Taking stock

As you’ve heard me mention before in relation to Bitcoin, the Stock to Flow metric is a powerful measure of an asset’s ability to maintain value over time.

I examine this trait in the alternative investments made for the families I work for. When we invest in hotel assets in markets like Malibu, CA or Sedona, AZ there are factors to areas like that which create very low stock and almost zero flow. Operational activities aside, the Stock to Flow ratio is wind at our back.

You’ve undoubtedly noticed the same thing at many country clubs around the US. COVID lockdowns ignited demand and usage for these clubs, and given the capped memberships, created a zero flow effect… driving up membership demand considerably. However, it’s important to note that for some asset classes, Stock to Flow can change. You could find yourself with a sudden supply shock or flow shock….affecting the asset value considerably. Depending on your long or short term view, this should impact investment decisions.

Back to Bitcoin, this is why the digital asset has garnered so much interest and investment. Its stock is clearly defined (21 million) and its flow is easy to calculate.

“Simplicity is the ultimate sophistication”. - Leonardo da Vinci

Finally, here is what’s on my radar:

lending & credit

Private Credit is a hot topic these days. While many behemoths like Blackstone & Apollo love the space, PIMCO’s taking the contrarian view. They think a lot of the larger private credit deals have (or will have) problems under the hood.

I look at many private credit opportunities on a weekly basis on behalf of the families I work for & it’s a space we actively allocate to. While the rate of return relative to traditional bonds is the measuring stick, the big factors for us are duration & liquidity. “How do I get my principal back, and how long do I have to wait?”

The longer your money is out there, the more chances something could turn on you.

Duration was largely ignored in the era of 0% interest rates, but the last 18 months has shown how vicious duration risk can be. One of the biggest casualties today belong to bank balance sheets…as many of them pigged out on long duration treasuries with scant yields that are now totally underwater. While many banks have time to let these bonds creep closer to maturity, they face another challenge with a wave of CRE refi’s on the horizon.

macro

Everyone knows inflation erodes purchasing power over time. This is why long-term cash holdings carry an opportunity cost.

Something seemingly as innocent as a 4% inflation rate can destroy nearly 20% of your purchasing power in 5 years.

This chart put together by the always-entertaining Game of Trades twitter account puts into broader perspective how powerful inflation is at eroding value.

What he’s showing here is that the S&P 500 is up over 50x since 1970 but when adjusted for inflation it’s up only 5x.

With a $34 trillion (and counting) debt burden, the likelihood of further money printing only increases by the day. That’s a worrisome omen for what this chart could look like in a few years.

real estate

Residential real estate fought through a rough 2023, but as we roll in to 2024 I’m keeping an eye on what the experts forecast.

Bloomberg breaks down the high end sector of residential and which markets are performing the best & worst.

The good:

The not-so-good:

At the high end of the market, there are more cash buyers, therefore their decisions are more driven on macro outlooks (and how it affects their entire portfolio). These buyers can also be more selective….waiting for a 10-15% pullback on a $10million house is a meaningful number. For 99.9% of buyers, their decisions lie strictly on personal debt service ability.

final thoughts

Rampant inflation has decimated the cost structure for many industries and perhaps the most acutely hit were restaurants. As I’m sure you’ve noticed by now, what started with the random & subtle practice of adding a “Credit Card Surcharge” to your bill has escalated into a seemingly industry-wide practice.

While other businesses have utilized the credit card surcharge practice for years, I have not seen it so quickly and so uniformly adopted by an industry like this before.

Some restaurants have taken it a step further, now passing all sorts of costs back on to the customer such as employee health insurance.

This is truly an interesting dynamic. Instead of simply raising menu prices, restaurants are now itemizing their cost structure to pass thru to customers. What’s next perhaps? Rent escalations? Or is this simply a fad?

How do you feel about the 3% CC surcharge practice? I will share the results next time..

Clark Gaines focuses on alternative investment strategies at Almanack Investment Partners, and is based in Charleston, SC.

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