Blogs y foros de trabajar madera en ingles

Hi Folks,
I just picked up a 220 volt radial arm saw that draws 9 amps and has a 15 amp plug on it.
I also have an unused circuit that it could plug into that previously ran a planer. It is a 30amp circuit with a 30amp receptacle on it and has 10 gauge wire.

1. Should the breaker be replaced with a 20amp or 15amp so that it is closer to the draw from the saw? My understanding is that the breaker shouldn't be much higher than needed.
2. What is normal practice or code for matching the breaker, receptacle, an plug? It is difficult to find information for matching up the plug and receptacle for 220. If for example if I go to 20amps, would it be a problem to use the 15amp plug and outlet. Most of the information seems to dwell on 15 amp outlets on 20 amp circuits for 110v.

Any help would be appreciated so that I can get the right pieces and get it wired.

3. Unrelated, does anyone go through "Jointing" planer or jointer blades after sharpening and installation? From what I gather, after installing blades a stone is lowered to the blades on a running machine to grind a slight micro bevel and make sure that all blades extend the same amount. This seems like a very scary operation to be that close to a running cutterhead and I would guess that most people send out the blades for sharpening and nothing more. I have an old 18 inch yates armerican planer and the manual says to do the jointing.

thanks,

Stevo



thanks,

Stevo (.-.)

I’m looking at putting together a second router table. My first table was put together using a Milwaukee motor that came with a switch and variable speed control. Its been a great unit but I can’t find one for sale anywhere. I also can’t find any router table switch that includes a variable control. Either just the switch, or just the variablespeed control that won’t work with a slow start router. Whats the preffered approach these days? (.-.)

I'll be needing to rip some 8/4 white oak and would like to buy a dedicated
rip blade for my 10" Sawstop 3hp PCS. I'm guessing 24T, 20 degree hook,
FT grind, but I'm really out of my depth here. Would love to hear some recommendations.

The Sawstop people recommend staying away from blades with depth limiting shoulders, so
that might eliminate some blades, esp. Freud.

Forrest is saying things are delayed up to 5 months.

Thanks in advance! (.-.)

My old Delta shaper is mobile so I need to be able to disconnect the dust collector and stow it in the minimal space possible. I was originally using two 4" hoses to the combiner on the DC inlet. I've changed that to a single 6" inlet so I needed an efficient combiner attached to the tool that stayed within the outline of the top.

It's sort of possible with standard PVC fittings but I couldn't come up with anything that didn't have at least one badly convoluted path. The maximum allowed profile was also giving me trouble with a printed fitting. I eventually realized that magnetic couplers would solve that problem.

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(.-.)

Matter of concern-placed an order for machined pulleys last week. Got the order# on the site. But no tracking, no way on the site to check order status. I sent a message through the site with a polite question about a timeline. No response. So I called. There are two numbers listed in the contact information on the bottom of the main page. No answer, no voice mail, nothing. The other #is either disconnected or it is a fast busy.
If it's a small or one man operation I can understand but at least fix it so I can communicate.
Do any of you have enlightenment on this?

edit: uh-oh. https://www.bbb.org/us/ma/webster/pr...111/complaints

Thanks,

Rich (.-.)

Hi,

I see some neat looking laminates out there. I have a potential customer that wants a 10 ft long desk with two L's that are 6 ft long. I first quoted him w/ 1/16" veneer & making my own veneer. It was certainly sticker shock, but I can't use thin veneer because I don't have a press big enough for the entire assembly and it would be too easy to get out of plane and sand thru the thin veneer.

So... he asked if I could use laminates. I started looking on YouTube and it doesn't seem much different than paper backed veneer. I also was searching around it seems there are some neat laminates out there. So getting this job, even if he prefers cheap laminate, could be good for me so that I can learn the process.

Is there actual high quality laminates? Without highly specialized equipment, can you do something like that shown below or do you need to buy from a vendor that specializes in forming laminations? Below is an example of something that I could be fun with my furniture. If you do go w/ a vendor, do you make the piece and have them form the laminate around your product?

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(.-.)

I’m in the process of constructing two cabinets as reliquaries for my father, who passed away in early May. He was a veteran of the Korean War, a recipient of the Bronze Star, and those events shaped and influenced his life. I’ve designed two cabinets, one to hold the flag we received from the military honors at his funeral, the other to house his uniform.

A key aspect of the design is a quarter round moulding that I’ve designed. The moulding will be formed by laminating woods to form 50mm long American flags. See a section of the design below. I designed the flags to be constructed from layers of cherry (red) and maple (white) to form the stripes, with the union to be formed by a block of walnut. I’ve purchased a profile to cut a 20mm radius on the stack of laminates to form the quarter round, and will then cut the flats using the table saw with the blade angled 45 degrees.

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My question is whether the cabinet is going to have wood movements problems in the long run given the dissimilar woods used in the construction of the moulding. The cabinet, and the main field in the moulding, is mahogany, which variety of mahogany I’m unsure of. I suspect it is Honduran mahogany. It isn’t African as far as I can tell. So the moulding would have mahogany, walnut, cherry, and maple — is it going to be a disaster or the crowning piece to accent the cabinet I desire?


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(.-.)

I have a Festool ts75 coming in a week. I’m debating what track to get. I think the 55” or 1400mm is a must. What about for you do 4x8 sheets?

I might be able to get a new 108” (2700mm) track locally for under $300. I was reading that with the TS75 this might have clearance issues which I don’t understand yet.

Maybe two 55” tracks and the TSO connectors are the way to go. Read the TAO connectors are better at securing both track sections.

Would going the Makita route for tracks be a good or bad idea? (.-.)

OK I bought my framing nailer and my finish nailer years ago and they are compressor.

I have watched enough videos lately that I have decided I need a small general purpose 20 volt cordless nailer sitting around. To be honest I see it mostly for incidental use on jigs and such. I don't need it often but not having it when I do is a pain.

Harbor Frieght has an $80 20 volt (tool only) brad nailer that drives 1 1/2" & 2" brad nails and on Amazon I see a combo brad nailer/stapler that does 5/8-1" staples and 5/8"~1-1/4" nails that reasonable and comes with batteries and charger.

Leaning toward the combo but trying to decide if inch and a quarter is a mistake.

Any input from one of you guys that have one of these would be great. Anything you wished you had considered before buying one. (.-.)

A week ago Sunday I had the worlds dumbest tale saw injury.

I was ripping on the slider using a Fritz und Franz jig when my daughters kitten leapt up on the saw, right beside the blade, and it’s tail went up into the guard.

The sliding table was in the full rear position pulled back to start the rip.

Without thinking I grabbed the cat and pulled it away, it was unscathed, my left hand, not so much.

Three injured fingers, one a slight cut, two with partially amputated ends.

How I ever got my fingers in beside the riving knife and blade I have no idea, photo attached.

I saw the surgeon yesterday, no further work required, although soaking the fingers on a daily basis in Epsom salts is a great reminder not to do it again��

In a couple of weeks the stitches OEM out…….Regards, Rod

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(.-.)

A friend stopped by to show me his garage sale purchase. We were both curious what the swivel part that is held by a screw detailed in the second photo was for or held. Saw lots of pictures online but no explanation.34245CB6-1EEC-4E10-B660-585684856C8E.jpgAA97E4B3-0964-43E7-9E67-7C6BAA39E28B.jpg Attached Images

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(.-.)

I need nice brushed nickel closet rods for a job.
The Big Box rods do not fit the client’s requirements.
Any ideas on where to get a “better” looking rod?
Or is there a brand that you can suggest?
Thanks, Mark (.-.)

OK, so the first thing after a push stick when the table saw is all set up is gonna be a lighter, thinner cutting board for my wife, alternating maple and walnut.
So I need to rip the lengths, maybe ~15 in. long, so you know the cuts have to be smooth and tight for the glue up.
For this, should I use a ripping/combination blade or (my thought) a 60 toother I have, just for this job?

Thoughts?

Thanks, Rich (.-.)

I'm building a new metal building, I am going to section off a woodshop area I'm planning on 20x30 (full depth of building, 20 ft of width) I want to have a loft to store lumber, plywood etc. Is then any realistic cost way to do this? I have some 10x10 barn beams that are long enough (20ft) if I cut them in half with mill would that give me enough strength? Or would I need engineered trusses etc? Won't be walking around etc very often but I have probably 2,000-3,000lbs of lumber I need to store.

My other idea is to try and find some cheap used I beams... any better ideas? (.-.)

Tired of small leaks in my 2 horse 20 gal air compressor. I have a number of joints in order to have attached a water filter, dust filter, air filter and pressure guage. I have been using a good grade plumbers tape but I still seem to have small leaks that add up over a few hours and I'm low on pressure again. I know there are several tooth paste tubes of stuff that people add around the threads joint before connecting to the next part. I've read a couple reviews where they thought that did the trick.a material that coats the threads that flows , let it set overnight plus some good plumbers tape should stop my problem. Advice from air compressor knowledgable creekers would be greatly appreciated. This constant air loss drives LOML mad because it goes on several times during the day and you can hear it throughout the home. Now you know the real reason I'm looking to fix the problem. If LOML ain't happy, nobody is happy. Any/all ideas and suggestions are Welome! (.-.)

Hi folks -
My shop is in an unfinished basement area, adjacent to a finished section. It's 300 sq ft, 2400 cu ft. In the long cold New England winter, it tends to get down into the high 40's at worst. Right now, I heat it only when I'm going to work using a couple of 1500W heaters - a fan-forced electric heater on the floor and a radiant heater on the ceiling.
It takes a good hour to get comfortable, and even longer to be evenly heated. Plus the floor heater is always in the way.

I've been trying to find a better means of heating it.

One possibility is some kind of more industrial heater, mounted high on wall - I've seen 220V models that were reasonable. I'm thinking something like that could bring the temp up faster if it had a good fan.

I've seen Envi heaters advertised in FWW - but they're only about 500W, and since they use convection, they aren't going to bring it up fast. I suppose I could use a couple of those to keep it a bit higher so it won't take as long to bring up to comfortable temp.

Breaking up the floor for some kind of radiant heat is not an option.

What do others do?

Thanks,
Michael (.-.)

Welcome to another issue of Net Interest, where I distill 25 years of experience investing in the financial sector into a weekly email. If you’re reading this but haven’t yet signed up, join over 22,000 others and get Net Interest delivered to your inbox each Friday by subscribing here 👉

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After Afterpay

Well, I said last week that I would be taking some time off over August. But this is a newsletter on financial sector themes, so when the biggest financial sector deal of the year is announced, it’s worth getting off the beach for!

Earlier this week, Square announced that it’s buying Afterpay of Australia in a deal (now) worth US$33 billion. We’ve touched on both companies here before – Afterpay in Online Lending: the Good, the Bad and the Ugly precisely a year ago (Afterpay was the Good) and Square in a write-up of the company (Hip to be Square) just before Christmas. They are both at the vanguard of fintech and share a distinctive feature. Unlike many fintech startups which create a lot of value for venture investors, these two have created most of their value in public. Square came to the market in November 2015 at a US$2.9 billion valuation and has created 98% of its value since; Afterpay came to the market six months later at a US$125 million valuation and has created 99.5% of its value since.

To understand the rationale of the merger, it is useful to delve into the background of Afterpay and the sources of its success. I am helped by the very timely publication of a new book, Buy Now, Pay Later: The Extraordinary Story of Afterpay, by Jonathan Shapiro and James Eyers, which came out not two days after the deal was announced. The authors write in their epilogue: “Writing a book about such a rapidly evolving subject was always going to leave us exposed to the risk that we’d be caught out by a dramatic plot twist.” They were right but it does mean they’ve written a complete account of Afterpay as an independent company, an account that Square shareholders may find very useful.

From eBay to Afterpay

Afterpay is a global pioneer in the growing Buy Now Pay Later market. It was founded in 2014 by Australian neighbours, Anthony Eisen and Nick Molnar.

Molnar had grown up in his family’s jewellery business in Sydney. It was a classic offline business with a store in Wynyard Station in the city’s central business district. Seeing the potential of the online market, Nick and his younger brother convinced their parents they could sell stock over the internet to supplement the store’s sales.

“I started to list a few pieces on eBay and it started to move quite well but I was in Year 11,” Simon Molnar told Fairfax. “I handed the keys over to [Nick] and he really ramped it up and became the top seller of jewellery for eBay Australia.”

That was when Nick was in college. He carried on selling throughout but was also attracted by a career in finance. He’d struck up a friendship with his parents’ neighbour, Anthony Eisen, who worked in investment banking. At the time, Eisen was winding down the investment portfolio of Guinness Peat Group, having previously worked as a corporate advisor at a number of firms including Credit Suisse. 

Through Eisen’s contacts, Nick secured an interview at a local venture capital firm. The firm’s founder, Mark Carnegie, was fascinated by Nick’s online jewellery business – so much so that he refused to give him a job, telling him to go away and scale up the business instead, and that they’d talk again next year.

Nick was quick off the mark. He skipped his graduation ceremony to fly to an industry convention in Las Vegas and came back with the franchise to launch Ice Online, America's largest online-only jewellery retailer, into the Australian market. 

However, there were some fundamental differences between buying jewellery online and buying it in a store:

“We realised buying jewellery online was not like buying a dress,” Michele Molnar told The Sydney Morning Herald. “People were getting to the checkout and not confident to complete the transaction. We used to sit around the dinner table and work out how to make the transaction easy.”

Nick observed that only 1 out of 100 visitors to the website would convert at checkout. He toyed with the idea of introducing credit as a mechanism to smooth the process and discussed his ideas with Eisen. 

Buying on Credit

It’s not unusual for retailers to offer credit to facilitate sales. In 1807, a furniture store in New York named Cowperthwait & Sons was the first to allow its customers to pay in instalments: “Liberal credit is granted without extra charge, while cash purchasers receive a ten per cent discount.” Shortly afterwards, Isaac Singer introduced a credit scheme to bolster sales of his sewing machines. According to Harvard Business School, “Singer’s machines were neither the best nor the cheapest products on the market. But the firm’s innovative credit plan, inspired by piano showrooms near company headquarters, tripled sales in just one year.”

Others followed. Department stores introduced cards for their wealthier customers to defer payment and then smaller retailers banded together to form cooperative payment card systems. Visa and Mastercard grew from these roots, as we discussed in our piece on Dee Hock, the founder of Visa. But even twenty years after the launch of the first bank-issued card, Sears had more cards in circulation than Visa and Mastercard combined.

Extending credit to customers hasn’t always gone well. That very first bank-issued credit card –  dropped on the residents of Fresno, California in 1958 – suffered delinquencies of 22%, much higher than the 4% projected. Those losses cost its innovator his job. 

Managing the trade-off between retail sales and credit losses can still be a challenge. In 2014, Texas based furniture retailer, Conn’s, warned of major losses in its credit book. The company finances nearly 80% of its sales through an in-house credit business and deteriorating credit quality placed a drag on earnings. In the five years up to July 2019, Conn’s lost a cumulative $566 million in credit against profits in its retail business of $807 million before tax (a big price to pay compared with the 3% discount rate that merchants typically pay to accept credit underwritten by others).

The divergent skills required to navigate retail and credit led many stores to outsource their credit books. For smaller stores, there was also the issue of scale, which is how Visa and Mastercard got their impetus. Larger stores took longer to convince since their own cards incurred no discount fees and stores that allowed customers to finance purchases generated additional interest income, like in the case of Conn’s over the past twelve months where credit losses have stemmed and credit now contributes over 40% of the bottom line.

Dee Hock won over one of the largest stores, JCPenney, as a customer in 1979, but it took some doing. In the year prior, JCPenney’s credit volume amounted to 20% of Visa USA’s entire volume, so it’s not surprising the store came away with an attractive deal, one which precipitated Dee Hock’s exit.

Most stores now outsource credit. Signet, the world’s largest jewellery retailer, was one of the last to fall into line. In its year ended January 2017, it financed 62% of sales in its Sterling Jewelers subsidiary (which includes Kay Jewelers, Jared and smaller regional brands) which it underwrote itself. Since then, it has been selling off its financing business in pieces (amidst sexual harassment allegations and questions from the SEC over how it booked credit losses). In March this year, Signet finalised receivable purchase agreements with third-parties, representing the final step in fully outsourcing its credit offerings and removing consumer credit risk from its balance sheet. 

Growing Afterpay

Nick Molnar registered a new business, Innovative Payments, in May 2014. Six months later he and Eisen changed the company’s name to Afterpay. The idea was to allow customers a choice of two financing options: to pay in full, within 30 days, after receiving delivery of their item, or to pay in four equal installments over six weeks. The experience at Ice Online was that nobody used the pay after delivery option, so that was soon killed.

The pair did a deal with payments company Touchcorp to build the technology at a cost of A$13 million (paid in two cash installments – obviously – plus an equity stake of A$10 million). They hired a credit guy (Richard Harris) and a sales guy (Fabio De Carvalho) and set to work. In July 2015, they raised A$8 million of funding from 41 early investors, valuing the business at A$28 million. 

Early merchant customers liked the proposition. One of the first to sign up was Princess Polly, an online fashion brand. Afterpay soon grew to support one in five of its purchases, increasing its revenues by as much as 15%. General Pants came onboard next followed by Cue Clothing. In its first week on General Pants’ site, Afterpay accounted for 20% of sales. The company has retained a focus on fashion since, where there is greater demand for instant gratification and where ticket sizes are lower than in electronics, say, reducing risk. Merchants that add Afterpay at the checkout typically witness more conversion, larger basket sizes and higher repeat rates. 

Investors liked the proposition too. On a $100 sale, the merchant would pay Afterpay $4. After deducting $0.80 for Touchcorp to process the transaction and around $0.70 lost to bad debts and failed payments, around $2.50 would be left as a transaction margin. Because of the high turnover of loans (they were extended for six week periods) that margin could be earned multiple times over a year. And because Afterpay borrowed its funds – National Australia Bank would go on to provide a warehouse lending facility – the return on equity capital was even greater.

By the end of 2015, Afterpay had run out of funds. Rather than raise a venture round, it went straight to the stock market, listing in May 2016 at a A$165 million valuation. The public offering meant that venture funds didn’t get a chance to invest, with one exception – Matrix Partners, which came in later, in 2018, to finance expansion into the US. Not even Nick Molnar’s former job interviewer, Mark Carnegie, was given a chance to invest, although nor did he put any of his personal funds in. Years later, he was asked by a journalist whether he regretted not putting money into Afterpay. His response: “What do you fucking think?”.

At the time of its IPO, Afterpay had 100 merchants and 38,000 underlying customers signed up. After that, the company grew and grew. Its original pitch deck had projected A$677 million of underlying merchant sales in its third year of operations (2018 financial year); in fact it did A$2.2 billion. In the last financial year to June 2021, it did ten times that – A$21.1 billion – with 98,200 merchants signed up and 16.2 million underlying customers. 

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Along the way, Afterpay merged with its early technology provider Touchcorp (hence its stock ticker APT, as in Afterpay Touch) and expanded into North America and Europe (in Europe under the brand Clearpay because a Dutch company, AfterPay, got there first).

Expansion into the US was especially important given the size of the market – 25 times larger than the Australian market. In order to replicate a startup culture, Afterpay set up a separate company, Afterpay USA Inc, with US$15 million of funding from Matrix Partners in a deal that gave it conversion rights on 10% of the US business. Nick Molnar relocated to take charge. The first retailer to sign up was Urban Outfitters; it was soon followed by Revolve. Within nine months, Afterpay USA had signed up 900 merchants and attracted 300,000 users. And then, on Thanksgiving 2018, the Kardashian team reached out, wanting to onboard that very day to take advantage of Black Friday. 

“We tried every single angle to get in the door there, and one morning they filled out our contact form. They came inbound to us. And we were like, ‘The world is lovely,’” Molnar told The Australian Financial Review.

By the end of March, the number of users in the US had hit 1 million. In February 2020, the US overtook Australia by customer count; the number of users there is now 10.5 million. 

Regulatory Threats

It wasn’t all smooth sailing for Afterpay. Between 2017 and 2020, the company faced the glare of regulatory scrutiny; it has also been subject to intense competition. Regulatory scrutiny came in three waves.

First, the Australian Securities and Investments Commission launched an inquiry focused on the industry’s lending practices. Afterpay offers consumer credit yet doesn’t conduct full credit checks of customers as per national lending laws. Doing so would slow down the application process, removing the product’s attractions. The company says that regardless, it rejects 50% of attempted transactions by first-time customers. It has been able to circumvent credit checks because its loans are short duration and don’t incur interest and so fall outside the definition of credit products in the credit laws. When it filed its report in November 2018, the Commission agreed. 

Then there was a Senate committee inquiry into credit and financial services. A focus here was late fees. Afterpay charges consumers a fee if they are late with payments – the only revenue it extracts directly from consumers. However, the fee is capped and so doesn’t compound like interest. The company told the inquiry that only 5% of transactions incurred a late fee in 2018. Since then, the contribution from late fees has been coming down, to ~13% of revenue from ~20% in 2017 and 2018. 

Finally, the Reserve Bank of Australia probed whether Buy Now Pay Later providers like Afterpay should be allowed to stop merchants passing their costs on to customers, as they insist in their contracts. Such restrictions were banned in the credit card industry in Australia in the early 2000s. 

Afterpay argues that its model is increasingly analogous to an internet referral platform like Google rather than to a payments processor like Visa. Indeed, in the year to June 2021, Afterpay drove ~1 million lead referrals per day to its merchant partners, with 55% coming from consumers browsing the home page on the Afterpay mobile app. Since its early days, the company has shifted its focus from merchant-as-customer to consumer-as-customer. The merchant partner finances Afterpay’s customer acquisition, but then gets value back through referrals and repeat business. One analysis shows that leads from Afterpay convert 8x more than leads from Google; lead referral is a growing part of the proposition for merchants. 

The Governor of the Reserve Bank of Australia plainly agreed and in December 2020, indicated that he would not remove the no-surcharge rules that would have put Buy Now Pay Later on equal footing with card processors. 

Together with Square

There’s a widely held narrative that “Buy Now Pay Later companies are particularly popular amongst younger millennial and Generation Z consumers who came of age amidst the Great Recession and have a generally dubious view of credit.” It’s certainly true that Buy Now Pay Later, funded via debit cards (90% in case of Afterpay) is popular in that demographic – the average age of an Afterpay customer is 33. But it’s not clear whether a dubious view of credit is the reason. Robinhood, which we discussed a few weeks ago, has a similar demographic among its customer base (median age 31) yet sells a lot of margin loans (albeit its customers skew male while Afterpay’s skew female). 

Whatever the reason, Buy Now Pay Later is a useful way for merchants to convert debit-sized baskets into credit-sized baskets with no incremental risk and only slightly higher cost. Its popularity has bred a lot of competition. As well as Affirm and Klarna, Apple is launching a Buy Now Pay Later product in partnership with Goldman Sachs, and PayPal is investing heavily. The deal between Afterpay and Square recognises the changing competitive landscape, but it does something more.

As we discussed in our Square write-up, Square has built two independent ecosystems that are approaching critical mass – an ecosystem of merchants (Seller) and an ecosystem of consumers (Cash App). The holy grail is to connect them (the “third horizon” as management puts it) to capture all the value available when the two sides transact. Management tried in the past with Square Wallet, but they went too early, before the sides had critical mass. Looking back, the CFO said: “I think what we learned there and why we shut it down is if you tried to contain what a consumer wants to do, you effectively are removing utility from them.” 

Afterpay provides the glue to mesh the two sides together. As well as bringing in both more merchants and more consumers, Afterpay has proven how to combine them. Like Square, it started out with a focus on merchants but has shifted its focus to the consumer side. It’s also the case that across financial services, lending reflects the largest profit pool, yet growing a lending business while managing risk is hard. 

Combined, Square and Afterpay are worth more than Citigroup, which once harboured a strategy to become a financial supermarket. The modern equivalent is a super app and although that’s not a term Square management likes to use1, that’s what it’s becoming.

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More Net InterestBig Tech Doing Finance

The Bank for International Settlements (BIS) has been wrestling with how to respond to the incursion of big technology companies into financial services for some time. We highlighted some of the challenges in The Policy Triangle earlier this year. For years, financial regulators have contained themselves to managing the trade-off between competition and financial stability, with stability usually winning out. Big technology companies add a new dimension to the trade-off: privacy. 

This week, senior BIS personnel published a paper, Regulating Big Techs in Finance. They reckon financial regulators have a role to play, given “the potential systemic relevance of big techs and the need to introduce specific safeguards to guarantee sufficient operational resilience. That may be especially relevant for big techs offering systemically important payment services to a significant section of the population.”

Historically, regulators have taken an “activity-based” approach to non-banks entering financial services, i.e. that the specific activities they undertake need to be licensed, be they in credit or in payments or wherever. The scale of its non-banks has forced China to adopt a more “entity-based” approach, holding companies like Ant to higher standards. The BIS wonders if regulators elsewhere need to pivot, too: “[G]iven the unique set of challenges that are thrown up by big techs’ entry into financial services, a purely activity-based framework for regulation is likely to fall short of an adequate response to these policy challenges.”

Financial regulators have big technology companies in their sights. 

European Banks

European banks have had a good earnings season. Most of them have now reported their second quarter earnings and they have beaten Goldman Sachs estimates by 18% at the pre-tax profit level. A lot of the beat comes from lower loan loss provisions, but pre-provision profits beat by 6% with revenues performing 2% better than expected to grow 4% versus the same quarter last year.   

Capital also accumulated over the period, providing the fuel for higher dividends once regulators lift restrictions on 1 October. Last Friday, just after Net Interest went to press, the European Bank Authority released results of its bank stress tests which contained no major negative surprises, providing support for higher payouts. After eighteen months of lockdown, European banks are close to being released. 

Blackstone

I discussed Blackstone with Zack Fuss on the Business Breakdowns podcast this week – part of the Colossus group of podcasts that also includes Invest Like the Best. David Haber summarised the firm’s essence on Twitter as “Firm > Fund”. That’s exactly right; few firms have historically been able to optimise both. If you enjoyed the primer on the company last week, the podcast is worth a listen.  

1

“I don’t know what you call that combination of all those things, but we call it Cash App, and we think it’s a new definition. We think it’s rather unique, and we’re going to continue to add surface area to it to make it something that people want to use every day.” — Jack Dorsey.

In 2019 I talked a lot about Quantum Economics.

What is Quantum Economics?

It’s the new world we live in. Negative interest rates, high bond prices, strong US dollar, and a stronger gold price.

When I was on a panel at a large resource conference 5 years ago… I stated in the coming years we would have further negative interest rates and higher bond prices. The other panelists and “gurus” stated that was “metaphysically impossible”.

Well, it’s exactly what happened and we are now in an era of Quantum Economics.

Be careful of following a dated “framework” by a dated guru.

For example, did you know that if you bought a French or German 10-year bond, you’d lose money?

Yes – yields on those 10-year government bonds are negative.

Let’s turn to their neighbor, Switzerland. It’s a pretty safe country so you’d think it would be hard to lose money there right?

Wrong. Lock your money up for 30 years and earn -0.192%.

Yes, you’re reading that right…

• You give the Swiss Central Bank your cash for 30 years, and in 30 years they give you back less than you started with.

The chart below shows the current yields for bonds in France, Germany, and Switzerland. Everything short and medium-term duration is below zero…

• By keeping interest rates negative, the central banks are trying to create an environment that encourages consumer spending.

Or at least that’s the hope. Given EU inflation can barely get above 2% which would be considered healthy in a normal market, things are not even close to back to normal across the pond.

Financially Transmitted Diseases (FTD’s)

The United States has kept with its Zero Interest Rate Policy (ZIRP), even in the face of skyrocketing monthly inflationary numbers.

What was once perceived as an ultra-loose monetary stance is now a disciplined approach compared to Japan and the EU.  And ZIRP and NIRP are critical to keeping the economy going.

Big fiscal stimulus packages and ultra-low interest rates are the new normal both in the US and abroad.

The combination of ultra-low interest rates and inflation leads to negative real interest rates. It is simply the yield on a non-inflation-indexed bond minus the inflation rate.

As you might guess, in today’s world of zero or negative interest rates, once you subtract inflation, you are left with a negative “real” rate of return.

Incredibly there is over $16 trillion in negative-yielding debt these days. The number is almost unfathomable. But that number will increase.

As inflationary pressures on certain sectors of the economy pick up, more and more debt will go negative yield.

In this situation, investors are incentivized to either

1. Spend the cash immediately, so it doesn’t lose value.
2. Or buy physical assets which are stores of value (like real estate, art, and gold).

Gold Price vs Real Yields

The next chart paints a very clear picture of the relationship between “real” interest rates and the gold price. This data goes back to 2006, where each dot represents the weekly gold price and associated real interest rate.

While this is only one metric, the relationship is starkly clear…if negative real rates continue, it is likely supportive of strong gold prices.

It’s not just gold that is doing well these days. The commodities boom is at full throttle, recently taking out the old 5 years high in the Bloomberg Commodities Index.

Where it gets exciting is when you take a longer-term view…

Here is the same index back to 2000. As you can see, we are still miles away from old highs.

• In fact, the index would need to rise by nearly 150% to get back to the old highs.

Commodities investing requires a contrarian strategy. It’s one reason why many on Wall Street shun the sector. Jumping on the meme FOMO bandwagon is a lot easier. These days, commodities relative to stocks, have never been cheaper.

The Chart 60 Years in the Making…

Below is a chart which shows the ratio of the Bloomberg Commodities Index vs the S&P 500 on a total return basis.

It’s a ratio that illustrates the incredible cyclicality of the commodity space. When it’s on you better be involved, and when it’s off, it’s best to keep the powder dry.

I’ve dedicated my entire 20-year career as a professional fund manager to the commodities space, traveling the globe multiple times over. All while building one of the best Rolodexes in the game.

The natural resource sector is as much an investment into the people running the company as it is a bet on the commodity.

I don’t take finders fees, kickbacks, or stock options, and no company can pay to be in my portfolio.

My subscribers and I just started loading up on several of my favorite gold stocks.

Subscribers to Katusa’s Resource Opportunities get to find out exactly what prices I’m willing to buy and sell at before the trades occur.

If you want to give your portfolio an edge, consider becoming a member and giving it a try for yourself.

Regards,

Marin Katusa

The post Ticking Bond Bomb appeared first on Katusa Research.

Welcome to another issue of Net Interest, my newsletter on financial sector themes. If you’re reading this but haven’t yet signed up, join over 21,000 others and get Net Interest delivered to your inbox every Friday by subscribing here 👇

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Blackstone’s Moment

Asset management is a big topic of focus for us here at Net Interest. Over the months, we’ve tackled the industry from several angles:

• In Zuckerman’s Curse, we looked at the economics of hedge funds and why their returns tend to drop off when they get bigger;

• In The Private Equity Firms’ Private Equity Firm, we explored the origins of the private equity business model and the differences between owning an investment management firm and being a client of one. 

• In Other People’s Money, we examined the quest for permanent capital pioneered by Warren Buffett and increasingly being copied by present-day investment management firms.

Along the way, we’ve touched on many firms: Sculptor, Renaissance, Paulson, Blue Owl, KKR, Berkshire Hathaway, Markel, Bluecrest, Nomad and more. But we haven’t gone into any one of those companies deep.

This week we seek to redress that with an exploration of Blackstone.

Blackstone is the largest alternative asset manager in the world, which means it traffics in the kinds of investments that don’t fall into the conventional buckets of stocks, bonds and cash. There are around $250 trillion of securities in conventional stock and bond markets around the world; Blackstone is focused on the $14 trillion market of investable assets that sits outside them. It currently manages in excess of $650 billion of assets and targets a trillion. 

Last week, it overtook Goldman Sachs in market cap, making it one of the largest financial institutions in America. But for many investors it’s still an enigma. In this briefing, we look at:

• Blackstone’s beginnings

• The economics of private equity

• Blackstone’s expansion into real estate and beyond

• How Blackstone makes money

• Going public

• Blackstone’s secret sauce

Blackstone’s Beginnings

Blackstone’s roots lie in a two-person start-up founded 35 years ago in New York. This wasn’t your usual scrappy startup – its founders had pedigree. In October 1985, Stephen Schwarzman, a former head of global M&A at Lehman, and Peter Peterson, former Chairman and CEO of Lehman (and before that Richard Nixon’s Secretary of Commerce), established Blackstone as a private investment banking firm. Peterson had been ousted from Lehman a year or so earlier in a power struggle with the bank’s chief trader. Soon after, the firm ran into trouble in the European commercial paper market and Schwarzman was tasked with selling it. He did a deal with his next-door neighbour in the Hamptons and Lehman was sold to American Express. Schwarzman hung around for a bit but he knew he wanted out and began breakfasting with Peterson to brainstorm business ideas.

Although his business was M&A, Schwarzman had his eye on the burgeoning leveraged buyout (LBO) market. He’d been introduced to the market in the early 80s as an advisor on some high profile LBOs. The premise was simple: buy a company by putting up some equity and borrowing the rest. The company pays interest on the borrowed piece from its own cash flow; meanwhile, the investor improves the operating performance of the company with a view to selling it for a gain.

Schwarzman recognised that the LBO business was more scalable than the M&A business. “As M&A bankers, we would be running only a service business dependent on fees. As investors, we would have a much greater share in the financial upside of our work.” At Lehman, doing both was viewed as a conflict of interest; at his own firm, that could be managed. 

“The appeal of the private equity business model to a couple of entrepreneurs was that you could get to significant scale with far fewer people than you would need if you were running a purely service business… Compared to most other businesses on Wall Street, private equity firms were simpler in structure, and the financial rewards were concentrated in fewer hands. But you needed skill and information to make this model work. I believed we had both and could acquire more.”

In order to fund their LBOs, Schwarzman and Peterson needed to raise some money, so after a year or so of focusing exclusively on M&A, they hit the streets to raise their first fund. Anyone who has marketed a fund before will be familiar with the struggles they faced. Despite their reputations, they didn’t have a track record to boast and so prospective investors resorted to the age-old heuristic – social proof – to determine whether to invest. A fund is an interesting social structure: investors are much more comfortable participating if other investors are involved. In Blackstone’s case, a ticket from Nikko in Japan was the anchor to raise 2.5x that amount from other Japanese investors and a ticket from GE flushed out other investors in the US. Some investors were more explicit. MetLife came into the fund early but on condition that Blackstone could raise 10x that commitment from other investors. 

In total, Schwarzman and Peterson met 488 prospective investors; 33 invested (MIT isn’t the only allocator to pass on most of the emerging managers it sees). On 15 October 1987, they closed their first fund with $850 million of commitments. The following Monday the stock market crashed. Blackstone’s history is grounded in some lucky market timing.

The Economics of Private Equity

Blackstone’s first LBO was of the transport division of USX, which it renamed Transtar. It paid $650 million for 51% of the business, putting in just $13.4 million in equity (USX put in $125 million in vendor financing and Chemical Bank lent the rest). Within two years, Blackstone had made a 4x return on its investment and by the time the last piece of equity was sold sixteen years later, the return was 26x. 

Similar deals followed over the next six years. When that first fund (Blackstone Capital Partners I) was finally liquidated, it had returned 2.6x to its investors before fees. Blackstone took out a quarterly management fee along the way, of 1-2% of capital commitments during those six years and at least 0.75% afterwards. But most of its payoff came at the back end, on the exit of an investment, when Blackstone took a 20% cut of the realized gain after any preferred annual return investors were eligible for. Schwarzman likens the revenue model to farming:

“…We’re like farmers. When we buy companies and real estate, it’s like planting crops. You put seeds in the ground, you water, and the seeds start growing, but you can’t see the crop yet. Then they grow very high, and it will be a great crop, and you will be very, very happy.”

The 20% cut meant that that first fund yielded around $250 million for Blackstone and its handful of partners – a scalable business indeed. 

Since that first fund, Blackstone has raised fifteen more funds in corporate private equity as well as others focused on specific niches like secondaries (where it acquires interests in existing funds), growth equity, infrastructure and life sciences. It currently has $66 billion ‘in the ground’ in private equity and $63 billion of ‘dry powder’. Through its funds, Blackstone owns around 250 companies, employing more than 500,000 people. Each quarter, the valuations of these companies are marked to market based on their underlying operating performance, but it’s not until exit that Blackstone captures the value. In the past twelve months, valuations in corporate private equity are up 52%. Accrued performance fees that could be crystallised on a realisation event are up to $3.6 billion, but if all of those funds in the ground plus the dry powder can be invested at a 2.5x return, then the total payout could be more than ten times that. 

Blackstone’s Expansion into Real Estate and Beyond

In the early 1990s, Schwarzman became attracted to real estate. The real estate crisis at the time left many assets at distressed valuations and Blackstone decided to try its hand. In partnership with Goldman Sachs, it bid on a portfolio of garden apartments in Arkansas and East Texas at a government auction. But the two firms had differing investment styles. 

“Goldman wanted to bid as low as possible to avoid overpaying. For me, the biggest risk was not offering enough and missing out on a tremendous opportunity… You often find this difference between different types of investors. Some will tell you that all the value is in driving down the price you pay as low as possible… That has always seemed short term to me. What that thinking ignores is all the value you can realize once you own an asset: the improvements you can make, the refinancing you can do to improve your returns, the timing of your sale to make the most of a rising market. If you waste all your energy and goodwill in pursuit of the lowest possible purchase price and end up losing the asset to a higher bidder, all that future value goes away. Sometimes it’s best to pay what you have to pay and focus on what you can then do as an owner. The returns to successful ownership will often be much higher than the returns on winning a one-off battle over price.”

Blackstone convinced Goldman to increase their bid, and the deal went on to generate a 62% annualised return. The experience stuck with Schwarzman and coloured his investment philosophy across all asset classes through the rest of his career. It also convinced him to beef up the firm’s real estate efforts. Blackstone made a number of hires into the real estate unit and, in 1994, raised a stand-alone real estate fund (Blackstone Real Estate Partners I) that ended up doing a 2.8x gross return. 

One of the hires was a young Jonathan Gray. Recruited into Blackstone’s private equity business as a 22-year old from college, he transferred to the real estate unit in 1995. Ten years later he was running it. Most successful money managers have a defining key insight sometime in their careers; Gray had two. He was quick to tap into the commercial mortgage backed securities market to make bigger real estate transactions when they were relatively new. And he identified that public companies frequently have a lot of properties valued at less than the sum of their parts; if you can buy entire portfolios, you can often offload them piecemeal and extract strong returns, 

That second insight was the foundation for one of the biggest real estate transactions in history, when Blackstone bought Sam Zell’s Equity Office Properties on the eve of the financial crisis. By then, Blackstone had raised its fifth stand-alone real estate fund, Blackstone Real Estate Partners V, a $5.5 billion fund that started deploying capital in December 2005. It had a proven track record – the first three funds all did in excess of 2x – but Equity Office Properties was six or seven times larger than any real estate deal done before. In February 2007, Blackstone bought it for $39 billion and immediately went out to sell off many of its underlying assets. Within two days it recouped half of what it paid and within two months it had sold $30 billion of assets. 

The deal is indicative of the scale Blackstone operates at. Today, the firm has around $46 billion of capital ‘in the ground’ in real estate and a further $36 billion of dry powder to deploy. Some segments of real estate have struggled during the pandemic, but 80% of Blackstone’s exposure is to more resilient segments like logistics, suburban multifamily and high quality office (including life sciences). 

Blackstone diversified into other areas as well as real estate. It established a “fund of hedge funds” in 1990 for partners to invest their own capital, which it then rolled out to external clients. Today, Blackstone Alternative Asset Management is the largest discretionary allocator to hedge funds in the world; the hedge funds business makes up around 15% of Blackstone’s total assets under management. 

It also has a large credit business, which grew following the financial crisis. Blackstone acquired credit manager GSO Capital Partners in 2008 just at the time banks were pulling back from lending, creating more direct lending opportunities for private credit managers. Today, Blackstone is one of the largest credit-oriented managers in the world. Credit makes up around 25% of the group’s assets under management. 

How Blackstone Makes Money

Blackstone makes its money from two main sources: management fees and performance/incentive fees. Over the past few years, the mix has shifted more towards management fees. Across all of its business segments, management fees now rack up at around $5 billion per year. As Schwarzman identified at the launch of his firm, private equity fees are highly scalable. Around 35% are allocated to investment professionals and other employees but the number of staff does not ratchet up linearly with assets under management. Blackstone currently employs around 3,100 people, up 54% over the past five years, during which time its assets under management are up 84%. The margin on fee-related earnings has therefore been going up at a rate of around one percentage point per year; it now stands at 55%.

Performance/incentive fees are a lot more lumpy and, in the private equity and real estate business, contingent on exits. In the last twelve months, the firm released $2.1 billion of performance and incentive fees and right now there’s another $6.8 billion sitting on the balance sheet waiting for exit events.

One of the reasons for the mix shift in fees towards management fees is the higher weighting of perpetual capital managed by Blackstone. Traditional fixed term fund structures such as Blackstone Capital Partners I and Blackstone Real Estate Partners V are analogous to ‘single crops’, to borrow Schwarzman’s farming framing. Capital is raised, deployed and compounded, but it’s ultimately handed back to investors – an intensive process to repeat. Increasingly, Blackstone has been raising perpetual capital which, unlike fixed term funds, is under no obligation to be returned to investors. Right now, Blackstone has around $170 billion of assets under management across 15 perpetual strategies. The firm gets paid incentive fees on performance based on valuations as opposed to based on realizations in sales and often the base management fees are tied to net asset value as opposed to the amount of capital committed.

A major source of perpetual capital is the insurance industry. As we discussed in Other People’s Money, one of Warren Buffett’s career-defining insights was to pair up insurance with investment management. Lower interest rates have increased the pressure on insurance companies to seek out ways to earn higher returns and one solution is for them to get closer to credit origination, which several are doing by replicating Buffett’s strategy to partner with asset managers. Blackstone recently did a deal with AIG to manage $50 billion of its assets, rising to $92 billion over time. The deal will take the firm’s total insurance assets to $200 billion when fully phased in. 

As well as insurance, Blackstone has also been increasing its penetration in the retail channel. It estimates that there are $80 trillion assets sitting on household balance sheets of high net worth individuals around the world, which compares with $30 trillion in insurance and $60 trillion in its traditional institutional market. Retail allocation to alternative assets is currently very low, but Blackstone is seeking to address that via the creation of bespoke products and a support organisation. It is currently attracting retail assets at a rate of $4 billion per month.

Going Public

Blackstone went public in June 2007, just four months before the stock market peak as the financial crisis brewed (lucky market timing once again). The IPO provided an exit for Pete Peterson and floated a currency that could be used for employee retention and for acquisitions. The challenge for any asset management firm – as we discussed in Zuckerman’s Curse – is to strike a balance between the interests of the asset manager and the asset owner; add a third stakeholder into the mix – an equity owner – and it compounds the problem. Blackstone reconciled this problem with an intention to be “a different kind of public company”:

“We intend to continue to manage our business with a long-term perspective, to focus at all times on seeking to optimize returns to the limited partner investors in our investment funds and to retain our partnership management structure and culture of employee ownership of our business.”

Over the past fourteen years, Blackstone has broadly stuck to that. Its stock dipped to $3.50 in the months after it priced its IPO at $31 as the financial crisis took hold but it recovered subsequently and now trades at $115. Looking back on the past five years, economics have been shared between the three stakeholders as follows: limited partner investors have enjoyed returns of around $100 billion, employees have taken around $10 billion and around $15 billion has been left for shareholders (although these interests do overlap). 

In its first few years as a public company, investors were reluctant to place a high value on Blackstone’s performance fees. This led Schwarzman to complain publicly. He argued, in 2012, that public mutual fund managers traded at 16 times earnings while growing assets under management at a rate of 6% per year. At the time, Blackstone was trading at 10 times and growing assets under management at 27% per year.

Since then, Blackstone has been rerated – it now trades at around 30 times earnings. Part of that is due to the shift in business mix towards more fee-related earnings, coupled with the proven persistence of performance fees. Part is due to a change in corporate structure in 2019 which allows it to access a larger pool of potential shareholders.

Blackstone’s Secret Sauce

Blackstone highlights its ‘virtuous circle’ as a cycle consisting of three elements: investment performance, investor confidence and the power to innovate. The problem with such cycles in the asset management industry is that time lags can inject friction into them. Investment performance cannot be evaluated overnight – it can take three to five years to evaluate it; longer in the case of a fixed term private equity fund.

But Blackstone has been around for a long time now and has delivered robust performance across its strategies through different market environments (with the advantage that it has discretion to time its exits). Underlying its performance are three factors: process, scale and integration. 

• As an outsider it can be hard to assess any firm’s process, but at Blackstone there’s a clue in the investment style Schwarzman articulated when recalling his first real estate deal. Price is important, but what you do with the asset after you’ve bought it is more important. This was demonstrated when the firm bought Hilton Hotels at cyclically the worst possible time, just before the financial crisis, at a price that several months later looked too high; yet the deal performed well and ultimately made $14 billion for investors. 

• “Scale is our niche,” declares Blackstone. There are certainly very few firms able to execute deals on the scale of Blackstone. Scale allows the firm to own and invest in assets and businesses that have greater surface area for improvement. In several cases, Blackstone has used scale to create new business platforms. For example, in spring 2012, it began buying single family residential homes – it bought its first in Phoenix for $100,000. Within a few months it was buying $125 million per week and eventually it rolled its properties into a platform, Invitation Homes, which made $7 billion for investors.

• Integration is possible in part because of the firm’s scale: Blackstone sees almost everything and has a pool of capital somewhere in the group to exploit it. It also practices a thematic style of investing which lends itself well to integration. Blackstone identifies macro themes and executes them across its various strategies. In life sciences, it has a dedicated fund but it also invests in specialised property in its real estate unit. Current themes it is exploring across the group are: sustainability, logistics, digital infrastructure, housing and the post-COVID travel recovery.

“Information is the most important asset in business. The more you know, the more perspectives you have, and the more likely you are to spot patterns and anomalies before your competition. So always be open to new inputs, whether they are people, experiences, or knowledge.”

Conclusion

Jon Gray is now President and COO and designated successor to Stephen Schwarzman at Blackstone. But as the firm shifts from Black to Gray, it is unlikely to skip a beat. The Archegos episode at Credit Suisse (see below) highlights the importance of culture at any firm, not least one built on intangibles like knowledge and risk. Blackstone is small enough at 3,100 employees that its culture can be cultivated but big enough that its culture can be leveraged. Of course, the firm has benefitted from the tailwind of a supportive liquidity environment, but across all of its distribution channels and all of its investment strategies, there’s plenty more growth to go.

Further reading: Most of the quotes in this piece come from Stephen Schwarzman’s memoir, What it Takes. Blackstone’s 2018 investor day materials are also a helpful resource.

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More Net InterestArchegos

Matt Levine does a good job summarising the independent report commissioned by Credit Suisse on its Archegos failings. What stands out is that some people within Credit Suisse knew the risks they were running in their dealings with Archegos but they weren’t necessarily the right people and they didn’t necessarily do anything about it. 

Of note, Archegos positions were persistently in violation of internal risk limits. The maximum potential exposure limit was set at $20 million during 2020, yet actual exposure fluctuated between $200 million and $500 million during most of the year. Credit Suisse solved this problem by moving the account to a different unit within the firm where risk limits were higher! By 8 March 2021, gross exposure was up to $21 billion which was large enough to merit a discussion at committee, but the issue wasn’t escalated to the executive board for two more weeks. During that time, Credit Suisse even agreed to pay across some excess variation margin to Archegos even though it was trying to get Archegos onto a “dynamic margining” system that would have sent funds the other way – a system that would have been implemented if only Archegos had returned Credit Suisse calls (“the business scheduled three follow-up calls in the five business days before Archegos’s default, all of which Archegos cancelled at the last minute.”)

The whole sorry mess reflects a problematic culture at Credit Suisse, a difficult thing to repair. There was a lot of staff turnover leading up to the default, one of the proximate causes for its fallout, and there has been a lot since. But as we observed in our piece on the matter, “you can change the head multiple times, you can change the stick, but it stays the same broom.”

US Payments

A new paper asks, “Why is the United States Lagging Behind in Payments?” It is co-authored by the co-creator of Diem (formerly Libra, discussed here) – a technology looking to disrupt US payments – so it’s not exactly objective. But it makes some good points. It observes that transfers between major US banks incur fees ranging from $10 to $35 for same-day wires and compares this to the UK, where individuals and businesses have access to a free, 24/7 interbank payments system which settles within seconds and supports over 8m transactions per day. It goes on to outline the frictions that exist in the US in payments systems used by individuals, businesses and government. It suggests three ways to remove these frictions. 

• One is to bring deposits on a single ledger through a Central Bank Digital Currency (CBDC), so that transfers between banks are not limited by external liquidity constraints or third-party rails. 

• The second is to follow countries such as India and Mexico and increase the throughput of always-on real time gross settlement systems. This is the model the Federal Reserve is pursuing with the introduction of FedNow, targeted for 2023.

• The third is to facilitate the growth of interoperable, stablecoin payment rails by creating the right regulatory framework for these new types of networks to safely increase competition in payments.

Diem (formerly Libra) is a play on the third, although it is hedging itself by also embracing the first. The second is a solution worth watching.

Monzo

We discussed Monzo here a year ago in The Good, the Bad and the Ugly (Monzo was the bad). This week the company filed its accounts for the year up to the end of February 2021, and yet again auditors raise question marks around the bank’s capacity to carry on as a going concern.

“Our Directors have assessed our ability to continue as a going concern and are satisfied that we have the resources to continue for the foreseeable future. But, there is a risk we won’t be able to execute our business plan, which could impact our ability to generate a profit or raise enough capital to meet future regulatory capital requirements. Because of these obstacles, the Directors recognise there continue to be material uncertainties which may challenge our ability to continue as a going concern.”

The company also highlighted that it is under investigation by the FCA over anti-money laundering breaches with potential criminal as well as civil liability. 

The UK is home to several challenger banks including Revolut (discussed two weeks ago), Starling and Monzo. They’ve each trodden a different path and risen to the challenge of the pandemic in different ways. Starling embraced government loan schemes to boost its loan portfolio, Revolut diversified into trading, but Monzo looks to have stood still. Customer deposits more than doubled, to £3.1 billion, but the bank said fewer customers were using their accounts on a weekly basis – 55%, down from 60% – which it blamed on limited spending in lockdowns. Monzo is unlikely to be the first to IPO. 

Finally

Well, it’s no longer hot in London; now it’s raining. But I may still take some time off over August. If you have any ideas, opportunities, proposals, observations, or anything else you want to talk about, do get in touch by replying to the email or via Twitter or LinkedIn.

The global “reopening” trade continues as economies surge on improving consumer demand.

Let’s just hope the delta variant doesn’t shut things down in the fall again.

Today we’re going to look at some current data on everyone’s favorite debate: Inflation. And then talk about what it means for gold.

I get a kick out of experts, fund managers, talking heads and nearly everyone I meet arguing, debating and trying to convince others on their views of inflation, stagflation, transitory inflation, deflation and everything in between.

I bet that “transitory” is the most searched economic term of 2021.

Hell, even doctors are using ‘transitory’ now to explain lingering side effects from the different vaccines.

Most of what you’re watching and reading is verbal diarrhea.

Always question what you’re watching and reading with this simple filter – “What kind of skin in the game does this person have.”

If you don’t have your own money on your thesis, then chances are you’re going to lose my interest quickly.

Now let’s get to it…

Cross-flation

Around the world, inflation is the key focus. With enormous amounts of stimulus and a red-hot economy, inflation in many parts of the economy will happen. I coined the phrase in my book, “cross-flation”.

In the U.S, there are two core measures of inflation.

1. The Consumer Price Index (CPI) and
2. The Core Personal Consumption Expenditure.

You can argue that both methods are rather outdated, but they are bell-weather metrics that politicians and the US Federal Reserve use to help in their decisions.

By either measure, inflation is evident as shown in the dramatic spike over the past 2 months…

However, one should tread carefully because the baseline is data from shortly after the pandemic when economic activity was very low.

So, it is easy to juice these numbers and expect inflation to be worse than it appears.

The true test of how inflationary things are will come later in 2021 when Sept-Dec 2021 data is compared to Sept-Dec 2020 data.

In Europe, the CPI shows a similar spike, though the 2% range would be considered healthy under normal economic conditions.

Looking at sources of alternative measures, such as the IMF World Food Price Index, shows major increases in the global price levels of food.

In the real world, you’re seeing everything from gas prices to luxury purses increase in price.

In short, there are certainly inflationary pressures.

But at this point, nothing that requires central banks to alter their course of stimulus packages and interest rate policy.

Golden Hedge for Inflation

Gold has long been argued as an inflation hedge.

Dramatic inflationary conditions can lead to a loss of confidence in the nation which can cause a currency death spiral.

This leads to a very weak domestic currency, while real assets such as gold, art, and real estate will appreciate.

• However, a littleinflation is bad for gold. The reason is that inflation is mainly controlled through interest rate policy.

To curb inflation, central banks raise interest rates.

Higher interest rates incentivize domestic and international investors to buy domestic bonds. This increases the demand for the domestic currency, leading to a higher valued currency relative to its peer nations.

• In this case, if the US Federal Reserve were to raise rates, the US Dollar would rise and because gold is priced in US Dollars, it would fall.

Do I think the Federal Reserve fears inflation and will raise rates in a big way this year?

No, I don’t. For several reasons:

First, the US is not back to full employment. The economy can continue to expand at an above-average pace so long as the country is below full employment.

Second, the era of double-digit interest rates or even 5% money is a long way away.

We are in the realm of low-interest rates (and NIRP) and these policy stances are not going away.

Raising rates to 5% would cause enormous stress on the system and likely lead to catastrophic failure locally and financial contagion.

Will History Repeat Itself?

For the last 20 years, relative to its peer nations, the US economy has emerged stronger from economic collapses.

This can be measured in many ways, such as GDP growth. And another very useful, but not so often mentioned tool is interest rate determination.

Central banks raise interest rates when economic conditions are strong and cut interest rates when conditions are weak.

As you’ll see in the next chart, through the tech bubble, the global financial crisis, and the Coronavirus pandemic the US always had the highest interest rates compared to its peers.

This is especially evident since 2008 when after a brief stint, the EU was forced to cut its interest rates to zero, while the US raised rates a handful of times.

As we look at the global economy, most nations are worse off today than they were pre-pandemic.

For example…

Japan cannot change from the zero-interest-rate policy it struggled with over the last two decades. The EU has negative interest rates, a struggling banking system and many highly indebted member nations. It’s hard to see them as a pillar of economic strength right now.

Canada is a major trading partner of the United States, it will try to closely mimic its interest rate policy. Being a commodity-driven nation, high commodity prices will also justify higher rates in Canada. Given the economic outlook abroad, it is hard to see any developed economy strengthening relative to the United States.

The BRICs (Brazil, Russia, India, China) will show strong economic growth, but none have shown themselves capable of being a responsible global leader when it comes to trade or central banking activity.

US Dollar Importance

• On a global basis, I remain firm in my US Dollar position.

There is a lot of negativity surrounding the demise of the dollar, death of the dollar, destruction of the dollar, and all other fear-driven narratives. I’m not in that camp.

As I’ve said many times before: The US Dollar only has to be the strongest currency relative to its peers.

I see no reason for the US Dollar to lose its reserve currency status. Below is a chart which shows the US Dollar versus a basket of global currencies.

Gold and Potential Headwinds

Gold has struggled for most of the year as investors have bought risky assets and sold safe-haven assets.

This past June was the worst-performing month for gold since November 2016.

• While we may not always like it, we must respect the price action in gold.

Inflationary conditions are not rampant, and US bond prices have weakened sending yields higher. This puts pressure on the gold price.

Below is a chart which shows the gold price versus the real return of the US 10-year bond. You will see that as real yields bottom, gold has a tendency to peak.

At this time a year ago, I was pitched more gold deals, financings and projects than in the previous 3 year combined.

When you start to see the “rounders” coming back into gold after being in crypto and cannabis, still flogging the same exploration moose pasture…

…you know it’s starting to get a little overheated.

That – along with many other underlying factors – led me to take Katusa free rides and profits off many gold positions and rotate into other opportunities with more upside in mid to late 2020.

It wasn’t a popular move, which made me all the more confident about it.

I like to make moves well in advance of others, to take advantage of liquidity and sell into periods of relative strength. And buy in periods of relative weakness.

I anticipated a correction, which now allows me to scoop up shares at a massive discount to last summer’s prices.

While gold was (and still is to some degree) retreating and consolidating, many of my subscribers to Katusa’s Resource Opportunities and I still made money on our gold picks.

One such company is up nearly 5x our money in just over 12 months.

And now the Way of the Alligator is working in real time and I’m methodically buying new tranches in my favorite gold stocks.

If the gold stocks correct further, I am ready, like an alligator to attack. My subscribers who followed my guidance are now strongly positioned with lots of attack capital.

My long-term bullish view of gold is intact. But I’ll use any weakness in the short term to build my positions.

You can read the exact moves I’m making by becoming a member of my premium research letter – Katusa’s Resource Opportunities.

I hope you’ll join me and all the other alligators.

Regards,

Marin Katusa

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