companies doing profitable, bread-and-butter things in the present, versus pie-in-the-sky things in the future, start to see their year-on-year earnings comparisons look excellent as 2021 quarterly earnings and outlooks compare with much-depressed 2020 versions.

• With consumer spending in recovery and companies working to rectify supply-chain shortages, investing in “stuff” starts to make sense again — think capital expenditure on things like factories and supply-chain infrastructure.

• With inflation picking up as wage and labor costs rise, it becomes possible for interest rates to start rising, too. Central banks can be comfortable with rising interest rates as long as inflation itself is rising even faster — because that means real yields stay negative. If 10-year interest rates go to 2% but 10-year inflation is at 5%, they are still inflating away the debt (which is part of the deliberate plan).

So now we get to “short-duration tangible assets,” which are basically the opposite of tech stocks.

Short duration, in this case, means companies with profit-driven earnings potential in the here and now, and business models that can make money in the near-to-medium term as the economic outlook improves.

Think of, say, an international construction company that suddenly has a lot of business building new factories in emerging-market locales because investor capital is flooding the emerging market (EM) space and EM companies are expanding operations. A company like that won’t be promising to make money in five or 10 years. They will be banking profits here and now. That is a short-duration focus.

Or think of energy companies — in particular, beaten-up fossil-fuel plays — that see their earnings outlooks go from awful to awesome as the crude oil price climbs northward and energy demand roars back on both the oil and gas side (with green energy alternatives still years away from displacement).

Then, too, as soon as interest rates start to meaningfully rise — even if they only rise a modest amount — a lot of the wild financing math that relies on super-low rates no longer works.

The higher the interest rate, the more that profits and cash flow actually become relevant.

• In a world of super-cheap funding, all kinds of speculative projects can get funded, even with payoff possibilities that are years away.

• But in a world where financing has a meaningful cost hurdle — because interest rates have gone higher — you actually need incoming cash flow (profits in the near-term) to justify borrowing at the higher rates that are on offer.

The impact of rising rates — a natural corollary to growth-powered inflation — is another reason why the whole regime shifts away from overinflated tech to underappreciated short-duration tangible asset plays.

And the “tangible assets” reference here is basically the opposite of intangible assets — stuff that is material, stuff that is physical, stuff you can drop on your foot (like a commodity) or stuff you can lean against (like a factory or a refinery).

So that is more or less what we see for 2021: A regime change from long-duration intangible assets (primarily tech stocks with nosebleed valuations) to short-duration tangible assets (beaten-up boring businesses that will make money in the present, on the strength of inflationary recovery).

And what happens, by the way, if the recovery stalls out for whatever reason? If, say, the vaccine rollout stalls, or global growth runs into unforeseen snags? In that case, we will still be oriented toward tangible assets — again think physical “stuff” — but more in the inflation-protection vein, like precious metals stocks (which could in fact do well in either scenario).

The stars are aligning for the return of inflation in 2021. Not fake inflation either, but the real stuff.

Inflation’s return could thus fuel a migration into tangible, short-duration assets, which would be a major shift from the dominant market configuration of the past few years.

Before we get into what that means (which may actually require a follow-up piece), let us address the world’s premier inflation hedge: Bitcoin.

As of this writing, Bitcoin has surged to new all-time highs yet again. As we complete this note, it is trading above $23,000 per coin.

There is very much an “inflation hedge” angle here, according to Ruffer.

What is Ruffer, you ask? It is a large U.K. investment firm with $27 billion under management.

Ruffer announced this week it  holds approximately $750 million worth of Bitcoin — that is three quarters of a billion dollars — as an inflation hedge. (Their stake is likely worth more now, as Bitcoin has risen substantially since the announcement.)

So Ruffer, a sizable institutional player running tens of billions, has enough conviction in Bitcoin — as an inflation hedge, per their own stated reasoning — to put 2–3% of their investable assets in BTC.

Another money manager who made Bitcoin-related news this week is Scott Minerd, the Chief Investment Officer (CIO) of Guggenheim Partners, a leviathan-sized investment firm with $230 billion in assets.

In a segment on Bloomberg television this week, Minerd said his research team’s findings suggest Bitcoin should be worth $400,000 per coin. And again, that is not some minnow talking, but a whale of whales — a man who stewards $230 billion.

The news from Ruffer and Guggenheim comes in the wake of Massachusetts Mutual, a 169-year-old life insurance company, with $235 billion in assets, announcing they had purchased $100 million worth of Bitcoin.

These mega-whales don’t care about the current Bitcoin price. Why would they, with potential upside of 10X to 20X or even more? They just want to build a small position and then sit on it. The upshot is that the mega-whales are so big, their “small” positions turn out to be huge.

More than 18 months ago, we explained in detail to TradeSmith Decoder readers how a point would come when institutional investors would start allocating a low-single-digit percentage of their portfolios to Bitcoin, and that the risk-reward relationship would shift in such a manner that owning Bitcoin, at some modest allocation level, would be an absolute imperative.

That is exactly what’s happening now — which is why Bitcoin is doing its thing (smashing old highs), and why Bitcoin, along with an assortment of Bitcoin-related equities, has long been the largest position in the TradeSmith Decoder portfolio.

But getting back to inflation: There is a consensus building among large-scale money managers that Bitcoin is a high-quality inflation hedge, and may even be a superior inflation hedge to gold.

And inflation is very much on their minds, for reasons that are visible in the U.S. dollar chart below:

The U.S. dollar index has broken a bull trend of nearly 10 years’ duration (dating back to mid-2011). The dollar’s weakness in recent months has been remarkable, and there are clear signs the downtrend is likely to continue.

By various trade-related metrics, the U.S. dollar looks very oversold right now — possibly more oversold than it has been in decades, with respect to the trading community leaning hard into a bearish positioning stance.

And yet, as things stand now, traders and money managers may not be the relevant group. The real question is what’s happening with central bank reserve managers and sovereign-wealth-fund investment managers all around the world.

Central banks have historically held a large portion of their foreign exchange reserves in dollar-denominated assets. That means assets like U.S. treasuries, U.S. corporate bonds, and U.S. equities. All such assets, being dollar-based, can instantly be liquidated for dollars in a pinch.

Sovereign Wealth Funds (SWFs), which manage hundreds of billions in assets on behalf of trade surplus nations — think Norway, Qatar, Singapore, and so on — have also historically had a large chunk of their capital in dollar-based assets, again ranging from U.S. treasuries to U.S. equities.

Here is our view: Central banks and SWFs the world over are “lightening up” on their dollar asset positions. That does not mean they are abandoning their dollar holdings. It does not mean they are making a dollar crash call or declaring the end of the U.S. empire. It just means they are cutting back in a meaningful way.

Central banks and SWFs are collectively the largest asset holders in the world. Their collective baskets run into the trillions, making all other players look like minnows.

So, ask yourself what happens when this group, collectively, decides to cut back its dollar asset weighting from, say, 60% of portfolio assets down to 40%? 

The net result is a collective dollar outflow measured in the trillions. That is trillions’ worth of dollar-denominated assets — again, U.S. treasuries, U.S corporates, U.S. equities, you name it — getting sold on the margins rather than bought.

And this is happening not because the dollar is being abandoned, in our view, but because dollar assets were so dominant for the past few decades it is a normal adjustment to see things go the other way.

But what it means for global markets, practically speaking, is that the U.S. dollar downtrend could last for quite a while. If we are witnessing the footprints of a major sea change in terms of the world’s willingness to sit on U.S. dollar assets, we could see the dollar overall trending down and down for months or years to come.

But where would the capital be flowing to? If central banks and SWFs are selling out of their overweight U.S. dollar positions, what are they buying?

Well, as you may have noticed, there is a vaccine-powered global recovery en route. That is hugely bullish for Asia. It is hugely bullish for emerging markets in general. And it is hugely bullish for commodity-producing countries, and all kinds of entities that see higher prices as the result of a weakening dollar.

Meanwhile, in the United States, one-third to one-half of the country is experiencing Great Depression-level economic conditions. That economic pain will require lots of ongoing monetary and fiscal support.

But the top third of the U.S. economy is doing fine economically — possibly better than fine, thanks to home prices booming again.

This means that, as the U.S. economy recovers in 2021, the stimulus and “help” directed at the struggling lower half of the economy will juice the top half, as such that well-off consumers, casting off their pandemic shackles, will go into a spending frenzy.

When upper-half consumers go into their celebratory spending frenzy — think post-pandemic boom mentality, like the 1920s after World War I and the Spanish Flu — there are going to be substantial goods shortages due to demand, thanks to pandemic-related supply-chain disruptions and trade disruptions that still haven’t been repaired.

As if that weren’t enough, the Biden administration is very pro-labor, and the incoming department heads are very, very knowledgeable in terms of figuring out how to work the levers of the system. At the same time, finding ways to raise wages is good public policy, whether Republican or Democrat.

This means that, in addition to all the above, wage and labor costs will be going up. And investors will see it, and workers will celebrate it.

So, yes. Inflation is coming. Big inflation. Expectations are the first factor. A falling U.S. dollar is the second factor. Rising commodity prices will be the third factor, an overly stimulated top half of the economy clamoring for supply-chain goods in short supply will be a fourth, real upward momentum in wages and labor costs a fifth, mushrooming deficits a sixth, and on and on.

Tomorrow we’ll explain what that means for market regime change and “tangible, short duration assets” versus what we’ve seen the past few years.

Bitcoin is a natural digital monopoly. It doesn’t have real competition. Some people wrongly assume that it does, but it doesn’t.

There is nothing else that does what Bitcoin does, in the same way it does it. The use case Bitcoin fulfills is incredibly valuable and important — and there is no other asset with the same profile.

At the same time, there is no real prospect for a competitor to step up. Bitcoin is a natural digital monopoly here and now, and is quite likely to remain one into the far distant future.

That is what makes the value proposition for Bitcoin compelling. It has a built-in scarcity factor juxtaposed with a tide of demand that just keeps rising, creating a supply-demand imbalance that will send the price chart up and to the right, on balance, for years to come.

If Bitcoin had any real competitors, the picture would be different. But it doesn’t.

The reality of competition helps explain why bubbles burst. Take Tesla (TSLA) and Snowflake (SNOW) for example, two hot names with arguably the bubbliest valuations on the planet.

The problem for both of these companies — and their impossible valuations — is that the competition they face is absolutely brutal, which means their implied profit trajectories are in no way sustainable.

As we have detailed before in these pages, the electric vehicle (EV) space is a bloody red ocean of competition. Giant automakers on multiple continents are pouring tens of billions into their EV strategy playbooks.

Meanwhile in Europe, arguably the most important EV market in the world, Tesla is getting lapped by not one, not two, not three, but four other players (Volkswagen, Renault, Hyundai, and Kia).

Because of competition, the EV business is going to mature into a large-scale, low-margin affair. Hence we agree in spirit with analyst Ryan Brinkman of JPMorgan, who has a grinch-like TSLA share price target of (don’t laugh) $90.

In cloud computing services, investors expect Snowflake to grow its revenue by tens of thousands of percent while booking world-class profit margins — all while going head-to-head in the cloud with three behemoths named Amazon, Google, and Microsoft, in a business where competitive advantages of scale will inevitably lead to price wars (a specialty of Amazon) and a wildly expensive, never-ending innovation race (with the juggernauts collectively spending tens of billions annually on research and development).

Bubbles that inflate via hope and hype go bust because of the inevitable gap between lofty expectations and competitive downward pressure on profit margins.

Competition eats away at profit margins, making them slimmer. This is not an accident, it is one of the crucial features of a free market system.

When competitors go head to head, they fight to deliver ever-greater levels of value for money. This causes profit margins to shrink. Consumers win as a result — but investors see booms turn to bust.

As the noted venture capitalist Peter Thiel has said, competition is not the ideal state. What you really want, if you can swing it, is a monopoly. With a monopoly, your stellar profit margins don’t erode because nobody can truly compete with you.

Monopolies are hard to create and harder to sustain, with governments taking strides to bust them up.

The most famous monopoly in history was probably John D. Rockefeller’s Standard Oil Company and Trust, which was broken up in 1911 and led to offspring like Exxon, BP, and Chevron. AT&T had a monopoly on U.S. telephone service in the 1970s, resulting in a 1974 antitrust lawsuit that led to breakup and the creation of the “Baby Bells” 10 years later. Microsoft had a quasi-monopoly with its Windows operating system in the 1990s, leading to antitrust action — and so on.

The best monopoly of all, though, is one that the government can’t mess with, either because it doesn’t know how or there isn’t any substitute for the product or service in question.

That is the position Bitcoin is in. As a natural digital monopoly, there is nothing else that compares. 

More than 18 months ago, we laid out the case for TradeSmith Decoder subscribers why Bitcoin was compelling as a form of “digital gold.”

We explained how Bitcoin’s store-of-value use case, coupled with a superior ability to store, transport, and spend BTC in comparison to cumbersome physical metal, would give Bitcoin the capacity to take a significant chunk of gold’s market share, sending the BTC/USD market cap into the trillions as institutions got on board.

That is exactly what has happened, though the story has a long way to go. The thing to understand is why Bitcoin has no true competitors on the horizon.

Bitcoin is definitely in competition with gold. But gold is not digital, giving Bitcoin the edge in that match-up. As Wall Street now acknowledges, Bitcoin is taking market share from gold, and could do so for a while via ease-of-use factors and accessibility of payment rails (think PayPal and Square).

A common assumption is that central bank digital currencies (CBDCs) will compete with Bitcoin. But this is a case of mistaken identity. Central banks will never be in the store-of value-business.

CBDCs will enable the rise of programmable fiat currency, but there won’t be a cap on supply. What is the maximum number of Bitcoin that will ever be created? Approximately 21 million. What is the maximum number of digital yuan or dollars or euros? The sky’s the limit. No algorithmic scarcity factor means no competition on the store-of-value front.

Another common assumption is that a more technologically advanced competitor could replace Bitcoin. But that assumption overlooks the power of global consensus and network effects.

Think about the QWERTY layout on Western keyboards. The QWERTY configuration is 146 years old, dating back to the Sholes and Glidden Typewriter launched on July 1, 1874.

Why is QWERTY still being used after all this time? Because of global consensus. Almost everyone is used to using it, and so the standard doesn’t change.

As a digital store of value, Bitcoin has a level of global consensus comparable to the QWERTY lock-in. At the same time, the robust simplicity of Bitcoin’s architecture is coupled with an active community of developers all working to upgrade and improve the Bitcoin ecosystem.

How do you improve on that? You don’t, for the same reason you don’t replace a QWERTY keyboard.

Bitcoin is also the only global consensus digital asset with a decade-plus transaction history underscoring its incumbency advantage, with new layers of infrastructure and payments architecture — exchange traded derivatives products, custodial service arrangements, investment charter amendments, pro-Bitcoin state legislation, and more — accumulating with each passing day.

To get a sense of a monopoly’s strength, try to imagine replacing it or recreating it. How would someone go about building a Bitcoin from scratch today? They wouldn’t.

And what store-of-value innovation baked into some new, unknown competitor would be worth abandoning Bitcoin’s 10-plus-years’ worth of transaction history, a global retail consensus, and a flywheel of institutional interest? There isn’t one.

Bubbly companies with sky-high valuations have competitors who will ensure out-of-this-world profit expectations are not met.

A scarce asset with a natural digital monopoly, on the other hand, has no real competitor to lessen the demand imbalance (gold, remember, is not digital). That is what it comes down to, really: Credible competition versus the absence of it.

Russian government hackers broke America’s cybersecurity defenses. They got into high-level departments like the U.S. Treasury and the Department of Commerce. They may have infiltrated hundreds of Fortune 500 companies, along with other sensitive areas both public and private. They may have accessed email accounts and who knows what else.

Worse yet, the breach may have gone undetected for nine months — from March 2020 through mid-December (last week). It was only on Saturday, Dec. 12, that the U.S. National Security Council called an emergency meeting to respond to the news. 

Agency officials all across the U.S. government, along with chief technology officers in Fortune 500 companies all around the world, are scrambling. On a scale of 1 to 10 in terms of “severity and national-security implications,” a government insider told the Wall Street Journal the breach is a “10.”

The news is like a four-alarm fire that you can’t even see. Imagine finding out one of your company’s most dangerous adversaries installed hidden malware on all the office computers — and did it nearly a year ago, leaving you in the dark as to what they’ve seen, stolen, carted off, or left behind in terms of unknown malware or malicious code.

To make a crude summation, the highest echelons of both the U.S government and the U.S. private sector are riddled with Russian malware, which could be deployed for espionage purposes or something even worse. It’s like a Tom Clancy novel come to life.  

Depending on how things play out, the consequences of this staggering breach could fall hard on Russia, and on Vladimir Putin himself. The fallout could also impact global energy markets.

A slow build-up of tension with Russia was already in the works for the United States. An aggressive confrontation between the incoming Biden administration and the Kremlin may now happen sooner rather than later in 2021.

So how in the world did this happen?

Cozy Bear, a notorious hacking division of the Russian government, was able to execute a subtle and sophisticated “supply chain attack” on a software provider to the world’s major players.

A supply-chain attack is a cybersecurity term of art, referring to the exploitation of a widely used product or service to potentially compromise any user who is connected to that service. 

The supply-chain element that was compromised is a software tool known as Orion, which is used to monitor activity across an internal network. Orion is a product of SolarWinds Corporation, a 20-year-old information technology company based in Austin, Texas. 

To scan the SolarWinds client list is to immediately see the problem. SolarWinds product users include 85% of all Fortune 500 companies, the Secret Service, the U.S. Federal Reserve, the U.S. Department of Defense, the National Security Agency, and more.

Thousands of the most strategically important and commercially valuable entities in the world, both public and private, use Orion, which exposed them to the Russian breach.

SolarWinds estimates that fewer than 18,000 customers out of more than 300,000 were impacted by the hack — about 6% of the total — but that 6% includes the cream of the crop.

The hackers appear to have “Trojanized” an Orion software security patch. (A Trojan horse is a means of getting inside a security perimeter by means of deception, as happened with the famous wooden horse in the legend of the fall of Troy.)

It is common for a software package to update itself every so often, via permission granted by the user, with new code streamed out from the parent company. You have likely seen these update requests for your own computer or smartphone. The Russians figured out how to use Orion patches as a backdoor means of system entry, while carefully covering their tracks.

“This is classic espionage,” Johns Hopkins professor and cybersecurity specialist Thomas Rid told the Washington Post. “It’s done in a highly sophisticated way,” he added.

The full extent of the damage is still being determined, and much of the detail will never be made public. Some information is so sensitive, the government would consider it dangerous just to admit that it was compromised. Private companies, meanwhile, will pick and choose what they reveal to shareholders.

The clean-up costs alone, let alone the espionage fallout, could run into the tens of billions as massive I.T. system architectures are swept clean or even thrown out and rebuilt from scratch.

It is impossible to imagine the U.S. government letting this go. Russia will be confronted, and quite likely punished, by the incoming Biden administration in 2021.

We don’t know what that punishment will look like, but the fallout could have a pronounced geopolitical effect. One area of direct transmission could be the oil and gas markets, where Russia remains one of the most important players in the world.

Aside from the security implications — not knowing what the Russians took, or what they planted and left behind, or what they now know — we can absolutely expect a ratcheting up of global tensions in 2021.

This will also come as the new U.S. administration works to shore up European alliances and rebuild the North Atlantic Treaty Organization (NATO), an entity directly opposed to Russian geopolitical goals.

On their Vitalogy album, the 1990s megaband Pearl Jam has a track titled “This is Not For You.”

It would make a good theme song for initial public offerings (IPOs), as in: When you see a hot initial public offering and feel tempted to buy it, remember: “This is not for you.”

Hot tech IPOs are liquidity events for the venture capital firms that built huge stakes for pennies on the dollar years earlier, and payday bonanzas for connected Wall Street firms that receive large share allocations at the official IPO price days before the opening bell.

The idea is that public investors — a mix of retail investors and money managers — come in on IPO day and bid the share price to nutty valuations.

This allows the big Wall Street firms and their preferred clients to cash out quickly — they were already long at the official price, prior to the opening bell, and can sell at their leisure — while the venture capital firms get paid astronomical sums after their lock-up period expires.

It’s a hugely profitable game for those with an inside track. DoorDash (DASH) and Airbnb (ABNB), two tech IPOs that hit the market last week, saw their share prices rocket higher, with ABNB more than doubling on its first day of trading.

Snowflake (SNOW), a cloud computing play that went public in September 2020, also rose more than 100% on its first trading day. Those three 2020 vintage companies — DoorDash, Airbnb, and Snowflake — are in the top 10 for the biggest IPO share price pops of all time.

Meanwhile the top three spots for first-day share price gainers — belonging to Palm Inc., Corvis Corp., and Infineon — are all from the year 2000.

In multiple ways, the IPO mania of 2020 has exceeded that of 2000:

• Bank of America Investment Research shared a chart showing a historic spike in call buying relative to put buying, calling it “the greatest call-buying frenzy since the dot-com bubble.”

• More than $50 billion has been raised in the past 11 weeks, according to research firm Dealogic, and at least $157 billion year to date — the most since the final push of the 2000 boom.

• The investor frenzy for Airbnb (ABNB) was so strong on IPO day, a robotics maker called ABB Ltd. saw its call option volume surge. Why? Because their stock ticker, ABB, was one letter away from the new Airbnb stock ticker, ABNB, and participants in the greed stampede were confused.

The eye-bulging venture capital paydays we see now are also reminiscent of the year 2000.

As an individual investor or independent money manager, it is very important to understand how the system actually works.

In order for capitalist economies to grow, new technology has to receive funding. Innovation requires investment, and sometimes wildly speculative investment, to get the ball rolling.

Fortunately, all throughout history, investors have been willing to provide the funding for technology innovation out of a greed motive. Booms and busts have been happening since time immemorial, dating at least as far back as Roman times.

The funding process is messy, and a lot of capital gets wasted. This is also a feature of how it has worked practically forever. Some hot new theme or concept takes hold, investors as a group get wildly excited, and they pour a river of capital into the new area.  

Most of the capital winds up wasted or destroyed, but a vital portion of it — usually a modest percentage — winds up funding the companies that change the nation or the world. 

Meanwhile, there are insiders in the business who get paid from the cycle, and they get paid every single time. They are like the guys who sell picks and shovels to gold miners in the gold rush. It doesn’t matter if most of the miners go bust. They get rich on the picks and shovels business.

Or, barring a profit from picks and shovels, the insiders make very early investments in speculative startup companies and then reap huge returns — on the order of tens of thousands to hundreds of thousands of percent — many years down the road. The huge returns, meanwhile, cover all the losses on investments that didn’t make it big.

This is why the splashy tech IPO is a major payday for two main groups, three if you count the company founders: The venture capitalists who backed the company, the company founders and early employees, and the Wall Street sales machine.

Those groups make out like bandits in IPO booms, because they are insiders who have been in the game for years.

For instance, take the venture capital firm Sequoia, the largest outside investor in Airbnb. Sequoia has been investing in Airbnb over the last nine years through various capital raising rounds. Its earliest investments, split-adjusted, have an average cost of less than one cent per share.

After the ABNB share price doubled on IPO day, the value of Sequoia’s Airbnb holdings reportedly exceeded $10 billion, with an internal rate of return on the earliest outlays as high as 7,000X. That is not a 7,000% return, that is a 7,000 multiple, which is more like 700,000%.

So, look: The technology-funding process requires investors to pour in large amounts of capital, most of which ultimately gets destroyed. The IPO process, meanwhile, happens late in the game and is meant to provide liquid riches to those who have been playing the game for years. The investor trying to buy these things at the very end is, more often than not, the sucker left holding the bag. 

The reason it gets bad at the end — and the reason the dot-com bubble led to a meltdown, and the 2020 tech mania will, too — is because the valuations make no sense. The math stops working.

At a certain point in a bubble, and especially in an IPO frenzy, the math goes out the window. The prevailing attitude of those who want to participate becomes “buy me shares at any price.”

Wall Street analysts, meanwhile, then encourage the frenzy in a respectable way by reverse engineering some crazy story to justify the valuations at hand.

While the wild run-ups in DoorDash and Airbnb were mania-level impressive, the king of mania valuations might be Snowflake (SNOW), the cloud technology play that went public in September. 

As of this writing, SNOW has a market cap of $100 billion on less than $500 million in revenues, while booking hundreds of millions in losses. It is hard to express how off-the-charts nuts that is.

We can do some quick math to see how crazy the SNOW valuation is:

• The super-profitable tech juggernauts — Alphabet, Apple, Facebook, Microsoft — tend to have net profit margins in the 25% range give or take, which means they make around 25 cents of profit off every dollar in revenue. (Amazon’s profit margin is consistently much lower, but that is because they reinvest in a hyper-aggressive way.)

• For Snowflake to justify its current market cap of $100 billion, it will need profits in the $3 to $5 billion range at least, which would presume a multiple of 20 times to 33 times earnings.

• The best profit margins Snowflake will ever have — absolute best case — have to be around 25%. That is what Microsoft and Google get, and what Amazon would presumably get if they weren’t reinvesting so heavily — and Microsoft, Google, and Amazon are all in direct competition with Snowflake (via the cloud business).

• This means that, to buy Snowflake at a valuation of $100 billion, you have to presume they will be able to grow their revenues by a multiple of 25 times to 40 times — 2,500% to 4,000% — and do so while swinging from big net losses to world-class profits — and do all of that while competing in the cloud against the three biggest, baddest competitors on the planet.

But wait, it gets better, or rather worse: Buying SNOW at the current price means anticipating future growth that is worth the risk, above and beyond a price that already discounts the implied outcome of this company growing sales by 25X to 40X, while earning world-class margins to boot, competing against three tech juggernauts.

It doesn’t make sense. But then again, it isn’t supposed to make sense, because this is how it works. Snowflake will eventually register a huge, gut-wrenching price decline, just like Tesla will, and heck, just like Amazon did before finding its footing (Amazon investors were down 94% at one point post-2000).

This thing — where investors lose their cool, and wind up holding the bag and paying off insiders as part of the innovation funding cycle — could practically be part of a David Attenborough nature documentary. It is the behavior of homo economicus in his natural investment habitats. It is just what investors do, over and over, with a rhythm as old as the hills of Rome:

• “Easy money” and loose credit conditions act as kindling for innovation to light a spark.
• Investors get all whipped up in a frenzy via the cheap money and hot story combination.
• Investors buy based on emotion, forget the math, and basically take leave of their senses.
• Insiders — venture capitalists, Wall Street firms, and founders — cash out hugely.
• The boom goes bust, 90% of investor capital is destroyed, and 10% is put to good use.
• Investors get burned, but insiders enjoy a huge payday and gear up for the next cycle.
• With a sufficient passing of time, investors forget how they were burned the last time.
• A decade or two later, it happens again — repeating on an endless loop for centuries. 

We wouldn’t say that 2020 is exactly like the year 2000. That isn’t how it works. No two manias, and no two boom-and-bust cycles, are ever completely the same. But certain parts of the script are highly recognizable, and we know full well how this type of movie ends.

On Wednesday, Dec. 9, another tech juggernaut weathered a firestorm in the form of two major lawsuits.

In October, as we explained on Oct. 22, the Department of Justice (DOJ) went after Google in one of the biggest trust-busting actions in decades. But the case appeared weak, and the share price of Alphabet, Google’s parent, shrugged off the news and rose more than 15% in the weeks that followed.

This time the tech giant in the crosshairs is Facebook Inc. (FB), and once again the case is weak. Facebook investors shrugged off the news, as evidenced by a lack of movement in the stock.

At first glance the action looks formidable. Facebook is being sued by the Federal Trade Commission (FTC) on antitrust grounds and simultaneously, in a parallel lawsuit on similar grounds, by 46 states and 48 attorneys general (the AGs of Guam and the District of Columbia joined in).

“Facebook’s actions to entrench and maintain its monopoly deny consumers the benefits of competition,” said the FTC’s Bureau of Competition director. “Our aim is to roll back Facebook’s anticompetitive conduct and restore competition so that innovation and free competition can thrive.”

In addition to anticompetitive practices, the AG for New York state accused Facebook of making “billions by converting personal data into a cash cow.”

The specific remedy requested is a breakup that spins off Instagram and WhatsApp, two of Facebook’s most important acquisitions. Instagram is the No. 1 photo-sharing app with 1 billion users, and WhatsApp is the No. 1 messaging app with 2 billion users. 

The problem here — for the FTC and the states — is that antitrust cases are hard to win without clear evidence of illegal behavior, and the case looks notably weak.

The core of the case revolves around the Facebook acquisition of Instagram for $1 billion dollars in 2012.

Evidence suggests that Kevin Systrom, the founder of Instagram, was afraid to turn down Zuckerberg’s offer for fear that Facebook would try to destroy Instagram if he didn’t sell.

“Will he go into destroy mode if I say no?” Systrom said. “Probably,” he was told. The idea is to portray Zuckerberg as a kind of Godfather figure, making acquisition offers that tiny startup founders can’t refuse.

The problem here is that it isn’t illegal for a large company to acquire a startup, and the Instagram acquisition was approved in 2012.

Then, too, it was conventional wisdom that Zuckerberg wildly overpaid at the time. When Facebook purchased Instagram, it was an app with 30 million users and baker’s dozen of employees.

Nine years later, Instagram has 1 billion users, but how much of that growth was due to being inside Facebook (where there are thousands of employees), tapped into Facebook’s substantial resources?

The WhatsApp acquisition looked even crazier when Facebook decided to pay $22 billion in 2014. It was conventional wisdom at the time that Zuckerberg was throwing shareholders’ money away and might have lost his mind.

The possibility of failure matters: The Instagram acquisition could have failed or flopped, costing Facebook hundreds of millions to a billion, and the same could have happened with WhatsApp, costing Facebook tens of billions.

The fact the acquisitions worked is testament to Facebook’s management skill — and as Facebook’s antitrust lawyer pointed out, both were approved.

We are skeptical that a pro-free-market judge would look favorably on the notion that a company can take a big financial risk on an acquisition, do everything legally, and then have the acquisition declared illegal later because it succeeded. It is just a bad argument.

As for the FTC argument that Facebook’s actions “deny consumers the benefit of competition,” all Facebook’s lead counsel need do in the courtroom is point to the roster of social media and messaging app competitors that still thrive: Twitter, Snapchat, LinkedIn, YouTube, Reddit, iMessage, and Skype, just to name a few.

Snapchat is notable, too, because Zuckerberg tried to buy them for $3 billion, and the founders turned him down. If Facebook went into “destroy mode” against Snapchat — as Systrom feared would happen with Instagram — the mission failed utterly, because Snap Inc. (SNAP) has a public market valuation of $78 billion as of this writing.

So, the FTC and the states can’t prove Facebook acted illegally in their acquisitions of Instagram and WhatsApp, which were both seen as wildly aggressive bets and both government-approved at the time.

They also cannot prove Facebook is denying consumers the benefit of competition, because plenty of competition exists in the social media landscape.

The New York AG charge that Facebook makes “billions by converting personal data into a cash cow” is also quite weak. As a statement, it is more or less true — but there are dozens of Silicon Valley companies that do that.

To single out Facebook for the exploitation of consumer data, given that such behavior is a Silicon Valley business model, would seem so unfair as to be absurd.   

Facebook does, in fact, engage in questionable practices with consumer data. So do Google, Amazon, and plenty of others.

The problem here is not what a single tech company does or doesn’t do with consumer data, but rather with a lack of logical rules and protections for consumer data.

What consumers need is a kind of citizens’ bill of rights for personal data use, which all tech companies would then comply with, including Facebook. But that would require intelligent government legislation, and the current crop of legislators lacks the focus or the tech smarts to pull off anything like that.

In our view, there really are questions as to whether or not Facebook is too big, and whether or not Facebook has too much power.

It would also be good to rein in Facebook and the other tech giants by giving them a legislative framework, particularly in sensitive areas like personal data rights and political speech.

But the lawsuits we have seen so far — first the Google antritrust effort, and now this one — come across as weak beer.

The latest effort is likely to fail, not just because Facebook will have the best lawyers in the world defending it, but because:

• There isn’t any proof Facebook’s initial acquisitions were anticompetitive (it’s not illegal to defend market share with acquisitions that are government-approved);

• There isn’t any case consumers are being harmed (the social media and messaging landscape has plenty of competition);

• And there isn’t a logical rationale for singling out Facebook’s use of consumer data, when exploiting privacy in exchange for free services is a Silicon Valley pastime. On that note, there is no evidence competitors would be more privacy-minded in the absence of Facebook, either.

All told, society has some real issues with the unchecked power and influence of the tech juggernauts, and that certainly includes Facebook. Unfortunately, the way to deal with these issues is through intelligent legislation, not weak lawsuits with a low likelihood of prevailing in court.

This dual lawsuit Facebook antitrust action, despite the impressive optics of 46 states joining in, is another one investors are likely to wave off — and rightly so.

“But soft, what vaccine through yonder needle jabs?”

The second person in the U.K. to officially receive the Pfizer COVID-19 vaccine was an 81-year-old man named William Shakespeare. He didn’t say those words, but he should have.

There is a long way to go, and darkness dead ahead. For the United States, the worst is yet to come in terms of hospital system breakage, small business strain, and daily death tolls in the thousands.

But still, with a major Western country (the U.K.) getting a vaccine rollout underway — and with Canada planning to start in a matter of days — we can say, definitively, that this is the week the pandemic started to end.

The war with the virus is far from over, but the tide will turn in the next few months.

That is the good news. The bad news is that, before the turn happens, America will endure one of the darkest winters it has ever faced.

“December and January and February are going to be rough times,” said Robert Redfield, the head of the Centers for Disease Control and Prevention (CDC), on Dec. 2.

“I actually believe they’re going to be the most difficult time in the public health history of this nation,” Dr. Redfield added, “largely because of the stress that it’s going to put on our health care system.”

Extreme stress on the health care system is no longer a prediction. It is a reality here and now.

“Hospitals serving more than 100 million Americans reported having fewer than 15% of intensive care beds still available as of last week,” the New York Times reported on Dec. 9.

At the same time, one in 10 Americans live in areas where intensive care facilities are 95 to 100% full — the point at which people get turned away.

When too many people get sick at once, the system breaks. That is happening in real time. As of this week the COVID Tracking Project estimated 104,600 Americans currently hospitalized for COVID-19, in a country that has fewer than a million hospital beds in total. 

Hospital systems around the country are frantically improvising just to cope. At the Renown Regional Medical Center in Reno, Nevada, two floors of a parking garage were converted into an emergency overflow treatment site.

“Our frontline caregivers are seeing things that they never would have imagined,” said Tony Slonim, Renown’s president and CEO, “adding that the fight was personal because his own father died of COVID-19.

In rural America, meanwhile, patients turned away due to overflow may have to travel hundreds of miles for treatment — if they can find any treatment at all. In the Big Bend region of West Texas, there is one hospital serving 12,000 square miles.

As another grim marker of Covid Winter, the COVID-19 daily death toll broke 3,100 this week, representing more deaths in a 24-hour-period than the 9/11 terrorist attacks (where the toll was 2,977). There will be more such days, perhaps many.

For those who are economically vulnerable, the worst pain is still to come.

According to a recent survey from the National Restaurant Association, the restaurant industry is in “economic free fall.” Based on the survey’s findings, an estimated 110,000 restaurants have closed their doors, which is roughly one out of six nationwide. Without more fiscal help, and with new shutdowns coming as hospital systems face collapse, many more will close.

At the same time, multiple aid programs are set to expire by this year’s end. “If no agreement is reached in negotiations taking place on Capitol Hill,” the Associated Press reports, “more than 9 million people will lose federal jobless aid that averages about $320 a week and that typically serves as their only source of income.”

The November jobs report was surprisingly weak with just 245,000 jobs added. At that pace, America’s pre-pandemic jobs level would not be clawed back until 2024. With Covid Winter in full force, economists are expecting the December jobs report could be worse — and even show another net loss.

“Stealing to Survive,” reads a dystopian headline from the Washington Post. “More Americans are shoplifting food as aid runs out during the pandemic.” The most popular items in this desperate crime spree: “staples like bread, pasta, and baby formula.”

But Wall Street is looking past all that, and so are corporate CEOs.

On the other side of the vaccine rollout, there will be new expansion opportunities for well-capitalized corporate survivors, along with rock-bottom interest rates, ongoing support from the Federal Reserve and U.S. Treasury, and a strong desire to return to normal life.

Markets are booming here and now in part because investors are anticipating this bullish future — looking past the pain of Covid Winter — and in part because there is so much liquidity in the system, with the strong prospect of more to come.

Whenever the U.S. government or the Federal Reserve try to help Main Street, they wind up helping Wall Street first, because of the way the system works.

In some ways this is hard to avoid: If the next administration winds up canceling student loan debt, for example, some observers believe it could trigger another housing boom — or bubble — because unburdened millennials will be in a far better position to pursue home ownership. (Swapping the student loan payment for a mortgage payment.)

This is why Wall Street won the pandemic: The unprecedented monetary and fiscal help that started in March 2020 caused stocks to go up and up, touching off bullish investor sentiment that morphed into euphoria and now flirts with mania.

To the extent the monetary and fiscal help continues, so can the boom, with the justification of a second-half 2021 recovery on the other side.

The net result of this is one of the strangest split-screens you or I are likely to see in our lifetime.

On one screen, the undeniable optimism of beating the pandemic is front and center with vaccine rollouts underway; on the other screen, the outlook for the next few months is grim beyond description.

And on the economic front, at least one-third if not one-half of Americans are experiencing Great Depression levels of food insecurity and economic distress — even as the stock market blasts to new highs and sales of million-dollar homes have doubled year-on-year.

We feel profoundly fortunate, and grateful, to be participating in this bull market bonanza even as so many fellow Americans are fighting to make it through. Hang in there, and stay healthy.

For Travis Kalanick, the prior CEO of Uber, self-driving cars were an inevitable destiny. For Dara Khosrowshahi, Uber’s current CEO, they are an expensive distraction to get rid of.

Uber has a five-year-old self-driving car unit known as Advanced Technologies Group (ATG). The unit has roughly 1,200 employees, many of them in Pittsburgh, Pennsylvania (a self-driving mecca due to the long-time robotics focus of Carnegie Mellon University).

In 2019, Uber’s self-driving unit raised capital as a standalone entity with a valuation of $7.25 billion. But on Dec. 7, Advanced Technologies Group was revalued lower, at just $4 billion, as part of a deal that spun the whole thing off to Aurora, a self-driving competitor that is valued at $10 billion.

Getting rid of its self-driving unit means that Uber can stop burning capital and resources in that area, and focus more on rideshare and food delivery instead (its two main lines of business).

At the same time, Uber will invest $400 million in Aurora and have a 26% stake, which Bloomberg calculates is closer to 40% when the personal stakes of Uber employees and investors are added in.

The close ties between Uber and Aurora mean that, when self-driving cars start to roll out in a serious way, Aurora will have full access to Uber’s rideshare network in a partnership that benefits both.

And yet, Travis Kalanick’s original worry still seems valid.

Kalanick believed that, eventually, the rideshare business would convert to a 100% self-driving model because of the economics, in a world where human drivers were obsolete and car ownership was rare.

“The reason Uber could be expensive is because you’re not just paying for the car — you’re paying for the other dude in the car,” Kalanick said at a technology conference in 2014.

“When there’s no other dude in the car, the cost of taking an Uber anywhere becomes cheaper than owning a vehicle,” he added. “So the magic there is, you basically bring the cost below the cost of ownership for everybody, and then car ownership goes away.”

Six years later, in 2020, the self-driving-car revolution is taking far longer than Silicon Valley expected.

This explains why Uber’s current CEO is exiting the self-driving business, while still maintaining an option to participate via the Aurora spin-off stake if and when self-driving takes off as a business.

It remains a possibility that Uber never becomes profitable, ever. The company is expected to lose at least a billion dollars in 2020, if not more, continuing a long unbroken string of eye-bulging losses. The company’s valuation of $93 billion, as of this writing, is based entirely on the hopeful assumption that the company will figure it out one day.

Without the benefits of being a large-scale, self-driving player, obtaining profitability will become that much harder for Uber (and Lyft, too).

The problem comes down to the terrible economics of human-driver-based rideshare and delivery businesses, coupled with brutal competition. The only way to make driver-based businesses work at scale, so far, appears to be forcing a low-wage existence onto the drivers, while getting them to fork out gas, vehicle, and insurance costs from their own pocket.

The model could theoretically work if, say, a competitor like Uber could grow large and dominant enough to have a near-monopoly in all geographical regions where it competes, and then raise prices enough to turn a profit and help drivers make a real living. 

But that isn’t going to happen anytime soon, because cutthroat competition among rideshare and delivery services is still going strong.

As an example of this, the delivery service DoorDash is expected to go public this week at a valuation near $40 billion. Grubhub, another food delivery competitor, has a market cap of just over $6 billion.

And there is also this little company you may have heard of, called Amazon, that already has such an extensive network of trucks and drivers it could conceivably dominate delivery service with the flick of a switch.

So, Uber is getting out of the self-driving car business — which requires large amounts of capital and investment for an uncertain payoff, years down the road — in order to focus on its food and rideshare delivery businesses, which have terrible economics and still face self-driving as an existential threat. 

Meanwhile the most fearsome competitor in the self-driving space is probably Waymo, the self-driving car company that began as a unit of Google and was valued in March at $30 billion.

In October of this year, Waymo announced a partnership with Daimler Trucks — the largest commercial vehicle maker in the world by volume — to enable self-driving big rigs.

The Waymo-Daimler partnership goal was to create “a full suite of driving capabilities,” said Waymo’s CEO, including “not just highway driving but full hub to hub capability, including the ability to navigate very complicated city environments.”

Waymo is also building a full-blown artificial city in East Liberty, Ohio, to test self-driving cars under realistic urban conditions. The Ohio location means Waymo’s cars will also gain experience with snow and ice conditions, to pad out the knowledge it has gained from more than six million miles’ worth of driverless miles logged in Phoenix, Arizona.

The global auto industry is projected to be worth nearly $9 trillion dollars by 2030. That is a staggeringly large ecosystem in terms of not just software, but physical technology.

Think of all the steel and fiberglass, cameras and sensors, vehicle and roadway modifications, and communication network hook-ups, on and on, that will have to be rolled out globally to enable autonomous self-driving capability on a mass scale.

In the face of all that physical infrastructure, and likely costs running into the hundreds of billions, Waymo’s long-term bet is that partnering with existing automakers (like Daimler) is the way to go, so that Waymo can focus on the highest value-add part of the system — the technology itself — and leave others to build the vehicles (at a significantly higher investment cost, and lower profit margin). 

The Waymo approach makes the most sense to us. If we had to pick a winner in the ultimate self-driving race, it would be Waymo.

• Waymo is building its approach around partnerships, which means their self-driving tech could scale faster across existing auto fleets in the future.

• By building connections within the global auto industry across a range of original equipment manufacturers, Waymo will have the ability to harness competition in favor of its business model, rather than trying to take it head on. 

• It doesn’t hurt that Waymo’s deep-pocketed parent is Alphabet (the owner of Google), that their valuation of $30 billion (likely higher by now) already puts them ahead, and that they are focused on the long game (even if profitability takes another five years).

As for Uber, spinning out their self-driving unit seems like a smart tactic, at least in the near-term. It is a way to placate investors who are anxious to see Uber reach profitability via rideshare and food delivery alone — a feat that might be akin to a miracle, but which plenty of investors still think is possible (as evidenced by Uber’s wacky share price).

And so, to the extent self-driving profits are too far-off a prize to justifiably keep shoveling money into that furnace, getting rid of the self-driving unit is a good thing. Unfortunately for Uber, this form of smart management is reminiscent of what is going on at IBM, where savvy financial engineering movements are akin to rearranging the deck chairs on the Titanic (in terms of actual long-term strategy and the state of the core business).

Last but not least, in a showy display of focus — the CEO may as well be shouting, “Look how disciplined we are being!” — Uber is giving up on its flying car ambitions, too.

“Uber is handing its flying car project, Uber Elevate, to the air taxi start-up Joby Aviation,” the New York Times reported a day after the self-driving spin-off news.

“Uber will also invest $75 million in Joby’s effort to build a flying taxi,” the NYT added, “while agreeing to become partners with the start-up when the flying car reaches the market.”

Which will come first, we wonder: Uber reaching actual profitability (after a decade-plus of routinely burning billions in business lines that still look terrible), or the Joby flying car debut?

Call it a toss-up, with “neither” the favored bet.