If you close your eyes and concentrate, you can surely see him standing on the edge of the pier, nervously watching as the Má-Magur, a large, high-prowed “deep-sea” cargo vessel, slowly sails away into the Persian Gulf. His name is Lu-Enlilla, and he is a merchant from the Neo-Sumerian city of Ur. It is a cold November morning of 2040 BC. The ship he so nervously watches edge away carries all the capital he has accumulated over his lifetime and his reputation: wool, sesame oil, dried fish, garments and hide.

Why would a keen and wealthy merchant risk his entire fortune on a single voyage? What did he know?

He knew well that the cargo was prized and would be well received in Magan (modern-day Oman). He was fairly certain that his agent, or shamallum (literally “the one who carries the bag”), would represent him fairly and effectively. He was confident of the commercial outcome of his enterprise.

What Lu-Enlilla didn’t know was whether the ship would survive the trek to and from Magan. The relatively shallow waters of the Persian Gulf, the famously violent Shamal winds, or pirates could all spell disaster. So why go all-in on such a risky bet?

Lu-Enlilla had entered into a partnership with the Temple of Nanna in Ur, which functioned similarly to modern-day insurance (or what later became known as a bottomry contract). In essence, these contracts were loan arrangements where shipowners pledged their vessel (the “bottom”) and its cargo as collateral. This allowed them to fund the merchant journey. If the ship was lost at sea, the lender forfeited the loan, and the shipowner was released from his obligation to repay it. In other words, the loan was due only if the ship completed its journey. This, in effect, transferred most of the navigational risk of the voyage from the borrower to the lender.

Same problem, different characters

Lu-Enlilla understood risk was a part of life. He focused his energies, first on survival, then on all else.

For a practical man such as Lu-Enlilla, the broadest definition of risk might have sufficed: “the possibility of suffering damage”. It can be further refined to mean “the possibility of suffering a permanent loss of capital”.

For that definition to work, there are two components, both of which must be present: uncertainty and exposure.

Neither alone is enough to represent risk.

You never really know

Risk means more things can happen than will happen.

— Elroy Dimson

Uncertainty means not knowing what will happen or, worse, not knowing what *can* happen. If you know the outcome of an event, then there is no uncertainty and, therefore, there is no risk.

However, uncertainty, on its own, does not entail risk. There is only risk if the outcome of an event, which is unknown, will affect me. In other words, there must also be exposure.

Can It Hurt Me?

Exposure is pretty straightforward. I may not know the outcome of a particular event, but if none of the possible outcomes can hurt me, either directly or indirectly, then those events do not represent a risk to me.

You’re on a walk and come across a burning house. You don’t know if it will collapse; that’s uncertainty. But you’re a safe distance away, so you don’t care either way — no exposure, no risk. The moment you step inside to check for people, the uncertainty of collapse matters enormously. Now you have both components.

The key point is that you chose to go in. That choice, managing your exposure, is the only thing you ever truly control.

The most we can ever hope to do is try to better understand uncertainty and to manage exposure. Humility will keep you out of burning houses.

Your success depends on the risks you take. Your survival depends on the risks you avoid.

— James Clear

Finance professors are wrong

Financial academia will tell you that risk is measurable and that it’s called volatility. Calling risk volatility is just a lazy attempt to simplify the complex into something easy to quantify, so they can fit it neatly into their models. They use variance, standard deviation or beta as if that really provided useful information. It’ll just make you think you know something, but you won’t.

Lu-Enlilla understood it better: he wasn’t too worried about the price his merchandise would fetch in Magan. He was worried if his merchandise would get to the market. Volatility is not risk; it is the reason buying opportunities exist and is what makes investing worth doing.

Volatility is a risk only in the sense that a sharp drawdown in your holdings will mess with your head, strain your emotions and test your convictions. Volatility *can* make you sell at the wrong time and for the wrong reasons, turning a paper loss into an actual, permanent loss.

Risk is buying the wrong stock by ignoring contradictory evidence, or acquiring more exposure than you can handle by using leverage. Risk is actually believing that your Excel model reflects reality or viewing markets through a dogmatic lens. These are risks that can hurt you enough to kick you out of the game entirely, and academia is hopeless at putting them into equations, so it ignores them.

Markets, and life more broadly, don’t care about models.

What You Can Actually Control

You can’t eliminate uncertainty; you can understand it. You can manage exposure. That’s the whole game.

Lu-Enlilla could not forecast the weather and could not even guess as to the result of the voyage. He could have chosen not to participate, but instead, he decided to find a way to make the trip happen without risking ruin. He only kept commercial risk, the part he understood best. He transferred to others the risk of the high seas. All he needed was to manage his exposure.

Today, the means, the instruments, the rules and the names are different, but the essence of the game is unchanged. We can research our investments, make an educated and reasonable estimate of the possible outcomes, and then manage our exposure through position sizing and the use (or lack thereof) of leverage.

Investors will always have a blind spot. We don’t know what we don’t know; if overconfidence is our greatest threat, humility is the antidote.

Back at the Dock

Back at Ur in 2040 BC, Lu-Enlilla sends the ship and walks home. He’s done everything he can; he managed his exposure as well as his tools allowed. The rest is uncertainty, which is to say, the rest is just life.

Early in the morning of October 3, 1955, the 70-foot merchant vessel MV Joyita set sail from the South Pacific island of Samoa, headed for the island of Tokelau, 300 miles to the north. On board for the two-day trip were 16 crew members and 9 passengers, including a doctor, a government official and two children. It was a routine journey.

At some point during the trip, a corroded pipe began to leak heavily. The bilge pump, a pump located in the lowest point of the hull where water collects inside a ship, was clogged from debris and the crew could not find the source of the leak. As the lower decks began to flood, the crew panicked. To them, it was clear the ship was sinking. The captain gave the order to abandon ship, the life rafts were launched and all passengers and crew evacuated.

What no one on board realized was that the Joyita was practically unsinkable: her hull was lined with 640 cubic feet of cork to insulate refrigerated cargo holds. During that fateful trip, she was carrying nothing but 80 empty fuel drums. These provided so much buoyancy that even if the ship were completely full of water, she would still float.

Five weeks later, the Joyita was discovered drifting 600 miles off course. She was listing heavily and half-submerged, but she was still afloat and perfectly buoyant. Had the passengers stayed on board, they would have been safe and likely rescued within days. Instead, because they panicked and fled to the small, fragile life rafts, not a single one of the 25 people was ever seen again.

Although ultimately tragic, the captain’s reaction is understandable. Who wants to wait and see if the ship will actually float once full of water? By then, it could be too late. In the presence of a fatal threat, the obvious response is to react, to do something.

There are lessons in this tragedy, not just about marine safety, but about human psychology: the way a group collectively reacts to a threat can be as dangerous as the threat itself.

If software was eating the world, what is AI doing now?

You could be forgiven for stating that we are in a software apocalypse. The iShares Expanded Tech-Software Sector ETF has fallen 27%+ since September 2025. Individual names, such as Atlassian (down ~56%), Figma (down ~58%) and Workday (down ~38%) are faring even worse. But what is even more important is the narrative shift. It used to be that software was the best business; low capital intensity, recurring revenue and sticky customers. Software companies commanded crazy multiples and investors piled on, in both private and public markets. But now?

Now AI is eating software. The market appears to be thinking that LLM’s make software companies, and developers, obsolete. Jack Dorsey’s decision to lay off 40% of Block’s workforce makes the threat all the more real. AI *is* coming for developers, even the software companies say so...

Is this reasonable?

The fears have merit: administrative workforces are bloated or wasteful, and a lot of that can be automated or done away with. AI does, in fact, make developers much more productive. Change is coming.

If software companies not only use AI internally, but also deploy it within their applications with autonomous power, that will raise further questions. Does an AI agent require a paid license, or should it share the license assigned to the human that created it? What happens when one human spawns multiple AI agents?

The cost-per-seat model may need to be updated to adapt to the reality, and we still don’t know how it will evolve creating more uncertainty. And yes, some deep-pocketed companies with an internal development team will build their own apps and ditch *some* vendor tools. But that trend has been in place for a while, and although AI will accelerate it, it’s not a new trend.

So why the shift?

The possibilities enabled by AI have been slowly eroding the narrative around software companies for some months now. AI companies have spent millions of dollars hyping their own narrative. Some of them are in the process of raising billion-dollar equity or debt rounds (or both) and some are in the process of going public. The media hype benefits them directly.

The AI Reality Check - Software companies are not dead

But real-world, scalable software is incredibly difficult to do. It’s not just about writing code, it’s about architecture, database design, data security, quality assurance, version control, logging, auditing, software vulnerabilities, debugging and constant fixing and upkeep. And software is never *done*. We are still a long way from AI handling all these tasks competently, transparently, and consistently.

And enterprise software is a different beast. Enterprise buyers will not switch mission-critical applications to vibe-coded slop. For years, large companies have had the ability to hire a professional development team to build and maintain their own applications, and some do, at least for some of their tools. Why don’t they do this for everything? Because it doesn’t make sense to do so. And within the enterprise software space, vertical market software companies are even more insulated.

Vertical market software, or VMS, is specialized, industry-specific software applications designed to meet the unique needs of a particular niche. These are boring but essential tools on which entire industries rely to get things done. They have deeply specific functionality and are compliance-ready, the result of years of embedded industry knowledge and unscalable personal relationships. If they fail, their customers cannot continue to operate.

AI will not replace these companies any time soon. AI, if anything, is a boon to VMS companies by making them more efficient and effective, not obsolete. We should expect changes and a lot of volatility in the software space, but not its complete destruction.

Take the opportunities that are handed to you

One ship that has been abandoned as if destined to fail and sink is Topicus.com Inc. It’s the Joyita story all over again: the market is abandoning ship as if catastrophe had already struck. But Topicus is not only seaworthy, she’s also in terrific shape and poised to navigate what’s ahead. Sure, choppy and stormy seas are approaching, but is it really time to jump into a dinghy life raft?

No.

Topicus.com Inc. is Constellation Software’s European subsidiary. While the parent company has become a $57 billion behemoth, Topicus is executing the identical strategy across Europe’s fragmented, regulation-heavy markets. Same model, same team, earlier innings.

To understand why Topicus matters, it’s important to understand the machine that built it.

The Mothership

Constellation Software was founded by Mark Leonard in 1995, following a career in venture capital. He realized that small, niche software products had staying power and could become quiet compounders.

At Constellation, Mark acquired small VMS companies, implemented best practices, and let the acquired management teams run their companies independently, with the flexibility, speed, and energy of small teams, all while supported by a head office that ensures they are well-capitalized and managed. Constellation’s core model could be summarized as “buy, improve, never sell”.

Mark and his team have been very disciplined acquirers and proven capital allocators. Over time, they developed an edge in quickly finding, analyzing and closing on acquisition targets. They have utilized that discipline to their advantage, making dozens, sometimes hundreds, of acquisitions each year.

Initially focused on Canada, they expanded into the US and other markets, including Europe. The company went public in 2006 and has consistently been extremely cautious when issuing new shares, which is almost unheard of among serial acquirers.

The Next Frontier

The model has worked beautifully. With Constellation’s core model clearly defined and tested, the next question is how far this success can scale beyond the US and Canada.

Enter Europe.

Europe is a large, rich and highly fragmented market. Each country, by itself, is relatively small compared to the US, yet has its own tax code, labor laws and regulatory framework, as well as its own language and cultural idiosyncrasies.

The European VMS market represents a unique opportunity, and Topicus is well-positioned to take on the challenge and deal with the complexities. To most competitors, this is too daunting a challenge.

Topicus is not a sequel or a do-over. Topicus is a subsidiary of Constellation Software, and the expert team of capital allocators, acquirers, and operators applies its experience and knowledge directly. The question isn’t whether the model works. The question is whether Europe’s software market is as rich with hidden gems as Canada and the US have proved to be.

Topicus.com Inc. is a Toronto-based holding company spun off as a dividend-in-kind in December 2020 and began trading on the Toronto Stock Exchange in early 2021. Constellation holds over 31% of its shares, has a super-voting share that gives it 50.1% of the votes and has the right to name six out of the ten board members.

Robin van Poelje, the chairman and CEO of Topicus, has been acquiring European VMS companies since 2006. And he’s not messing around. From 2014-2020, TSS (Topicus precursor) executed over 60 deals, averaging €6M each. Since 2021, the year they were spun off, activity has accelerated, with €1.06B deployed across 135 deals, with a median ticket size of €3.9M.

At Topicus, bonuses are based on the return on invested capital minus a hurdle rate set by the board. Between 25% and 75% of bonuses must be used to acquire shares in the open market, subject to holding restrictions of three to ten years. This results in executives owning a considerable portion of their net worth in shares they *bought*, not shares they were granted. No accounting tricks, no stock dilution, no executives making millions at the expense of shareholders. Insiders own close to 30% of the shares.

What kind of targets are van Poelje and crew after? The boring kind. They acquired Cipal Schaubroeck NV, a local-government software provider based in Belgium with €110M in 2024 revenues and over 590 employees. Cipal offers solutions such as Citizen Administration (population management, registrar services), Financial Tools (local-government tax collection, debtor management, payroll/HR), Social Welfare, Land Planning, and smart city apps, among other services. Once a local government makes the switch, it’s more likely to buy more functionalities and stick with Cipal for a very long time. This is but one example.

Full Steam Ahead

Constellation’s track record provides the benchmark. Operating cash flow has averaged 22.74% of revenue over the last ten years — the lifeblood of a serial acquirer. Using the company’s own ROIC methodology, returns have averaged 31.75% annually over fifteen years.

Topicus is in the early stages of its European conquest. Some see the selloff and narrative shift as a reason to abandon ship. The market panic will also affect private-market valuations, making future acquisition targets cheaper and still more accretive. Topicus is built to deploy capital; if it can execute, the current environment is an opportunity to pick what others tossed: more sellers, fewer buyers, lower prices, better results.

It’s not the time to panic. The negative narrative is likely a tailwind for Topicus. Shares of Topicus are trading 43.9% below their all-time high, handing long-term investors an attractive entry point.

The company reported earnings on February 25. Revenue grew by 20% to 438.67 million EUR, net income increased 41% to 79.4 million EUR and operating cash flow increased 35%. Yet, it missed revenue expectations and the market shrugged it all off. It’s like somebody found a small puddle of water in the lower deck and called for the evacuation of the ship.

Even after the selloff, Topicus is not cheap, by any metric. But investors waiting for Constellation Software to become cheap have missed out: shares have *multiplied* 5.16x over the last ten years, a compound annual growth rate of 17.83%. Quality is very rarely *dirt* cheap.

2025 reported diluted EPS: 0.50 EUR

March 9 stock price: 111.06 CAD

EUR/CAD exchange rate: 1.36 CAD

EPS in CAD: 0.50 EUR x 1.36 = 0.80 CAD

P/E Ratio: 111.06 / 0.80 = 138.83x

However, serial acquirers have large non-cash amortization charges from previous acquisitions, which seriously understate their true earnings power. A more accurate measure is to use P/FCF.

Topicus generated €403.1 million in FCF in 2025. This adds to their available cash for new acquisitions and implies a P/FCF multiple of 26.37x. Rich, but not outlandish.

This is not for the faint of heart. Multiples can still contract further, but over a long enough time frame, Topicus is poised to outperform the rest of the market. Investors seeking to hold for anything less than five or seven years should look elsewhere.

Not Without Risks

One of the biggest risks materialized on September 25, 2025, when Mark Leonard announced his sudden resignation as Constellation’s president, citing health reasons. Mark Miller, Constellation’s COO and part of Leonard’s team for over thirty years (founder of Trapeze Group, Constellation’s first-ever acquisition), took on the role. Leonard remains on the board.

This matters to Topicus because Constellation controls it. Constellation’s culture, discipline, and capital allocation expertise flow directly to Topicus, which means any deterioration at the parent level could affect the subsidiary.

That said, Leonard built a team and a system, not a one-man show, yet Topicus shares have fallen by more than 35% since the news. Miller has been implementing this playbook for three decades and is a very capable captain. However, it is still early to tell how this will impact Topicus, if it ever does. In any case, directly executing the company’s strategy falls to van Poelje, and execution risk is present in any investment.

A bigger concern is multiple contraction, which is largely already underway. For whatever reason, the market may decide to pay even less for Topicus’s earnings. But patience and a long-term outlook will likely be rewarded.

Steady as she goes

The crew of the Joyita didn’t know the ship was unsinkable. They saw water rising and made the only logical decision available to them, and it cost them everything. Patient investors have something Joyita’s crew didn’t: time to think.

Topicus sells software to Belgian municipalities, Dutch hospitals and German regional banks. These customers are risk-averse and unlikely to switch to an app built with a chatbot; if they ever do, it won’t happen quickly. In the meantime, van Poelje and his team will keep buying boring European software businesses no one else wants to touch, at prices the current panic is making cheaper by the day.

AI will change software; it won’t kill it. VMS will be the last category to fall, if it ever does. The risks are real: Leonard’s absence, rich multiples, and execution uncertainty across dozens of jurisdictions. Yet none of them are reasons to abandon ship.

Constellation Software has never been cheap. It still isn’t. But investors who bought at rich multiples and stayed the course reaped the rewards.

Disclaimer and disclosure

The author holds a long position in some or all of the securities mentioned in this publication, either directly or through entities he controls. He may buy more, sell, or change his mind at any time and without notice. Do not assume his position has remained unchanged since the date of publication.

Nothing in this publication constitutes a recommendation to buy, sell, or hold any security or financial instrument. This is not financial, investment, legal, or tax advice of any kind, and no professional or advisory relationship is created between the author and any reader. The views expressed are solely those of the author, are based on information available at the time of writing, and may change without notice.

The author has no obligation to update, correct, or supplement any information contained herein. Some information is sourced from third parties believed to be reliable; however, no representation or warranty is made as to its accuracy, completeness, or timeliness. Readers should independently verify any information before relying on it.

Certain statements in this publication are forward-looking in nature and involve assumptions, risks, and uncertainties. Actual results, outcomes, or developments may differ materially from those described or implied. Past performance is not indicative of future results.

All investments carry risk, including the possible loss of some or all of the capital invested. The securities discussed in this publication may be volatile, illiquid, or otherwise unsuitable for certain investors. You should consider your own financial situation, risk tolerance, and investment objectives before making any investment decision.

This publication is for educational and informational purposes only. Conduct your own independent research and consult a qualified financial professional before making any investment decision. The author is not responsible for any financial loss or damage resulting from reliance on the content of this publication.

We all know that not everything that shines is gold. The reverse is also true: not everything dull is worthless.

Dull can, in fact, be golden.

Enter boring businesses: grey, monotonous and unglamorous. They are the backbone of the economy, overlooked precisely because nobody wants to talk about them at parties. They do essential work that most people find about as exciting as watching concrete cure.

In an attempt to focus my writing, I’ll be hunting for and profiling publicly-listed boring companies. This shouldn’t be interpreted as saying the big, headline-grabbing names should be ignored. There’s plenty of money to be made there. But anybody can find those.

Our brains on stories

All stocks have stories attached to them, whether we realize it or not. The story is either widely told and part of the zeitgeist, or hidden, waiting to be discovered. But there’s a third possibility; one that gets investors into trouble: the story we tell ourselves that isn’t true. Since nature abhors a vacuum, if we don’t find the real story, we fill in the blanks with false narratives.

Because humans love stories.

Our brains are wired to think in narratives, not facts, figures, or probabilities.

Stories give us scaffolding on which to hang our thoughts, emotions, hopes and dreams. If a story appears even slightly logical, supporting facts become less crucial. The more interesting, novel, scary, or funny the story, the more easily we process, remember, and empathize with it.

We encode experiences as narratives, as sequences of linked events: “A” happened, therefore “B” happened, which led to “C”... and so on. This mental model helps us anticipate outcomes, predict threats and spot opportunities. Storytelling hijacks that same framework, tapping into our most basic emotions. Early humans shared experiences as cautionary tales, passing on vital knowledge and building group cohesion long before writing existed.

Compelling stories trigger neurochemicals like dopamine (which boosts attention and arousal) and oxytocin (which enhances empathy and social bonding). Hearing vivid, sensory-rich narratives activates the same brain regions as if we were experiencing the events ourselves. It’s far easier to picture yourself as the protagonist than to absorb a spreadsheet.

Stories are persuasive, relatable, and easily shared, and they crowd out critical thinking. It’s not that the story-brain ignores facts; it just has less bandwidth for them. Narrative wins every time.

This pull toward stories doesn’t just shape how we see the world. It shapes markets.

Every company has its story

Our brains work differently when money is involved. They operate on a more primal level, easily falling prey to fear and greed.

Sensational stories of riches catch our attention instantly and stick to memory, making them easy to amplify. What do you think gets CNBC better ratings: an interview with a CEO promising to revolutionize humanity, or a deep dive into WESCO International’s electrical distribution margins? One story writes itself. The other requires you to care about wire gauges.

Consider that people love to brag about their crypto trades or biotech bets, but nobody flexes about dividend income from a regional parking lot operator.

Both can make you money. But as a boring person myself, I’m drawn to the latter.

We all love being “in” on the story, which usually means holding the same opinion as everyone else. It’s reputationally risky to think differently. If Nvidia is ripping higher and you’re sitting there with shares of a septic tank manufacturer, you’re a fool. But if Nvidia tanks and you own shares, your losses are socially acceptable; you are in good company. In markets, as in life, sexy failures beat boring gains.

Stories draw in talent

Talented people want to work in sexy, world-changing fields. Rarely will you find a child dreaming of becoming a plumbing parts distributor. This creates a talent gap in unsexy industries, which lowers competitive pressure. Boring companies that execute well can quietly come to dominate their markets while everyone else chases the next moonshot.

Stories create trends

Trends are born from stories. The current AI revolution didn’t appear out of nowhere; it emerged from the narratives that CEOs, entrepreneurs, and investors tell us about how this technology will transform every corner of our lives. We extrapolate those stories far into the future and imagine making generational wealth if we get in early. This triggers exactly the right cocktail of emotions to hijack our decision-making.

Don’t get me wrong: there’s serious money to be made riding hot, universal trends usually at the frontier of developing technology. But those are crowded trades. That’s where the sharpest minds and deepest pools of capital hunt.

I’d rather fish where there’s less competition, which tends to be dull. I’ll leave the sexy opportunities to the sexy people.

Boring Alpha

Owning, investing in, or running boring businesses won’t make you popular at dinner parties. But it can make you a lot of money.

Boring businesses are essential. We would all notice, and suffer, if cement production stopped, trash collection ceased, or industrial parts suddenly became unavailable. These companies may not revolutionize the world, but they keep the current one running. They tend to operate in critical markets with inelastic demand, high switching costs, and high barriers to entry. They’re less subject to consumer whims and the fashion cycle of innovation.

This means boring businesses can be remarkably stable, generate predictable cash flows, and become compounding machines over time. They also have something many high-flying startups lack: longevity.

Boring doesn’t mean risk-free. But boring can mean quiet compounding over years or decades which is a proven way to build wealth.

As any parent knows, young kids are noisy, chaotic, even destructive; constant horsing around, screaming, fighting. But silence? Silence means they’re up to something. Silence is suspicious. Silence means, pay attention.

It’s the same thing for investors. We want to find the quietest parts of the market.

I’m a nerd; I find everything interesting, especially the mundane; and I don’t mind looking like a fool. If you can tolerate the boredom, you’re welcome to look over my shoulder: my research, my mistakes, my philosophy. This is my quest for profitable boredom: digging for gold covered in mud.

Luck matters a lot in our lives. Even if we don't acknowledge it, it's still there, playing its hand, influencing us and everything around us.

We love stories of people who ‘took control’ of their circumstances and triumphed. But we forget that these are nothing but narratives that were constructed after-the-fact, that they explain things clearly and linearly and reason luck away; we then conclude that everything is controllable, at least to a point. We forget how messy and uncertain things are as they develop.

The story of Jeff Bezos is a wonderful example. It is widely known that he quit his job on Wall Street and wrote a business plan for an online bookstore as he drove across the country with his family to Seattle. He then launched the business from a garage selling nothing but books and gradually opened new markets and offered new services, all done through sheer determination, skill and hard work. That story is largely right, but incomplete.

A lot of external factors beyond Bezos’s control coalesced to put strong winds behind his back. For starters, he was born in the US in a unique stretch of peace, growth and prosperity. The world was globalizing and freely trading goods and services, but also ideas and technology. The pool of talent in the US was growing like never before, not just from home-grown talent, but from some of the smartest folks in the world flocking to the US.

Amazon launched in July 1995, when the Internet was well established, stable and going mainstream. Millions of people were joining every day and there were far fewer sites to visit, and even fewer that were interesting or useful. Online payment systems were relatively new, but they were there and they worked. The shipping infrastructure to deliver books quickly and cheaply was also already in place, built by someone else.

All these factors converged to help Bezos secure his dream. If any one of these had not existed or had broken along the way, the entire Jeff Bezos and Amazon story could be completely different. Jeff was smart and hard working, but he was also lucky.

Luck is not all that matters. The people that benefit from bouts of good luck are the ones that earned it. The people that put in the hard work, that applied their intelligence and developed foresight; in other words, they are prepared to take advantage of opportunities when they arise. Seizing an opportunity requires the wisdom to recognize it and the courage and confidence to act. Neither of those things is easy to acquire. Both must be acquired ahead of time.

Yes, Jeff Bezos had many tailwinds, but he had the intelligence, wisdom and foresight to see the opportunity and the guts to go after it. He also never became complacent; his founder’s drive continued as he pushed his talented team to innovate into new products and services, growing it into the Amazon we know today.

We should all make room for luck in our lives, because it's there, whether we like it or not, whether we acknowledge it or not.

Be intentional about your choices. Design your life to maximize your chances of encountering good luck. Who you marry, who you surround yourself with, who you know, who knows you, where you live, what industry you work in and what you do every day are all important factors that will affect the frequency and quality of opportunities presented to you.

Just as important, you should prepare. Educate yourself, read, learn new skills, meet new people and push out of your comfort zone. If you wait until you see a clear opportunity, it'll be too late.

You can also prepare for the inevitable bouts of bad luck. Live within your means, save money and invest. Stay sharp and healthy. Use debt wisely. Be kind and help others. Stay close to family and cultivate a circle of trusted friends.

Because luck is a whimsical lady and ignoring her does you no good. So let’s acknowledge her presence and do our best to learn to play the game by her rules.

Why all the rage in SPACs?

To the uninitiated, the explosion in SPACs may seem even more puzzling given the dismal returns most of these have shown investors. Well, retail investors, at least.

SPACs have made a ton of money for sophisticated investors who get early access and, of course, for sponsors.

So what, exactly, are SPACs, and how do they work?

The acquirer's dream

A special purpose acquisition company is, at its simplest, a public company set up for the sole purpose of acquiring a company. They're also known as blank check companies, in that, immediately after going public, they have no operations or assets, save for the capital raised in the IPO. Again, the idea is to use that capital to make an acquisition. What acquisition is to be made is not known at the time of the IPO.

When a SPAC goes public, most, if not all, of the raised capital is deposited in a trust. That money can only be used for an acquisition approved by investors. Investors get their money back if a suitable target is not found and approved within two years of the IPO. If a target is found and approved, the deal goes through, and the acquired company merges with the SPAC and immediately becomes a public company.

But, the devil is in the details and that's where the smart money makes, well, its money.

Meet the sponsor

The first character in the SPAC play is the sponsor. This is the person or institution that decides to launch a SPAC and does all the work: hiring advisors, lawyers and bankers, raising capital and finding and acquiring a target company.

The first step is incorporating an entity, the actual SPAC, and putting up initial working capital. This startup capital is known in the industry as "at-risk capital" because it does not have the right to demand redemption. In other words, if the search for an acquisition fails, at-risk investors lose their money. In exchange for this added risk, at-risk investors get a steep discount to the standard IPO price of $10 per unit. They get to purchase their units at $2 to $4 and are subject to a one- to two-year lockup.

One unit is usually equal to one share plus a fraction of a long-dated warrant. Warrants can be separated from the shared after a predefined period from the IPO, usually 52 days.

The sponsor can provide the risk capital itself or raise it from outside investors. But it is usually a combination of the two. This startup capital ranges from 2% to 7% of all the raised money. Of course, these aren't retail investors. These opportunities are only open to sophisticated and well-connected investors, such as hedge funds and large family offices.

The sponsor files an S-1 with the SEC as a SPAC. It selects a preferred industry and geography but uses careful wording to allow it maximum flexibility. A tech-focused SPAC can end up acquiring a gravel pit if that's the only acceptable target it can find. The review process for a blank check company is much simpler and streamlined than a traditional IPO. Instead of the usual 12 to 18 months, this process takes 4 to 6. But don't be fooled by this. Simpler and quicker does not mean easy. It's just less complex.

The sponsor should not have a specific target in mind at the time of filling. If it does, it must disclose it to the SEC, which will then evaluate the target company as a plain-vanilla IPO, complicating the process.

When and if the SEC approves the S-1 filling as effective, the SPAC goes public. Units are sold to IPO investors at $10 each and then begin trading freely on an exchange. IPO investors don't get a discount on the units, but they have redemption rights at $10 per share. Deals are structured so that the sponsor retains a ~20% stake in the SPAC. Sweet deal.

Notice it's $10 per share, not per unit. IPO investors can separate the warrants and sell them in the open market. They can then redeem their shares, and whatever income they get from the sale of warrants is pure profit; risk arbitrage at its finest. Again, retail investors don't have access to IPO prices and can only acquire shares in the secondary market and usually do so without warrants. And often, they buy-in at a premium to the $10 redemption price.

No wonder SPACs are bad investments for the average Joe. Buying SPAC shares in the secondary market is a terrible idea. You get very little downside protection, and the upside is iffy at best. It all depends on the sponsor finding a good target, negotiating a good deal, having it approved, executing the transaction and then executing on the business side. Too many things have to go right. All other investors have ample margin of safety, downside protection and either steep discounts or arbitrage opportunities.

The second act

The sponsor now directs its attention to finding a target. At-risk capital pays for search and compliance expenses, which is why it is not guaranteed and has no redemption value.

The 18 to 24-month window sounds like a lot, but finding a good target at a reasonable price is hard, especially with so much competition. Sellers know the SPAC is under pressure and with millions of dollars burning a hole in their pocket, something they will take full advantage of. Also, blank-check regulation states that at least 80% of the capital raised must be used towards an approved acquisition, effectively putting a floor on the size of the target. On the other hand, if the sponsor finds a target with a larger price tag than the equity raised, it can upsize its offering with PIPE investors.

As the name implies, a private investment in public equity, or PIPE, is a private placement of public shares. Again, these are only available to well-connected investors and are sold with favorable conditions, such as a steep discount or additional warrants.

This sounds expensive to the SPAC. Why would a sponsor want to do this?

Because PIPE investors usually help to stop-gap a SPAC.

When the sponsor finds a target it likes, it submits the acquisition to a vote. A predefined majority of shareholders must approve the deal. If the deal is not approved and the search period is nearing completion, the sponsor may request an extension. The sponsor must return all the IPO funds to shareholders if none is granted, liquidating the SPAC.

If the deal is approved by a majority of shareholders, those who voted against it can still demand the redemption of their shares at $10 each. Many IPO investors participate in SPACs with the blind intention of demanding redemption and simply making a risk-less profit on the sale of warrants. This means that, even though the deal was approved, enough investors redeemed their shares that the SPAC does not have enough funds to close the acquisition. That's where PIPE investors come in. They can make up the difference in exchange for generous terms and access to non-public information.

Closing

Once approved by shareholders, the SEC gets a final say on any deal. Assuming that happens, the trust releases the funds and the SPAC merges with the target company, usually changing its name and ticker symbol.

And voila! The target is now a publicly-traded company and the sponsor owns a considerable take. At-risk, IPO and PIPE investors also made a killing along the way. Now rinse and repeat.

Way to go, boys!

Boom times

SPACs have been booming.

Source: spacanalytics.com

Not only are there more deals being done, but the average size is getting larger. 407 SPACs have IPO-ed and are searching for a target.

Source: spacanalytics.com

That’s $114.8 billion waiting to be deployed.

Source: spacanalytics.com

A lot of people find this boom surprising. You shouldn't. Everybody is making a killing except the dumb money, as usual. Why would you stop doing these deals if you had access to them?

Many factors set off this boom, but the most important one is regulation. The SEC changed SPAC rules, made them more transparent and, by extension, made them respectable. Goldman Sachs went from a "no SPAC" policy to underwriting and sponsoring SPACs in a few years.

The process sounds simple, but it's a real challenge if you are not a part of the old boys club. As the sponsor progresses through the steps described above, its position becomes more and more vulnerable. If bankers did a poor job selling the units, an uncomfortable percentage of shareholders might choose to redeem their shares, sometimes blindly.

But it's not all easy sailing. The SEC is concerned with the pace of filling and is increasing scrutiny. It has also made ambiguous changes to the accounting of warrants, leaving sponsors, accountants and lawyers confused. Also, as competition increases, so do acquisition valuations, and the market feels crowded.

But none of this is an issue to those connected investors that have access to these deals. And the SPAC acquisition process is quicker and smoother for most companies looking to go public, which is why I believe these deals will continue. It's a sweet gig if you can get it.

The Grayscale Bitcoin Trust has had a wild ride.  Its price appreciated over 4.8x in the span of  less than five months (only to give more than half of that back by mid-summer).  Some still believe there is still explosive upside in GBTC and Bitcoin due to its "unique" structure.

The Grayscale Bitcoin Trust, as the name implies, invests in Bitcoin.  But it is structured as a quasi ETF, quasi closed end-fund. 

It works like this:

The trust first vets certain sophisticated investors as "authorized participants."  The trust then issues shares to these participants in exchange for Bitcoin.  As the trust increases its holdings in Bitcoin, it increases its share count (sort of like an ETF).  The only catch is that these authorized participants must hold on to their shares for at least six months.

As the price of Bitcoin surged, so did investor demand for GBTC shares.  The trust issued more and more shares to its authorized participants, who had to acquire more and more Bitcoins, which increased the price of Bitcoin, keeping the demand flywheel going.

These authorized participants made a killing using sophisticated trades to borrow Bitcoin, selling it to the trust at a premium and then unwinding the trade six months later, usually at a much higher price.

But unlike an ETF, the trust does not have a mechanism to redeem shares.  So when authorized participants or investors want to sell their shares, they do so in the secondary market, selling to other investors.  This means that inflows into the trust created demand for Bitcoin, without corresponding outflows when investors want to sell. All that Bitcoin just stays in place.

The result is a fascinating dynamic.  As the trust gathered more and more assets, i.e., acquired more and more Bitcoin, it did so with no apparent mechanism to sell them and put them back into circulation.  So the price of GBTC can have a significant mismatch with the trusts NAV.  In fact, GBTC shares went from a premium of 40% in late December 2020 to a 15% discount today.

Here’s a chart from YCharts:

Think about what that does to Bitcoin's investment thesis.  One of the premises of Bitcoin is that the supply of Bitcoin is limited to a certain amount of new coins each year and capped forever at 21 million Bitcoin.  Subtract an unknown amount of Bitcoin that's lost forever due to forgotten passwords, stolen drives and plain old bad luck, and the total supply is still smaller.  Now, subtract the 589,616 Bitcoin the trust holds and cannot sell in the foreseeable future.

That's just under 3% of all the Bitcoin that will ever exist and more than 15 days of trading volume — a massive amount in any context.   And Grayscale is not the only long-term hodler.

As of today, the trust has suspended private placements.  But that may change, creating further long-term demand for Bitcoin.  And the opposite is also true.  The trust may institute a redemption mechanism through which it sells its Bitcoin in the open market.  However, I think this is highly unlikely given that Grayscale Investments, the trust's sponsor, earns a 2% fee on the trust's holdings.  Why would they reduce their asset base and cut their recurring fees?

I believe this dynamic, among other forces playing on Bitcoin, place significant upward pressure on the long-term price of Bitcoin.  And remember, this all works on an asset of dubious value at best.  What would happen if this same dynamic repeated, but on a real asset?  What if it happened on an asset that had very inelastic demand?  What if it happened on an asset whose end-consumer cannot forgo acquiring it, cannot use a substitute or postpone purchases for a long time?  What if, further, the supply of this asset was already constrained?

It’s happening again

Well, all that is playing out in the uranium market.

Uranium in the form U3O8, after refining and enrichment, is the primary source of fuel used in civilian nuclear reactors around the world.  It is a notoriously opaque and complex market, where buyers are not sensitive to price changes.  It's not like they can forego purchasing fuel for their reactors or decide to burn trash instead.  Plant operators usually enter into long-term contracts with suppliers and occasionally acquire uranium in the open market.

Production, as you can imagine, is a complex undertaking.  New uranium mines take years to prospect, design, permit and build.  There's usually a lot of local opposition to new mines, which can delay or derail projects.  Then there's the whole refining and enrichment process, followed by transportation to the end-users.  In other words, supply is slow to react, especially to the upside.

Uranium is coming out of a long and painful bear market; from a high of $140 in 2006, to a low of $17.50 in 2016.  As profitability fell, several large producers temporarily shut their mines, while others closed them permanently, and all froze all new mine projects.  This environment has restricted supply and, more importantly, producers' capacity to respond quickly to increased demand.

There are, of course, other sources of supply.  First, there's a large stockpile of reserves.  Also, weapons-grade uranium from nuclear arsenals can be decommissioned and repurposed for use in power plants, but this is a marginal source of supply. And even nuclear waste can be processed into plutonium for use in some power plants.

So what changed?

After the Fukushima disaster in 2011, many countries decided to scale back their nuclear energy ambitions.  Germany went all out and decided to shut all its reactors by 2022.  In 2000, 30% of electricity produced in Germany came from nuclear power.  By 2020, that share had fallen to 11% and still plans to reach 0%.

But setting Germany aside as an overreactive, ahem, outlier, other countries are going in the opposite direction.  According to the World Nuclear Association, there are 57 reactors under construction around the world.  With 442 reactors already operating, that represents an increase of 13% in the number of reactors and a 14% increase in generation capacity. 

Demand for electricity, in general, continues to rise with no end in sight.  How are we to meet this demand?

The long-term case for uranium and nuclear energy in general is that there is currently no way to meet expected electricity demand while hitting climate change goals without using nuclear power.  Wind and solar are excellent sources and are getting better, but they suck as base-load producers.  The only energy sources that can substitute coal and gas-powered plants as base-load generators are nuclear and geothermal, and geothermal is still in its infancy.  So the demand for nuclear fuel is there, is likely to increase and remain inelastic.

But there's a new wildcard, and that's speculative buying.

Financial speculators have long messed in the big commodities markets, be it oil, gas or corn.  But uranium is different.  Taking actual possession of uranium is no simple feat, so investors have pretty much stayed away.  If you wanted exposure to the price of uranium, you had to buy illiquid uranium futures or buy shares in a miner or refiner or, if you were lazy, a uranium ETF.

Until now.

Enter Sprott

The Sprott Physical Uranium Trust is a closed-end fund set up to acquire physical uranium in the open market and store it.  Like Grayscale, special qualified investors deposit funds into the trust in exchange for newly issued shares; then, the fund goes out and acquires physical uranium and stores it in special facilities in locations across the world.  Those qualified investors can then sell their shares in the open market, where anybody can buy them at a discount or premium to net asset value and participate in uranium price movements.

The fund began operations early this year and has seen massive inflows. It has purchased a lot of uranium in just a few months, just under 29 million pounds of it.  As of the time of writing, the fund does not have a mechanism in place to redeem shares, so like Grayscale, purchased uranium is essentially out of the market.  The trust becomes a new source of demand and competes with end-users for limited supply.

The worldwide production of uranium in 2020 was about 124 million pounds and about 25 million pounds a year from secondary sources.  Worldwide consumption, on the other hand, was around 190 million pounds.  This means that there is currently a shortfall of about 41 million pounds a year, which is filled by eating into existing inventories.  How long can this last?  How will that shortfall change as new reactors come online, and no new mines are not yet producing?  What happens if the Sprott Fund accelerates its purchases or if similar vehicles create artificial demand?

This smells like a bubble in the making to me.

But what will this do to the long-term price of uranium?

It's impossible to say, but the obvious guess is that it puts pressure on the upside.  In the grand scheme of things, the long-term price of uranium will still be determined by the development of the nuclear energy industry.  The Sprott Physical Uranium Trust will likely play a small role, in that it may distort prices for short periods.

The question is: how long until inventories and reserves run out? Will additional supply be available by then? What happens if power plants can't find the fuel to keep reactors running? What will governments do?

I'll let you ponder these scenarios. And remember that this is not investment advice. I'm not suggesting you go out and buy any of the securities mentioned here; you must do your research and make your own decisions. I'm long both Grayscale Bitcoin Trust and Sprott Physical Uranium Trust, but I may change my mind as things change.

Caveat emptor.

Of course, this is a revolutionary conclusion that I came up with before anyone else. And, of course, it is not an oversimplification.

I know. Data is not gold because, unlike gold, it is abundant and unlimited. And over the last few years, data has also become more broadly accessible. And what is abundant and accessible is not, by definition, very valuable.

I will contradict my headline further by stating that data analysis is not a solution to all our problems. Like anything new and exciting, it has been overhyped. It is an excellent tool on some applications, but definitely not all.

But there is a kind of data that is gold-like valuable in a few narrow applications. I'm talking about proprietary data, data that is only accessible to you. And I'm talking about data in the narrow field of credit risk analysis, specifically in lending to SMBs and micro-lending.

Again, quite revolutionary.

We've always known the importance of information in lending. Traditionally, banks would obtain said information directly from credit candidates during the underwriting process. Bank officials would also have access to the banks' own historical data making such loans and their own experience in the field.

But the economics are markedly different when lending to SMBs. The traditional underwriting process is time-intensive, and therefore too expensive for small loans. Just as important, most SMBs don't have all the information required by banks, such as financial statements. To top this off, SMBs rarely have the assets necessary to secure a bank loan. So yes, lending to SMBs is a different beast.

SMB loans are cash-flow-based, with recovery rates on defaulted loans around 10%. And loan underwriting is done with statistical analysis, looking at factors such as industry, location, years in business, sales, number of employees and the owner's FICO score. To do this accurately, though, you need lots and lots of data.

You can get a lot of data from public sources, but so can everyone else, so the only differentiation is getting, storing and analyzing your own data. For an SMB-focused lender, that takes time, plenty of mistakes and lots of capital, which means a costly education.

There's a catch-22 here: the more data you get, the better at lending you are likely to get. To get more data, you have to deploy more capital and do so faster, increasing the likelihood of expensive mistakes.

Is there a faster way?

Yes.

Provide services that churn out relevant data, like payment processing. This is why new payment processors such as Square, Stripe and Paypal have been very active and profitable in the SMB lending space. They generate TONS of data from their payment processing and use that to offer financing to their clients, which further enriches their database.

Terrific, right? We have to set up a payment processor and then start lending!

Well, yes, but that is incredibly difficult, capital intensive and risky.

Is there another way?

I'm betting there is, in POS (point-of-sale) software.

A cloud-based POS solution can provide the same, if not more information, than a payment processor because it handles all of a business's transactions, not just credit card sales. POS solutions can offer modular ERP-like products and services for managing inventory, payroll, financial planning, cash flow management and even accounting and taxes.

A low-priced solution that allows the POS vendor access to anonymized data would be the equivalent of a gold mine. I should have used "POS Vendors are the New Gold Mines," but that title is even crappier than the one I used.

Competition is fierce in this space, but you do not need to be the leading POS vendor. Reaching a critical mass will do.

Easier said than done.

Is this a challenging, risky and long-term solution? Yes. But it is also doable, much more so than acquiring a payment processor or starting one from scratch.

Do you think I'm wrong, stupid or crazy? Hit me with an email and tell me why.

The world is a complicated mess. It's unpredictable, hard to understand and, at times, dangerous.

And I mean everything: our lives, existence, human society, international trade, geopolitics, economic competition, physical infrastructure, etc. Our lives experience time linearly but are a part of and depend on a wild mesh of systems.

Modern life is a marvel. It's a marvel not only because we have made our existence safer and more comfortable than ever but also because our cozy lives require so many complex systems to interact and function smoothly. We take these for granted, and we rarely give them a moment's thought. And that's ok. That's the whole point: since we no longer have to worry about procuring or producing our food, energy and tools, we are free to focus our time and energy on other tasks.

But with this complexity and sophistication comes frailty.

Complex systems fail. And when they do, their consequences can set off a chain reaction with enormous consequences. Most of the time, these consequences represent a temporary inconvenience, other times, they entail a massive loss of resources or even human lives.

I'm a private pilot and aviation geek. I have always been fascinated by flight and aircraft, and I can hardly think of a more complex system and with higher stakes than flight, or commercial flight to be more precise.

Think about it. A modern turbofan engine is as complicated a machine as any. And the engine is just one subsystem of many other subsystems that make a modern commercial aircraft. The wings don't get much attention, but they are a masterpiece of design and engineering. So is the fuselage. The landing gear, control surfaces, navigation and communications instruments, and cockpit are complex and sophisticated. 

And an aircraft is itself but a single node in the complicated mess that is modern air travel. A plane cannot just take off and point its nose to wherever it wants to go. There are entire networks, protocols and subsystems that govern the operation of aircraft. Training pilots and aircrew is itself a complex activity. Flight tracking systems and air traffic control are another. And the ongoing operations that must take place and coordinated in every airport is yet another.

And the stakes couldn't be higher. Millions of people take to the sky every day, engaging in one of the most complex and high-stakes systems known to man. Most of us do it without hesitation. And modern flight is, by all accounts, a huge success. 

In 2019, there were 20 fatal accidents out of an estimated 39 million commercial flights (including passenger and cargo traffic). That's equivalent to one fatal accident (where there is at least one fatality) for every 1.95 million flights. And safety is improving, even as the volume of passengers and flights increases as well*. 

If the accident rate for 2019 were the same as in 2000, there would have been 35 fatal accidents. And 2019 was a notorious year because it included one of the two costly and high-profile accidents of the 737 MAX*.

If aviation is so complex, how did it achieve this level of safety?

Like all complex systems with high stakes, redundancies and safety protocols are built-in. What may be unique to aviation is how the industry learns from every accident and how that new information is disseminated.

What does this have to do with business, investing and decision-making?

We deal and interact with complex systems all the time. The stock market is a complex system, if there ever was one. That goes for both the infrastructure that keeps it running smoothly and the dynamics at play in its behavior. The US's legal and tax systems are complex, and things get even crazier if you invest across international borders.

Companies themselves are complex systems, and the business activities they engage in also tend to be complicated. So it pays to understand complex systems and how they fail.

Lessons from Those Dealing with Complex Technology

Earl Wiener, a NASA scientist and a famous aviation expert, developed rules for dealing with complex flight systems. There are several versions of these:

1. Every device creates its own opportunity for human error.

2. Exotic devices create exotic problems.

3. Digital devices tune out small errors while creating opportunities for large errors.

4. Complacency? Don't worry about it.

5. There is no problem in aviation so great or so complex that it cannot be blamed on the pilot.

6. There is no simple solution out there waiting to be discovered, so don't waste your time searching for it.

7. Invention is the mother of necessity.

8. Some problems have no solution.

9. It takes an airplane to bring out the worst in a pilot.

10. Whenever you solve a problem, you usually create one. You can only hope that the one you created is less critical than the one you eliminated.

11. Automation is meant to reduce workloads during normal conditions (when workloads are already low) but increase workloads in extreme conditions.

12. When automation fails, there is a significant price to pay.

Although written explicitly with aviation in mind, these rules apply to all complex systems. They point out something obvious but at times not acknowledged; there is frailty in complexity. Not only does the possibility of an error or accident increase when dealing with complexity, but the consequences of errors tend to be larger and mostly unknowable ahead of time.

If complex systems are so frail, why don't they fail more often?

Dr. Richard Cook, a research scientist and physician, wrote a short but powerful paper** on the subject while working at the Cognitive Technologies Laboratory at the University of Chicago. It is a dense, high-level view of a complex (ahem) subject. In eighteen short paragraphs, Dr. Cook instills the most critical lessons from the field of systems design. An ode to simplicity in the face of complexity.

In that short and fascinating paper, Dr. Cox explains that built-in redundancies, but above all, operators, are what keep things running smoothly. It's the people in the trenches, the ones interacting with systems that are the first and last line of defense. In a speech Dr. Cox gave at a web operations conference, he shares further insights about planning for downtime and maintenance when designing a new system because maintenance and repair are never really finished. These activities are continuous and closely integrated with the system itself, rather than discrete activities with a set start and end time.

Think about your own business's activities. A company, even the simplest and humblest of them, is a system of people, tools and activities geared to producing a product or providing a service. Next time you plan on implementing a flashy new technology, think of the project through the complexity lens. Is the project going to produce local optimizations but make the whole more fragile? What happens when it fails?

If we are trained to view business and investing through this lens, we are likely to find weaknesses and frailty, which is, of course, half the battle in a complex and ever-changing world.

* https://news.aviation-safety.net/2020/01/01/aviation-safety-network-releases-2019-airliner-accident-statistics/

** https://www.researchgate.net/publication/228797158_How_complex_systems_fail

*** 

Windows have always been used as metaphors, often to describe gateways into hidden truths, different worlds or veiled insights. It's a fitting figure of speech because we all know what windows do.

I want to talk to you about a particular window. Yes, it's a metaphorical window, but one that is far less exciting or sexy as the great authors and poets deploy. Yet, it is incredibly important. You must watch this window, and you must do so like a hawk.

I'm talking about the Overton Window.

The Overton Window describes the range of public policies that the population will deem as reasonable and acceptable at any given time. Any policy put forth by a politician or public official must fall within this Window, or the public will reject it as unacceptable or radical.

The term is named after Joseph P. Overton, who stated that an idea's political and social viability depends on whether it falls within this accepted range, not on the politician's preference, charisma, or political capital.

No matter how popular a political leader is, if he or she proposes an agenda that falls outside the Overton Window, it is doomed to failure because it's outside of what current opinion considers acceptable.

Joshua Treviño, a speechwriter for President George W. Bush, described the degrees of acceptance of different policies or ideas with a gradient that went from accepted and implemented policy to popular, sensible, acceptable, radical and finally, to unthinkable.

The key is that the Overton Window is not fixed. It moves closer or further to one extreme or the other the political spectrum, i.e., to the left or right. The zeitgeist of the time and the creative use of propaganda, narrative and political discourse can nudge the Window towards one side or the other.

What was once radical and unthinkable can, at other times, be perfectly acceptable.

For example, in the 1980s, it would have been unthinkable and wholly unacceptable for the federal government to collect massive amounts of private data from its citizens. But events over the last two decades have coaxed the narrative that there is a need to protect the population from terrorism and that the best way to do that is through mass surveillance. This surveillance has also been made somewhat easier by the gradual shift our lives have made into the digital realm. Steadily since 2001, the zeitgeist has shifted, and the Overton Window has moved along with it. The once unthinkable is now an accepted reality.

The Overton Window affects all public policy and discourse. For example, the founding fathers of the US rejected the idea of federal government debt. They believed that the government should intervene as little as possible in its citizens' daily lives, that it should operate within its means and that it should avoid the servitude, real or imagined, that comes from owing money to creditors. For a very long time, the federal government had zero debt indeed. It would only use leverage in times of emergency, such as war, and would do its utmost to pacy it back as soon as possible.

How far the Window has shifted. Today, the opposite is true. It would be unimaginable and unacceptable for the government to have no debt and limit itself to spending what it receives from tax collection. Might it one day shift again?

But the Overton Window doesn't only drift to one direction or the other. It can widen and contract to encompass a broader or narrower range of policies and ideas. In times of social and political discord, like today, the Window tends to widen as different factions espouse and promote their agenda. When opposing sides fail to reach common ground, their views and agendas tend to radicalize and move further to the extremes of the political spectrum, expanding the Overton Window.

There's not just one Overton Window. You could argue there's one for foreign geopolitical policy, another for trade, and several others for domestic issues.

What does the Overton Window look like today?

I believe it's as wide as it's been in a long time. International cooperation among traditional allies has diminished. The globalization trend seems to be on hold, and nationalism is rising around the world. But these ideas aren't dead either. New leadership, both in the US and abroad, can bring these trends, cooperation and commerce, back on track. Or they could continue to reverse them. Both extremes appear reasonable enough to be plausible.

On the domestic front, the Window is expanding to the edges of the spectrum to include policies that would have been considered radical a mere five years ago.

Ideas such as universal basic income, modern monetary theory and a green new deal are going mainstream. The monetization of government debt, the decoupling between government spending and government income, and the outright purchase of financial assets such as corporate bonds or ETF's by the Federal Reserve are now being seriously discussed and implemented, not at the fringes of society, but in mainstream political circles.

All this portends the possibility of a broader range of possible futures, making it more difficult for businesses and investors to make decisions. Social and political turmoil likely lies in the future. Even widespread violence is not out of the question. But I believe that, after a period of unrest and commotion, things will again settle down. As always, businesses and investors with a long-term orientation have a distinct advantage over those seeking to beat the quarter.

So stay the course, keep an eye out for the zeitgeist and watch the Overton Window. You are less likely to be surprised when the radical becomes a reality and to thrive in the long run.

We are living in crazy times. Things are out of whack in the political sphere, to put it mildly. On top of that, the pandemic has upended everybody's lives and the economy. People are dying as doctors grapple with a new disease, while many others are losing their jobs and livelihoods. I've heard some describe the current times as unprecedented.

But are these times unprecedented?

Is this the first time that a pandemic hits every corner of the world? Is this the first time people have had to stay at home? Is this the first time that a massive number of businesses had to close? Is this the first time people need to wear masks to go outside?

The answer to all these questions is "no." These are unprecedented times for everyone alive, but none of these things are new; they have all happened before. Face masks, social distancing, and business shutdowns were all part of the reality of 1918.

Spanish Flu

The last real pandemic was the great influenza of 1918. It was horrifying, highly contagious, painful, and, yes, very deadly. It also struck at unimaginable speed and spread to every corner of the earth within a few months. It brought society very close to collapse and had profound and lasting consequences.

What scares me the most about the Spanish Flu is that science and civilization never triumphed over it, and it still hasn't. Science was never able to stop its spread, cure it, or prevent it with a vaccine. The virus went away by itself.

A lot of things have changed since then, but the human element remains the same. Our most primal emotions, needs, fears, and desires have not changed, even if many other things around the edges of our existence have.

Many people disregard the study of the Great Influenza as useless because "it's not comparable." But things don't have to be comparable to be useful or insightful. I also believe history is worth studying for its own sake. I suggest you read the book and draw your conclusions.

Not from Spain

The Spanish Flu did not originate in Spain but the US. It is popularly known as the Spanish flu because of some peculiarities of the time.

Much of the world was busy fighting World War I, so many counties had news censorships in place to ensure "the morale of the troops and civilian population." Spain, a neutral country, did not have such censorship. Its press was free to report on the pandemic as it struck through the country, even as it afflicted King Alfonso XIII. The unrestricted reporting in Spain, coupled with concealment in other counties, gave a false impression that Spain was the worst-hit country, hence the "Spanish" Flu.

Out of the Blue

Dr. Loring Miner first reported a novel strain of influenza in early January 1918. Haskell County, Kansas, where he practiced medicine, saw what appear to be the first cases. From there, the virus spread at a speed that few would think possible in a world that was not as globalized, integrated, and connected as today.

What made this strain of influenza spread so quickly, besides its extreme contagiousness, was WWI. In early 1918, Europe and much of the world was already three and a half years into the war, with the US only recently joining the allies. The US was on a full war footing, hoping to make its mark in the conflict, and mobilized every available resource towards the effort. Men were being recruited, trained, equipped, and shipped off to war as quickly as possible. The federal government imposed rationing on many goods and services, including food staples, rubber, fuel, coal, and other materials. The media was censored and was only allowed to publish a positive spin on the news to "protect and boost morale." People were encouraged to purchase Liberty Bonds as a patriotic act, and rallies were held to promote them. The government was, by that point, weaned into the very fiber of everyday life in America.

Young men from Haskell reported to Funston Army Camp. From there, they were transferred to other military facilities all around the country, many carrying the virus with them. Conditions in these camps were deplorable, with little to no ventilation and severe overcrowding, providing tinder for the virus.

The constant recruitment and concentration of young men spread the virus throughout the US within weeks. As these men were shipped to France for further training and, later on, join the fight in the front lines, the virus quickly spread to Europe. Soon, England, France, and Germany had thousands of infected soldiers on their hands. As soldiers rotated home on leave, they took the virus with them to Europe's civilian populations. Soon, the virus hit the rest of the world through shipping lines and coaling stations.

This first wave of the virus spread quickly and was extremely contagious. Still, it was generally mild for the majority of those infected. Most were bed-ridden for several days with chills, fever, and fatigue. Doctors were concerned about its virulence. Even though modern medicine was still in its infancy, they were keenly aware of the possibility of a mutation that would make the virus much deadlier.

An enemy like none other

Viruses are weird beings. They are not alive, under the typical test for what science considers life, yet they are not entirely inert, either. They are not made of cells and are generally incapable of achieving homeostasis, that is, the capacity to reach and maintain a steady-state on their own. They do not reproduce, at least not by the usual methods employed by other species. Viruses highjack a cell and then use it to produce more copies of itself, so they technically replicate. Viruses also don't grow in size or complexity as they consume nutrients or as time progresses. When they replicate, new copies are made fully-formed.

It does compare to other forms of life in its objectives, though: the survival of its genes.

To do that, they must strike a delicate balance between contagiousness and deadliness. A virus that is not very contagious cannot spread. A virus that kills its hosts too quickly runs the risk of not having enough time to infect new hosts or even of running out of hosts.

At their core, viruses look to replicate, destroying host cells and wreaking havoc in the host's body in the process. And, it is perfectly designed to do just that. Nothing more, nothing less. Pure efficiency. No unneeded complexity. One of nature's masterpieces.

How do you kill a deadly enemy that's not alive in the first place? As opposed to bacteria, which can be killed by antibiotics, viruses are treated with antivirals designed to attack the replication process, not the virus itself. At most, antivirals slow the replication rate, allowing the immune system to mount its response without being overwhelmed. They are an imperfect solution, but they are all we have.

No antivirals were available in 1918.

Not your grandfather's medicine

It's more like your great-grandfather's medicine.

The early 20th Century was a transition period for medicine. When the Great Influenza hit, the development and practice of science-based medicine was still in its infancy and not yet generally used. In fact, there were places in the US where old methods, such as bloodletting, were still used.

But there were also many scientist doctors working to understand the disease, isolate the virus, and develop therapies, cures, or vaccines. These doctors, both civilian and military, led the charge, sometimes putting their lives on the line in their effort to control the pandemic and treat patients.

But really, all doctors could do was treat the symptoms and control a patient's fever as much as possible. Beyond that, the battle was fought inside the victim's body, mostly in the lungs. The only approach left to control the pandemic was prevention.

A nightmare scenario

In the fall of 1918, a new, deadlier strain of the virus hit. This one killed, and it did so within days of infection, and it killed in a gruesome manner.

The virus would lodge itself in the victim's lungs and begin wreaking havoc there. The virus played clever tricks on the immune system, inhibiting interferon release, usually the first line of defense against viral infections, triggering a disproportionate immune response. This battle destroyed the lungs and weakened the immune response against other stimuli, such as bacteria, which is why many developed bacterial pneumonia. The most severe cases lead to acute respiratory distress syndrome or ARDS.

Patients with ARDS that were treated in intensive care had mortality rates between 40% and 60%. Without intensive care, mortality rates reached 100%.

Symptoms included fever, painful headaches behind the eyes, swollen middle ear, renal failure, and loss of the sense of smell. As the disease progressed, cyanosis set in, where the patient's skin, lips, and tongue turned a deep tone of blue. Next, their nose, ears, and eyes began to bleed.

Doctors were pretty much hopeless. All they could do was watch, wait, and alleviate some of the symptoms with aspirin and morphine.

The new breed of scientific doctors all around the world worked frantically to develop a treatment or vaccine. Most believed, correctly, it was an airborne pathogen; that breathing it in could cause the disease. They did not know the exact details, like how long the virus could stay active in the air after it was exhaled. They did know that the lower the humidity, the longer the virus could survive in the air. They also knew it was a crowd disease that spread in large gatherings. They also believed, correctly again, that it could infect by hand-to-mouth contact.

However, this knowledge was of little use because only severe and rigorous isolation and quarantine could slow down the spread, and no scientist or public health official had the political power to take such action.

Throughout 1918, 47% of all deaths in the US were from influenza, hitting the young and healthy particularly hard. The virus depressed the average life expectancy in the US by more than ten years.

Ruthless actions, such as quarantines and shutdowns, could have slowed the spread. Doctors had noticed that the virus was getting weaker, so delaying its spread could save thousands of lives. There was precedent for such action. In 1916, several East Coast cities had dealt with a polio epidemic with strict measures. But the country was not at war, as it was in 1918.

WWI compounded the problems. The constant concentration and movement of hundreds of thousands of young soldiers across the country and then across the world was feeding fresh new hosts to the virus. Medical workers were getting sick at an alarming rate, which compounded the lack of trained medical staff, both doctors and nurses because many were off in Europe fighting the war. The military, which was conducting its own efforts to combat the pandemic, was instead hurting the civilian population by sucking up resources.

But what hurt the most was the lack of accurate information and strong leadership. President Woodrow Wilson never openly acknowledged or addressed the pandemic, which reduced trust and increased fear and uncertainty among the public. There was no coordinated response at the federal or state level. Instead, leadership came from local governments, and when even that was lacking, community leaders, such as wealthy businessmen.

Businesses shut down across the country and the world, not because of government mandates, but because so many people were getting sick, or were afraid of getting sick, that businesses did not have the manpower to operate.

By October, vaccines were appearing everywhere. Everyone claimed that their vaccine provided immunity and was safe, which was, of course, false, which only deepened mistrust among the public.

Hopelessness sets in

Everything doctors and community leaders did proved useless. The masks worn by millions were futile as designed. Vaccines didn't work, and all treatments and therapies also proved ineffective. Only preventing exposure to the virus could protect people. But the lockdowns were not severe enough. As author John Barry said, "in the end, the virus did its will around the world."

After the horrors of the second wave quieted down, complacency set in, and in the winter of 1918, a third wave hit. It was still deadly but not as terrible as the second wave.

When the third wave waned, the virus continued to kill millions of people around the world during 1919, with local outbreaks hitting here and there. Yet, even these comparatively less deadly outbreaks were destructive. It still killed, and it did so at a rate that would have categorized it as the most lethal influenza virus ever known.

In the Western world, the heaviest blows fell upon the young and those densely packed together, such as minors in schools and industrial workers and soldiers. Among these, the death rate reached to 6.21%.

In Guam, the virus killed almost 5% of the entire population in just a few weeks. In the Mexican state of Chiapas, 10% of the population died from the virus. It killed 7% of the entire people in much of Russia and Iran. In the Fiji Islands, 14% of the population died from the virus within a 16-day window between November 25 and December 10. India suffered massively, with a mortality rate of 9.61%. In the Indian subcontinent alone, estimates place the number of dead at close to 20 million, possibly more.

If the epidemic continues its mathematical rate of acceleration, civilization could easily disappear from the face of the earth within a few more weeks.

-- Victor Vaughan, head of the army's Division of Communicable Diseases writing in late 1918

Nature steps in

As mentioned, individual viruses highjack a cell and use it to make thousands of replicas, which then highjack more cells. Crucially, these replicas are not all exactly the same. Each one has tiny variations. The replicas whose variations made them less able to highjack cells and replicate don't survive. The ones whose variations made them more efficient are successful and make more replicas very similar to themselves. It's like a Darwinian contest at lightning speed.

This same process mutated the virus from a relatively mild strand when it made the jump from animal (most likely birds) to human, into the deadly killer of the second wave. But once that happened, once the virus made itself an efficient killer, the next mutations were, statistically, more likely to make it less deadly. If a virus is too efficient and kills its human host too quickly, it gets little chance to infect new humans. In other words, it does not help a virus's odds of survival to kill too efficiently.

And that's precisely what happened. The virus slowly mutated into a milder and milder form until, a few years later, it disappeared from the global stage.

Immunity also played a role in easing the pandemic. As the virus worked its way through the population, the vast majority of survivors developed some immunity to it. Local cycles of contagion usually lasted six to eight weeks, from the first case to the end of the regional pandemic. It left as suddenly and as violently as it arrived.

In the end, the total death toll from the pandemic is estimated to be between 21 to 100 million people, the actual figure most likely closer to 50 million. Considering the global population was 1.8 billion, the Great Influenza took 5% of the global population.

A similar death rate today would imply over 390 million deaths.

The Wake

The pandemic left lasting effects. Besides the human loss and suffering, on top of the millions of children left orphaned and the pain inflicted, the Great Influenza showed humanity how frail it is. At the same time, it proved how resilient it can be.

No. The Coronavirus pandemic is not the first time humanity faces such a challenge. It is not the first time we have taken measures that seem odd and carry a high cost. And no, this is not the worst we've had it as a race, which should give us some solace and strength at the same time. This, too, shall pass.

But I cannot close this note without stating what is now evident: The COVID-19 pandemic is not the last pandemic we will face. It is not even the worst pandemic we will face. The big one, the one that is comparable to the Great Influenza in its deadliness, is likely to be influenza again. Our old enemy, which last time arrived suddenly, bested us and left on its own terms, will be back. Its spread will be much, much worse, and its effects more far-reaching. And if it strikes when we lack leaders on the global and local stages, the results will be worse still.

Like any predator that goes after the weakest target and strikes when least expected, so too will influenza hit again. It will strike when we are least prepared, like in the middle of a global crisis, and it will do so without mercy.

But unlike most of nature's predators, which kill their prey without disturbing the equilibrium of its ecosystem, the influenza virus would not care to wipe humanity off the face of the earth. You see, for a virus to kill its host is really an unintended consequence of its success. If a virus kills its host too quickly, it hurts its chances of infecting other hosts, limiting its odds of survival.

Not so for influenza.

From the book: “Some diseases, such as measles, depend on civilization for their own existence. Since a single exposure to measles usually gives lifetime immunity, the measles virus cannot find enough susceptible individuals in small towns to survive. Without a new human generation to infect, the virus dies out. Epidemiologists have estimated that missiles require an unvaccinated population of at least half a million people, living in close contact, to continue to exist. The influenza virus is different. Since birds provide a natural home for it, influenza does not depend upon civilization. In terms of its own survival, it does not matter if humans exist or not.”

I had hoped to end this post on a positive note, but the truth is that, as painful as this pandemic has been, we should see it as a practice run for when the real test begins. The big one is still out there, and it will test us. It will test our medical and scientific knowledge. It will test our modern communications and supply networks. It will test our political and civilian leadership. But most of all, it will test our humanity. For the next pandemic, we will need to come together and fight it. No political squabbling, no conspiracy theories, no animosity between countries and factions. Because influenza won't care and will provide no quarter, and neither should we.

Here's to hoping we learn the right lessons.

On May 21, 2005, David Foster Wallace gave a commencement speech at Kenyon College titled "This Is Water." It begins with a short story about two fish:

There are these two young fish swimming along, and they happen to meet an older fish swimming the other way, who nods at them and says, "Morning, boys. How's the water?" And the two young fish swim on for a bit, and then eventually one of them looks over at the other and goes, "What the hell is water?"

The two young fish are clueless to the fact that they are floating in, and surrounded by, water. "The point of the fish story is merely that the most obvious, important realities are often the ones that are hardest to see and talk about.", Wallace said.

It turns out it's not just fish that are clueless about their surroundings.

Some things surround us, of which we are unaware. Important things. Consequential things. Yet, we don't see them.

There's one such thing, let's call it a system, that affects our lives in many ways, but few people know of its existence and the ones that do rarely understand it. Even fewer people talk about it. Yet, it's a system whose importance cannot be exaggerated.

This system is hidden in plain sight but likely escapes our attention because of its decentralized and complex nature. It influences everything from international trade and finance, to public policy and geopolitics. It has started - and stopped - wars. It has shaped governments and brought countries to their knees. Its effects are felt by everyone.

When it breaks, we realize something is wrong, but we're not exactly sure what. We are like fish in the water.

I'm talking about eurodollars.

What are eurodollars?

A eurodollar is simply a dollar on deposit outside the US. Period.

It does not have to be on deposit in Europe, just outside the US. A dollar on deposit in Japan is still a eurodollar.

And it's not just the dollar. There are many eurocurrencies. Any currency on deposit outside its home country is a eurocurrency. A Mexican peso on deposit in Australia is a europeso. A Swiss franc on deposit in Canada is a eurofranc. And yes, a euro on deposit in China is a euroeuro.

Eurodollars have nothing to do with the euro, the currency of the European Union. The name is a curious historical accident that only deepens the confusion, but we'll get to that later.

Who cares?

What happens in the eurodollar market affects everyone, either directly or indirectly. You may not know it, but the eurodollar market is all around you. Like fish swimming in the water, you may not realize it's there, but it affects you nonetheless.

How?

First, it's the oil that greases the global economy. The vast majority of trade is settled in dollars, and the eurodollar market is how most corporations and governments find dollars. Due to the quirks of what is called fractional reserve banking, a bank that receives a dollar on deposit can lend a fraction of that dollar to a third party. So the eurodollar market is, in essence, a funding market. Without it, international trade and commerce would grind to a halt. Today's vast, extended and complex supply chains would suffer, and, consequently, consumers around the world would face shortages in everything from food and medicine to cars and computer equipment.

Second, it's everywhere and nowhere at the same time. It's a decentralized market. Any bank outside the US that decides to take dollar deposits and provide dollar funding is part of the market. Any company or government that chooses to incur dollar funding outside the US is part of the market.

Third, it is not subject to regulation. The US Treasury and the Federal Reserve are the only entities responsible for printing and regulating the US dollar, but their jurisdiction and responsibilities end at the US border. There's no one set of rules that all participants must observe. An assortment of practices has developed over time, from the bottom up. In essence, each participant decides how to engage with the market and under what guidelines, limited only by its domestic banking and financial regulations. When trouble arises, there's no central authority to bring order to the market.

Every time a problem arises, the Fed must decide whether to leave the market or intervene, but it is never under the obligation to help correct imbalances. However, this power to step in with unlimited dollar reserves has proven to be a powerful geopolitical tool for the US government, just as influential, if not more so, than its military power.

Finally, it's big. To say that the eurodollar market is enormous is an understatement. But it's also true that, due to its decentralized and unregulated nature, nobody knows its exact size. Some estimates say that it's larger than the US domestic dollar market, or 18.4 trillion dollars (using M2 money supply as a proxy). And that's just the eurodollar. Again, it's big.

How did this beast come about?

The origins of the eurodollar are shrouded in mystery.

It all began after World War II.

In 1945 Europe and other parts of the world were devastated. The war had destroyed almost all its infrastructure, from roads, bridges, and tunnels, to factories, universities, government buildings, and even civilian housing.

The population itself was also devastated. Sixty million people had died in the war, around twenty million of which were European. The majority of those deaths were young men of fighting age, leaving a sharp demographic dent.

On the other hand, the US had suffered mostly military casualties, with a few civilians deaths on board transatlantic vessels. But the country's infrastructure lay intact. New York had already surpassed London as the world's financial center, with the US being net creditor since World War I.

Something needed to be done to get Europe back on its feet.

Even before the war ended, in July 1944, delegates from the 44 allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, to agree on a new financial and monetary order. Among other things, the attendees agreed that the US dollar would be backed by, and convertible to, gold at a rate of $35 per ounce. The other countries would, in turn, hold their reserves in, and fix their exchange rate to, the US dollar. From that point on, the US dollar would be the world's reserve currency, and a significant portion of the world's countries entered into a de facto gold standard.

Bretton Woods also created other mechanisms and institutions, such as the IMF and the International Bank for Reconstruction and Development (now part of the World Bank), to help correct imbalances between countries. An international operating system was in place.

The Soviet Union declined to ratify the agreement, arguing that this gave undue power to the US and that the new institutions were nothing more than "branches of Wall Street."

A few years after the war had ended, the US implemented the European Recovery Program — better knows as the Marshall Plan. This initiative transferred $12 billion — about $129 billion in 2020 dollars — to European countries for reconstruction and economic recovery. The goal of the plan was to help Europe rebuild, return to prosperity and, importantly, stop the spread of communism.

These treaties and initiatives had several consequences:

First, demand for US dollars increased as governments worldwide began accumulating reserves to back their local currencies.

Second, the use of US dollars increased as the funds from the Marshal Plan moved through European economies.

Third, as European governments and companies found themselves flush with US dollars, they parked those dollars in US Treasury bonds, in effect, lending that money back to the US.

Meet Eurobank

In 1915, the Russian Moscow Narodny Bank, or MNB for short, set up a subsidiary branch in London to finance trade between Russia and the UK. After the Russian revolution and subsequent nationalization of banks by the communist government, the London branch managers decided to protect their operation by incorporating it as a British legal entity. In October 1919, they established the Moscow Narodny Bank Limited.

The bank continued to operate, financing trade between the Soviet Union and the UK and within the counties of the communist block.

In 1956, after violently suppressing revolts in Hungary, the Soviet Union feared that the US government would confiscate its dollars on deposits at US banks as retaliation. They decided to transfer their dollar holdings to MNB Limited, and then have that bank deposit them in US financial institutions. This move barred the US from confiscating the funds because they effectively belonged to MNB Limited, a British bank.

However, not all the funds transferred to MNB Limited made their way to US banks. A portion was transferred to another Soviet bank in Paris, called Banque Commercial pour l'Europe du Nord, otherwise known in the industry as Eurobank. Eurobank took some of those dollars and lent them to a third party, effectively creating the first eurodollars.

The name eurodollar stuck because of the bank's nickname and its telex address, "euro."

A Parallel Currency

The use of eurodollars to finance international trade took off in the 1960s because it was, in essence, a parallel currency.

Since gold backed the US dollar, trade and current account imbalances were settled by shipping bullion between trading partners. Since eurodollar activity took place outside this legal and regulatory framework, it was free from the need to fix imbalances with actual gold. It was, in effect, a ledger currency. You might even say it was the first digital currency because it existed primarily within the accounting books of participating banks and corporations.

The new systems worked well while Europe and Japan rebuilt their economies. As these economies recovered and grew, they began to compete with the US. From 1950 to 1969, the US's share of world economic output fell from 35% to 27%.

Meanwhile, the US was dealing with problems of its own. It faced a balance of payments deficit, inflation and ballooning public debt, which had been growing steadily, mostly due to the war in Vietnam. The dollar was losing the confidence of the US's trading partners.

Soon, grumblings began.

The French did not like the Bretton Woods accord from the beginning, calling it "America's exorbitant privilege." American economist Barry Eichengreen summarized international sentiment when he said: "It costs only a few cents for the Bureau of Engraving and Printing to produce a $100 bill, but other countries had to pony up $100 of actual goods in order to obtain one". As the dollar's value got more and more misaligned, America's trading partners began looking for an alternative.

In 1965, French President Charles de Gaulle announced his country's intention to exchange its dollar reserves for gold at the official rate of $35 per ounce. Other nations followed suit. A run on the dollar had begun.

By 1966, US gold reserves had fallen to $13.2 billion, while its trading partners' had increased to $14 billion. Of those reserves, only $3.2 billion were available to support foreign dollar holdings since the rest covered domestic holdings.

In May 1971, West Germany left the Bretton Woods system altogether and allowed its currency to float freely. Soon Switzerland left the accord. As American historian William Glen Grey wrote in 2007:

The Bretton Woods agreements were based upon two fundamental premises: the provision [...] that the dollar was fixed to the price of gold at a ratio of $35 per ounce, and the requirement that governments maintain a fixed and agreed parity vis-à-vis the dollar (i.e., gold). The free convertibility of dollars into gold, and the ready exchange of other currencies into dollars, lent predictability to international commercial transactions and facilitated a mind-boggling of trade in the first two post-war decades. Unfortunately, official parities did not always represent a realistic exchange rate between two countries. Inflation, budget deficits, and trade imbalances undermined the perceived value of many currencies; conversely, those few counties with low inflation and tight fiscal discipline -- such as Germany and Switzerland -- saw the effective value of their currencies rise.

As gold redemption by foreign governments continued, the US Congress recommended the Nixon administration to devalue the dollar against gold. Instead, Nixon decided to respond with more drastic actions. First, suspend dollar convertibility to gold; second, impose a 90-day freeze on wages and prices in an attempt to control inflation; finally, set a 10% tariff on all imports to make American products more attractive in the domestic market.

The first of Nixon's three actions, known as the "closing of the window," ended the Bretton Woods system and the gold exchange standard. Previously, all currencies derived their value from the dollar, and the dollar derived its value from gold. Now the crucial link to gold had been severed, and all currencies became fiat currencies. Soon after, all currencies would trade freely against one another, bringing volatility and complexity to world markets.

But the US didn't care. It was now free from its gold reserve chains. It could freely print dollars without having to worry about keeping enough gold reserves to cover each one. When debts came due, it could just print the money and pay.

But there was a problem. Foreign creditors weren't as enthusiastic about holding US debt now that they were getting repaid in paper money backed by nothing. Also, what was the point of keeping large amounts of dollar reserves?

The Nixon administration worried that demand for dollars would fall and that the US would lose its privileged position as the sole purveyor of the world's reserve currency.

Let's Make a Deal

In 1973, Nixon's Secretary of State, Henry Kissinger, negotiated a sweet deal with the House of Saud: Saudi Arabia would henceforth price all its oil sales exclusively in US dollars, and invest surplus dollars in US Treasuries. In return, the US would sell arms and military equipment and assured protection for the Kingdom from its foes, including Israel. Soon, other OPERC members followed suit.

It was a masterstroke for the US.

From that point on, anyone who needed to buy oil first had to exchange domestic currency for US dollars, which meant an endless demand for dollars. Since oil-producing countries were investing their excess dollars into US Treasuries, this deal also ensured demand for its debt. The US could theoretically acquire oil using dollars that it could print into existence.

More than anything, this deal helped secure the dollar's role as the world's international trade currency. It ensured that everyone would need dollars at some point. It all but guaranteed sufficient demand for its debt and securities, and it safeguarded the dollar's place as the world reserve currency, even if it was no longer backed by gold.

Today the dollar still is the currency of trade. All commodities are quoted and paid in US dollars. America's financial system is the deepest and most sophisticated in the world, and most international transactions involve the use of the dollar, even if no US parties are involved. If a Japanese company wishes to invest in Mexico, its local bank is unlikely to hold a lot of pesos; it is likely, however, to hold a lot of dollars, which the company can acquire and exchange for pesos with a Mexican bank. The US dollar, and its bastard brother, the eurodollar, are an integral part of the world's economic operating system.

Limitless Growth

As mentioned earlier, the eurodollar market is a funding market. Non-US banks provide dollar-denominated loans to individuals, governments, and corporations worldwide, subject only to their local regulations. These regulations can vary widely from country to country, with no universal framework for what is, in fact, a global market.

Why would a non-US party want a dollar loan?

First, many manufacturers need dollars to acquire commodities or US-made components. Even goods manufactured outside the US are often prices and settled in dollars.

Second, interest rates on dollar-denominated loans are usually lower than those on local-currency debt. Of course, the advantages of lower rates only hold if the exchange rate between the local currency and the dollar remains relatively stable. Even if it doesn't, there are tools to hedge currency risk.

Finally, many countries' financial system lacks the capital base to provide the funding required to provide these loans. Often, dollar-denominated loans are all that is available, even if it's at a high rate of interest compared to US rates.

And where do these dollars come from?

Initially, they came from the US in the form of investments and trade. For example, when a US company purchases goods or services from an Australian company, the Australian company will deposit all or part of those dollars at a bank. Wherever that bank maybe, that dollar deposit sets off a chain of dollar creation that increases the supply of dollars.

Fractional Reserve Banking

The vast majority of baking systems work on a fractional reserve system, where banks are required only to hold a fraction of the money their customer deposit. That amount is called the reserve requirement and is usually set by the local central bank. Banks are free to invest the rest of the deposit, mostly in loans.

In a fractional reserve system, banks create money when they make a loan. Although in today's fiat currency world, the definition of money is open for debate, let's at least agree that they create currency, be it dollars, euros or yen, when they lend.

Most people think that only central banks can create money. That's true in part. Central banks are the only ones that can print bills and coins, but their real power comes from their ability to influence credit, albeit indirectly. Credit is the more critical variable because it's what pumps currency into the economy. Central banks influence credit by setting interest rates and reserve requirements, as well as other policy tools.

Central banks can also create ledger money, that is, money that only exists in digital form. Theoretically, there's no limit to how much money they can create, but the newly created money, by itself, does nothing. The central bank needs to put that money into circulation by placing it in the hands of economic actors. The most common way to do this is for the central bank to buy securities in the open market, which usually means buying US Treasury bills, notes or bonds. Since the Great Financial Crisis, however, this catalog has expanded to include mortgage-backed securities and, recently, corporate bonds.

When the central bank buys securities in the open market, the sellers of those securities, special dealer banks, receive reserves on deposit at the Fed in return. In other words, they don't receive cash they can freely spend but reserves that increase their capacity to lend.

If the banks decide to lend, that ledger money created by the Fed becomes actual currency, new money that can work its way through the economy.

When an individual or an organization takes on a new loan, new money is created. The debtor can do whatever it wants with that money: invest in securities, spend it on useless junk, or invest it in property, plant and equipment. Whatever the debtor decides to do, most of that cash will likely end up as a deposit at another bank sooner or later. This new deposit increases the reserves, and thus, the lending capacity of the receiving bank, which can, in turn, provide new loans, and the process repeats.

Through this mechanism, one single deposit can create many times more cash. This is known as the multiplier effect.

The money on deposit at all the banks, plus bills and coins in circulation, is called the monetary base, and central banks aim to influence it indirectly by buying or selling securities.

Why would the central bank want to do this?

To help stimulate economic activity during hard times, such as a recession, or to cool it down during a boom. Expanding credit increases demand, reducing credit trims demand.

Fractional Reserves at Work

Let's assume the reserve requirement is 10%. Let's also assume the Federal Reserve wants to inject more cash to kickstart the economy. It creates $100,000 out of thin air with a few clicks. It then goes to the open market and buys $100,000-worth of US Treasuries, for the sake of simplicity, from a single dealer bank.

That dealer bank sees its reserves increase by $100,000. Given the 10% reserve requirement, it must keep $10,000 in reserve, but it is free to lend $90,000. When the dealer bank makes a loan for that amount, it literally creates the money. Let's assume the debtor decides to take the cash and deposits it into his checking account at Bank A.

Banks A sees its reserve increase by $90,000 with the new deposit. Since the reserve requirement is 10%, it is only obligated to keep $9,000 to back-up the deposit and is free to lend $81,000 to a new customer.

Bank A then provides an $81,000 loan to a corporate client. What does Bank A do when the loan is approved and signed? It deposits the money at the borrower's account at Bank B.

Banks B sees its reserve increase with the new $81,000 deposit. Since the reserve requirement is 10%, it is only obligated to keep $8,100 to back-up the deposit and is free to lend $72,900 to a new customer.

Bank B decides to provide a $72,900 loan to another client to acquire a house. What does Bank B do when the loan is approved and signed? It deposits the money at the borrower's account at Bank C.

Banks C sees its reserve increase with the new $72,900 deposit. Since the reserve requirement is 10%, it is only obligated to keep $7,290 to back-up the deposit and is free to lend $65,610 to a new customer.

Bank C decides to provide a $65,610 loan to another corporate client. What does Bank C do when the loan is approved and signed? It deposits the money at the borrower's account at Bank D.

Theoretically, this process could go on forever because the amounts get smaller and smaller but never actually reach zero. In practice, the process does not go on forever, of course. The above is a gross simplification because there are many factors at play, but the chain stops when the amounts become negligible.

From a $100,000 increase in new "ledger money" created by the Fed and put into reserves through the purchase of securities, an operation otherwise known as Quantitative Easing, $309,510 in new money was "created" in loans. $90,000 loan from the dealer bank + $81,000 loan from Bank A + $72,900 loan from Bank B + 65,610 loan from Bank C. And that's just from four iterations.

There's a way to estimate the maximum impact a $100,000 expansion of the monetary base can have. Simply divide the amount of expansion by the reserve requirement rate: $100,000 / 10% = $1,000,000! Note, that's the maximum impact, but things aren't so simple in real life.

Notice that, once the central bank creates ledger money and puts it into reserves, it's the commercial banks that control credit expansion. Banks never react linearly to increases in reserves; never does an increase in deposits lead to a proportional increase in lending. That decision depends on each bank's reserve policy, risk appetite and even demand for loans.

Once the money enters the banking system, it's out of the central bank's control. It can only nudge banks to increase -- or decrease -- lending, but it can't order them to do so.

Fractional reserve banking is a fragile system. If all a bank's customers want their deposits back at the same time, it will not have the money on hand. This is called a run on the bank, and it can prove ruinous.

Runs on banks were much more common in the late 19th and early 20th centuries, and it's what deepened the Great Depression: as the stock market crashed and companies failed, people worried that the banks that had lent money to those same companies might fail, so they redeemed their deposits. Since the banks did not have the money, they failed. Since banks lend money to other banks, one bank failing can create a domino effect and provoke more bank failures. A loss of confidence in the banking system is what made an economic depression into the Great Depression.

Banks play a crucial role in the economy, the most important of which is providing loans, but they also bring other essential services such as taking deposits, keeping custody of assets and facilitating payments. Without these services, the economy grinds to a halt.

To avoid a repeat of the Great Depression, Congress created the Federal Deposit Insurance Corporation in 1933. Now, deposits are not only backed-up by each bank's reserves, but by the FDIC, which will make depositors whole, up to $250,000 per account, in case of a bank failure. Deposit insurance sounds great, but it creates a moral hazard in that banks now feel encouraged to take on more risk because Uncle Sam has them covered. And, in case you are wondering, the Federal Reserve set the reserve requirement to zero on March 26, 2020, to encourage banks to lend in response to the economic crisis. Yep. Zero.

The same multiplying mechanism from fractional reserve banking applies to eurocurrencies. A single dollar-deposit outside the US allows the receiving bank to lend a fraction of those dollars to another client. And on the chain goes, with little oversight or input from the Fed.

Drunk Dollars

So, where's the problem?

To a great extent, this system workes great, particularly in an expanding and globalizing economy. But the truth is that it's just one big experiment. There has never been another point in history where *all* money is fiat money. Policymakers are figuring things out as they go along. And the fractional reserve system amplifies everything.

The problem is that a considerable chunk of this complex and experimental system, the eurodollar market, is a giant Pandora's Box: once opened, it took on a life of its own; it morphed, grew and mutated over time, to the point where it is now massive and unpredictable.

Brent Johnson of Santiago Capital gave an excellent analogy (which I altered slightly): imagine a bunch of 18-year-olds in California. They can't drink because the minimum drinking age in the state is 21, so what do they do? They drive south of the border to Tijuana, Mexico, where the drinking age is 18. They buy booze and get drunk. They are still the same kids, except they are now drunk, yet they are not breaking any laws.

That, in a nutshell, is what the eurodollar is, drunk dollars. And like any drunk, it acts a little crazy. And like most drunks, it runs into trouble from time to time. Occasionally, it runs into serious trouble.

Fractional reserve banking works fine when credit is expanding. As long as there's a healthy demand for credit and that demand comes from good debtors, the banks will lend. But when the economy enters a recession and nudges the system into reverse, the entire mechanism works backward and subtracts credit from the marketplace.

When this happens in the US, such as the GFC in 2008, the Fed, the Department of the Treasury and other government agencies intervene to bring order to the banking system and keep the public's confidence. It doesn't matter if you agree with bank bailouts or not; the point is if the banking system is not functioning correctly, nothing else does, including supply chains.

In the eurodollar market, there are no adults nearby to tell the drunk dollars to stop boozing when they've had too much. When someone in the eurocurrency market runs into trouble, it can throw the whole system into reverse, sucking dollars out of these economies. When there aren't enough dollars in a particular country to satisfy demand, both for commerce and debt payment, local economic actors panic and begin buying dollars in the open market, devaluing their country's currency. Local central banks can provide some relief by using their dollar reserves, but history shows that no amount of reserves can stop a currency from repricing once panic sets it.

Who do these counties run to for help?

Well, the only country that can print dollars out of thin air: the US.

Of course, the Fed and the Treasury are under no obligation to provide liquidity during these periods of stress. The IMF can also intervene, but one could argue that the IMF is under US control, which gives the US an incredible amount of power.

No Good Benchmark

The eurocurrency market is tough to follow. Like physicists studying quarks: they can't observe them directly, but they can deduce their existence and behavior by observing their interaction with other particles. So it is with the eurocurrencies. There's no index to watch, no indicator to monitor and no one way to follow it.

For years, the London Interbank Offer Rate, or LIBOR, has been an imperfect proxy.

As the name implies, it is the rate at which London banks are willing to lend to each other for a given term in a given currency; the most important of which is the 3-month USD LIBOR. The vast majority of debt is priced off this benchmark, which — big surprise — can be easily manipulated by participating banks.

But stresses in the eurocurrency market don't always show in LIBOR. For that, you have to watch, for each country, the currency exchange rate, the central bank's reserves, interest rates and many other indicators for clues of dollar shortages.

Yet Another Paradox

Belgian-American economist Robert Triffin observed, since 1959, that having the world's reserve currency is not all good. Later dubbed Triffin's Paradox, he predicted that eventually, short-term domestic needs would conflict with external requirements.

Whichever country issues the world with the reserve currency must supply the rest of the world with that currency to fulfill world demand, which can lead to asymmetries in the balance of payments. In other words, the US would have to supply more and more dollars to the rest of the world to maintain liquidity, to the point where its gold reserves would no be sufficient to cover all the dollars in circulation. As this continued, other countries would question the dollar's convertibility into gold.

In other words, the US would not be able to maintain liquidity and confidence in the dollar simultaneously.

He was right because that's exactly what led to the Nixon Shock in 1971.

Of course, Triffin first described this dilemma when the dollar was still backed by gold. Regardless, this paradox still applies today. If the US continues to run a balance of payments deficit, specifically, a current account deficit, confidence in the dollar erodes abroad. To correct these imbalances, the US would have to reverse the current account deficit, sucking dollars from the rest of the word, creating a dollar shortage and likely sparking a crisis abroad.

These conflicting interests have happened before, the last time during the Great Financial Crisis, and are likely happening again today.

The current administration has prioritized reducing trade deficits with its trading partners and bringing investment and manufacturing back to the US. This means the US is now providing fewer and fewer dollars to the rest of the world, just as it needs them more and more.

Some may not care about what happens abroad, but that is a mistake. It does the US no good to have trading partners in disarray. And in today's world of complex and global supply chains, keeping the dollars flowing is also a matter of national interest.

So, what happens next?

Nobody Knows What's Next

The world is now hooked on credit, especially the US. Over the past two decades, credit expansion fueled economic growth, and any problems brought on by overleverage were solved with more debt. It's like handing a drink to someone who is already stupid drunk. It may make him happy in the short run, but it won't do him any good.

It's not that policymakers don't know what they are doing. They understand that any credit contraction would be painful for the real economy, not just markets and financial institutions. It would destroy wealth and jobs, and would likely have social and political implications. Troubled credit markets can destroy demand and supply. Policymakers prefer to kick the can down the road and have someone else deal with the fallout.

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner, as the result of a voluntary abandonment of further credit expansion, or later, as a final and total catastrophe of the currency system involved.

— Ludwig von Mises

As author James Rickards said, “just because something is inevitable does not mean it's imminent”. Trouble is brewing in the eurocurrency markets, and there will be a reckoning sooner or later. Most people look at the stock market to get a sense of the mood of the economy. But if you want to get a real sense of what's coming, look at the eurocurrency markets.

Keeping a margin of safety has never been more critical. Run your finances, your investments and your business more conservatively. Keep some dry powder to take advantage of opportunities.

Fortunes will be destroyed and made in the coming years.

There's an often-told story of a young college graduate who got a job as a stockbroker at a regional broker-dealer in the suburbs of Vancouver. The financial industry is infamous for its cut-throat competition, and the new hire had very little to make him stand out from his peers. Nobody expected great things from him.

But something strange happened. The newbie began to bring in new clients and, with them, new business for the firm. He was directly responsible for generating tens of thousands of dollars in revenue, then hundreds of thousands, then millions of dollars. Within eighteen months, Trent Dyrsmid made over five million dollars in revenue for the firm, and he was earning the equivalent of $125,000. Not too long after that, he was hired by a prominent and more influential firm.

How did he do it? Did Trent have some exceptional talent as a salesman? Did he have a knack for picking stocks? Was he a financial genius after all?

Maybe he did have a unique talent, but that's not what led to his quick success in a notoriously difficult job.

What set him apart is that he developed a process and stuck to it, almost obsessively. It was a brilliantly simple is process that was likely to get him the results he wanted, and he executed it with rigor. Every day. Without fail.

Trent knew that to bring in new customers, he needed to cold-call them. He also knew that most cold-calls from stockbrokers end in rejection, which meant that his success rate would be low. Constant rejection and low hit rates will demoralize anyone, so he developed a simple process to overcome these obstacles:

He set two glass jars on his desk. One was filled with 120 paper clips, while the other was empty. Each day he would begin making cold calls, and, after each one, regardless of its outcome, he would take a paper clip from the full jar and transfer it to the empty one. As the day progressed and he made more calls, the full jar began to empty, and the empty jar began to fill. He would not leave the office until all 120 paper clips had changed jar.

He did this day in and day out. As time passed, his selling skills improved. I don't know his success rate, but it is not as important because he made 120 calls a day, 600 calls a week, and 2,400 calls every month. Even if he only got one new client out every 100 calls, he would get 24 new clients per month. And his success rate likely improved over time to more than 1 out of 100, compounding his results.

Trent could have done things quite differently. He could have gone with conventional wisdom and set goals. For example, Trent could have decided that he needed twenty new customers within 90 days, either choosing that number arbitrarily or because that is what the best salesmen did when they were rookies. He then could have compiled a list of friends and acquaintances that he might win over as clients and then called each one, hoping for the best. That's what most people do, and this is why most people fail.

You see, Trent was a genius of sorts. Instead of being "goal-oriented," he decided to focus on the process.

By focusing on the process, he concentrated on things that were under his control. He could not control how many new clients he got every day, but he could control how many calls he made. He couldn't control his hit rate, be he could tweak and adjust his sales pitch and improve it as he gained experience. The results followed as an almost natural consequence of his process.

Never mind the experts

Management gurus, text-book writers, and "experts" want us to focus on goals. But not just any goal will do. They will pontificate about how there are good goals, and there are bad goals.

Good goals are ambitious yet possible. They are precise, quantifiable, and measurable. They are easy to communicate to others and leave no room for ambiguity or interpretation. Good goals are binary: you either reach them by a specific date, or you don't.

Bad goals, as you might expect, are the opposite. Unambitious or impossible goals are not sound. Unquantifiable goals are downright stupid. And goals that are not easy to communicate in an elevator pitch are a waste of time. And of course, if you don't have any goals, you're a loser.

None of this is correct.

When the measure of something becomes a target, it ceases to be a good measure.

-- Goodhart's Law

Quantifiable goals are called hard goals. Not hard as in difficult, but hard as in solid. Non-quantifiable goals are called soft goals. Both are useful in the right context.

Bet first, we must acknowledge that goals, especially hard goals, have a dark side, even more so if they are linked to pay and incentives.

Goals can be gamed. If monetary incentives are tied to reaching a goal, cheating is likely to take place. People and organizations will likely focus their energy and attention on maximizing their bonus and self-interests, to the detriment of all else.

Hard goals must have constraints, rules, and conditions to limit, but never eliminate, cheating. So your easy-to-communicate goal now must be followed by a bunch of legalese. Not as sexy and as motivating as the experts led us to believe.

Soft goals are derided by exerts precisely because of their ambiguity. They can mean different things to different people and lead to inconsistent behaviors.

Let's get something straight: the whole point of having a goal is to modify behavior, get people in an organization working towards a common objective, and focus on the activities to help them reach their objective.

Then why not focus on the behavior itself, instead?

Focus on the process

By focusing on the process, you concentrate on the behavior you are trying to influence in the first place. By focusing on the process, you emphasize the tasks and activities that are needed to reach your goal. In other words, you focus on what is under your control.

How many new clients you win every month is not under your control. How many cold calls you make to potential clients is. How you pitch to them and what you offer them is also under your control. How you serve new and existing customers is also very much under your control. Why not focus on those tasks? By focusing on each of these processes, the number of calls you make, refining your sales pitch and serving clients, you reduce frustration and enter a virtuous circle of trial and error. You create a constant feedback loop, which helps you improve.

This approach is much more resilient than a goal-oriented strategy because it allows an organization to adapt and make changes when warranted.

It helps to have goals. But you definitely can get away with soft goals if you are going to focus on processes.

Why soft goals?

Because what you want is to set the direction you want to go and then design and execute processes to take you there. Regardless of what the experts say, you can tell when a soft goal is reached or if you are moving in the right direction.

When you want to build a ship, do not begin by gathering wood, cutting boards, and distributing work, but rather awaken within men the desire for the vast and endless sea.

-- Antoine De Sait-Exupery

Goals should inspire and direct, but execution is king. Processes are where shit gets done.

So get to it

This isn't ivory tower theory. This is practical advice you can put to use in business, investing and life.

Consider diet and weight loss. Most people set a hard goal with a date attached: lose 40 pounds by summer. What do you do next? Starve near-to-death; take dangerous pills; suck the joy out of your life. If you are lucky and have Spartan-like disciple, you will reach your goal by summer.

But what's likely to happen next? Some prize-eating, some reward-binging and some weight-gaining. All that pain and effort for short-lived results sounds like a Pyrrhic victory. You obsessed over a quantifiable objective and reached it with unhealthy and unsustainable behavior.

What if you set a soft goal? What if you said you want a healthy lifestyle?

Experts and business gurus will cringe because it is not quantifiable. They'll say it's vague and progress can't be measured. Yes. It's all true, but it's also irrelevant.

Not everything that can be counted counts, and not everything that counts can be counted.

-- Albert Einstein

Any mature adult is smart enough to know what a healthy lifestyle means, even if you can't put it on a spreadsheet. In any case, most hard goals are set arbitrarily anyway. Having a hard number makes them feel more precise and scientific.

Your focus can now shift to designing and implementing healthy behaviors, which will later turn into habits, which will, in turn, lead to a healthy weight.

Do you drink a lot of soda? Don't cut it all off at once; instead, cut it out one day a week. Then two, and so on. Are you a couch potato? Do the 7-minute exercise routine every day and work your way up to hitting the gym four times a week. But focus on executing these small steps and add to them over time. Forget your weight. Your weight is mostly a product of your choices, so losing weight will be a natural result of your new processes.

But here's the secret: you must obsess over execution. Whatever steps you decide to take, follow them religiously. Forget everything else. As you progress along, you'll begin to notice and improve other aspects of your life, such as your environment. Are you trying to eat less candy? Get rid of the bowl of jelly beans. Are you trying to eat more vegetables? Change the store where you do your groceries and learn new recipes.

Your metabolism? That's outside your control. Your choices and habits? Those are all on you.

Get to work

Good processes can sometimes lead to bad outcomes. But it's about consistency. Good processes are more likely to lead to good outcomes, and if you execute on your processes over a long time, better results are all but guaranteed.

Remember, Trent didn't focus on bringing an X number of clients every month. That would have just frustrated him. Instead, he set the soft goal of bringing in new clients for his firm and then focused on the process: cold call 120 people every day. He spent his time and energy on executing the strategy of cold calling.

So to hell with management experts. Set a soft goal. Design a process and obsess over it. Repeat it. Tweak it. Improve it. The results will follow.

Buy a cheap calendar and mark a red X on every day you executed. Or copy Trent and place your jars on your desk and make sure to shift the paper clips every day.

Due to the ongoing pandemic, many companies have made some of their data available to the public.  These resources can help us gauge both the spread of the pandemic and its impact on economic activity.  

Some of these sources are more useful and reliable than others, but they are all interesting.

Coronavirus Trackers

World-O-Meter

This website provides counters and tracks different statistics, including population, health data, and the economy, among others. It has an entire section devoted to tracking the pandemic’s evolution, which is organized by country.

​Johns Hopkins University

A map and dashboard tracking the evolution of the pandemic, from the Johns Hopkins University of Medicine. I’ve found that this is one of the most often cited resources by the media.

Mobility and Traffic

TomTom Traffic Index

GPS maker TomTom has developed traffic indices for 416 cities across 57 countries on 6 continents. Each of these indices ranks urban congestion worldwide compared to the previous year’s congestion. It’s a great way to gauge how much people are starting to move around within a certain city.

Apple Mobility Trends

This is a good resource based on anonymized data from users of Apple Maps. It breaks down GPS guidance requests by three modes of transportation: walking, driving, or public transport. You can drill down by country, state, and city and export the data to a CSV file.

Citymapper

Citymapper is a public transit app and mapping service. It integrates data for all urban modes of transport, from walking and cycling to driving, emphasizing public transport.  Since it is available for Apple and Android devices, it offers data from a wide variety of users.

Google Community Mobility Report

This resource is very similar to Apple’s but based on Google Maps users.  It offers practically the same level of detail and also allows you to download data.

WeatherBug Live Cams

Sometimes the best way to get a sense of activity is by taking an actual peek into cities and towns.  You can do that with traffic cameras.  There are many sites for this, but the one I find the most comprehensive is WeatherBug.

Flight and Travel

FlightRadar24 Statistics

Stockholm-based FlightRadar24 posts daily stats on the volume of total and commercial flights, with 7-day moving averages.  They have an awesome app for tracking flights in real-time, which I can’t recommend enough for any aviation nerd like myself.  Great resource!

TSA Checkpoint Travel Numbers

The US Transportation Security Administration (TSA) posts daily stats on how many passengers they screen at security checkpoints at airports throughout the country.  Its format is not the best, but the data is there, and it’s a terrific view of the state of air passenger traffic.

Kayak Flight Search Trends

Kayak is a travel agency and metasearch engine owned and operated by bookings.com, the largest online travel agency globally.  It publishes data on the volume of searches and the most popular destinations. It may be a good leading indicator of future travel demand.

Travel Restrictions Map from Kayak

Another resource from kayak.com with a map showing each country's entry restrictions due to the pandemic. This may be useful to consult if you must travel and see how each country is restricting foreign travel.

Restaurants and Retail

OpenTable State of the Restaurant Industry Report

OpenTable shares data on restaurant reservations made through its platform. It gathers data from its community of nearly 6,000 restaurants in the US, Canada, Mexico, Australia, Germany, the UK, and Ireland.

SafeGraph Foot Traffic Report

SafeGraph is an aggregator of foot traffic to six million point-of-interest in the US. Data is organized by categories, brands, and regions and shows comparables to 2019 for context.

Placer Retail Impact Tracker

Placer.ai is a start-up that provides businesses with location and foot-traffic analysis tools. It shares its vast data in a user-friendly platform that lets you drill down by brand and compare its foot-traffic to Coronavirus trends.  Traffic data is can also be broken up by specific regions of the US.

Womply Local Business Research

Womply aggregates data from different sources to help small businesses.  They share research reports and data for specific retail sectors or regions in the US.

Yelp Economic Average

The popular consumer review site developed the Yelp Economic Average as a benchmark to gauge economic activity in different US regions.  Instead of a dashboard, Yelp produces periodic written reports with a lot of data, analysis, and commentary.

Energy Consumption

Power Consumption in Europe

Power consumption is one of the most transparent and reliable indicators of economic activity. The European Network of Transportation System Operators, or ENTSO-E, represents 43 electricity transmission system operators from 36 counties in Europe.  It shares power demand from all its constituent countries (not are all EU members).

US Power Consumption

The US Energy Information Administration shares data on energy demand on a national and regional level. The data is also segregated by energy source. This serves as a proxy for industrial and economic activity.

Ecommerce

SimilarWeb Coronavirus Hub

SimilarWeb provides businesses with website traffic data and other tools. They set up a dashboard with data related to the ongoing pandemic, such as keyword searches and traffic to major websites, such as the World Health Organization or the CDC, and commercial sites from different sectors, such as travel or retail.

Klaviyo Ecommerce Pulse

Klaviyo is a software platform for digital marketing and ecommerce. Here they publish aggregated data for ecommerce sales, not just online traffic.  Data can be broken down by retail category or region.

Shiphero Ecommerce Trends

Shiphero is a platform for warehouse management and third-party ecommerce shipment and fulfillment. They set up a simple dashboard with data from its 1,000+ merchants who sell on Shopify or Amazon Marketplace.  Together, these merchants represent over $2 billion in annual sales.

Trade and Industrial Activity

AAR Rail Traffic Data

Rail traffic is a great indicator of broad economic activity.  From the Association of American Railroads, this site provides data on rail traffic in the US, Canada, and Mexico. They publish a sample of weekly, monthly, and annual information on freight rail traffic in interactive charts.

Transborder Freight Data from DOT

The Bureau of Transportation Statistics shares data about freight coming in to and out of the US through various channels.  The data can be drilled down to freight category, origin, and destination.

US Port Activity

WorldCity Trade Solutions provides a heatmap and various resources on US trade with the rest of the world. On this site, they share trade volume going through ports and airports throughout the country.

Housing

Housing Sales from Redfin

Redfin is a real estate brokerage firm with access to data from multiple listing services and insight from its own real estate agents across the US. It provides information on listing volume, price trends, and other data, broken down by region.

Housing Market Data from Zillow

The popular real estate platform shares data and insight from its vast online real estate database. You can download data on home values, rentals, inventory, and sales.

Advertising

Ezoic Digital Ad Index

Ezoic shares data on a significant sampling of global sites and uses that data to produce an index to gauge relative online ad rates by day. It’s a decent way to see how digital ad rates have varied over time.

Other

State of Small Business

The US Census Bureau created this interactive dashboard based on its small-business surveys.  You can drill data down by industry or region. This is a great snapshot of the state of small business in the US.

I will add or remove more resources like these. I’ll try to keep the list relatively short and useful.

A study conducted by a Swedish psychologist found that 93% of drivers in the US believe their driving skills to be above average. This is, of course, ridiculous. There are some psychological factors at play here, but it's quite clear that we can't all be above average. If that were the case, the average itself would move up, but the vast majority of people would still be, well, average.

Something similar happens to investors.

By that, I don't mean that most investors overestimate their abilities, although that may also be the case. I mean that they overestimate the quality of their investments, which can lead to overpaying.

Many investors claim they only invest in companies with "wide moats" and "defensible positions." If this were true, the bar is so high they would make few, if any, investments.

Before we go any further, let's get our definitions straight.

As Buffett and Munger use the term, an economic moat is more than your run-of-the-mill competitive advantage. It's a competitive advantage on steroids; it's one that allows a company to earn above-average returns on capital.

On the other hand, a plain-vanilla competitive advantage is anything that a company does better than the competition; it's why some customers choose that company over others but does not provide enough of an edge to earn returns above the industry average.

Real moats are rare. There can't be too many companies earning above-average returns for long periods.

It's not that moats are overrated. It's that investors see moats where there aren't any.

Investors tend to confuse a competitive advantage for a moat. And the companies that do, in fact, have a real moat, usually can't hold on to it long. Moats tend to be finite and fixed. And fixed defenses are eventually overcome.

Lessons from Monsieur Maginot

After World War I, France anticipated another confrontation with Germany and built a series of fixed fortifications along its border. What began with modest forts soon grew onto a sophisticated network of 142 heavily-fortified bunkers, 352 casemates and 5,000 blockhouses, thousands of artillery and machine-gun positions and a complex mesh of tunnels. The line itself consisted of multiple defensive layers up to 16 miles deep at its broadest section. It was designed to have overlapping fields of fire among its various positions. Troops could move from one location to another through a network of tunnels without being exposed to enemy fire. The entire line was supported by mobile rails guns that could move to bolster a section in need. Overseeing the whole line was a chain of 78 command and control decks that could coordinate the troops and guns throughout the network. Everything was linked with a self-contained communications network. It could hold half a million soldiers in decent living conditions, with ventilation systems, running hot and cold water and living installations.

Known after its champion, André Maginot, a member of the French Chamber of Deputies and later minister of war, the Maginot Line was widely considered a stroke of military and engineering genius. And the French loved it. They felt safe and secure behind these defenses, confident that Germany would never attempt another assault on France similar to WWI.

And they were right.

On May 10, 1940, Nazi Germany invaded France. How? It began by going around the Maginot Line, through Belgium, Luxembourg and the Netherlands with highly mobile forces. The French believed they were facing a repeat of Germany's World War I strategy, the Schlieffen Plan, and moved most of its troops to the Low Countries to face the threat. They were confident their right flank was secured by the Maginot Line.

The Germans surprised the French and allied forces when it simultaneously assaulted the weakest section of Maginot Line that was directly opposite the Ardennes, a dense and rough forest that French military planners assumed was too difficult to traverse with tanks.

Not only did the German traverse the Ardennes with thousands of tanks and mechanized infantry, but with the use of mobile tactics, quickly defeated the defenses of the Maginot Line. Once in French territory, German tanks swung North and encircled Allied forces, trapping them against the English Channel.

Six weeks after the invasion began, Germany conquered Belgium, Luxembourg, the Netherlands, and France. It had driven the majority of the British Expeditionary Forces into the sea and captured sixty French and two British divisions. It was a stunning defeat, and the entire world was shocked.

How could the Germans make quick work of such formidable defenses?

To begin with, French leadership thought a second war with Germany would look much like the first. They took their experience from WWI and extrapolated it to WWII. They failed to account for new technologies and, more importantly, new applications of existing technologies.

It's a mistake to think that the French were clueless. They weren't. There was much debate within the top military brass during the 1920s whether to pursue a fixed-defense strategy or a mobile strategy based on armor and aircraft. However, they did not anticipate how the Germans would use their tanks: by concentrating them in massive numbers and having them overrun their defenses, advancing before French forces were even neutralized, creating havoc and confusion.

In contrast, French military doctrine envisioned tanks spread out among the infantry divisions and taking on a supporting role. Even though French tanks were technically superior to their German counterparts, French forces were quickly overwhelmed.

A Teaching Moment

The business world is filled with the corpses felled giants that once seemed invincible — an expensive education, free for anyone paying attention.

In 2013, 3G Capital and Berkshire Hathaway acquired control of H.J. Heinz for $23 billion and then funded the acquisition of Kraft Foods, creating the behemoth now known as Kraft-Heinz, the fifth-largest food company in the world.

3G Capital had been spectacularly successful using a simple formula: acquire well-known consumer brands with "wide moats", at a premium if necessary. Finance the acquisition with cheap debt. And operate the business as efficiently as possible.

3G's portfolio includes Anheuser-Busch InBev, Restaurant Brands International, and now Kraft Heinz. These monster companies operate in vast international markets and control an enviable collection of leading brands in each one. Yet all three face strong headwinds from changing consumer tastes as young millennials shift to craft beer, healthy restaurants, and fresh foods. All their "moats" are still there: strong brands, large and efficient distribution networks, deep pockets, and large marketing budgets. Smaller, nimbler brands are merely innovating around these.

Jorge Paulo Lemann, a co-founder of 3G and board member of its three largest investees mentioned above, addressed this issue head-on at a conference in 2018. "I'm a terrified dinosaur," he said. "I've been living in this cozy world of old brands and big volumes."

"We bought brands that we thought could last forever." He added: "You could just focus on being very efficient…". But things turned out to be a little more complicated. "All of a sudden, we are being disrupted."

Kraft-Heinz isn't going bankrupt, but it did take a $15.4 billion write-down on its acquisition of Kraft Foods and Oscar Mayer, it cut its dividend by 36% and is being investigated by the SEC regarding its accounting practices. 3G Capital and Berkshire Hathaway each took billion-dollar write-downs.

Was it worth paying a "moat premium"?

Was there a lesson here?

Where they exist, moats don't last forever. Sooner or later, new technologies will emerge, parallel markets will develop, and new competitors will find novel ways of doing things.

Companies that do have an economic moat tend to sell for higher valuations, which reduces investor's margin of safety. The underlying business must perform as implied by their high multiples; it must continue to earn above-market returns and, crucially, the market must continue to pay a high multiple for the company's shares. If any of these conditions are not met, investors will lose money or, in the best of cases, earn lower returns than those earned by the business itself.

Investing is hard

Do you think this is a one-off? It's not. If anything, the pace of change is increasing as new technologies, new industries and new markets develop. Investing has always been hard, and it's going to get even more challenging in the future.

A simple thought experiment:

Imagine it's the year 2000, and you somehow predicted, with 100% certainty, the rise of the internet and, later, the rise of mobile technology. What companies would have you acquired as the likely beneficiaries of these new markets? AOL? AT&T? IBM?

The dominant players of 2000 are barely relevant today, and it was impossible to foresee who the winners would be because they either did not yet exist or were unknown start-ups in a garage. New parallel industries can make the old, established industries less relevant.

This is not new. It has happened many times over. The only difference is that it now happens more often and more quickly. Think about what airlines did to rail and shipping lines or what mobile networks did to fixed-line telephone networks. The list of examples goes on.

Above and beyond the rapid pace of change and disruption, artificially low interest rates and Quantitative Easing are distorting markets and price discovery.

Are moats overrated?

Not really. From an operational perspective, moats are invaluable. And it can be argued that a company with a real moat does deserve a valuation premium.

It's not that they are overrated but that they are "over-spotted." Most investors pay for moats that aren't there because very few companies have real ones, and the ones that do, only do so temporarily.

When a company enjoys consistently superior returns over the rest of the industry, it attracts new players and imitators. The increased competition depresses margins and, eventually, returns reverse back to the mean.

Moats are overrated in the sense that they are not necessary to earn significant returns.

We have reviewed countless companies, both public and private, that thrive with no moat, only plain-vanilla competitive advantages. One example is a company that produces disposable wares for parties. It has no patents; it uses off-the-shelf technology and has no brand per se. Yet, it is immensely successful. Is it sustainable? As long as the business is run by its passionate founder and his great team, we believe the company is likely to build on its success and prosper.

The only real moat is culture

A good culture allows companies to do the essential thing for survival: adapt. Companies that can adapt to changing trends or even innovators that set trends are most likely to survive and thrive. I can think of no better example than Apple after Job's return in 1996. People want to work for Apple. People want to own Apple products and use Apple services. But those products and services have changed over time, and Apple adapted and morphed into a completely different company. Apple's revenue from services, such as App Store, Apple Music and Apple-Pay, reached $13.4 billion in the three months ended March 28, 2020. That's close to a quarter of its revenue. This from a company that "makes computers."

Apple certainly has excellent leadership, which is necessary for a great culture. But after Job's passing away, things did not break apart, and the company continues to grow, prosper and generate tons of cash flow. Its culture allowed it to adapt to management changes, to transition to new business models, and continue to thrive.

The problem is that culture is a soft subject that is shunned by most investors. It's impossible to quantify and hard to nail down as an outside investor. But there are windows into a company's culture that investors can use.

Price is always important

If price is the primary source of a margin of safety in investing, it makes little sense to pay-up too much for a moat, if it's there in the first place. Paying a premium reduces the margin of safety and can even eliminate the upside from growth.

Paying a premium for a moat means you run the risk that that precious moat disappears. Kraft-Heinz is a perfect example of a company with a wide moat. But just like pre-WWII France, Kraft-Heinz's moat does nothing to protect it from changing consumer tastes. New and nimbler competitors are merely going around Kraft's moat and taking market share.

As the study of drivers' self-assessed skills, not all businesses can be above average. But most of the time, that's ok.

The little things in life matter. A lot.

Many people make the mistake of dismissing the little things in life as inconsequential or unimportant. Those same people focus their attention and energy on the significant issues because, they believe, those are the ones that matter.

But that is a mistake.

What are "the little things"? Little things are those moments, decisions, and situations that fill our days, filling the gaps between those sporadic, big and consequential moments. Those situations where we let our guard down because they are mundane, routine and, well -- tiny.

I'm talking about short interactions with strangers on the street, doing routine chores and grunt work or dealing with small ethical dilemmas, those that appear to have little to no consequences beyond your conscience.

Why care about those?

There are two reasons to care.

First, they add up. We go through millions upon millions of them. They are the very fabric of our lives. They are the tiny bricks we lay every day as we build out our lives. They add up to the point where they become more meaningful than those grand moments we all are waiting for.

The accumulated weight of these tiny moments grows to the point where it shapes our identities and personalities. They form who we are and what we are. Are you kind to strangers? Do you assume the worst of everyone around you? Do you cheat when you are unlikely to get caught? Do you help others that are in need? Do you complete your chores with care and pride? Are you respectful to those of lesser socioeconomic status than yours? Do you laugh and smile often? Are you patient and understanding with those that require patience and understanding? How do you treat children? How do you treat other people's children? How about the elders? How do you spend your free time? What thoughts fill your mind for most of the day?

The answer to these and similar questions reveal who you are. And none of them have to do with where you work, what school you went to or how much money you make.

Second, the way you deal with the little things become a habit.

Many people are deluded into thinking that it's alright to cheat on small things but that they would never cheat on the big, consequential things. How we deal with the tiny, over time, become a reflex. The people who cheat at a restaurant when the waiter forgot to add an item to their bill are precisely the people who would commit fraud if they believe they are unlikely to get caught.

The way we handle the small things become habits or reflexes. If the way you act on the little things heavily influences how you will behave on the big things, you can view those tiny moments as training for when the big things finally come along.

There's a saying in military circles that states, "train like you fight." And you should train like you fight. You can't expect to give your 110% in a real fight if you are used to training within your comfort zone, at 80% of your capacity. You must push yourself to the limit and beyond during training. Train your reflexes. Build good habits because you will fight like you train. If you train like a wimp, you'll fight like one, too.

So how do you want to train? How do you want to prepare yourself for life's real challenges?

By paying attention to the little things.

In a world starved for meaning, you can find meaning in these tiny moments; the routine, the menial, the small. It all depends on how you frame things.

There's an old story of a medieval traveler who comes upon three men working at a construction site. The traveler asks the first man what he is doing. The man responds, "I'm laying bricks." The traveler approaches the second man and asks him what he is doing. The man replies, "I'm building a wall that will bear part of the ceiling's weight." The traveler finally approaches the third man and asks the same question. The third man answers, "I'm building a cathedral."

They were all doing the same thing, yet they approached the simple task of laying bricks quite differently.

There's value in the mundane. At the very least, you can find purpose and consider those moments training.

So build your cathedral, brick by brick. Mind the little things.

Welcome to Thought Stack!

I’m an ex-investment banker turned business owner and investor.

I write about business, investing, and decision making in general.

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