Growth & Crypto: BIG Moves Coming
America 2.0 (#A20) growth stocks are seeing crazy volatility. But where else are you going to go?
America 1.0 is in a waterfall decline.
Around 50 of the big blue chips in the S&P 500 are not expecting to make enough cash this year to cover all their interest, dividends and share buybacks.
People crowd into blue chips during times like this… Now they might wanna rethink that.
On the flip side, nearly all of our #A20 companies showed growth after this earnings season.
This is a no-brainer moment for growth AND crypto right now.
We talk about bitcoin’s price speculations a lot, but now we’re seeing exactly why bitcoin was created in the first place.
And that can create even more crypto demand. Check it out:
Paul Mampilly: Good afternoon, Ian.
Ian Dyer: Hey, Paul. How are you?
Paul: I am doing well. How are you?
Ian: Doing well. Thank you.
Paul: Another grow selloff today. A bit of a surprise, right?
Ian: Admittedly, yes. I was not expecting it. People are taking profits from that rally. I still think the overall direction is up. I still think the bottom is in for a lot of these stocks. You have to be strong and hold on. In times like this, stuff is going to be volatile. There’s going to be choppiness and you just have to hold on.
Let’s Look into The Market!
Paul: As someone who traded through the 2008 bottom, I can tell you it was crazy volatile. There were days when people panicked all the time that everything was going to crash again. If you gave in to that you would have given up so much. That was true in 2008 a number of times, in 2009, 2010 and 2011.
The market is going to do what the market does. It’s going to go up and it’s going to go down. Without getting too into it, we have some charts. We will throw them up there. We have two charts.
One compares corporate bond yields, junk bond yields, muni bond yields, mortgage bond yields.
Then we have a second chart which shows government bond yields.
The bottom line to all this is that it’s really weird. Even in the time we’ve been together there has never been a period when bonds have not been in demand when there is some kind of a crisis.
To have a war going on is definitely a crisis. There is something unusual going on, which we have told people about. There is an unusual circumstance right now where safety is no longer safe. It’s not safe in the bond market or the stock market.
We’ve been telling people that since 2008 when the Federal Reserve lowered interest rates, one group of companies have had access to the bond market has thought yields are cheap, the Fed wants us to borrow and we are going to do that.
Companies like Clorox, 3M, Home Depot, Honeywell, Pfizer — you can see the class of companies. They are considered to be blue chip, dividend-paying, companies seen as being safer than safe. They are the ones that have borrowed and borrowed and borrowed.
This goes to heart of why during this period of time the corporate bond ETFs, LQD, for 2022 is down 6%. I’m just going to say, that’s a big number for investment-grade corporate bonds.
Big Companies Are Borrowing Money
Ian: As you said, this is a time when people usually flee to this stuff. This is highly reliable company debt where it’s seen as a guarantee you are going to make a given yield on this debt. People usually flock to this because there is a certainty there. Markets love certainty.
At a volatile time like this they are going to look for that yield. But this time, we’re seeing the opposite. It’s unusual to see bonds down at this point.
Paul: In several videos I have talked about that. I did one on Home Depot. After they reported, they announced a 16% increase in their dividend. Yet, the stock went down hard. I mean, for Home Depot. It’s a brand name, blue chip company that people think represents something safer than safe.
It’s not different than all the other ones I mentioned. I believe it gets to the heart of why this investment-grade, corporate bond ETF is seeing selling into a period when there should be buying because there’s a crisis. People can say that the Federal Reserve is planning to increase interest rates and if interest rates are going up, bond prices are going to go down.
Yeah, true. But Chairman Powell went in front of Congress yesterday and said only a quarter point is coming. Yet, we haven’t seen a gigantic rally in any of these yet.
Ian: With the situation like Home Depot, there are a bunch of companies in that situation where they pretty give all their incoming cash for the year to three things: interest payments, dividends and share buybacks. A lot of companies do this. Now those companies have even less cash.
A lot of them, Home Depot included, are not even expected to make enough cash from their operations this year to cover their dividends and interest payments. Assuming they keep their share repurchases the same as last year, they wouldn’t make enough cash to pay for all that this year.
It seems like with these companies there is uncertainty if they’re going to be able to afford these things that aren’t even befitting their operations. These companies aren’t even going to be able to afford that.
Paul: I will class these as capital commitments the market expects. They aren’t required to buy back stock. They aren’t required to pay a rising dividend. But all of these have built these records. So if they were to stop lifting the dividend every quarter there would be a massive selloff.
People would flee the stock. They have trained the market for certain things. What the vast majority of investors in these companies have not realized is these companies have not grown fast enough to have actually grown their dividend by what they have over the last 13 years.
They have not generated enough extra free cash flow to buy back stock at the level they have. Where do you think it’s come from, Ian? Magic money?
Ian: They are taking out more debt.
Paul: That’s right. They have been borrowing hand over fist, taking advantage of low yields for a long time. If the bond market is saying, “No, I am not going to lend you that money.” Who is going to give it to them?
Ian: That’s the situation. I think, like you said, this has been a big moment for people to rethink their investment in these companies. That’s why we’ve seen the shares drop 20%, 30% or more. Home Depot got crushed after their earnings. Clorox and some of the others you named are usually seen as a guarantee. They are losing that status quickly now.
Paul: I went and looked. Pfizer is down 26% from the high. I know people will say, “Paul, that’s better than your stocks.” Yeah, this is true, but the expectations for Pfizer are completely different from Wayfair, PayPal or any other of our stocks.
People expect these things to trade like bonds. In other words, in a very tight range. In fact, a whole group of investors see them as bond substitutes. The reason we are bringing this up is not to hammer these stocks. We’re not invested in it. We would definitely say it’s a warning.
Their income statements, balance sheets and cash flow statements are telling you why you are seeing this waterfall style decline. It does also tell you why we continue to tell you it’s volatile, but where are you going to put your money in the markets? You can’t buy bonds because you are worried about inflation, rising interest rates or deteriorating balance sheets.
The deteriorating balance sheets tell you that the dividends and the buybacks are unsustainable. You went and did a screen of the S&P 500. What was it? I forget the number.
Ian: It was 46 companies that weren’t projected to generate the free cash flow this year in order to pay their interest, dividends and share buybacks. I think it’s even higher now. I think it’s in the 50s. That’s crazy because a lot of those companies are blue chip, dividend paying stocks that people crowd into in a time like this.
Now, people are going to be rethinking that for sure. That’s clear in their share prices that they are rethinking that.
Paul: As crazy as it sounds, the safe haven is growth. Interest rates can go up and these companies are growing irrespective of interest rates. We just had a quarterly reporting season where nearly every single company, at minimum, is showing 10%, 15% growth. Some of them are at 30% or 40% growth.
Compare that to something like General Mills or Clorox. You did the work. Was it 2% or 3%?
Ian: It’s definitely low single digits for a lot of these companies, if that. The consumer staples had a surge in buying during the pandemic where people bought extra stuff because of safety precautions.
Now they aren’t going to have that. Some of them are actually seeing declining sales into inflation and into a time where they need as much extra cash as they can get to fulfill those obligations.
Paul: We think this is a no brainer for growth. They don’t largely borrow. Whatever the bond market does, if they lift yields, they don’t care. They have cash. One benefit of the big spike in prices in 2020 and 2021 is that money companies sold stock into that.
They raised cash into that at high prices. They have a ton of cash. Their businesses are unaffected by what is going on. They don’t have a lot of exposure to Europe or Russia. They are reporting that the conditions are good. 3D Systems just reported and they said everything is great.
I think they had, if you took out the businesses they sold, 14% growth. This is fantastic. 14% growth compared to someone who is going to see declining growth next year or 2%. It’s volatile, but the underlying thesis and premise for our stocks, nothing has changed.
Should You Buy ETFs?
Today it’s crazy volatile, but underlying it you can see there are buyers coming in to buy. Even on day like today where you can see what we track as a proxy for us — ARK Innovation ETF — it’s still nowhere near its lows. It’s down a lot today, but nowhere near testing its low.
Ian: As you said about 3D Systems and a lot of these other companies, they have a ton of cash. I think the certainty aspect where people want certainty in uncertain times is going to flow from a dividend or an interest payment to companies that have a lot of cash.
They are generating positive cash flows and consistent cash flows. They don’t take on a ton of debt. They might issue some stock to fund their operations, but that’s not something they are going to have to pay off over years and years.
Also, companies that aren’t putting a ton of cash into repurchasing shares. Or even worse, taking out debt to repurchase shares, which are just empty ways of spending and borrowing money. I think we will see how people view certainty is going to shift in the next few months or so.
Paul: I agree. I would love for the markets to go on a consistent run day after day and week after week. I am certain there will be a period like that. It’s clearly not here yet. When that comes, I know all of you will be thrilled and happy. So will I. I have been tweeting that I have been buying into a number of ARK ETFs so I am along for this ride with you.
I am not allowed by contract with my publisher to own the stocks that are recommended in our services, but I have been buying ARKK, the 3D printing ETF. I am stoked to have a lot of exposure to 3D printing. When I think about the crisis, 3D printing is the answer to so many things.
Bring back production and making of things to America, which would be the easiest and best way to increase our security.
Ian: Those 3D printing stocks are one of the few sectors that didn’t make a new low during the selloff the past couple months. Their 52-week lows are all the way back in May. Those stocks do look like they are in more demand than a lot of other ones.
During a selloff, that’s how you can tell what’s standing apart from the rest. When most of the stocks are making new lows, that sector isn’t. That’s a good sign.
Paul: The other ETFs I have been buying, again to get exposure to our stocks because I can’t own them directly, when I look at ARK ETFs they are so similar to our thinking. They own Coinbase, Robinhood and all the stocks I would choose to buy.
I wish I could buy them. I prefer to own the stocks themselves. Generally speaking, individual stocks are going to go up way more than an ETF. The upside of an ETF is it’s less volatile because it is a diversified portfolio. ARKF, which is their fintech ETF. ARKG, which is their genomics ETF.
ARKQ, which is the one that gives you exposure to robotics and automation. Those are the ones I have been buying into. I think this is going to be a massive rebound. It’s going to shock people because of what we were talking about earlier.
It’s such a big mindset change to go from buying stocks based on dividends and income and stable prices to where you start to see innovation and growth and the ability of a company to growth through time as being the thing that’s most valuable.
Ian: And they are also taking market share from a lot of these other companies that are already falling out of favor. Naturally the money is going to flow into the companies that are taking that market share. Also, we still have the market pricing in high interest rate hikes this year.
It’s still pricing in about six. We just heard Powell talking about how they aren’t going to do a 50 basis point hike in March. They are just doing one at most and maybe they won’t do it at all. Going forward, I still can’t see them doing anywhere near six this year.
I think that’s going to be a big relief for growth stocks as well. These stocks are pricing in a terrible 2022 in general because a lot of them reported their 2021 financials. They are pricing in high interest rates and that’s another backward looking thing. When rates are higher you sell assets that are perceived as risky.
And, like we were talking about, they are a lot more stable than these blue chip companies. They have a lot more cash. They don’t have as many obligations like interest and dividends. Overall, they have much better balance sheets and cash flows.
Paul: Many people may not think this and I know there’s a school of thought that’s prevalent about fundamentals. However, the stock market is a relative game. People will go to where they are going to be treated best relative to all the other choices available to them.
If you ask us and if you are looking at the world the way we are, the thing that’s desired is to get some benefit. You want to see your capital grow. The only place you can get that in any way, shape or form in the world we have described to you where yields on bonds are going up, so you can’t go there.
That’s true not just for corporates, it’s true for municipal, mortgage and government bonds for now, although that world might change. Dividend stocks, they have all the problems we have described to you. What do you have left? You have the companies that are actually growing, they have cash and innovation on their side.
All we need is a little demand to come on a sustainable basis. In other words, people who can see all the things we are seeing and that they can see themselves.
Crypto Is Coming Along With Many Benefits!
Ian: There’s also crypto, which is coming into the spotlight a little. You can also earn a yield on a lot of cryptos like Ethereum (ETH) is paying a 5% or 6% yield. I think eventually a lot of money is going to go into things like that too where you can earn way more than something like a money market or bond.
You are putting your money into a decentralized network and there’s a lot of benefits to that. That could be another area that could benefit from all this.
Paul: Before we go into crypto, I just want to say it’s volatile today but I am not selling any of my ETFs. I expect them to go up a lot, just like our stocks. Be strong hands. Be BOP. I am bullish, optimistic, positive. Ian, let’s go to crypto.
I want to talk about this tweet I put up which referenced this chart. I think it gets to the heart of one thing that might act as a catalyst. I know people are going to object because they will say people are trying to escape the sanctions by going into crypto, which has become a big discussion point on the internet.
I got this snippet from the Wall Street Journal. It says, “A waste of paper.” Then it shows you a chart of the official reserve assets held by the world’s nations. Then it goes on to say that official reserves went from less than $2 trillion to a record $14.9 trillion in 2021 according to the International Monetary Fund (IMF).
It represents 78% of all reserves. The rest being made up by gold and something called special drawing rights. The reason this is coming up is because, effectively, the reserves that Russia had, which was $630 billion with them having sold their dollars off, by being at other central banks or international banks around the world, they have been deplatformed.
In other words, they don’t have access to that. In this article, it questions what is the point of having reserves if you are unable to access them. I have connected this idea. If you are one of the countries that is not following along, let’s say you are in the Middle East.
For example, most of the Middle East is not following along with our sanctions we are putting on Russia. They are countries in Asia that are also not following along. What if they got into some dispute with the United States? It might be about trade, a border they share with an ally.
Would they be cancelled from the reserves they own either with the Federal Reserve or international banks? If you were sitting there as the president, prime minister, head of the central banks of India, Indonesia, Saudi Arabia, would you not consider the sanctions that have been done to Russia might happen to you if you were on the wrong side of any dispute with any reserve currency?
It might be the European Union, China, Japan, the United States. If it were, what could you use? For me the answer is obvious: You got into crypto.
Ian: For sure. It’s cut off from the whole financial system. That’s the safe haven for central banks. We haven’t seen any action on that yet. Like you said, these countries have to consider this now. I don’t think it’s ever happened before. It should be a major consideration.
I think it’s going to speed up the adoption of Bitcoin (BTC) as a reserve currency. Like I said, it’s totally cut off from SWIFT or any system like that. You can’t block a BTC address or seize assets from an address if the person or entity has the keys to that address.
It’s totally safe. It would be a huge step from the current system in a lot of good ways.
Paul: People have responded to me when I wrote this. They say governments like Canada recently was able to get various crypto exchanges and service providers to freeze accounts. That’s true if you are leaving it on — what are they called? Centralized exchanges?
Paul: Centralized exchanges. OK. You can download crypto and put it into any kind of USB drive.
Ian: You can store it in cold storage. There are a bunch of online wallets that give you your private keys and they aren’t exchanges. I forget the name of the wallet, but Canada reached out to the company that created this cold storage system where people could put their BTC and asked them to stop the accounts.
The company said they can’t do it, because they can’t. That was a major advertisement for BTC and keeping your coins out of exchanges. We actually saw the CEOs of Coinbase and Kraken say if you want to avoid this situation you have to keep your crypto in cold storage because they are legally obligated to do this.
They don’t have a choice. I guess that’s arguable, but they probably don’t have a choice. Ultimately, this is a way for people and countries alike to keep their money in a totally decentralized system that can’t be shut down, no matter who is trying to do it.
That was the original use case for BTC and crypto in general. It kind of got forgotten a little and I think this is a major reminder that this is what it’s for.
Paul: We ourselves are guilty of that. We talk about the price speculation element of it, but BTC’s original intent was to create a decentralized currency system. Many people may not know how BTC processes transactions.
Let’s say Australia tomorrow decides they are going to buy $100 million worth of BTC. Could the U.S. stop Australia from having access to that? How would it get setup?
Ian: They would probably talk to some custodian who would manage it.
Paul: In Australia. It would need to be somewhere in Australia.
Ian: They would reach out to a custodial service that would be able to get the BTC for them. I’m not sure they would be able to do a totally offline way of buying it. Push comes to shove, there are ways of buying BTC that aren’t on exchanges companies can block.
Even if they did want to do that, the U.S. couldn’t tell Coinbase to not accept a payment from Australia. Then they could just keep the BTC offline and it would solve that problem too.
Paul: Or, you could invest in mining rigs and mine your own BTC.
Ian: Yes, which I think Australia is doing. That’s one of the countries that’s been leading that push. More and more countries are getting into it. Even within the U.S. there seems to be a race going on now between states to become the prime mining area for BTC.
Paul: I know the answer, but I am going to pose this question to you. Who coordinates all the mining rigs so there’s enough capacity to process buys, sells and transfers?
Ian: The beauty of BTC is that’s all decentralized. If a bunch of miners go offline, and we saw this in China when a lot of mining operations shut down, which dropped the amount of computing power that was mining BTC…
Paul: I am going to interrupt you. That’s called a hash rate. When you see that, that’s what Ian is referring to. Continue.
Ian: Yes, the hash rate went down, which means it was easier to mine BTC. That incentivizes more people to start mining it. Those companies eventually pulled out of China and set their operations back up. When the hash rate drops when people go offline there is a natural incentive for people to get in the network and mine their own BTC.
That’s a built in function of BTC that’s useful and will keep the network sustained. After that, it gets more decentralized and keeps getting more safe too.
Paul: I will add that when the hash rate goes down it acts as incentive to come in because the rewards come much faster and much bigger. The other thing we should say is this happens with no coordination. People hear the hash rate has dropped and the reward is higher.
They come in and start to do this. I believe the BTC mining capacity was something like 70% in China. After their ban, it’s virtually zero over there and virtually 70% in the United States. Or something like that.
Ian: I think it was around half or over half in China. They got out of there and the U.S. benefitted huge from that. Also, some other countries did too. Countries bordering China because geographically it’s easier to move your mining rigs.
Also, we saw a lot of companies in the U.S. take the opportunity to expand. The U.S. and Canada both benefitted huge from that.
Paul: We will go back to something some people might disapprove of. I have said in my Tuesday video that if even small countries came in to buy, countries like El Salvador — El Salvador has what? $600 million in BTC?
Ian: I think even less than that. It’s not much at this point.
Paul: Let’s say $300 million. They came in and bought over a month. I don’t believe there’s enough BTC in the system between all the people hodling, the amount the current cycle generates, for this not to be a jump in the price of BTC.
Ian: For sure. Once more countries do it it’s going to create a domino effect. El Salvador was the first one and a lot of people still see them as some crazy outlier. But as more and more do it, even more are going to adopt faster. It’s going to be a domino effect.
Like we were talking about earlier, countries that don’t want to put up with sanctions can put their money in BTC because now maybe they are afraid their reserves can get frozen and they won’t be able to use them. That incentivizes holding BTC too.
Paul: A new risk has been introduced into the fiat-based financial system that nobody thought existed. We have gone through world wars, a lot of crises and never have the reserves of a country been unavailable to them. This is now a new risk that will start to move through asset markets, reserves, decision choices of not just countries but companies are going to think about this too.
You don’t want to get on the wrong side of something and then have no access. It could be that in hindsight three or six months later there wasn’t a problem. You need to survive through that period and you want an alternative. BTC is an asset that is independent.
It’s processed independently. There’s no central bank or leading authority. It’s independent. Nothing like this has existed in human history.
Ian: One of the other things on that chart is countries are getting into gold. That’s been something I have seen with China and Russia buying a bunch of gold to avoid this. But BTC has so many more advantages than gold. It’s the natural progression from gold.
A lot of money is going to progress like that to BTC. A lot of countries like El Salvador where it’s easier to do something like that are going to be the first wave. It’s going to help them a lot with their economy. That’s something to watch too.
If a big country like Russia does that, it’s going to be huge and we’re going to see it evolve even faster.
Paul: I think it would be difficult for Russia to buy a lot of BTC under current circumstances. I think you are much more likely to see someone who sees what has happened and think they’d like some insurance on the fiat-based reserve system where if something were to occur they have some store of value that they can access that does not depend on the approval of various governments.
We’ve gone long. We will keep this short. What do you think? Who might be a country that you think might go first? I don’t think it’s going to be Russia because I don’t think anybody would take that risk under current circumstances. It’s going to be someone else.
Ian: I have seen stuff about Brazil being open to it. They are another huge economy. If they do that it would be massive for global BTC adoption. There’s also a bunch of island nations. Tonga is paving the way to do that. There’s also smaller countries in Central America.
I think Paraguay is one of them. There are a bunch of possibilities out there from everything to an island all the way up to a country as big as Brazil and a bunch in between we haven’t heard from that are considering it at this point because of the qualities of BTC and what it can provide.
It’s really hard to say at this point, but those are three contenders that I think could be the next one.
Paul: I am going to say Mexico. They neighbor us. They have some risk. If we were ever to cut them off they would be in deep trouble. From a risk perspective, that’s where the greatest risk is.
Ian, we will close off this IanCast. You say goodbye first and I will wave everyone goodbye.
Ian: Thank you so much for watching. Have a happy Friday, a great weekend and we will see you next week.
Paul: Before I sign off I just want to say things are going our way. It may not seem like this. What we have described, the stuff with bonds, the stuff with dividend stocks, even the stuff going on with reserves, our portfolio is setup for the world that is unfolding.
I know it’s tough to sit through volatility, but hang in there. Be strong hands. Be BOP. We will come back next week for another IanCast. This is Paul saying bye.
Editor, Crypto Flash Trader
P.S. You’ve seen crazy volatility — companies losing upward of 25% in one day.If your hands are strong and you’re feeling #BOP, click here to watch now…But there’s no reason to panic. Zoom out. I’ve looked, and I’ve not seen a single one of the companies in our services with negative sales growth. Their technology and their innovation are still incredible. So, it’s a Strong Hands moment… In fact, it’s a buy moment in my opinion. In this video, Paul talks about how new technology is going to change the way we drive, shop and work. And we’re not that far off.