Last week, the U.S. presidential election consumed the world’s attention. This week, the potential for a game-changing COVID-19 vaccine dominated headlines and market action.

But something else shocking happened last week, an event so surprising — and in some ways so ominous — it would have dominated headlines if not for the stiff competition.

The Chinese government killed the world’s largest-ever initial public offering (IPO) at the last minute.

On Oct. 28, we explained the details of the largest IPO in history. It was set to be a dual-listed Shanghai and Hong Kong share offering for Ant Group Co. — the owners of Jack Ma’s Ant Financial — that would raise an incredible $34 billion.

Ant Financial is a sprawling digital payments giant with hundreds of millions of users inside China. Its anticipated market cap in the vicinity of $313 to $330 billion, and its consumer lending power among Chinese citizens, led many to consider it China’s version of J.P. Morgan.

The Ant IPO was on track to be a runaway success. Investor interest was oversubscribed by 870 times, meaning that, in theory, they could have fulfilled their planned capital raise (the aforementioned $34 billion) an incredible 870 times over.

The banks, brokerages, and exchanges involved with the IPO were also on track for a stunning payday. The Ant IPO was expected to generate $198 million in banking fees and another $178 million in brokerage fees.

But all of that disappeared when, on Nov. 2, the People’s Bank of China (PBOC) and a group of government regulators summoned Jack Ma, the co-founder of Alibaba and Ant Financial, for a meeting.

At the meeting, Ma was told that China’s regulatory environment had changed. Ant Financial would have to increase its level of capital reserves at various lending units and reapply for national licenses that authorize consumer lending.

Shortly after, the world’s largest ever IPO — which would have raised more in a single offering ($34 billion) than any other offering in history — was canceled. The Chinese government had killed it and had done so at almost the last possible moment.

Bankers were stunned and markets reeled. Jack Ma’s Alibaba Group (BABA), which is more or less China’s version of Amazon and Google combined, lost tens of billions of dollars in market cap within minutes. Ma’s personal fortune dropped by $3 billion. Shares in Hong Kong Exchanges & Clearing, the owner of the Hong Kong stock exchange, fell by more than 2%.

The questions were immediate. Why would the Chinese government halt an IPO so late in the game and humiliate an entrepreneurial favorite son?

And why would China’s authorities be willing to infuriate investors, increase the perception of government regulatory risk, and potentially poison the well for future Hong Kong or Shanghai initial public offerings?

There are multiple possibilities for the Chinese government’s motive, all of which could hold.

First, they may have seen Jack Ma as becoming too powerful. Second, they may have wanted to favor China’s state-owned banks and reduce the competitive pressure being placed on them by Ant. And third, the authorities may be worried about the internal state of China’s financial system.

Jack Ma was set to become the richest man in Asia as a result of the Ant IPO. According to the Bloomberg Billionaires Index, Ma’s stake would have increased his net worth to $61 billion.

With Ma becoming more outspoken in recent years, the Chinese government may have decided too much money, power, and influence was being concentrated in a single individual. Killing the Ant IPO could be seen as a form of public humiliation, a harsh rebuke, and a reminder of who holds the power in China, all in one stroke.

Ant Financial’s lending activities, and its sprawling hold on the financial lives of Chinese consumers, may have also posed a threat to China’s state-owned banks. Chinese regulators may have decided that, were Ant to become too innovative and too well capitalized, the state-owned banks could suffer from digital competition to a degree that was unacceptable.

Third, it is possible, and perhaps even likely, that severe hidden problems exist within China’s financial system. To the outside world, China’s internal financials are a black box.

There is no real way to tell how healthy the Chinese economy actually is, or how much leverage has built up within the banks and the financial system, because the Chinese government deliberately obscures this data.

At the same time, in China, financial institutions do not fail or go belly up in a public manner. Sometimes an institution, or a large-scale bond offering, is allowed to fail — but more often than not, the government just writes a check and absorbs the loss on its own balance sheet.

This state-dominated way of doing business, in which the Chinese government is the lender of first resort rather than last resort, appears remarkably stable from the outside. Financial crises, as a rule, seem not to happen in China, because the whole system is interconnected. The government’s balance sheet supports the entire thing, and information is suppressed.

And yet, China’s system will still have leverage issues and financial pressure build-up, even if the outside world cannot tell what is happening. Then, too, if the Chinese government continues with a habit of swallowing all risk, not unlike a cartoon character swallowing a bomb, at some point there could be a time when the government itself loses control.

If this loss of control happens, due to a build-up of hidden debt and leverage issues over countless years, it probably would not manifest as a run of visible bankruptcies or public failures — those can always be hidden — but rather the internal mechanisms of China’s domestic economy ceasing to function as systems break down.

Our hunch — and it is only a hunch, because, again, the internal financials of China’s economy are a black box — is that all three of these factors apply to the Ant IPO cancellation. They killed the IPO in a brutal manner to send a message to Jack Ma, who was getting too big for his britches as Asia’s richest man; they wanted to protect China’s state-owned banks from overly dominant competition; and they are worried, at some level, by hidden stressors and pressure build-up within China’s opaque financial system.

Pfizer, the pharma giant, and its research partner, BioNTech, changed the outlook for 2021 — and for the whole world — with a huge announcement this morning (Monday, Nov. 9).

Pfizer and BioNTech shared Phase 3 trial results of a COVID-19 blocking vaccine that was effective in more than 90% of patients. The data results are early, and not yet final, but were verified by an independent external committee, and looked promising enough to share. You can read the press release from Pfizer and BioNTech here.

“Based on current projections,” the press release from Pfizer and BioNTech reads, “we expect to produce globally up to 50 million vaccine doses in 2020 and up to 1.3 billion doses in 2021.”

This is amazing. It is beyond amazing.

“It is a great day for science,” Pfizer Chairman and CEO Albert Bourla told CNBC. “It is a great day for humanity when you realize your vaccine has 90% effectiveness. That’s overwhelming.”

Markets went absolutely wild on the news.

In premarket trading after the announcement, Dow Jones futures rose more than 1,500 points. Russell 2000 small-cap futures rose a jaw-dropping 7%. The bellwether bank ETFs, KBE and KRE, were up more than 9%. Airline and cruise ship stocks jumped 20 to 25%.

On the commodities side, crude oil futures jumped an incredible 10% on the prospect of the world getting moving again. Cocoa, cotton, coffee, and copper all saw immediate gains of 1 to 3%.

At the same time, treasury bonds fell sharply, and yields rose. Precious metals prices also fell sharply, with gold and silver prices falling 3% and 4% respectively, as capital rushed out of safe havens and back into economic recovery plays.

If America has an effective vaccine, the U.S. economy can bounce back. And if Pfizer and BioNTech can manufacture 1.3 billion doses in 2021, that means not just the United States, but the entire world, can bounce back. 

What’s more, with a highly reputable pharma giant behind the vaccine (Pfizer is in the top 5% of the S&P 500, with a $202 billion market cap as of this writing), confidence in the business outlook for 2021 can return immediately.

That is why the price of oil went wild alongside airlines. If travel and commerce return in 2021, oil demand can start moving back toward normal levels. This also means all manner of businesses can adjust their forward outlooks, preparing for a return of commerce in 2021, which means dusting off shelved spending plans and replenishing inventory levels now.

It is hard to overstate the potential impact of this news. If Pfizer and BioNTech come through — and based on Pfizer’s reputation and thoroughness, there is reason to believe they will — humanity may have just beaten the pandemic, and done so in time to avoid permanent economic damage.

On Oct. 30, we noted that Bitcoin is outperforming gold. Less than a week later, as the U.S. election week comes to a close, Bitcoin is up another 14% (above $15,500 as of this writing).

The latest run higher seems driven by a sudden burst of extreme U.S. dollar weakness — a bullish thing for risk assets in general, and Bitcoin especially.

It could also be related to a Department of Justice (DOJ) seizure of 70,000 Bitcoins generated by drug sales in the now defunct Silk Road online marketplace. That is about $1 billion or so worth of Bitcoin supply that is off the market, at a time when demand is exploding.

Last but not least, it can’t hurt that a Bitcoin “Hodler” (an affectionate nickname for long-term holders of Bitcoin), who bought her first BTC all the way back in 2013, will have a seat in the U.S. Senate.

How do we know that Cynthia Lummis, the projected Republican senator-elect from Wyoming, is a Hodler? Because she said so herself at a local event, the third annual Wyoming Blockchain Stampede.

“It was during my time in Congress that I first learned about Bitcoin,” Lummis said. “I was struck by how innovative Bitcoin is with its decentralized public ledger and a fixed supply.”

“Knowing that there’re only going to be 21 million Bitcoin makes it an attractive store of value,” Lummis added. “I have long worried about the Federal Reserve’s program of quantitative easing and the amount of debt on which our nation’s economy’s future rests.”

Again, that is a U.S. Senator talking — pretty remarkable stuff. 

It was also interesting to see this Nov. 3 article headline in Chief Investment Officer magazine, as currently shown on its website homepage: “Why Wild and Crazy Bitcoin May Become a Pension Portfolio Fixture.”

The article subhead, “Retirement funds and other institutions are gradually warming to cryptocurrencies,” is exactly what we anticipated — with detailed explanation as to why — 18 months ago.

To understand why this is happening, it helps to understand that Bitcoin is a Schelling Point.

The Schelling Point, sometimes also known as a Focal Point, is a powerful Game Theory concept, introduced by the American economist Thomas Schelling in the 1960s.

“”People can often concert their intentions or expectations with others,” Schelling wrote, “if each knows that the other is trying to do the same.” 

A Schelling Point can be seen as a solution, or a course of action, that people converge on without talking to each other. The greater the number of people who observe a Schelling Point and interact with it, or take some action because of it, the more powerful the Schelling Point becomes.

The power of a Schelling Point also depends on how exclusive it is. If a Schelling Point offers a solution to a problem that can’t be obtained any other way, or a means of expression that has no real alternative, it can behave like an electro-magnet, exerting a pull on most who discover it.

Bitcoin, in our view, has the potential to become the most powerful Schelling Point in history.

We say this because no asset known, other than gold, has the potential ability to pull in such a diverse and global array of users — American investors, Brazilian shopkeepers, European bank executives, Kenyan farmers, Japanese housewives, you name it — with all of them seeking a solution to the same problem: How can one protect savings from the ravages of inflation and currency depreciation, while avoiding the hassles and headaches of physical ownership? 

Another aspect of a powerful Schelling Point is this: The more attention it gets, the stronger it gets, as attention amplifies the signal and increases the distribution.

Bitcoin is now a textbook example of this, and the cycle is accelerating.

• The more that Bitcoin’s price goes up, the more attention it gets.

• The more attention Bitcoin gets, the more that users gravitate toward it, making the Bitcoin network even stronger, and even more robust and widespread.

• As the Bitcoin user network expands — with the majority of users holding for long-term price appreciation of 10X or even more — an overwhelming demand imbalance drives the price up.

• The price rise generates more attention, and the cycle repeats.

In our view, that cycle is going to repeat, over and over again, until Bitcoin obtains a multi-trillion-dollar market cap. (As of this writing, BTC/USD has around a $290 billion market cap.)

Given the non-replicable, universally valuable, and globally distributed nature of the Bitcoin use case — acting as a dematerialized, sovereign store of value, aka “digital gold” — it would make perfect sense for Bitcoin to settle into a plateau after achieving a greater market cap than all the FANG names put together, on par with a quarter to a third of the above-ground gold supply.

And because new generations of savers and investors are more comfortable living in a digital reality, and increasingly more likely to favor Bitcoin over gold, we can expect the relative market share of Bitcoin versus gold to rise over time.

Gold is a Schelling Point, too, by the way. It was the yellow metal’s elemental properties, as noted by its place on the periodic table, that caused the whole world to converge upon gold as the most efficient money solution available (portable, divisible, scarce, doesn’t rust, doesn’t corrode, and so on).

Nobody had to communicate to determine that gold was the best stuff for the job — instead, all the other elements were eliminated by a process of reasoning or experiment. (Silver had a competitive run, but it ultimately wasn’t scarce enough.)

Bitcoin, as a digital alternative to gold, is the first asset to offer a store-of-value equation while bypassing the periodic table entirely. This does not mean the Bitcoin network is invisible or imaginary, however.

It is immensely tangible and real in terms of a globally active user community, a globally distributed infrastructure (impervious to any single point of failure), and a global hive mind of genius-level programmers constantly improving the technology architecture.

And every time another person “gets it” — every time a new light bulb clicks on, so to speak — the demand rises that much more, even as supply remains constantly and immutably fixed.

This is why we can say, with a high degree of confidence, that Bitcoin may well be the dominant Schelling Point of the Information Age — which, again, would automatically make it the most powerful Schelling Point of all time.

“The political polling profession is done,” Republican pollster Frank Luntz told Axios on Nov. 4. “It is devastating for my industry.”

The frustration with polling was further echoed by a New York Times opinion piece titled, “Can We Finally Agree to Ignore Election Forecasts?” The Atlantic also piled on with a piece titled, “The Polling Catastrophe.”

Our hunch is that no, we can’t ignore election forecasts, and the polling industry will stick around. The polling industry will keep revising its methods and try to do a better job in the future — particularly in down-ballot races — but it won’t go away for multiple reasons.

Pollsters exist because people crave certainty as to what will happen in the future. Who is likely to win a race? What are the issues the public cares about? These questions will always be important in politics, whether or not the pollsters have a good year or a bad one in getting them right.

Pollsters who feel beat up right now should have a drink at the bar with Wall Street analysts. The Wall Street analyst profession is similar: Investors love to beat up on analysts, and sometimes use them as a punching bag.

But the analysts have a job that won’t go away: They provide the certainty, or some semblance of it, that investors will always crave. A need for certainty, for an answer to the question “What is going to happen?” is baked into the human psyche.

Then, too, Wall Street models are like political polling models, and sometimes they get things spectacularly wrong.

Prior to the global financial crisis, Wall Street went all in on quantitative analyst models that said U.S. home prices could never decline on a nationwide basis. That assumption turned out to be wrong, and hundreds of billions of dollars were lost.

Whenever investor institutions lose a huge sum of money, there is probably a bad model — or the Wall Street equivalent of a bad forecast poll — involved in the process somewhere. Consider the models that said commodities were a permanently investable asset class, for example, and that buying timber, copper, or crude oil was like buying stocks.

At the peak of the commodity supercycle, which roughly coincided with the peak of the subprime bubble, these bad models convinced pension funds to buy long-dated oil futures contracts above $130 per barrel before the price of oil collapsed.

The political polling industry will have to adjust its methods, in some cases by a lot. But the way people interpret the data will have to change, too.

A good portion of the problem is not the data, but the incorrect way the data is interpreted. If the data says event X has a 70% chance of happening, and users just interpret 70% as meaning certainty because it is a large number, then everyone will get upset when the 30% scenario occurs.

At the core of all this, you have uncertainty. Humans, as a rule, do not like uncertainty. They want to know what will happen, preferably with zero risk of error. But this is usually impossible.

Some of the problems in the forecasting business come from trying to fulfill a market demand for certainty when no real certainty can be had. “Tell me what is going to happen” is a very different request than, say, “tell me what the odds are and give me the scenarios.” All too often, people want an answer rather than a forecast. They want certainty. 

For investors (and pollsters, too) there are three types of uncertainty. It’s helpful to understand the difference, because the three are very different — although they can overlap and blend into each other.

The three types of uncertainty are:

• Aleatoric Uncertainty: The uncertainty of quantifiable probabilities.

• Epistemic Uncertainty: The uncertainty of knowledge. 

• Knightian Uncertainty: The uncertainty of nonquantifiable risk.

Investors, traders, and poker players work with all three forms of uncertainty on a routine basis. Managing uncertainty in its three main forms — and converting it to certainty when possible — is at the heart of making money, or winning votes.

Aleatoric uncertainty is taken from the Latin word “alea,” which means dice, where the dice represent games of chance.

Aleatoric uncertainty relates to probability-weighted outcomes, and the type of data you can plug into a spreadsheet. If you can quantify the odds of an outcome, but you don’t know which outcome you will get, that is aleatory uncertainty.

For example, say you are in a high stakes poker hand with an ace-high flush draw. As part of your decision on whether to bet, you can calculate the odds of completing your flush with the next card.

There are nine cards that can complete the flush and a total of 45 unknown cards in the deck, which reduces to 1 out of 5, which means the next card will complete your flush 20% of the time.

That is aleatoric uncertainty: You don’t know which card will come, but you know the probability, or range of probabilities, that you are working with. Aleatoric uncertainty can also refer to statistical variability within an experiment. You know you will get some noise or randomness around various measurements, but it falls within a definable range.

Epistemic uncertainty is harder. It relates to knowledge and whether or not the things you know are true.

If your experiment has epistemic uncertainty, you may not be sure your data is correct. If your knowledge inputs are wrong, then all the conclusions from the models are likely to be wrong or useless (or both). A simplified version of this is the idea of “garbage in, garbage out.”

Epistemic uncertainty is a huge issue when it comes to polling, because of the connection between bad information and bad conclusions.

If a polling model is built on questionable data, then epistemic uncertainty can lead to a false sense of aleatoric confidence. If polling numbers show a given Senate candidate has a 10-point lead, but the numbers are based on bad data, the percentage assumption might be worthless.

To avoid epistemic uncertainty errors, some will want to avoid forecasting models. But if a strong desire still exists to get a handle on the future — to get some clarity on what’s likely to happen — the same issues crop right back up. Every hunch is based on a mental model of some kind, even if the hunch is just instinct.

The final type of uncertainty, Knightian uncertainty, is the trickiest of all. It was introduced by Frank Knight, a University of Chicago economist, in the 1920s.

Knightian uncertainty speaks to the unknown unknowns — the knowledge you don’t have and the risks you don’t see. It is the hardest to deal with because you can’t address it directly.

If an entrepreneur starts a business, they will deal with all three types of uncertainty at once.

• They might face aleatoric uncertainty in planning for a range of outcomes based on statistical models for sales forecasts and product costs.

• They would then have epistemic uncertainty in verifying that the data and knowledge inputs used in their models were correct, and that no key pieces of information were missing.

• And they would need to address Knightian uncertainty in safeguarding against the unknown.  

Investors and traders face all three of these in running a portfolio and deciding how much risk to take while managing positions.

• Aleatoric uncertainty impacts profit targets, levels of conviction, and probability assigned to scenario outcomes for investments and trades.

• Epistemic uncertainty applies to data analysis, and the quality of information that goes into assumptions about an investment or a trade.

• Knightian uncertainty covers the unknown forms of risk that have to be guarded against — a good reason for using stop losses or protective risk points, keeping leverage in check, and having a buffer of cash on hand.

An understanding of uncertainty can also improve the process of analyzing outside data.

When looking at polling forecasts, for example, aleatoric uncertainty can speak to what probability ranges actually mean, e.g. understanding, on a gut level, that a 30% probability is meaningful.

Epistemic uncertainty, meanwhile, is a reminder that if the assumptions or data behind a forecast are wrong, the forecast itself could be way off, or at least advisable to take with a grain of salt. And finally, Knightian uncertainty is a reminder that, in all things, sometimes risk comes flying in out of nowhere. There are always events we hadn’t planned for, or possibilities we hadn’t considered, that could up-end the model or turn things upside down. The best safeguards are the ones that do a good job of protecting against risks we didn’t see coming.

If you’ve ever wondered what mind-bending, jaw-dropping uncertainty looks like, this it.

The snapshot below, taken at 8:00 a.m. Eastern on Nov. 4, shows a vertigo-inducing swing in betting market odds for who will win the 2020 presidential election. 

As of election night on Nov. 3, President Trump had roared ahead in the betting odds, thanks to a strong showing in Florida, Ohio, and other key states.

But then, in the early morning on Nov. 4, former vice president Joe Biden developed a lead in the must-win state of Wisconsin, and the odds shifted wildly in his favor. By the time you read this, Biden may have solidified his lock on the presidency — or the odds may have shifted again.

Over the past 48 hours or so, the financial markets have tested out multiple combinations of possible election outcomes:

• On Election Day itself, markets were bullish in all the areas that suggested trillions of dollars in fiscal stimulus en route for 2021, with the U.S. dollar falling and yields rising. This behavior pattern, across a wide array of instruments, strongly indicated a “Biden Sweep,” meaning an expectation that Democrats would take both the White House and the Senate.

• As election results rolled in, Republican candidates well outperformed expectations, particularly in U.S. Senate races. This caused the overnight markets to shift toward a “gridlock” scenario, with small caps and commodity prices falling, but Nasdaq futures spiking (because large-cap tech stocks are seen as safe havens in a low-stimulus, low-growth scenario).

• By the end of election night, it became clear President Trump was in a strong position, but Biden was still very much in contention, with yet-to-be-counted mail-in ballots in states like Pennsylvania potentially pivotal.

• So when President Trump prematurely declared victory at about 2 a.m. Eastern, saying “frankly, we did win this election” and “we want all voting to stop,” the markets shifted to a chaos scenario, with commodity prices tanking and Russell 2000 (small cap) futures plunged more than 3.5% on the prospect of a court-litigated ballot fight or something worse.

• A few hours after the “chaos” scenario emerged, however, markets calmed down a bit as Biden picked up a visible lead in Wisconsin and clawed his way to even in Michigan (Wisconsin and Michigan ballots are 97% and 89% counted, respectively, as of mid-morning on Nov. 4).

Hopes for a clear winner have been dashed. “Election turns into a nail-biter that may extend for days,” says The New York Times. The hope now is to avoid days turning into weeks. (That one, too, could be dashed.)

One result seems clear-cut: Democrats will not take the U.S. Senate. Mitch McConnell was reelected easily, and Republican Senate candidates did significantly better than expected in multiple states.

That in turn means that, if Biden wins the presidency by way of Wisconsin, Michigan, or Pennsylvania, a Democratic White House will face off against a Republican Senate, delivering the “gridlock” scenario in which fiscal efforts are either blocked entirely or sharply reduced in scope.

Markets are still processing what this could mean, as evidenced by ongoing wild swings in the futures markets.

As of Wednesday morning, heading into the stock market open, the U.S. dollar and precious metals and commodities are flat, while Nasdaq futures are up sharply and Russell 2000 (small cap) futures are still down sharply.

This dovetails with a low-stimulus or no-stimulus landscape, where the real economy struggles due to a lack of relief funds, large-cap tech stocks regain their bullish footing as safe havens (which fits our view of the FANG names being like zero coupon bonds), and the outcome for commodities and precious metals remains a question mark.

The drama will continue, but we can close this note with a positive observation on Bitcoin, which is above $13,800 as of this writing, having gained more than 2.3% in the past 24 hours. The institutional flows into Bitcoin are so strong now that, when it comes to globe-rattling political drama, Bitcoin is like the honey badger. It just doesn’t care.

What’s good for investors is sometimes terrible for the U.S. economy, and what’s good for the economy is sometimes terrible for investors.

You know that old saying, “What’s good for General Motors is good for America”?

Sometimes, that saying is completely backwards. What is bad for an industry can be wonderful for America on the whole — and vice versa.

The all-time champion of this phenomenon is the oil and gas industry in the aftermath of the shale revolution. The fracking-based shale revolution was one of the best things that ever happened to the U.S. economy. It was also one of the worst things that ever happened to oil and gas investors.

This is not a coincidence. The cause-and-effect mechanism that helped the U.S. economy immensely was the same one that, for the period of 2009-2019, made the U.S. energy sector one of the worst places to invest, ever (more on that shortly).

To put it simply, the shale revolution was so successful that a flood of cheap capital was converted into a superabundance of low-cost oil and gas.

That tremendous supply of American oil and gas, pulled up from rock that was previously deemed worthless, did two things. It helped various sectors of the U.S. economy boom, while creating jobs in dozens of states — and it caused investment returns in the oil and gas industry to collapse.

The shale revolution was vital to economic recovery in the aftermath of the global financial crisis.

The post-2008 recovery will be remembered for being sluggish and slow as it stands — but if it weren’t for the boost created by shale, and America returning to glory as an oil and gas superpower, that recovery might not have happened at all.

It was almost as if oil and gas investors had chosen to sacrifice themselves — or sacrifice their capital, at any rate — for the sake of helping America out.

After 2008, so much capital poured into the shale space, in part due to easy money conditions at near-zero interest rates, that an ocean of low-cost financing more or less created an ocean of low-cost oil and gas supply. By ignoring the basic economics of supply and demand, oil and gas investors financed their own doom (in terms of generating viable investment returns).

But this catastrophic investment error was an incredible boon to other industries, like chemical companies and light manufacturers who benefited from the guarantee of a long-term cheap energy supply and the ability to lock in supply contracts on a 20-year time horizon.

Prior to the shale revolution, it was conventionally received wisdom to believe America was running out of oil and gas. One notable energy company, Cheniere Energy, was set up to run liquid natural gas (LNG) ports expected to handle natural gas imports, with the LNG coming in from other places.

But then, after shale got going, Cheniere had to completely reverse its business model. Instead of LNG ports that received natural gas, the U.S. needed facilities to liquify local gas and ship it out.

At the same time, chemical companies that had been building new production plants in far-flung locations, like the Middle East, started tearing up their international plans and building in the United States instead. The difference was a sudden superabundance of cheap, natural gas.

That cheap gas made such a difference, in fact, that Chinese chemical companies, which were previously run in China, and set up to serve Chinese markets, started building multi-billion-dollar facilities in the United States.

Why? Because American natural gas had grown so cheap, it became more economical to build facilities tapped into low-cost U.S. gas supply, and ship the finished product back to China, than to use the more expensive gas available at home.

Again, all of this was wonderful for the U.S. economy. Low-cost energy creates an economic tailwind for a wide variety of industries. It makes production cheaper, and transportation cheaper, and also lowers the cost of electricity and heating homes.

But the oil and gas industry itself suffered mightily from the energy bonanza it found beneath the earth.

In 2007, Warren Buffett jokingly wrote the following about the airline industry: “If a far-sighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.” Ironically, Buffett became the butt of his own joke years later, after Berkshire Hathaway took heavy losses in airline stocks.

A far-sighted oil and gas investor, with knowledge of what would happen in the 2009-2019 period, might comparably have tried to stop George P. Mitchell, the father of fracking, from getting his tenacious experiments off the ground.

But the fracking boom unfolded, and America is much the better for it — even in the midst of utter carnage for the oil and gas industry.

To grasp how much the mighty have fallen, consider the following.

On Oct. 29, the market valuation of Zoom Video Communications (ZM), an online video conferencing firm, surpassed that of Exxon Mobil (XOM), one of the largest oil majors in the world.

Exxon has since bounced back as of this writing, but for at least a day or so, Zoom was worth $140 billion while Exxon was at $137 billion.

“Exxon Mobil Corp. posted its third consecutive quarterly loss for the first time on record,” The Wall Street Journal reported on Oct. 30, “and disclosed that it may write down the value of natural gas assets worth as much as $30 billion.”

“Energy has been the worst-performing sector this year,” Bloomberg reports, “dropping more than 50% and underperforming the best-performing group — tech — by 70 percentage points.”

“Energy is the worst sector, ever,” says a research note headline from Jason Goepfert of Sundial Capital. “Energy has been one of the most consistently losing sectors out of any sector since 1928,” says Goepfert. “It’s also suffered one of the largest drawdowns.”

Why did this happen? More pointedly, why did the oil and gas industry keep allocating capital to new and existing projects, to the point of burying itself in a supply glut now worsened by a pandemic?

It wasn’t really a coordinated thing. Rather, there was a lot of cheap capital available after the global financial crisis — thanks to zero interest rate policy, or ZIRP — and so a whole lot of projects got funded.

Then, too, a well-developed financial industry meant that very few shale products had to shut down, even if the original producer went bankrupt. Rather than capping the wells, or otherwise mothballing the project, the assets could be sold at a distressed value to a private equity buyer — and the oil and gas could keep flowing.

Robust financial support of the shale complex explains why Saudi Arabia failed in its attempt to kill off U.S. shale producers in the “Saudi Oil War” of 2014. The Saudis tried to glut the oil market and put U.S. oil producers out of business, repeating a play they had used successfully in 1986.

But in launching a new oil war, with the hope of bankrupting U.S. oil producers, the Saudis didn’t count on the finance angle, or the ability of busted shale operations to simply change hands and keep on pumping. Eventually the Saudis gave up.

So, what will save the oil and gas industry, or at least help turn it around? 

Amusingly, it might be green regulation.

“While Biden has called for prohibiting new oil and gas projects on federal land,” Bloomberg reports, “the candidate has made it clear he does not support a widespread ban on fracking — which involves pumping water, sand and chemicals underground to free oil and gas from dense rock formations.”

“Even if Biden wanted to, he couldn’t unilaterally ban fracking on private lands,” Bloomberg goes on to add. “Under a 2005 law, the Environmental Protection Agency has almost no regulatory power over fracking. Changing that would require an act of Congress.”

So, if environmental regulation is used to restrict fracking, while still enabling fracking on private lands and the continuation of key projects, guess what happens to the oil and gas supply glut? It starts to shrink.

Then, too, we are going to have high-priced oil again. It is just a matter of time.

The global economy is struggling right now, thanks to a 100-year pandemic, but eventually America, and the world, will return to a robust pattern of economic growth.

When this return to economic growth occurs, even if renewable energy projects are expanding at the fastest clip imaginable, the expansion of renewable energy supply will not come fast enough to fill in the fossil fuel gap.

As a result of this, the crude oil price, and the natural gas price, will shoot up again as fossil fuel demand outpaces supply. If green regulation has hemmed in the footprint of U.S. fracking, meanwhile, that supply restriction will be even more bullish for oil and gas names.

Investing can be funny sometimes. That which seems good can be bad, and that which seems bad can be good. For the oil and gas industry specifically, the restrictive nature of green regulations could help speed up a renaissance.

In markets, sometimes what you wish for isn’t actually what you want — and what you wind up getting is better than you expect.

October 2020 was an ugly month for the U.S. stock market. The Dow, S&P 500, and Nasdaq Composite all declined more than 2%, registering their second down month in a row.

Some will attribute this market weakness to pre-election jitters. In our view, it is more a reflection of post-election jitters — that is to say, what happens in the months after the election, rather than what happens with the election itself.

For the stock market, the immediately relevant question is not “Who is going to win the election?” but rather, “When will we get more fiscal stimulus?”

The real U.S. economy — meaning Main Street, rather than Wall Street — needs help from the government to keep consumers and small business from going under, particularly with COVID-19 cases topping 100,000 per day and the threat of new evictions and shutdowns looming.

Wall Street craves fiscal action too because, when the government injects currency into the real economy, a good portion of that money winds up flowing into stocks. This is what happened earlier this year, with financial surveys indicating that “buying stocks” was a popular use of the $1,200 stimulus check.

The market weakness of the past two months can be traced to uncertainty over a deal. For months now, Republicans and Democrats have been debating the terms of a new relief bill, and nothing has happened.

The president has also been all over the map on this issue, first tweeting a desire to cancel all stimulus negotiations until after the election, then hinting at terms for a partial deal, then saying he wanted a larger stimulus than the Democrats (which Senate majority leader Mitch McConnell certainly does not).

The bottom line is that, if another round of multi-trillion-dollar fiscal stimulus comes through before Christmas, the U.S. economy will get a boost and markets will be happy.

But if it looks like the fighting will persist, with nothing on the table until February 2021, the U.S. economy could convulse in fear as the pandemic worsens, and the stock market could see a sharp drop.

Struggling consumers and small businesses need more help to keep from going under, and tech stocks with wildly inflated multiples need another wave of stimulus-funded retail support to stay sky-high. In the absence of such help as provided by Congress, look out below. 

Given this state of affairs, it is worth discussing the crucial differences between monetary policy and fiscal policy. The two are very different, but many investors don’t know why or how. Let’s take a look.

The first thing to understand is that fiscal policy is far more powerful than monetary policy.

If monetary policy is like caffeine, then fiscal policy is a high-potency prescription drug.

A pot of coffee can help keep you awake, but if you are feeling incredibly tired, the coffee won’t help. Prescription drugs like amphetamines or methamphetamines, in contrast, can make you want to stay up for 72 hours straight, to paint your house, clean your basement, and organize the garage besides.

Monetary policy has a limited effect because it is wholly oriented to borrowing.

The interest rate at which one can borrow is like the price of money. When interest rates are high, the price of money is high (and borrowing is expensive). When interest rates are low, the price of money is low (and borrowing is cheap).

When a central bank uses monetary policy to boost the economy, they typically lower the short-term interest rate, which is like lowering the price of money. Cheaper money, in theory, makes it easier for consumers and businesses to borrow, which encourages lending and spending.

The problem is that, at a certain point, consumers and businesses lose their appetite for borrowing. In a deflationary environment, interest rates can fall to zero and yet the borrowing impulse is still weak.

When this happens, monetary policy is described as “pushing on a string,” because borrowing is made about as cheap as possible and yet nothing happens.

Another problem with monetary policy is that, as a general rule, it works through the banking system.

Most of the money and credit in circulation is not created by the central bank. It is created by the banking system itself.

When the central bank lowers interest rates, the idea is that consumers and businesses should go to the banks and borrow more, and the banks should lend willingly. This lending and spending then increases monetary velocity (the speed at which money changes hands) through the effects of fractional reserve banking and stepped-up consumer behavior.

But if the central bank lowers interest rates to zero, and engages in quantitative easing (QE) by purchasing hundreds of billions of dollars’ worth of assets, what is happening is that liquidity is piling up inside the banking system and isn’t getting lent or spent.

If, say, the banking system has a trillion dollars in liquidity just sitting in its vaults, stagnant, then that liquidity will not have an inflationary effect. This is why the dire predictions of inflation after the 2008 financial crisis were wrong: Most of the liquidity created by the Fed’s multi-trillion-dollar balance-sheet expansion stayed inside the banks. The funds didn’t venture out into the economy and speed the pace of borrowing and spending, so prices didn’t go up, and no inflation occurred.

The one place where inflation did occur after the 2008 financial crisis was in asset markets, and this is because a particular type of borrower benefited hugely from quantitative easing (QE).

While businesses in the real economy did not borrow much after 2008, blue chip corporations took advantage of near-zero interest rates to borrow money to buy back shares. So, QE was great for the stock market in the 2009-2019 period, but not for much else.

Here and now in 2020, monetary policy is believed to be maxed out in the sense that the Federal Reserve has done nearly all it can do. There is only so much effort you can take to entice someone to borrow money, particularly if that person, or business, is already in debt.

Fiscal policy, however, is completely different, in ways that are much more powerful.

With fiscal policy, the government can simply hand out money, and let people spend it however they want. Alternatively, the government can use fiscal policy to buy things itself, injecting currency into the system through direct transactions with private-sector businesses.

Either way, the core of fiscal policy is not about lending or borrowing. It is about the “helicopter drop,” in the sense that the government goes out and drops money from helicopters on people.

With fiscal policy, there is an element of borrowing that takes place — but the debt is assumed by the government itself. So if, say, Congress decides to authorize $2 trillion in new pandemic relief, and then disperses that money to consumers and businesses, that is the U.S. government deciding to increase the national debt by $2 trillion for the sake of boosting the economy here and now.

When it comes to being a credible borrower, the U.S. government has powerful advantages.

• It is immortal, meaning the U.S. government does not have a lifespan and never retires.

• It is a military superpower (think aircraft carriers and control of two oceans), a technology superpower (Amazon, Apple, Google), an agricultural superpower (U.S. farm output), and an energy superpower (U.S. shale output).

• It has taxation rights, backed by the authorization of force, on U.S. economic output that represents about 24% of total world output.

• It maintains the world’s deepest and most liquid debt market (the U.S. government debt market).

• It issues the world’s reserve currency.

For all the above reasons, the U.S. government is the only entity in the world that could decide to borrow $2 trillion, based on an act of Congress, and more or less say “we’re good for it,” and have the world believe it (as evidenced by the U.S. bond market not collapsing).

This isn’t to say that emergency fiscal policy is always a good idea. It is only to point out that, when the U.S. government itself decides to pump currency into the economy by taking debt onto its own balance sheet, that is a very different proposition than asking consumers or businesses to borrow more, even at near-zero rates.

Just think about the difference between, say, a person or a business being offered a loan of $10,000 versus receiving an outright gift of $10,000.

With the loan offer, a decision has to be made by the borrower whether to take the loan or not, and that decision will hinge on factors like how much debt the person already has, and whether they have a responsible use for the funds that will result in the loan being paid back.

But if someone is given $10,000 in the form of a direct stimulus check, or unemployment top-ups, or small-business relief funds, there is no encumbrance. It is more like “here is some currency, go spend it however you want.” That money can then be spent on food or utilities or paying down other debts, or a down payment on a brand-new car, or even on near-dated call options on Tesla or Peloton or Netflix; there is no obligation to pay the money back, so the funds provided tend to slingshot back into the economy, or the stock market. 

The incredible potency of fiscal policy is the thing that gets proponents of Modern Monetary Theory (MMT) so excited.

If the government can borrow trillions upon trillions with no ill effects, the MMT theory goes, then why not target that spending in specific ways and put the money to good use?

We are probably going to test the limits of the MMT theory in the coming years. In a very real sense, we don’t have to wait for MMT to arrive — thanks to the pandemic, it showed up without anyone noticing.

In a meaningful sense, mega-powerful fiscal policy is, in fact, MMT in action. The main difference is that advocates of MMT want to use the government borrowing and spending bazooka on a regular basis, and not just in the depths of an economic emergency as created by a 100-year pandemic.

The dangers of out-of-control fiscal policy revolve around undesirable inflation and, ultimately, the destruction of the currency.

If a government borrows too much relative to its balance sheet, or prints too much currency relative to the size of its economy, the result can be inflation that gets out of control, or a debt market that threatens to collapse, or a glut of currency that causes its value to freefall (which then leads to devaluation-fueled price inflation).

In laying out the risks of overactive fiscal policy and MMT, we come full-circle to the metaphor of caffeine versus a powerful prescription drug.

You can drink a lot of coffee, maybe even too much coffee, and you will probably still be OK, other than feeling jittery and nauseated. If you overdose on amphetamines, on the other hand, the side effects can hospitalize you or kill you.

Those who fear a full-on embrace of MMT-style thinking, in using the government’s deep pockets and vast balance sheet strength to prop up the economy with trillions, and then trillions more, are looking down the road at the prospect of 1970s-style inflation but far worse, or a dying currency, or both.

In the short run, though, the announcement of a new multi-trillion-dollar stimulus package would likely be seen as a good thing for both the U.S. economy and the stock market alike — because the market would first focus on consumers and businesses being saved here and now, rather than what comes later, and would also anticipate a direct refueling of retail investor buying-power.

If you own gold, you are likely satisfied with the yellow metal’s annual performance thus far. As of Oct. 29, the gold price was up more than 25% year-to-date, as determined by Comex gold futures. GLD, the popular gold ETF, was up a tad less at just under 23%.

Bitcoin, however, has blown past gold like it was standing still. By the same Oct. 29 reference point, Bitcoin (as priced in U.S. dollars) was up nearly 84% year-to-date — more than triple the performance.

What’s more, gold seems to have stalled out a bit, whereas Bitcoin is still powering higher.

Gold’s high point for the year (thus far, at least) came 12 weeks ago, at $2,063 per ounce on Aug. 6, and the gold price is about 10% below that now.

Bitcoin, on the other hand, made a brand-new, multi-year high less than 72 hours ago, at $13,743 on Oct. 27, and might be hitting new highs again even as you read this.

So why is Bitcoin crushing gold in performance terms right now? It is a slightly odd disconnect when you think about it. The dominant use case for Bitcoin is often expressed as “digital gold,” in the sense Bitcoin has a sovereign store-of-value function comparable to gold.

Because the use case is related, and Bitcoin is competing for a chunk of gold’s market share, one might expect the Bitcoin price and the gold price to move more in tandem, rather than Bitcoin leaving gold in the dust in terms of price appreciation.

This partly has to do with the institutional world’s late discovery of Bitcoin, and the one-time journey Bitcoin will take on its way from a market cap below $250 billion to a cap in the multiple trillions.

For Bitcoin to take even a modest percentage of gold’s market share, in terms of private investor holdings and central bank reserves, the Bitcoin price will have to rise by a factor of 10, if not more. In the early years of such a rise, there will be periods of extreme upside velocity. 

Then, too, the respectable banking houses of Wall Street are doing a 180-degree turn on Bitcoin.

On Sept. 12, 2017, JPMorgan CEO Jamie Dimon publicly called Bitcoin a “fraud” that was “worse than tulip bulbs.” Dimon further said that, if any JPMorgan employee attempted to trade Bitcoin, he would “fire them in a second” for being “stupid.”

That was three years ago. Now, in October 2020, JPMorgan analysts are hyper bullish on Bitcoin.

“Even a modest crowding out of gold as an ‘alternative’ currency over the longer term would imply doubling or tripling of the bitcoin price,” says a new JPMorgan research report, adding that “the potential long-term upside for bitcoin is considerable as it competes more intensely with gold…”

So, JPMorgan was arrogantly dismissive of Bitcoin, from the CEO on down, and now they have seen the light and are endorsing its advance.

This is exactly what we said would happen. And we started saying it in the summer of 2019 — within months of Bitcoin’s long-term bottom — pounding the table hard enough to break it.

The following TradeSmith Decoder excerpt is from July 2019:

In the future world we anticipate, gold will become a staple of institutional asset allocation. The eventual world we foresee could have every institutional investor, as a manner of social signaling and accepted conventional wisdom, have something like 5% to 10% of their total portfolios allocated to gold and gold-related investments.

At the same time, these institutional investors will (in our future projections) want a smaller, but still significant, level of exposure to Bitcoin, as the price appreciation for BTC in the coming years could produce investment returns too fantastic to be ignored…

If this scenario more or less unfolds — again over a long period, perhaps the better part of the 2020s — then gold’s market cap goes to $30 trillion or more, Bitcoin’s market cap rises into the multi-trillions as part of its historic journey to becoming a full-fledged store-of-value asset class, and BTC as a long-term investment fulfills the potential we see.

Long story short, we not only saw this coming, we described exactly how the institutional world would start to behave, in terms of shifting toward a Bitcoin allocation stance. Everything is happening now, just as we foresaw, except on a rapidly accelerated timetable because of the pandemic.

As we have said before, if you don’t believe in Bitcoin yet, you will. The only question is how long it will take before the final pieces click and you “get it.” JPMorgan now gets it. 

So Bitcoin is outperforming gold now, in part, because the BTC market cap will have to increase by at least an order of magnitude to reach full maturity as a store-of-value competitor to gold, and the institutional community, along with the broader retail community, is finally waking up to this.

But there is yet another reason gold’s performance is lagging behind Bitcoin heading into year-end: Central banks have become net sellers of gold in order to raise cash.

“Central banks became gold sellers for the first time since 2010,” Bloomberg reported on Oct. 28, “as some producing nations exploited near-record prices to soften the blow from the coronavirus pandemic.”

According to data from the World Gold Council, central banks were net sellers of 12.1 tons of gold in the third quarter of 2020. This was a big shift from a year earlier, when central banks were net buyers to the tune of 141.9 tons. Russia’s actions were particularly notable, with Russia’s central bank posting its first net sale of gold in 13 years.

Central banks are not selling gold because they are bearish, or because they think the gold price is too high, but rather because they need cash. Russia, in particular, depends on oil revenues to fund its budget, and the oil price is stuck at multi-year lows.

The good news for gold is that central bank demand is expected to rebound in 2021, and the total gold supply continues to shrink. Bloomberg reports that total new gold supply was down 3% year-on-year, even with mines fully reopened after pandemic-related shutdowns.

At the same time, new mining projects are becoming ever-harder to bring online, as attractive sites grow scarce, regulations get tighter, and environmental opposition gets fiercer.

In TradeSmith Decoder, we remain extremely long-term bullish on precious metals stocks (though Bitcoin is our largest position by far, and will likely remain so).

While gold is experiencing sluggish performance as of this writing, it will almost certainly get up and go. And yet, if you are holding gold but not Bitcoin, and feeling like you are puttering along in a Ford Fiesta that just got blown out by a Porsche 911 Turbo, you aren’t wrong.

Not owning Bitcoin — in at least some modest allocation, if not a large amount — is a recipe for regret, and that regret will only intensify in the months and years to come.

A high-profile hedge fund manager is warning that an “enormous” bubble in technology stocks has popped. He believes the top was registered on Sept. 2, 2020, that investor sentiment has shifted from “greed” to “complacency,” and that bear-market pain for technology stocks is ahead.

Is he right? Possibly, yes. The reasons he cites for calling a tech-stocks top will be familiar to TradeSmith Daily readers, as we have touched on some of them over the past few months.

Among those reasons are the fact that Silicon Valley engineered a retail trading mania (as we noted on July 13); the various reasons stocks could retest the March lows (as noted on Sept. 14); and the reasons why, in leveraged conditions like the ones we now see, you don’t need fear to see a big market decline (as noted on Sept. 17). 

It is also possible this hedge fund manager is wrong, however, and the top for tech stocks is not yet in. He previously called for a tech-stocks top in 2016, and was certainly wrong then (more on that shortly).

Whether wrong or right, a top call is a statement about the future more so than the past, because a top call in effect says prices will not go higher for years to come.

It is rarely wise to place all one’s chips on such a bet. There are far too many unknown variables to have absolute certainty as to what the future holds, and some of them can radically change future outcomes.

Were the U.S. government to unleash trillions more in fiscal stimulus before the end of November, for example, the market picture would look very different than it did if, say, Congress authorized no stimulus at all until February 2021. That factor alone could swing the verdict in the direction of “top” or “no top.”

For instance, on the one hand, Robinhood traders could pile back into their favorite stocks with a vengeance if given the chance to gamble with stimulus checks a second time.

On the other hand, a multi-month absence of fiscal pandemic relief, coupled with spiking hospitalization rates in dozens of states, could send the real economy over a fiscal cliff, dragging the stock market down with it to the point that bullish tech-stock sentiment never recovers. 

As such, beyond the election result itself, fiscal stimulus or no fiscal stimulus is the big X-factor here, but the fiscal stimulus dynamic depends on post-election congressional action — and how do you map post-election congressional action on a price chart?

You can’t, not really — and there are many unmappable events like this that make true certainty impossible. Again, the future cannot be known with certainty when critical market-moving factors cannot be guaranteed.

Instead, the tools of the trade are odds and probabilities, coupled with an ability to move quickly as needed in the presence of uncertainty, whether that quick movement means cutting risk or jumping on a new opportunity.

The rational path forward in the presence of irreducible investment uncertainty is to work with the odds, and adjust for probabilities, and make portfolio decisions in real time as new information comes to light.

Risk management is foundational to this process. In that sense, the risk management process functions like a world-class set of brakes on a sports car. The brakes let the car go faster without crashing.

So, with the above said, if asked whether we think the top is in for technology stocks, the honest and rational answer is: “We don’t know — it depends on the timing and magnitude of future events — but it is certainly possible.”

There are other factors, like how much the pandemic intensifies with the onset of winter, and hidden aspects of market structure and margin-call impacts, that could further play a crucial role in determining whether tech stocks have topped.

But the case is certainly worth revisiting and exploring, and not just because a particular hedge fund manager is making it. While you can’t have certainty, an understanding of odds and probabilities can be just as useful. Professional investors, like professional poker players, act profitably in the face of uncertainty on a regular basis.

Then, too, there are other wise and experienced market observers, and respected research houses with decades of experience, who have made related observations that suggest the possibility of a tech-stocks top.

The top-calling hedge fund manager described above is David Einhorn of Greenlight Capital.

For many years, Greenlight Capital was seen as one of the most successful value-oriented hedge funds on Wall Street.

In its early years, Greenlight also developed a reputation for profitably shorting financial frauds, making money on the bear side as well as the bull side. Einhorn’s peak of fame and influence came in the aftermath of the global financial crisis, as he had been an early and vocal bear on Lehman Brothers before it collapsed.

In Greenlight’s latest quarterly letter to investors, Einhorn made the case for why technology stocks are in an “enormous” bubble, and why the market likely topped on Sept 2.

Einhorn also admitted to a top-calling error four years ago, when Greenlight made a comparable top warning for technology stocks in 2016. Einhorn’s rationale for the 2016 top call was that investors would not want to repeat the insane mistakes of the 1998-2000 period. “Clearly we were mistaken,” he said.

Einhorn and others have noted that, in order to call a top, or otherwise say a bubble has popped, you need more than just extreme valuations. You need investor behavior that is mania-like, or even downright  nutty.

The action in tech stocks fits this bill. On Sept. 2 — the day Einhorn thinks was the top — TradeSmith Daily published our thoughts on “The Meaning of Tesla,” reflecting on how Tesla’s valuation was so nuts, Tesla investors would need to anticipate self-driving cars on Mars, or something to that effect, to have a hope of getting their money back.

Then, too, the whole “SPAC” trend has reached a point of sublime ridiculousness.

SPAC stands for “Special Purpose Acquisition Company,” which is a fancy way of describing a large pile of money to buy something unknown, or, alternatively, a publicly traded shell that allows a company to go public without the rigors of an IPO process.

If you want to take a company public quickly, but you don’t want too much scrutiny, the way to do it is to throw the thing into a SPAC. You find some lifeless company that has a functional stock ticker on an exchange, and you use it as a wrapper, and boom, you have a publicly traded stock for hyper-bullish investors to throw money at.

Or, if you have a vision in the spirit of the South Seas bubble, “for carrying on an undertaking of great advantage; but nobody to know what it is” — that was the actual 18th century description used — then you slap together a SPAC vehicle and get investors to send you hundreds of millions to billions to buy something you like.

We are now hearing about so many SPACS, even musicians and professional athletes are getting in on the game. This is goofy, nutty behavior. Einhorn is right about that.

In addition to this, we have seen top markers like entire industries going crazy (electric vehicle plays come to mind), stock splits leading to manic price run-ups (Apple and Tesla in late August), and an alarming embrace of leverage via near-dated call options (part of the Robinhood phenomenon).

Last but not least, you have what Ned Davis Research calls “the Elite Eight” trading at valuations that are beyond extreme. The Elite Eight are Apple, Amazon, Alphabet, Facebook, Tesla, Nvidia, Microsoft, and Netflix.

In the Sept. 18 TradeSmith Daily, “Why the FANG Stocks Will Start Trading Like Commodities or Currencies, For Years to Come,” we noted the following:

“As of this writing Apple’s forward-price-to-sales multiple is 6.6X. This means that Apple could go on being Apple, booking huge profits every quarter, and a mere mean reversion to the top of its old price-to-sales range — not the bottom, mind you, but the top — could mean a roughly 40% share-price drop.

If it merely fell to the middle of the old range, in terms of this standard valuation measure, Apple’s share price could fall by more than half. And this could come in the absence of any bad news on the China front or the iPhone sales front.”

The “Elite Eight,” as Ned Davis describes them, are subject to such extreme valuations that their share prices could fall by a third to a half without a material negative change to their business bottom line — and in so falling they would merely go back to where they were historically, before things started to get crazy.

This doesn’t have to happen, of course. The top may not be in, and the wildness may continue. But in seeing the likelihood of a tech-stocks top, the point is that Einhorn and others could be right, and have a significant body of evidence that suggests they might be right.

As an investor, what to do about this? The first job is to preserve capital, which is a matter of risk management. With capital preserved and risk management protocols in place, the second job is to go where the opportunity resides, and find other things to invest in even if tech stocks have topped.

In TradeSmith Decoder, we remain long Amazon, for example, and still have substantial profits on our core Amazon (AMZN) position established earlier this year. But we also took meaningful profits on a portion of our Amazon exposure months ago, and maintain a risk point on the core position to protect profits if the Amazon chart deteriorates.

It’s a similar story for silver (SLV), where we built a large position starting shortly after the March 2020 lows, and then added substantially to the position later: We have taken a large chunk of profits off the table with silver, and have a profit-protective risk point on the remaining core.

Part of the idea here is to use risk management in conjunction with opportunity awareness to avoid being forced into an all-or-nothing stance. There will be opportunities long and short no matter what the market does, and the most rational path of action will be responding logically to odds and probabilities whether a top materializes or does not.

The one thing you absolutely do not want to do, however, is find yourself subjected to “analysis paralysis” and holding stock positions into the depths of new downtrends. Given the non-trivial possibility that Einhorn is right, and that tech stocks may in fact have topped, that could be a recipe for disaster.

Ant Group Co. — the owner of digital payments leviathan Ant Financial, a digital payments firm with 730 million active monthly users in China — is set to complete the largest initial public offering (IPO) of all time by Nov. 5, raising an incredible $34 billion via dual share offerings in Shanghai and Hong Kong.

The rise of Ant Financial says a lot about the changing state of the world, the tech-driven chill in an increasingly frigid U.S.-China relationship, and the rapidly shifting digital payments landscape.

In some ways, Ant Financial represents a particular vision of the digital payments future, in which a single, sprawling juggernaut touches all aspects of a nation’s financial network, using apps and smartphone QR codes in a single coordinated payments layer to connect customers and lenders and businesses, with government entities maintaining quiet oversight in the background.

But Ant Financial doesn’t have to be the world’s future. It could also be a solution particular to China, with the West going a different way.

In January 2017, Ant Financial tried to expand into the West with the $1.2 billion acquisition of Moneygram, a U.S-based money transfer company. But by January 2018, the Moneygram acquisition had been called off, due to regulatory objections from the U.S. government. By then it had become clear: The U.S. feared Ant Financial as a tool of Beijing.

Ant Financial got its start as a spin-off from another China-based tech giant, Alibaba. Jack Ma, a former English teacher, founded the e-commerce giant on April 4, 1999, in Hangzhou, China. As Alibaba grew its e-commerce business, it ran into a problem with customers being defrauded by strangers. Due to scammers, buying things on Alibaba had become a gamble.  

To create trust, Alibaba created a service called Alipay in 2003. Alipay held customer payments in reserve until the items ordered were confirmed to arrive in good condition. If the items weren’t confirmed, the seller didn’t get paid.

The Alipay innovation solved the trust problem, allowing Alibaba’s e-commerce business to keep growing. Eight years later, in 2011, Alipay was spun out as Ant Financial and kept growing from there.

China’s digital payments landscape is now dominated by Alipay and WeChat, the two major means of payment. Chinese consumers are used to scanning a QR code via their smartphone to make a purchase, whether in person at a cashier or buying something online at home. The QR code habit is so ingrained, roadside beggars reportedly seek donations via QR code more frequently than they ask for cash or coins.

Part of the reason Alipay and WeChat dominate so thoroughly is because China never had a legacy system that preceded digital payments. Long before e-commerce became a thing, the United States had a credit-card-based payment system that worked just fine — but with the founding of Alibaba in 1999 and Tencent (the proprietor of WeChat) in 1998, China was starting from scratch.

The expected $34 billion to be raised by the Ant Group IPO will be greater than the $25 billion raised by the Alibaba offering in 2014, previously the No. 2 largest IPO raise, and the $29 billion raised by the Saudi Aramco IPO in 2019, previously No. 1.

Ant Group’s initial market valuation is expected to be in the range of $313 to $330 billion, which would rank No. 14 in the list of the largest S&P 500 companies — just ahead of United Health, Home Depot, and JPMorgan, and just behind Procter & Gamble, Nvidia, and Mastercard.

The U.S. will stay wary of Ant Group due to its extensive ties to the Chinese government and China’s financial system. Various Chinese government entities hold sizable stakes in the company, and Ant Financial is a facilitator for hundreds of billions in consumer loans originated by Chinese banks.

China’s digital payments landscape is concentrated in the hands of just two players — or three, if you count the Chinese government as the third — because of the way China’s e-commerce foundations were built from scratch in the late 1990s.

But in the West, the digital payments future will be more distributed, in part because the landscape of financial players is already so much more diverse.

There will be the PayPals, JPMorgans, Mastercards, and Visas dominating the landscape — but the FANG giants will also get in on the payments game, if they can figure out how to do so without triggering antitrust mechanisms, and there will also be an array of smaller and nimbler crypto-based competitors.

However things shake out, digital payments innovation is entering a period of hyper acceleration, and the Ant Group initial public offering — the biggest of all time — calls attention to that reality. In the West, the involvement of cryptocurrency (and central bank digital currency) on the digital payments solution side will further underscore how rapidly things are changing, and will create opportunities to take a new direction.