Your Best Idea Might Now Be Your Worst

SBF behind bars... Sam wants more investor money... Remembering Adam Neumann... These businesses will never make a penny... Howard Marks' third 'sea change'... The past is gone... It's not all bad news...

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They finally arrested Sam Bankman-Fried...

The Royal Bahamas Police arrested the disgraced founder of cryptocurrency exchange FTX on Monday for extradition to the U.S. Then on Tuesday, the U.S. charged him with eight counts of fraud and conspiracy.

As Digest editor Corey McLaughlin reported on Tuesday, FTX's new CEO, John Ray III, told Congress in testimony, "This is really old-fashioned embezzlement." In other words, it's taking money from customers and using it for your own purpose.

I've alluded to the possibility of Bankman-Fried, also known as SBF, being arrested more than once, including in last Friday's Digest when I said this...

And while I'm certainly not a criminal investigator, I believe what he said could possibly get him arrested.

As Bankman-Fried admitted to the [Wall Street] Journal...

[Those deposits] were wired to Alameda, and... I can only speculate about what happened after that.

Dollars are fungible with each other. And so it's not like there's this $1 bill over here that you can trace through from start to finish. What you get is more just omnibus, you know, pots of assets of various forms.

Did Bankman-Fried really just say he "can only speculate about what happened" to billions of dollars in customer deposits because all dollar bills look alike?

I also said this...

Bankman-Fried thinks he's being candid about FTX's downfall. But to law-enforcement agencies, it probably just seems like he's daring them to get off their duffs, have him deported to the U.S., and arrest him.

(I'm no lawyer, either. But I assume that can happen.)

Indeed, the first two charges are conspiracy to commit wire fraud and wire fraud on customers for...

... misappropriating those customers' deposits and using those deposits to pay expenses and debts of Alameda Research, BANKMAN-FRIED's proprietary crypto hedge fund, and to make investments.

SBF's arrest is certainly news...

But this part of the story doesn't have that "Oh my God, did he really say that out loud?" quality that has made him irresistible Digest material for weeks now.

There's plenty of that, though, right until the bitter end.

SBF kept saying stupid things apparently right until the Bahamian police started knocking on his door.

In an interview on Monday, just hours before he was arrested, Bankman-Fried said on a Twitter Spaces chat with "Unusual Whales" that he planned to testify before Congress on Tuesday but would do so remotely because he was "quite overbooked" and had concerns about "paparazzi" in Washington, D.C., not because he thought he would be arrested on U.S. soil.

And before that, during a Saturday interview with the BBC, as the website DailyWire.com reported...

The would-be digital asset wunderkind said he would "give anything" to start a new venture and earn the funds necessary to compensate investors and customers. "I'm going to try if I can," he added.

SBF didn't say where he'd get the money. Or if he has any left. A couple weeks ago, he claimed to have just $100,000 left to his name, so we know he won't be putting his own capital at risk. Also, is it possible to raise money for a new venture when you're in jail on fraud charges from the last one? Again, not a lawyer, but it must make everything harder.

SBF would need to attract investor capital to start a new business. Can you imagine him pitching this business to you as an investor?

Hey guys, I'm in jail and might soon be convicted on eight counts of conspiracy, fraud, and money laundering, and I've said a dozen times or so that I'm not nearly as competent as I thought I was, and I never take my lawyers' advice because I still think I'm smarter than everyone even though I've proven otherwise beyond a shadow of all doubt, but I want you to give me $10 million so I can start another business to pay back all the people who got screwed by my last one because altruism and stuff.

Normally – whatever that means anymore – I'd have laughed it off and moved on. Then I remember Bull Club member Adam Neumann.

Surely you remember Neumann...

He co-founded WeWork, a company in the so-so business of renting office space to startup companies. In the speculative frenzy of 2019, Neumann's colorful personality helped garner the firm a $47 billion valuation.

It tried to go public, but investors balked at some of the disclosures in the firm's first pre-initial public offering ("IPO") filings, including how Neumann owned buildings WeWork was leasing and borrowed $30 million from WeWork at rates as low as 0.2%. The company's idiotic mission statement was "elevating the world's consciousness."

WeWork filed its first IPO document on August 14, 2019. The public reception was so awful that Neuman resigned as CEO a little over a month later on September 24.

You'd think that would be the end of Neumann's ability to attract large sums of investment capital, but in May of 2022, global news service Reuters reported that his new company, Flowcarbon, had attracted a $70 million investment. The business is a "a blockchain-enabled carbon credit trading platform," whatever that is. (If I were covering this company as an analyst, I might project triple-digit "buzzword growth" in the first year and 100% losses for investors.)

Then in August, the New York Times reported that Neumann had started a new residential real estate company called Flow, which had attracted a $350 million investment from Silicon Valley venture firm Andreessen Horowitz.

When Marc Andreessen wrote to his investors to announce the investment – the biggest in his firm's history – he said Neumann's company was solving a national housing crisis and then called renting an apartment "a soulless experience." Shortly before the announcement, Andreessen and his wife issued a public comment opposing an apartment complex in their neighborhood.

Sounds like Neumann's kind of guy: a billionaire who talks about making the world a better place out of one side of his mouth, while keeping the "hoi polloi" out of his neighborhood out of the other.

I don't know what Flowcarbon and Flow are doing lately, but I'm willing to bet neither has made a penny. In fact, I'll go out on a limb here and do something I almost never do: make a prediction.

No Adam Neumann business will ever make a penny...

And I'll make the same prediction about Bankman-Fried. No SBF business will ever make a penny.

They're both young entrepreneurs full of hubris and philanthropic aspirations who are short on business acumen and long on virtue signaling and personal vices.

They run around purporting to change the world so they can get rich and give it away and show us all the wonders of altruism. People say how brilliant they are... But people like Neumann and Bankman-Fried deliver only promises and plans. Business successes will remain elusive.

SBF talking about his next business while the clean-up crew has barely begun mopping up his last mess shouldn't surprise us. Doing so just before he's arrested might seem awkward, but when he's out of jail in a few years and the financial press reports that he has raised $50 or $100 million for some crypto, blockchain, climate, carbon, or other highly questionable buzzword-based venture, I will not bat an eye.

Neumann's antics at least have so far been kept away from retail investors, and he has never been arrested. But lots of retail investors lost tons of money when FTX imploded. Bloomberg recently told the story of a 33-year-old life-insurance-company employee whose remaining life savings – $10,000 – sits in a locked FTX trading account. FTX has over a million creditors. There are a lot more folks like that guy in the Bloomberg article.

Between the big declines in crypto and highly speculative tech garbage stocks...

Retail investors have gone from hero to zero in two short years...

They quickly emerged as a new force in the market in 2020 and 2021, after years of being pushed around by institutional investors. They posted on message boards like Reddit's WallStreetBets forum and pushed up the prices of meme stocks like GameStop (GME), AMC Entertainment (AMC), and Bed Bath & Beyond (BBBY).

Those episodes famously caused hedge fund Melvin Capital to close its doors due to soured bets against GameStop, despite a multi-billion bailout by hedge funds Citadel and Point72 Asset management.

Emboldened by their David-versus-Goliath success story, the meme stockers kept at it and caused similar short-covering spikes in other heavily shorted, money-losing businesses.

Those stocks and their meme-stock supporters have been crushed this year, with BBBY down about 80%, GME down 43%, and AMC down 78%. Yet meme stockers are still posting on Twitter, including hashtags like #tothemoon and #MOASS (mother of all short squeezes).

But just look at how their favorite stocks have performed this year...

As the chart shows, the retail army has been bludgeoned this year, despite two significant meme stock rallies in March and August.

Meme stocks weren't their only disastrous bet this year...

According to a recent Wall Street Journal article, the retail army put a net $1.9 billion into one of its favorite speculative vehicles – the ARK Innovation Fund (ARKK) – in the first five months of the year. And they bought the dip, as the fund fell 53% during that period.

Ultimately, they failed. Since May 31, ARKK has fallen another 20% and trades about 78% below its all-time high.

Data collected by broker-dealer Webull Financial indicates investors have been net buyers of ARKK year to date (likely a reflection of the huge flows in during the first five months of the year), but that the number of accounts holding the fund has declined about 8%.

It has been said many times that the bull market from 2009 to 2022 was fueled by cheap money provided by the Federal Reserve and other global central banks.

It sure looks like retail investors fell under that same spell. Between COVID-19 lockdowns, stimulus checks, and suspended student loan payments, they found themselves with time on their hands and money to burn. They bought stocks, flexed their muscles enough to cause a few short squeezes, and felt empowered.

But in the end, fundamentals have triumphed. Money-losing garbage stocks from ARKK to SPACs to meme stocks have all been hammered. It's no longer possible to feel smart for buying them unless you sold out with a profit.

What the retail hyperbulls tend not realize until it's too late is that whole classes of equities tend to outperform for years at a time... then underperform for years. There comes a point at which buying the dip is financially suicidal. It's over. Time to move on.

The regime has changed...

Investor and author Howard Marks' latest memo, "Sea Change," echoes this point...

He says that he has seen two sea changes in the investment world in his 53-year career. He believes we're living through a third one today. Regular readers might remember that I said something similar in our October 15 Digest, when I listed all the ways the world is turning upside down now and for the next several years.

Marks says the first sea change of his career began with a "new investor mentality" that resulted from the emergence of the high-yield bond market in the 1980s. In the new regime, "risk wasn't necessarily avoided, but rather considered relative to return." The growing high-yield bond market helped create many new investment categories, including distressed debt, mortgage-backed securities, structured credit, and private lending.

The second sea change occurred after Paul Volcker became chairman of the Fed and pushed the fed-funds rate to 20% to kill inflation. Marks points to renewed optimism and "an incredible four decades for the stock market," featuring 10.3% compound annual returns for the S&P 500 Index from August 1982 to January 2022.

Marks considers it "nearly impossible to overstate the influence of declining rates over the last four decades." He concludes by summing up the current sea change we're living through...

We've gone from the low-return world of 2009-21 to a full-return world, and it may become more so in the near term. Investors can now potentially get solid returns from credit instruments, meaning they no longer have to rely as heavily on riskier investments to achieve their overall return targets. Lenders and bargain hunters face much better prospects in this changed environment than they did in 2009-21. And importantly, if you grant that the environment is and may continue to be very different from what it was over the last 13 years – and most of the last 40 years – it should follow that the investment strategies that worked over those periods may not be the ones that outperform in the years ahead.

That's the sea change Marks is talking about. On its own, it doesn't sound so bad, does it?

But in the paragraph just prior to these, Marks said the current moment is "overwhelmingly different from – and mostly less favorable than – those of the post-GFC" era and that, "we're unlikely to quickly see the same optimism and ease that marked the post-GFC period."

However you interpret Marks' comments, we agree on one thing...

The past is gone...

And unlike every other bear market or correction of the last four decades, the present moment likely augurs a more difficult period of greater risk but, for the right kind of investor, greater reward.

As Marks points out, the state of today's market is good news for bargain hunters and credit investors. I'm willing to bet most of my Stansberry Research colleagues know this already and have begun to take advantage of it.

But I'm worried about anybody who has started investing since 2009. They're too likely to remain enthralled by highly speculative activity like trading cryptos, buying dips in ARKK, and hanging on to meme stocks in hopes of another short squeeze.

In many cases, as Marks points out, that's a mistake.

So be careful: Whatever made you the easiest money during the last decade could be your worst idea today.

Take a good, hard look at the list of ways the world has changed in my October 15 Digest and read Marks' "Sea Change" memo, which contains a similar list.

And learn to see the grisly, occasionally entertaining details of the demise of FTX, ARKK, and other former highfliers as signs that the world in which they emerged and briefly succeeded is gone...

And that a new investor mentality is required to succeed in the world that's now unfolding.

New 52-week highs (as of 12/14/22): Novo Nordisk (NVO).

A quick housekeeping note before we get to the mailbag: Our offices are closed tomorrow as the company celebrates the holiday season. We'll publish our Masters Series essays this weekend, then pick back up with our regular fare on Monday.

Now, in today's mail, feedback on yesterday's Digest about the Federal Reserve's latest moves... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Hi, I know I am just an old fart that is not supposed to know much. But, I think that the problems our nation is facing are mainly due to the massive amount of debt the federal government has accumulated. They have not concept of how much that debt is affecting just about everything in our nation. These multi-trillion dollar spending sprees are not helping either.

"We need a balanced budget plan. If it were up to me the fed would not be allowed to give any money to any other nation until our budget were balanced. It is just like running a house, or a community, or a state. They all have to balance their budgets. The governments are the only organizations in the world that don't have any concept of money. They just print their way out of any problem. This is causing our entire nation to pay the price for their reckless spending.

"Both the Democrats and the Republicans are to blame. No matter their political objectives or viewpoints they don't have to worry about balancing a budget... " – Paid-up subscriber Michael D.

Good investing,

Dan Ferris
Eagle Point, Oregon
December 15, 2022