Coca Cola and Obesity in Mexico, Ramifications of Chinese Lockdowns, The Depth of the FTX & Alameda Disaster, Global Population Growth, the Buffett Indicator and the 3 Key Financial Statements

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

— Benjamin Graham

Thursday, December 1st, Puerto Vallarta, Mexico.

YAY, I finally succeeded in publishing the newsletter on the first day of the month! 🎉

Let’s see if I can keep it up. 💪

Puerto Vallarta is situated on Mexico’s pacific coast at about the same latitude as Mexico City. At this time of the year, the weather here is just wonderful!

I have been here for almost a month now and with the exception of one cloudy day, it was just a blast of sunshine day after day. In addition, the temperature is pleasantly warm throughout the day without being particularly humid and while it cools down a bit in the evening, it still remains warm enough to comfortably sit outside with a t-shirt. It’s just perfect. To top it off, I love sunsets and the way it is situated on the west coast provides amazing sunsets every day!

Viva México!

Mexican culture has many admirable features.

When I go to a new city, I always like doing long walks instead of going through the trip-advisor tourist-spot checklist. I enjoy this kind of exploring a new place and getting a feeling for it much more. Especially since Mexico has a lot to offer: There are so many colorful and interesting things to be seen all around and occasionally you can even accidentally witness some traditional customs. And the Mexican food is amazing — even for a vegetarian.

One blog described the culture as “rich, colourful and vibrant” . I think this description pinpoints it precisely.

Also, I have heard a lot of concerns about Mexico being a dangerous country. But so far I can say, that I didn’t encounter any situation in which I didn’t feel safe.

Having been traveling a lot, I would say that the basic rule applies here just as anywhere else: Behave with some common sense and things will be fine.

Aspectos negativos

One of the negative aspects here is that the concern and awareness for personal health is quite low. I am generalizing of course, but people don’t really seem to care a lot about implementing a healthy lifestyle.

The amount of obesity, was literally the first thing that me and my friends noticed upon arrival. When we were contemplating about why that is, food was of course our number one culprit.

And indeed, just going through a big supermarket provides the necessary proof.

Right when entering the supermarket, the first thing that catches the eye is a big pack of 12 donuts for 30 pesos (about $1.50). Besides that, while there are also plenty of affordable healthy vegetables and fruits in good quality available, the marketing is definitely aimed towards the junk foods. Standing in the checkout line, a glance in the shopping trolleys ahead confirms the presumption — most of them are filled with garbage. 🫣

On the other hand:

• The smoking rate is very low.
• I see many joggers in the evening and morning time and many of them have a surprisingly good running posture and speed, given their (slightly overweight) body frames.
• There are a lot of gyms and I see a lot of people who are fit, but still have a belly.

→ Case in point: Nutrition accounts for 80% of our health.

A special culprit here in Mexico is Coca Cola!

It is literally everywhere.

Passing by restaurants in the evening you can see the coke bottles on EVERY single table.

Furthermore, when we were driving through Yucatan, we also noticed that even in small townships there are often “Coca Cola” commercials on the walls of buildings.

It is really astonishing to me, how popular this sugar-infusion drink has managed to become here.

According to a Yale University study from 2019, Mexico has the highest soft drink consumption among the most populated countries:

The consumption of Mexico, and to a slightly lesser extent also the U.S., dwarfs the consumption observed in the other countries.

634 servings of 8 ounces results in a total of 5,072 ounces per year. For other Europeans like me, who have no idea what an ounce is, that’s 150 liters.

Thus, on average Mexicans consume almost half a liter of soda a day. That’s a lot!

And I am pretty sure that most of it is coke.

I highly recommend to follow Cristiano Ronaldo’s example:

https://www.youtube-nocookie.com/embed/_nw7FOgOgtA?rel=0&autoplay=0&showinfo=0&enablejsapi=0

Definitely one of his best moves ever! 😂

This month’s newsletter will cover the following topics:

• Part l – Market Analysis:
  • Key Indicator Rundown
  • Consequences of the FTX Collapse
    • Regulation
    • Current Market Condition
  • The World Population Exceeds 8 Billion People – A Few Demographic Considerations
    • Is the World Overpopulated?
    • What Implications Do Falling Birth Rates Have?
    • Future Prospects
  • The Buffett Indicator – Using the stock market capitalization-to-GDP ratio as Key Market Indicator
    • Historical Analysis of the Buffett Indicator
    • Critical Assessment
    • The Historical Trend Line Approach
    • How Useful is the Indicator for Investors
    • Conclusion
• Part ll – The 3 Key Financial Statements
  1. The Balance Sheet
  2. The Income Statement
  3. The Cash Flow Statement
  • Summary

---

Part l – Market Analysis

After more than 3 years since the Covid outbreak, markets are still dealing with all the consequences, that are emerging everywhere as a result from all of the different measures that governments had implemented. The situation is particularly mind-blowing in China, which still adheres to a zero-Covid strategy as an attempt to contain any spreads.

Seeking Alpha reports:

“It has now been three years since the first COVID-19 case was reported in Wuhan, but China doesn’t seem to be letting up on its strict coronavirus policies. In fact, quarantine facilities and makeshift hospitals are expanding across the mainland to deal with the largest surge of cases on record. Meanwhile, panic buying is taking place among supermarket delivery apps as lockdown-like restrictions take hold in Beijing, while Nomura estimates that more than a fifth of the country is under some sort of restricted movement”.

As Chinese people watch the world cup, they are getting a daily reminder of their situation. They can see on their screens that people all around the world have put Covid behind, while they are still in a state of forceful lockdowns, mandatory quarantines and compelled to wear masks.

While the government is trying its best to control the media content and wield its power to suppress any uproar, it seems to become increasingly difficult for them to maintain that.

Over the recent weeks, there have been increasing protests in several provinces. Such widespread protests are rare in China and put a lot of pressure on Xi Jinping, who was just secured his 3rd term as China’s supreme leader.

Over the decade under Xi Jinping, China has turned away from its previous trend of opening up and allowing more freedom. Instead, Xi has taken the approach of a more authoritarian regime. More government controls, less openness internationally and more restrictive inside. This shift also contributed to the slowdown of Chinas growth rates. Government guided misallocations of capital, such as the buildup of ghost cities and massive accumulation of private debt levels, have further increased the fragility of the Chinese economy. Thus, the recent three years of continuous “on” and “off” lockdowns have had extreme effects on the already strained economy and created a situation in which many workers find it difficult to make a living.

China’s lockdowns not only stir increasing resentment among its own population, but it is also has massive effects on the global economy:

• They cause consequential production delays and therefore are a major reason why global supply chains remain under extreme strain.
• Furthermore, they have a meaningful effect on the global energy market: While the missing demand provides some relief in the form of lower prices, it might also give a wrong perception of the actual situation of energy markets, which are already manipulated by the Biden administration’s continuing sale of the US Strategic Petroleum Reserve (SPR).
• Moreover, it also affects many countries that have become reliant on Chinese business and tourism over the decades. This especially has an effect on the economies in Southeast Asia, which have not been able to meaningfully revive their deeply distressed tourism sector.

Key Indicator Rundown

• It appears that Inflation is finally trending lower, with both the yearly US CPI (7.7%), as well as the CPI of the Eurozone (10%) declining in October.
• The 10-Year Treasury Yield has seen a substantial decline in November. This is due to the lower than expected inflation number that came out on November 10th. and a recent speech by Powell in which he hinted at a slowdown in the pace of rate increases. This is in contrast to a more hawkish presentation, given by Bullard several days before, who hinted that a preferred model for Fed policy suggests that the terminal rate would need to go to 5-7%. In addition, the spread between the 2-year Treasury and the 10-year Treasury hit the widest inversion (-0.77) since the 1980s. Historically, this is a clear indicator for severe economic distress ahead.
• The dollar index has seen a substantial decline in November. After it peaked slightly short of 115 at the end of September, it has now retreated to around 105. The Euro is back above parity at 1.05 and the pressure on the Japanese Yen has also loosened up a bit at 135JPY for an USD.
• The S&P 500 is up 5.38%. Most of the gains were maid in two spikes:
  • The positive inflation print on November 10th.
  • Powell’s Wednesday speech (11/30) indicating a potential slowdown in the hiking cycle.
• International markets also fared well with regards to a more positive outlook regarding the interest rates. In addition, most international stocks also benefited from the strengthening of their currencies against the USD. Thus, the MSCI ACWI index climbed 8.34%, outperforming the S&P 500.
• The CAPE Ratio increased slightly in November. It stands at just below 30 and remains on a historically high level.
• The Buffet Indicator stayed basically flat in November with a dim decline to 1.53. This is due to the fact that the US GDP showed an annual increase of 2.9%, which offset the rise of the stock market.
  (You can learn more about the Buffet Indicator in a dedicated section below.)
• The soothing atmosphere amidst the positive inflation development and the expectation of less aggressive rate hikes, is also represented by the volatility index. The VIX has calmed down over November and is currently around 20, suggesting less volatility ahead. The index is generally used to gauge the fear in the market. A reading of 20 is still above the long-term average, but is actually quite low in comparison to its average since the Covid shock of March 2020.
• The Oil price has seen a decline in November, even falling below $80 and closing the month slightly above. The 27 members of the European Union are in the process of deciding whether they are going to join the G7 and impose a $60 cap on the oil price. This measure would come in addition to the embargo of all vessel-bound imports of Russian crude oil that comes into effect on December 5th. Apparently most Russian current exports are already priced below $60 and well below the current Brent price. It is however difficult to gauge the revenue exactly, since there is a lack of price transparency in many of the negotiated contracts. Nonetheless, the Kremlin has announced that it might not deliver oil to those countries that implement the price cap. It remains to be seen how it plays out, but if the cap is implemented and Russia finds other buyers, such a resurgence of Chinese oil demands, this could make it more probable for Russia to go through with their thread, which in turn could lead to massive price increases in the coming months. Further, it is also not clear when the US is going to stop depleting its Strategic Petroleum Reserve (SPR) and what effects this would have on the global oil market.
• Natural gas on the other hand has been rising again. In the US the price closed slightly below $7. After the European gas price has been significantly declining since the massive spike in August, it has remained at a comparatively high level and is trending higher again. Furthermore, while the potential gas delivery through the Nordstream pipelines has stopped and the EU is engaged in ramping up its sanctions against Russia, it has significantly increased its LNG imports of Russian gas to record highs at significantly higher prices. Thus, it is still heavily reliant on Russia’s energy and provides the Kremlin with some leverage options.
  On a positive note, The concern of Europe running out of gas this winter has been strongly reduced over the recent months as European countries were able to fill up their gas stores. The goal to fill up 80% has been exceeded as the current level is at 93.2%.
  The reasons for that are:
  • The weather has been particularly mild so far.
  • There has been way less demand due to high prices and gas rationing.
  • Massively increased LNG imports.
• Gold had a strong month, climbing 7.27% and closing at $1,760. Most of this increase happened during the first 2 weeks in 3 massive spikes around the CPI announcement. This might be surprising since gold is generally seen as a hedge against inflation. However, gold prices are also influenced by interest rates and the prospects of lower rates are positive for gold. Furthermore, a declining dollar index also helps the gold price (as measured in USD).
• Amidst the FTX and Alameda meltdown (Covered in last month’s issue), Bitcoin has tumbled to a new low of $15,487 in the current bear market cycle. It saw a slight spike at the end of the month to close at $17169. Some of the revelations concerning FTX and how the contagion effects are spreading through the industry, are addressed in the section below. Suffice it to say, that these events underline the importance of holding the private keys for the Bitcoin, as it becomes obvious once more, as everyone engaged with 3rd-party entities is scrambling for the door, that the fraudulent industry has fabricated more claims on BTC than there are really existing. Not your keys, not your coins.

While the crypto world is in turmoil and also the Bitcoin price has declined to new lows, there seems to be some positive sentiment in the markets, as expressed in the decline of long-term interest rates. However, 3.7% is still a high interest rate for an economy that has become accustomed to rates way below that.

Closing this section, here is a good tweet by Pentoshi to keep in mind:

Consequences of the FTX Collapse

“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.

From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.”

— John J. Ray III (the man who liquidated Enron, the new CEO of FTX and in charge of overseeing the bankruptcy procedures)

This quote comes right out of the 30-page FTX Bankruptcy court filing.

You can also read some of the outstanding excerpts of the court filing here. 🤯

In the last newsletter, I wrote about the events that took place as the FTX & Alameda collapse was unfolding. You can catch up with the story here. What has happened since then is just a nightmare of mind-blowing crazy revelations.

It is just unbelievable, how these entities were run. The whole story provides a perfect script for an amazing ‘Hollywood Fraudster Blockbuster’ about the story of Sam Bankman-Fried — or more appropriately: Scam Bankrupt Fraud! — so, keep the popcorn ready!

There is a lot of talk about his motives and a lot of the coverage about him is astonishingly still quite positive and forgiving.

In my opinion there is zero justification for what he did and how he didn’t care and disrespected his customers and counterparties.

Scam Bankrupt Fraud subscribed to the ethic philosophy of Effective Altruism.

This wrong-headed philosophy aims at trying to find ways to benefit others as much as possible. The main focus is the outcome rather than the means to attain it.

His belief in this philosophy was often displayed in interviews where he said that he wanted to make as much money as possible with the goal of donating it later and do as much good as he possibly could (and on the way also buy himself and his family luxurious real estate on the Bahamas of course).

If you belief that the ends justify the means, then it makes total sense that he did not care at all that the money he used for his purposes were the deposits of customers that entrusted their funds with his companies.

In my opinion this guy is just a complete scumbag!

The good part of the story is that it weeds out a lot of the crypto clown-show. 🤡

The bad part is, that some good actors have gotten entangled in it as well, or are strongly negatively affected by the massive BTC price decline.

In addition, it will likely also lead to increasing wrongheaded regulations. 😵‍💫

Regulation

“The SEC fails to investigate things that they should and places far too much attention on things that are not relevant. The recent FTX thing I think is an example of that”.

— Elon Musk

There are a lot of voices now screaming for more regulation “to protect the customer”. This is one of those phrase-lines that sound good and everyone who doesn’t think about it would immediately agree.

In reality, the topic is a bit more complicated and it is very questionable, whether regulation a) actually protects the customer, b) what are the actual regulations and c) what other consequences such regulations might bring.

First of all, fraud is a crime, no matter in which jurisdiction. The main crime that happened in this debacle, was fraud.
Hence, there is no further regulation needed. Just execute the regular property and fraud laws that are already in place!

But as Sam Bankman-Fried is still running around and is even invited to the New York Times Dealbook Summit and other platforms who still seem to take this fraudster seriously, it doesn’t appear that the law enforcers are too concerned with someone stealing from customers.

Furthermore, when the news about the FTX exchange first broke, it was assumed that only the FTX main entity, headquartered on the Bahamas was affected and that everything on FTX.US was fine and the funds were secure. Some regulators were actually quick in jumping to point out that it is due to FTX.US being registered and regulated in the U.S. However, as it quickly turned out, the U.S. registered entity was just as involved in the whole scheme.

Thus, it doesn’t apear to have helped customers a lot.

Next, the main regulation that is usually applied when it comes to investments (e.g. hedge funds) is, that only ‘sophisticated investors’ are allowed to invest. Since it is — in a parenting manner — assumed that normal retail investors cannot evaluate the risks correctly. According to Investopia, “a sophisticated investor is a high-net-worth investor who is considered to have a depth of experience and market knowledge that makes them eligible for certain benefits and opportunities”.

However, as it often turns out, these ‘sophisticated investors’ are also just as stupid as anyone else. Bloomberg provides a list of some entities that invested in FTX:

FTX’s list of investors spans powerful and well-known investment firms: NEA, IVP, Iconiq Capital, Third Point Ventures, Tiger Global, Altimeter Capital Management, Lux Capital, Mayfield, Insight Partners, Sequoia Capital, SoftBank, Lightspeed Venture Partners, Ribbit Capital, Temasek Holdings, BlackRock and Thoma Bravo.

These are all entities, staffed with well-paid Ivy League researchers and analysts, who are assumed to be the cream de la cream of ‘smart money’. These institutions should have the resources, time and capability of doing appropriate research and due diligence for each of their multi-million investments and know exactly about the risk structure of their undertakings.

The reality, as it turns out, is radically different: Here is an example of how the venture capital firm Sequoia Capital arrived at the ‘sophisticated’ decision, to hand over $150 million to FTX:

After my interview with SBF, I was convinced: I was talking to a future trillionaire. Whatever mojo he worked on the partners at Sequoia—who fell for him after one Zoom—had worked on me, too. For me, it was simply a gut feeling. I’ve been talking to founders and doing deep dives into technology companies for decades. It’s been my entire professional life as a writer. And because of that experience, there
must be a pattern-matching algorithm churning away somewhere in my subconscious. I don’t know how I know, I just do. SBF is a winner.

It doesn’t sound like a very deep and sophisticated approach to me.

This whole “customer protection” talk is really just BS!

Let’s be honest, what those government regulatory agencies are after, is more funding and more power.

Unfortunately, they’re likely gonna get it. The average consumer on the other hand, will be worse off and not better ‘protected’.

Current Market Condition

The question on everyone’s mind is whether the bottom is in, or whether we will go through more turmoil in the coming months.

Here is the typical cycle of market emotions:

It’s hard to say where we are. Maybe at “Capitulation”. 🤔

This would mean, we have one more step down, before entering the next boom cycle.

In my opinion it mainly depends on two things:

• Fed policy: When is the Fed gonna pivot and cut rates?
• Will there be more bankruptcies, leading to more forced BTC liquidation events?

The first question is another topic that I addressed multiple times elsewhere.

The second question is in progress and it is hard to tell at this moment how far it will go.

Last week we saw Blockfi, one of the largest lenders, declaring bankruptcy. It is also kind of an irony, since they were already in trouble just a few months ago after the Luna & Terra collapse and then they were ‘saved’ by FTX. Now their bankruptcy filings reveal that the main reason is the liabilities of FTX.

In other words, they went bankrupt because of their previous savior. 🤣

Some contagions to still worry about are:

• Genesis is the biggest entity that served as the prime broker and was the company responsible for a lot of the yield creation for other platforms. They already halted withdrawals and it appears that they are not going to be capable of honoring their liabilities, if they are not getting a liquidity injection soon.
• There are also some concerns about the Grayscale Bitcoin Trust (GBTC). According to their custodian Coinbase, it appears that they have all the underlying Bitcoin. However, Coinbase did not provide any proof for it (for instance signing a transaction), claiming that such a disclosure would entail risks.
• There are also rumors about a possible Digital Currency Group (DCG) bankruptcy. This is the holding company that owns Genisis, GBTC as well as the Gemini exchange.
• Failure of another major exchange (e.g. Genesis, Coinbase, Binance, Huobi or Bitfinex). I am actually a bit suspicious about Binance recent behavior:
  • They first wanted to buy FTX.
  • Were quite quick of providing a Proof-of-Reserves (but only disclosed BTC assets and didn’t state their liabilities.
  • Engaged in creating a recovery fund
  → to me all these activities seem a bit suspicious and it might be that their finances are also not as strong as they try to make everyone believe.
• A stablecoin like Tether or USDC going bust. There are a lot of rumors, especially about the backing of Tether. I personally don’t think that this is one of the main concerns, Tether already had a massive “bankrun” after the Terra & Luna meltdown, and they were able to pay out all the requests. (I think they are actually way better backed than most traditional banks.)
• Bitcoin miners are under severe stress. They took on risky positions with high leverage during the bull market and face the consequences now. Their problems stem from:
  • High debt levels (often secured with BTC as collateral).
  • High energy prices.
  • A low BTC price.
  • The mining difficulty remains high due to machines that were pre-ordered many months ago but are entering the market now.
  → The liquidation of the assets by bankrupt miners further puts downward pressure on the BTC price.

There are more, but these are the main ones that people are worried about at the moment.

To end it on a positive note: We saw a massive withdrawal of BTC from exchanges and a new record spike in new addresses holding between 0.1 and 1 BTC. This is an indication, that there is a rising awareness of Bitcoins value proposition and the importance of self-custody. 🌱

The World Population Exceeds 8 Billion People – A Few Demographic Considerations

According to the United Nations, November 15th. is the date when the world population surpassed the 8 billion mark.

This is more than 3 times as much, as the 2.5 billion back in 1950.

And in the following 2 weeks, we have already added yet another 3 million.

Here is the chart:

Considering how long humans have been running around on this planet, it is absolutely staggering to look at this chart and contemplate how we as a species have progressed over the last centuries.

The most impressive rise occurred pretty much along with the industrial revolution in the late 18th. and early 19th. century.

Especially the discovery of fossil energy sources and the ability to extract and use them, contributed to the tremendous rise in our standard of living.

First, it was coal and then in the 20th century, increasingly oil and natural gas which made this impressive growth possible:

The capability of using fossil energy made it possible to:

• Develop machinery for efficient production processes.
• Technological advancements in agriculture.
• Spectacular inventions in transportation.
• Impressive construction advancements.
• Crucial progress and breakthroughs in medicine.

Combined, these factors allowed humanity to flourish, extend live expectancy and massively expand the population.

The UN further forecasts that:

• India is about to overtake China as the most populated country in 2023.
• We will reach 9 billion by 2037.
• 10 billion by 2058.
• The world population is going to peak in 2080 at around 10.4 billion.

A different study published by the Lancet predicts a peak population of 9.73 billion in 2064. They also take into account several feasible scenarios and therefore consider a possible range of 6.83 – 11.83 billion people by 2100.

These forecasts are of course just based on models with various factors and assumptions, all of which can be wrong or change over time.

However, all current data suggests that growth rates are declining and that the population will peak and start to decline at some point within the next 100 years.

The annual growth of the world population peaked in 1962/1963 at 2.2% and has basically been on a downward trend ever since. According to forecast predictions, this trend will continue.

In 2021, it fell below 1% for the first time and in 2022 it stands at 0.84%. This is the lowest growth rate since we have somewhat accurate data to measure it.

Is the Earth Overpopulated?

There are many people who are worried about a rising population. Some of the main concerns that are often mentioned are:

• Climate change: More people will produce more CO2 and thereby fostering global warming.
• Food Supply: There are already people who do not have enough to eat.
• Overpopulation: We will run out of livable space.

I think that all of these concerns are flawed. There is a lot to write about each of them, but I will try to condense it here:

• Climate has always been changing. There have been ice ages and there have been warmer periods before. Statistically, far less people die today related to climate events than ever before (and more people die due to cold weather as compared to heat-related deaths). This is due to our advancements in technology and more wealth that enables us to deal with any such issue. For instance, we can build secure dams to deal with rising sea levels (see Netherlands), or, have access to heaters or air conditioning to live comfortably amidst extreme temperatures. Moreover, somehow the pre-industrial temperature has somehow become the “perfect” temperature. But nobody ever asks, why this is the perfect temperature that we should take as a benchmark to measure against. Most (non-critical thinking) people just take that as a given. But there hasn’t been any scientific research to proof that this is the perfect temperature for humankind — and for a good reason. Such an ideal temperature would be impossible to identify, since it is just too complex, always changing and prone to subjective judgement. To conclude: A changing climate requires humanity to adjust to it in various ways, but it is definitely not a crisis to be worried about.
• Similarly, concerns about sufficient food production are erroneous. There are numerous problems when it comes to the food supply, but the amount of people is not the cause of the problem. We went from 99% of people in agriculture to less than 1% over a few centuries. The production of enough food is not a problem of space or technology. The root of the problem is the government. Whenever property rights are upheld, free exchange between people is allowed and the government stays out of the way, 99.99% of foot shortages will be eliminated.
• The last one is the easiest. Traveling across the world and observing the landscape from an airplane or a bus window makes it pretty obvious that the major amount of this planet is still uninhabited. There is still a sufficient amount of space for many billions of people. In addition, making use of energy, progress in construction techniques and advancements in other technologies, allows us to settle in new territories that were previously deemed uninhabitable.

In essence, all of the worries fail to take into account the fundamentals of human nature. Each of us as an individual always has a goal that we try to achieve. We constantly use our minds to think about how we can make progress towards our ends. According to our knowledge, judgement and the circumstances that we are challenged with, we choose the means that we can employ to make advancements. Thus, through this natural process, which is embodied in human nature, we are a species that has evolved over centuries of development and adaptation.

The world has always been a huge and constantly changing organism. Over the centuries, we have used our minds to always develop and find new solutions to the environmental challenges we have found ourselves faced with.

What Implications Do Falling Birth Rates Have?

There are also concerns about demographics. Especially in the western hemisphere, people are worried about the declining birth rates.

Interestingly, often the same people who are concerned about overpopulation are also the people who ring alarm bells about falling birth rates.

Consistency is not a characteristic that most humans are good at.

Taking a step back: From my perspective, there is in general no problem with either a growing or a declining population.

People make their choices based on whatever life they want to live and this results in whatever population will come from it.

There are of course some advantages for both scenarios:

• The higher the population, the more smart minds, the more inventions, the more progress and development → leading to a higher standard of living. 🚀🤑
• On the other hand, there is less scarcity of desired places in a world with less population. And maybe we can also feel a bit more special. 🤔

However, as always, problems arise as soon as the government enters the stage and starts to mess things up.

There are countless examples, but just to name a few of them:

• Chinas 1-child policy → leading to a massively skewed age pyramid.
• Subsidy of children in developed countries → leading to more children in families which are not really able to support them and normally would have made a different choice → which in turn leads to a bunch of other perverse consequences in society…
• Government health care and retirement schemes which are based on growing populations. Basically this mainly happens in democratic systems which are more short-term oriented in order to gain votes → leading to an unfair contribution system and an eventual collapse of the pyramid scheme.

Due to these disruptions of the free market, we need to consider possible consequences of them.

If we look at the current population forecasts, one main aspect to consider is that poor countries tend to have way higher birth rates than wealthy industrial countries.

The main population gain is going to happen in Africa. The population in Africa is more than doubling over the next few decades. To a lesser extent, the population in Asia, especially South-East Asia is also going to increase over the next few years. On the other hand, some populations in North- and South America will see only slight increases, while some will stay stagnant. Lastly, in Europe and some East Asian counties, the population is forecasted to decline.

Given the structure of society today, these changes do pose several concerns. Government programs and institutions have implemented structures that face systemic risks. These risks are directly linked to these demographic developments.

One of the most serious threats is the working age collapse in developed nations:

Over the years, the role of most governments and its related institutions has grown. In other words, while the productive part of the economy is and has been declining, the parasitic part has been continuously growing.

At the same time, most governments have gone further and further into debt, while they have artificially held down the interest rates.

All of this is of course unsustainable.

Future Prospects

One obvious solution to at least counteract against some of the demographic risks — although they cannot be eliminated — would be the free movement of labor and capital across borders:

• For instance, young people from Africa could immigrate to Europe to find jobs.
• Companies could relocate more easily to places that offer a broader labor market.

However, given the current trend of de-globalization and an increasingly hostile mindset towards foreign labor, combined with a growing pile of ever increasing regulations and bureaucracy, it seems not very likely to see any positive changes in the near-term.

The main narrative of this newsletter is that our fiat-currency based financial system is on the brink of collapsing and that we will — in some form or another — see the world shift to another monetary system over the next decade(s).

While this sounds very pessimistic, I am actually quite confident that the shift will result in a way better monetary system. More precisely, I think that we will have a monetary system that is sound and cannot be artificially manipulated by anyone. Probably, it will be based on Bitcoin as the fundamental settlement layer.

The demographic development is one of the puzzle parts playing out in this development.

The ramifications that such a system would have for the world are numerous — and all positive! 🙂

The Buffett Indicator – Using the stock market capitalization-to-GDP ratio as Key Market Indicator

In last month’s issue, I covered the CAPE Ratio.

This time, we will look at the Buffett Indicator, which is a very similar tool. However, there are some differences between them, which make it worthwhile to look at both of them.

The stock market capitalization-to-GDP ratio is simply a ratio of the total stock market value divided by the Gross Domestic Product (GDP). Since Warren Buffet was the first who popularly proposed this metric in 2001, it is often termed as the “Buffet Indicator”.

The reasoning behind it is, that the total stock market valuation should generally tend to display a good representation of the underlying economy.

Waren Buffet referred to the ratio as “the best single measure of where valuations stand at any given moment”.

If the valuation is way higher than the total output that the economy can produce, then this might be a good indication of the stock market being overpriced.

In reverse, a comparatively low valuation might indicate that the actual performance of companies exceeds their valuation and would therefore suggest that the stocks are cheap.

It is a bit similar to looking at the price-to-sales (P/S) ratio of individual companies.

Historical Analysis of the Buffett Indicator

In the United States, the indicator is generally calculated by taking the Wilshire 5000 index as an approximation for the total stock market and dividing it by the current GDP number, which is published by the Bureau of Economic Analysis on a quarterly basis.

Looking at quarterly data starting from April 1971, we see that the indicator has been below 1 for most of the time. In other words, for the majority of the time, the GDP was higher than the total stock market valuation. Previous to 2013, the only times that the indicator was above one, happened throughout the Dotcom bubble and for a short period around the 2008 Financial Crisis. Since the indicator crossed the 1-mark in early 2013, it saw a massive increase over the following years. It actually topped out at 1.99 in December 2021, before dropping back down to 1.55.

The moving average over this time frame is currently at 0.83.

Under the assumptions that: a) the fundamental underlying framework hasn’t changed over time, and b) that the indicator should tend to revert to its mean, we would need to conclude that the stock market is still significantly overvalued.

The total US stock market value is currently close to 40 trillion. Reverting all the way down to its mean, would mean a stock market decline of 47%, resulting in a total stock market valuation of about 22.2 billion. Almost $18 billion of wealth would disappear.

Critical Assessment

There are some critical points, about the validity of this indicator:

• The Wilshire 5000 only includes companies, which are publicly traded. The GDP on the other hand is generated by public and private companies. Hence, shifts in the corporate composition will not be accounted for by the indicator and an increase in the percentage of public companies might push the ratio higher, even if the GDP stays flat.
• Through globalization, companies can grow internationally. For instance, American companies have increasingly sold products and services abroad, which might increase the valuation of the company without contributing to the US GDP (if they are not exported, but locally sold).
• Furthermore, there are also increased possibilities and vehicles for foreign investors, to invest in the American stock market. A lot of international investors might for various reasons be attracted to invest in American stocks.
• The last and probably most crucial point is the interest rate. Interest rates have been falling since the early 80s and have been close to zero for over a decade. The valuation of stocks are based on their future cash flows which have to be discounted by a discount rate. This discount rate, in turn, mainly depends on the cost of capital, i.e. the interest rate.
  • Moreover, the low interest rates also diverts investors away from low-coupon bonds, into more risky investments like stocks.

Buffett himself has a good description:

“These [Interest rates] act on financial valuations the way gravity acts on matter: The higher the rate, the greater the downward pull. That’s because the rates of return that investors need from any kind of investment are directly tied to the risk-free rate that they can earn from government securities. So if the government rate rises, the prices of all other investments must adjust downward, to a level that brings their expected rates of return into line. Conversely, if government interest rates fall, the move pushes the prices of all other investments upward.”

— Warren Buffett

All of these critical points might offer an explanation for the general uptrend of the stock market capitalization-to-GDP ratio.

The Historical Trend Line Approach

An approach to account for that, is to measure the ratio against a historical trend-line, instead of an overall average.

Currentmarketvaluation.com has a nice chart for it:

The black line shows the “Historical Trend Line”, which is an exponential regression line, displaying the historic growth rate. Based on this rate and the fluctuations, the standard deviation lines can be deduced. One standard deviation means, that based on historic observation, the ratio was 68% of the time within these bands. The two standard deviation lines encompass 95% of the observations.

In the chart we can see that currently the indicator has recently dropped back below the +1 standard deviation line.

Under the assumption that the assessment of this model is viable and we are currently exactly at the +1 standard deviation line, the Likelihood of the stock market further declining is 84%.

The current Historical Trend Line would suggest a ratio of 1.29. This is much higher than the moving average of 0.83, as analyzed above.

Thus, instead of a 47% decline, the Wilshire 5000 would need to decline ‘only’ 22%, to a valuation of $31.2 trillion, to get to its ‘fair’ valuation with respect to the GDP.

How Useful is the Indicator for Investors

The last time when the indicator dipped below its moving average, was right after the 2008 financial crisis. In October 2008 Buffett wrote:

“Equities will almost certainly outperform cash over the next decade, probably by a substantial degree.”

This was probably one of the best times to invest.

When it was below it throughout the 80s and one short dip in the early 90s were also good times to invest. On the other hand, throughout most of the 70s, the indicator was also below its average but stocks did perform poorly (although they did better than bonds in the inflationary environment. By far the best performing asset during that time was gold).

The problem of taking the average as an entering point, is that the indicator rarely dips below it. Hence, investors might forgo many good investment opportunities.

When we take the stock performance results based on the Historic Trend Line approach, we get a nice and regression trend line:

The y-axis shows the 5 year return and the x-axis shows the deviation from the mean trend line. The yellow line indicates where we are at the moment (+1 Std. deviation).

As expected, the trend line clearly suggests that the returns tend to be higher when the Buffet indicator is below the historic trend line. Based on the figure, we would expect a very slight, but still positive, return over the next 5 years.

Important to note is, that it is just a regression and the predictive value is small:

• If the stock market gets back up and makes new all-time highs and remains there for a while, this could quickly change the direction of the trend line.
• According to Currentmarketvaluation.com, the r-squared is low, meaning that the statistical significance of the predicting factors are low.
• It’s a time series, so autocorrelation might overstate the significance of the results: If one Month has a good return over 5 years, it is likely that the next month will show a similar result.

Conclusion

I think that artificial low interest rates have totally obfuscated the price mechanism.

Therefore, I do believe that a lot of phenomena we see in the markets are a symptom of it.

One of these symptoms is an overblown stock market.

While I attribute some of the gains in the stock market as compared to the GDP to globalization, I main culprit is the

Despite this and the other mentioned short-comings, keeping them in mind I think that the Buffett indicator still offers a valuable instrument to assess the broad market condition.

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Part ll – The 3 Key Financial Statements

This time we will look at the three most important financial statements, all of which are crucial to evaluate any business.

These are:

1. The Balance Sheet
2. The Income Statement (also called Profit and Loss, or just P&L Statement)
3. The Cash Flow Statement

These three statements complement each other and understanding them provides a very valuable overview about how a company works financially.

Everybody has an opinion and talks about companies on a daily basis. Furthermore, most people are also — at least to some extent — either directly or indirectly affected by some business regarding their salaries. Therefore, I actually think that some basic knowledge in accounting should be part of any education.

What I mean is of course not that everyone should become an accounting expert. Diving deep into accounting and all its aspects gets quite complicated. And that’s what we have accountants for. But an accounting 101 course, that explains the basic concepts, would in my opinion be quite beneficial for everyone.

Getting an understanding of the 3 major financial statements is already a substantial part of that. 👍

So I’ll try my best. 😅

1. The Balance Sheet

In a nutshell, the Balance Sheet shows the financial position of the business at a specific point in time. It displays what the company owns and what it is liable for. Accordingly, it provides a good gauge at how healthy the company is.

More specifically, it compares the assets that the business has, to its equity and liabilities. Thus, it is structured as A = E + L (Assets = Equity + Liabilities).

To depict this, it is often presented in a T-shaped format, with the assets on the left side and equity & liabilities on the right side. However, many companies also just publish their balance sheet in a vertical format:

I personally prefer the T-shaped format, since I think it makes it more easy and clear to quickly get a sense of it and grasp the relevant information that it conveys.

Anyway, the important aspect is, that the A = E + L equation balances out correctly (hence, the name “Balance Sheet”):

The above Balance Sheet shows:

• Assets = $49,500
• Liabilities + Equity = $49,500
  • Total Liabilities = $27,000
  • Owner’s Equity = $22,500

The Assets category shows us what the company owns. Or in other words, it shows us, how the company has invested its capital.

Assets can be defined as items that:

1. Are controlled by the corporation
2. Are the result of a past transaction
3. Will result in a future benefit for the corporation

Further, the asset side is generally structured in categories, which are mainly based on the liquidity of the respective assets:

• Current assets: These are assets that are, or can be converted to cash within a short time-frame (usually one year or less is the criterion). Hence, they are often referred to as liquid assets. These could include things like:
  • Cash
  • Cash Equivalents (for instance a Treasury Bill)
  • Accounts receivable (sold products that have not been paid yet)
  • Short-term investments
  • Inventory
• Long-term/non current assets: These are assets, which cannot be sold easily and/or are expected to be held for a longer period of time, such as:
  • Buildings
  • Land
  • Machinery and equipment
  • Long-term equity investments
• Intangible Assets: These are assets such as goodwill, brands, trademarks, patents etc.

The Liability and Equity side of the Balance Sheet shows us, how these assets are financed.

Likewise the asset side, we can also divide the liabilities, based on the length of time, in which they have to be paid. Thus, there are:

• Current liabilities:
  • Accounts payable (the reverse of accounts receivable on the asset side)
  • Short-term loans payable
  • Current portion of long-term debt
  • Taxes payable
• Long-term liabilities:
  • Notes Payable
  • Bonds payable

The Equity section of the Balance Sheet is often referred to as “Shareholders Equity”.
It is all that remains after calculating the assets minus the liabilities and it consists of:

• Capital: The amount of money received through transactions of the shareholders to the company.
• Retained earnings: The accumulated net profits, which have not been paid out to shareholders in the form of dividends.

Here is a good example of a balance sheet, that shows it all:

As stated above, the Balance Sheet serves as kind of a health check. When analyzing it, the most important aspects to first look at are:

• A = L + E ✅
• Does the company have enough short-term assets to cover its short-term liabilities?
• How much retained earnings does the company have? This shows, whether the company has been profitable and it is part of its capability to pay dividends to shareholders in the future, buy back shares, or reinvest it to expand the business.

Depending on the industry, the general market condition and many other factors, there might be many different aspects to consider when looking at a balance sheet. Therefore, there is no clear agreement about what makes a perfect balance sheet. However, the Balance sheet does provide the investor with a lot of useful information about the business and he has to analyze it in accordance with his knowledge, judgement and investment strategy.

One more crucial point to consider is the amount of liabilities vs. the amount of equity, which is known as the Debt-to-Equity (D/E) Ratio. The average D/E ratio of the S&P 500 is about 1.6. However, this varies a lot depending on the industry.

A quick glance at the above Balance Sheet gives us a D/E ratio of 1.66 (481/289).
Thus, it is just slightly higher compared to the average of the S&P 500.

A high D/E ratio means that the company has taken on a lot of debt. Generally speaking, this means that its cost of capital is lower, because the rate of interest demanded by creditors, tends to be lower than the return expected by equity investors. During prosperous times, such a company tends to perform better.

However, while the cost of capital tends to be lower, the leverage, which the company is exposed to, is correspondingly higher. Accordingly, if market conditions get bad, the leverage imposes higher risk to the viability of the business. Therefore, if a Balance Sheet reveals a very high D/E ratio, this could be a red flag.

Last, it is also important to note that in case of a bankruptcy event, the shareholders are only compensated after all the liabilities have been paid out to the creditors.

2. The Income Statement

The Income Statement shows the financial performance of the business over a certain period of time. It shows whether the company made a profit, or a loss.

The above Income Statement looks at an imaginary company.

Let’s assume it is a company selling merchandise.

“Net sales” shows the total revenue that the company generates by selling its products. In the first step, all the “Cost of Sales” are subtracted from it. These cost might include things like:

• Raw materials
• Factory labor to create the product
• Products purchased for resale
• Service and transportation costs to distribute the products
• Storage costs

What remains, is the so termed “Gross Profit”.

In the next step, all the “Operating Costs” are deducted. These costs are the most basic costs of the business, which the company needs to pay regardless of how many products are produced and sold in a specific period. They usually include expenses such as:

• Overhead costs
• Salaries
• Benefits (e.g. health insurance, further education etc.)
• Rent
• Property purchases
• Marketing

(in the above Statement they are represented as “Selling, general and administrative expenses.)

After the subtraction of these expenses, what remains is the “Operating Income”.
(It is often referred to as EBIT: Earnings before Interest and taxes, or EBITDA, which additionally excludes depreciation and amortization.)

In the following step, “Non Operating Income (or Expenses)” are accounted for. These can be any gains or losses related to the company’s activities outside of its core business operations. For instance, a company might own stocks, bonds, or real estate.

In our example, the company has “interest expenses” as well as “losses on sale of equipment” in 2019 and 2021:

• “Interest expenses” means that it borrowed money.
• A “Loss on sale of equipment” means that the company sold some asset at a lower price than its book value, represented in the balance sheet.

Now, we are left with the “income before income taxes”.

Depending on the jurisdiction, where the company is registered, it needs to pay the applicable income tax.

What remains in the end, is the “Net Income” (or potentially also a net loss). When investors talk about whether a company is profitable or not, it usually refers to the net income.

A positive net income will appear on the balance sheet as “Retained earnings” (see the Balance Sheet above).

Finally, the above Income Statement gives us the periods of 2019, 2020 and 2021.

As we can see, the net income has been constantly rising. Hence, just looking at this statement suggests that it is a healthy business with growing profits.

3. The Cash Flow Statement

The Cash Flow Statement summarizes the cash flows over a certain period. It shows how much cash the company generated and how much it spent. Thus, it displays whether the cash balance increased or declined.

The Cash Flow Statement is somewhat similar to the Financial Statement, in that it also looks at the changes over a period of time.

However, it is possible that a company makes a profit on paper (Income Statement), while burning through its cash balances (Cash Flow Statement). This is due to the fact that the Cash Flow Statement only tracks the cash coming in and the cash flowing out.

For instance, a company might have stakes in other companies. This might lead to a situation in which it was spending more money than it generated through sales, but at the same time the valuation of its holdings have seen substantial increases resulting in an overall profit.

While a paper profit always looks good, it is crucial for every business to always have enough cash to cover its short-term liabilities. Therefore, it is an important part of every company to keep an eye on the cash flows.

Here is an example of how such a Cash Flow Statement might look:

As we can see, the Statement is divided into different groups. This helps to have a better understanding, where the cash is generated and where it is going.

For our example corporation, we have the following cash flows over the year:

• Cash flows from operating activities:
  • This is where usually most of the cash flows will be appearing.
  • The example corporation generates a net positive cash flow of $262,000.
• Cash flows from investing activities:
  • The company sold some of its equipment.
  • But it made way higher capital expenditures (CapEx):
    • E.g. a copper company might have invested in new coiling machinery.
    • Or an oil company might have purchased additional wells.
  • Thus, it had a net outflow of $260,000.
• Cash flows from financing activities:
  • The company issued debt (sold bonds) of $200,000.
  • It paid out $110,000 in dividends to its shareholders.
  • Thus, it generated $90,000

In total, the corporation has a positive cash flow of $92,000.

In the last step, it is added (or in case of a negative cash flows subtracted from the available cash at the beginning of the period.

We can see that the corporation ends the period with a cash balance of $193,000.

As a last thought: On the one hand, having adequate cash is important to avoid liquidity issues and stay solvent. On the other hand, carrying large amounts of cash comes with opportunity costs, since the cash could most likely be used more profitably in other ways.

Summary

The important insights to take away are:

• The Balance Sheet shows the financial position of the business at a specific point in time. It displays what the company owns and what it is liable for.
  Therefore, it provides a good gauge at how healthy the company is.
• The Income Statement shows the financial performance of the business over a certain period of time. It shows whether the company made a profit, or a loss.
• The Cash Flow Statement summarizes the cash flows over a certain period. It shows how much cash the company generated and how much it spent. Thus, it displays whether the cash balance increased or declined.

Here is a good overview to condense it:

Another comprehensible analogy could be made by comparing the company to the human body, its operations to exercising and its profits (or losses) to the training results: 💪

• In this analogy, the Balance Sheet would present the physical composition of the body at a certain time.
• The Income Statement provides results of the muscle adaptation over a certain training period. Further, it also gives a general idea about the causation.
• To be capable of exercising, the body always needs to take in an appropriate amount of nutrients in accordance with the energy required. This is what the Cash Flow Statement entails.

🧠 Hopefully, reading this was useful and you learned something valuable. 🙂

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Best regards,

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Disclaimer: The content of this newsletter is for informational and educational purposes only. It contains my personal views and opinions, which are not to be taken as direct investment advise. All investments have risks and you should do your own due diligence before making any investment decision. If you require individualized advice, to review your unique situation and make a tailored advice for you, then contact a certified financial planner or other dedicated professionals.

This Newsletter was first published on Substack.