DIGITAL CURRENCIES, U.S. DOLLAR, AND FUTURE OF CAPITALISM

Robert Hansen

So would you have done that move if you were them? Is that pretty much how you would do it?

Jake Moilanen

I think it's death by 1000 cuts, they're trying to chip away wherever they can. And that's an easy place to go after.

Robert Hansen

Because of one of the things they did, they grabbed two to three times the amount of strategic gold reserves after the Crimean War, which they handily won. But that signaled to everybody post hoc, that they assumed that their money wasn't going to be worth very much anywhere else in the world.

So they're going to have to trade with something else, or they want a lot of strategic reserves. Is having a lot of gold, two to three times the amount of gold that they had in less than 10 years before, a good place to start? How do you future proof your currency?

Jake Moilanen

I don't know for sure. This might not be a proper opinion, but I don't think gold is going to contain the same sort of value and matter as it did in the past. I do think that a crypto asset, digital asset, like Bitcoin, will supplant gold at some point.

I think the actual structure I think actually makes the most sense is you have the way that gold was used, everything was backed to it, you weren't actually exchanging gold, you weren't actually handing. If I go to the store, I wasn't going to give you gold, maybe way back in the day.

But dollars were created to go with Exchange instead, that was actually the medium of exchange. I think the same way bitcoin is actually going to be a store value going forward, and it's going to take away some of the requirements for gold.

You’re not going to actually exchange bitcoin, it’s still clumsy, it takes about an hour to settle still, you can't handle that many transactions anyways.

Robert Hansen

It suffers from all kinds of things like 51% attacks and all kinds of threats.

Jake Moilanen

There's still lots of issues with it. I think that the actual magic formula, though, is that you do have Bitcoin as a store of value, equivalent to gold. And then to actually go do a medium of exchange is going to be a digital currency of some sort.

I do think that the US dollar is in the best position to be that digital currency. As a digital version, the US dollar is probably the best way of doing it. A lot of these other crypto coins and tokens, they're going away.

No one really trusts them. Stable coins, no one trusts at all. So you really need to have something like the US dollar, a digital form to really be able to do that well.

Robert Hansen

I read somewhere that there's as many as 12,000 or more crypto shit coins that have gone under In this last year alone, and something much higher than that, like 17 18,000 total, since this whole boom began. That doesn't signal to me that it is a well-lit ecosystem.

Jake Moilanen

No, absolutely not. Do you believe that almost all those coins are going to be going away? I think there's only a handful of actual good use cases for a lot of the crypto tokens that are out there so far. I'm sure there'll be more, but I haven't seen a ton.

Robert Hansen

So why do you think it is a good replacement for cash? It seems like we already have the system, it already works well, I can fulfill anything at any time, there's no reason I can't transfer money across the world with just my bank and an internet connection.

We already have all these features, what does that give us? And frankly, I do have quite a bit of privacy. While it is yes, possible for some hedge fund to maybe know bits and pieces of my financial history, they only know bits and pieces at best.

Why is it better for the average consumer? Why do we want to switch to it?

Jake Moilanen

To a digital currency? There are reduced fees, if you don't have to pay Visa and MasterCard, two and a half percent, that adds up. Imagine doing a $500 transaction that starts adding up over time. So I think that people are going to want to reduce their overhead and their fees that are involved.

I do think that it is more convenient, frankly, if you can go and tap your phone to go pay and be purely cashless, it is frankly, more convenient. So I think that convenience is ultimately going to win out at the end of the day, and fees as well.

Robert Hansen

So why wouldn't the Visa, MasterCard of the world drop their fees, get down to next to zero and then use this add model or sell their data to supplement?

Jake Moilanen

They make so much more, Visa is worth some 400 billion or something. They make so much money on the fees that the revenue…

Robert Hansen

The alternative is to go out of business.

Jake Moilanen

They're going to lose 80% of revenue, if they do, probably more than that. So they approach our fees. They have to make it work and again, to find other ways to provide value to justify those fees. I'm not sure that they're going to be able to.

Robert Hansen

So it seems like there is some element of the West that would like to crush the US dollar and get rid of it entirely. But it seems like most of these people are primarily anti-government as opposed to pro cryptocurrency per se.

It’s not like they're like, “Oh, well, the US could be so much better if it were on a digital currency.” But it seems like those people from what I can tell are not really understanding what they would lose if they got rid of the US dollar wholesale.

Supplemented it not with a digital currency of the US dollar, but completely got rid of the US dollar completely and now we have cryptocurrencies in general, like Bitcoin, like Ethereum, or whatever.

Jake Moilanen

Yes, I don't think a lot of those people realize how much they've benefited from the US dollar being the reserve currency. And how much cheaper their cost of capital actually is, their interest rates are lower, they can get mortgages easier, by the sheer fact that the US dollar is the reserve currency of the world.

I think if they actually were from a different part of the world, they might see things very differently. But I think it's a very naive way of viewing the world.

Robert Hansen

Various different governments are now preparing for this future eventuality where everything will be digital. What, if anything, do you think the US isn't ready? Why not do it today? Why not build it right this second and start implementing this?

Jake Moilanen

The systems, the software, it's going to take a lot of time to ever put in place. I think it's like the Y2K bug. There's a lot of stuff written out there today that would be very difficult to retrofit and change.

So it could happen, it will probably happen over time. But it's definitely not going to flip over in one day.

Robert Hansen

If you had to say, approximately timeframes, when do you think that would happen?

Jake Moilanen

I don’t know,

Robert Hansen

Guess.

Jake Moilanen

10 years.

Robert Hansen

Another couple election cycles, maybe, we might start seeing stuff like that. because I think a lot of people see that as either strongly pro or strongly against, and there's very few in the middle who go, “Whatever, I'll deal with whatever happens.”

Because I think there's such a huge privacy component. And it's hard to have a digital currency that everyone can uniformly agree this person has this thing in their account or they don't if it's on a consensus Protocol, or And then you get into all kinds of other things, and everybody can track it.

For instance it's one thing for me to swipe my credit card and go to a convenience store and the shop owner has no idea if I have $1,000 in my account or a million dollars in my account, they have no idea.

But if they could look on the block chain and say, well, this person has traded, like for $400 million this week in different commodities or whatever, well, maybe they got some money in their account, and follow me home or whatever.

Jake Moilanen

Yes, I do think one core feature that why credit cards wouldn't go away is that a digital currency would act like a debit card. Where a credit card, pretty much you can go, you're actually being provided credit.

So you can go over your limit, if you need to, to go pay off something, you can take on debt. So there is a core feature to that. How many Americans are in credit card debt? So they are definitely making use of it..

Robert Hansen

Leverage.

Jake Moilanen

Exactly.

Robert Hansen

Yes. So going into the future, there's always a possibility. And we're already seeing this with China, for instance, with their social credit score, but there is a possibility that governments might utilize this.

Everybody has their flavor du jour of whatever government they want to be in control. But when any government gets unchecked, there's all kinds of problems. Having very tight monetary control, whether it be to curb terrorism, or stop child pornography or whatever good original premise they might have.

Ultimately leads to them also being able to flip the switch and say,” Okay, we have political rivals, and we need to go take them out.” We saw this happen in Canada, for instance, when the trucks basically went into I think, was Montreal and locked the entire thing down.

Then people were donating money to the families to let them keep on trucking or whatever. And the Canadian regime basically said, “No, if you do that your business account is blocked, and you can't trade anymore. Basically, your money's locked up in this bank account.” So we know that it can happen. Even in the Western world, this isn't like some far off location or something.

So what is the average person to think of that, well, do I really want the government, the centralized government, to have that much access over my ability to spend which, even using banks, that's already a bridge too far and now you're also going to get rid of my cash.

Jake Moilanen

No, I think it's absolutely fair. I think it is unlikely, you have three branches of government for a reason. And even from a privacy standpoint, you look at how much the government has gone after Facebook.

I do think they'd be a tougher sell in the US. But that's not to say that it couldn't happen. I think the fiscal dollar is going to remain for a long time.

Robert Hansen

So how would that affect, let's say, the average convenience store or Macy's or your car dealership or whatever, they're going to eventually say, “Screw it, we don't take cash.” Because that's already started.

Jake Moilanen

It’s happening, yes. How many times have you gone to a food truck and they won't accept cash? Cashless is becoming more common.

Robert Hansen

Under the pandemic, that seemed like that was a jumpstart to that direction

Jake Moilanen

It’s an acceleration for sure.

Robert Hansen

I don't want to get too conspiracy theory, But do you think that that was part of the plan? Do you think that was something that higher ups were like actually, this kind of helps this long term game of getting more of this cryptocurrency out and getting people to move to a more cashless society which we can track?

Even if it's not us tracking it, it’s a partner, it's Visa, MasterCard, or it's the banks.

Jake Moilanen

I think there's a lot of economic destruction that occurred, that was a benefit for them. They probably wouldn’t have put us through that, I don't think.

Robert Hansen

I'm not claiming that they created it for that effect. But more like that, it was very convenient. Maybe we should double down on that in the future or keep people guessing it's already out there, why not keep them in their household for a little bit longer and use more and more cashless.

I'm not saying that that's true, but boy, it's awfully convenient.

Jake Moilanen

It did work out.

Robert Hansen

Yes, it's a little a little sketchy.

Hey, guys. I have a question from the control room.

Robert Hansen

Yes.

Hey, Jake, do you ever see the government when they set up the United States crypto service, do you think they would basically say get rid of all the Bitcoins, get rid of everything else and you can only use the government digital currency. Do you think that's a possibility?

Robert Hansen

So outlying all crypto currencies, except for the US one?

Jake Moilanen

I don't think so. I forget the entity that monitors the commodities, but both Ethereum and Bitcoin are actually under the review of that entity now. So it'd be very difficult to remove those both just because different branches have to pay attention to it.

Robert Hansen

Well, a follow up question would be, we've seen China basically say that they're no longer going to allow cryptocurrencies in the country, it's probably an energy issue, too many people mining and it's unregulated, whatever.

But what they haven't done is say, you're not allowed to use other nation’s currencies. But that seems like that would basically perfectly say you cannot use the US digital currency because it is a digital currency. It is a cryptocurrency.

Jake Moilanen

Yes, they definitely would want to block the US version. My opinion is that the CCP was trying to do surveillance and ultimately control the monetary supply. So I think that was very, very intentional.

Robert Hansen

So how does the US maintain itself as the premier dominant digital currency amongst a sea of literally 10s of 1000s of failed digital currencies?

Jake Moilanen

I think this is a much larger question. So how the US maintains the reserve currency, I'll start there. Let me take a big step back. One of the things I always look at is, I try assessing things over a larger time frame, and then get narrower and narrower.

There's a few models, I'm not a classically trained economist, I learned everything I've learned out of necessity. One of the things that if you look at it, there's a few books, I think are really great models.

Ray Dalio had the “Changing World Order” book come out, which I thought was fascinating. And this really talked about how nations and empires have risen and fallen over hundreds of years. And what it has done to the reserve currencies.

It’s been interesting, because you look at Rome , who fell to the French, who fell to the British, who fell to the US. Then you see how the US is starting to teeter on the point where they're actually starting to lose control.

They're starting to see the downfall of the US Empire. You start seeing that from a very populous type of government, to a lot of social unrest. We're likely going to fall to China, with China's 2049 plan. That is definitely their angle, and there's a good chance that the US dollar will lose its reserve currency status at some point.

Now, within those larger multi 100 years type of time spans, there's this other book called “The Fourth Turning” which is all about breaking things down into about four generations of time, really about roughly about 80 years.

You see these generations, these 80 year blocks follow a very predictable pattern over and over again. And even within that 80 year period, there's usually about four generations, about 20 years each, that occur, and these patterns occur over and over again.

A lot of it is due to the fact that what you are and where you are in society at the time, how do you handle a turmoil that's occurring, and how you react in the future, as you found that there's a very much a generational type of pattern.

So if you look at it, right now we're about to approach the fourth turn. The first turning effectively started at the end of World War Two. And that's when it was a period of prosperity. That was the time in the world or in the US where we saw most even making roughly about the same.

You could work at the gas station and still afford a home, a nuclear family type of time. About when JFK was assassinated, you start seeing things shift from that to the awakening where a lot of individualism started being celebrated.

People trying to discover themselves. That was another period of a lot of prosperity. But around 1984 when Reagan won the second election, you started flipping over to the third turning, which was effectively when we started seeing things starting to get a little bit disheveled, a little bit questionable.

Started seeing some things like the LA riots, you saw 911, you saw Columbine and a lot of these stuff started happening and started shaking up the foundation. Then around 2008 with the big global financial crisis, that's when you started seeing the fourth turning occur.

That really mark's kind of where we are today, and that's when things start going awry. This book was actually written in 1997 and it predicted that we would see somewhere around 2020, it was very eerie, that we'd see a pandemic, we'd start seeing wars again.

It punctuates every single time, there's a massive war that occurs. If you look at years ago, from now, that's when World War Two was. 80 years before that was when the Civil War was, 80 years before that is when we saw the Revolutionary War.

That's the US, this pattern has existed across all kinds of nations all through history. So if you understand where we are, you start seeing that we are definitely in the rising of the falling time of the US Empire.

We are also in this fourth turning where we see a new superpower could be emerging, and also where we are from a generational standpoint could also lead to our ultimate downfall. So I think that the risk of a reserve currency losing that is very, very high right now, given the fact that these cycles are all lining up at the very wrong time.

I think there's something to be said that if you look at why reserve currencies actually maintain their hold is really, if they're doing the most commerce, most trade with a nation, that's what really dictates if this can be a reserve currency or not.

China now has more trade than the US does. However, if you look at it, I don't remember the exact number. I'm not sure where I got the source from. I remember hearing that some 100 million businesses across the world have their current system wired to the US dollar.

This could be very difficult to displace that in the short run again. So it's going to keep a lock on the US Dollar as a reserve currency for a little bit longer. Now, I think if we do go to a digital currency, it makes the most sense to go with the US dollar, because it is the current reserve currency, and people will trust it.

Where they might not trust you, pick your favorite token out there. But I do think that there's a chance that our reserve currency might last much, much longer. But we'll see history, we'll see if it does repeat again.

Robert Hansen

Well, that's all terrifying. Follow up question on that one, though. So why do you think it's going to be China? Why is China the next big superpower economically beyond the obvious that they're growing quickly?

Jake Moilanen

Well, I think the biggest problem the US has is very short term. We think in election cycles. We do all of our planning based around very short term type outcomes. If you look at China, they've taken the formation, the CCP was 1949.

They pretty much had this goal, this multigenerational goal that all leaders adhere to, to actually go and make sure China is a superpower in 2049. So I think the biggest downfall of the US is too short sighted, where the CCP has taken this very long term type of view. I think it's going to be very difficult for the US to compete with that, because we think too short term.

Robert Hansen

It’s one advantage of an authoritarian government, I suppose. The one negative though it's been playing out very interestingly, in the Ukrainian conflict is having a centralized control where no one gets to make a decision on the battlefield, it all has to roll up to some general.

Then even that generals his boss until you finally get the person who says, “Yes, you can drop a bomb here.” It makes it incredibly difficult for the Russians to function and everything. Their supply chains are very hampered by this and all kinds of stuff.

In one way, economically, maybe it is great, in other ways, militarily, maybe not so great.

Jake Moilanen

That's true.

Robert Hansen

Interesting. So let's switch back to investing. This was an interesting tangent, I'm glad we went down there. I've been thinking for a while now, this phrase, I can't get out of my head, it's “You're too poor to get rich.” Which I realize is not true.

People bring themselves up from nothing all the time. But there are certain things that are standing out more and more to me as being sort of institutional classism for lack of a better term.

So one of the simplest ways I like to explain this to people who are not in your line of work, so they require a little more explaining, I’ll be traveling down a road, and I have the option I can travel on the main road or I can go in the toll lane, which in Texas, you pay for.

It's not like a carpool lane where I have to have a certain number of people in there. I decide I'm going to go down this road, and I pay more and I get there. So maybe I save a couple of minutes every day, which time is money, so that's somewhat useful.

But also, I'm less likely to interact with police officers, I'm less likely to get into a wreck. Even a minor wreck, just a little fender bender. That fender bender may not seem like very much but when you add it up, compounding like okay, that fender benders there, but I was maybe not ready to pay for this out of pocket expense right then in there.

My insurance says it's my fault, so I'm kind of in trouble on this one a little bit, or I don't want to tell my insurance about it at all, so I'm going to pay for it. Now the cop sees me with a busted taillight or whatever, and it starts spiraling.

This thing keeps happening. And it all stemmed from me deciding to spend an extra dollar or two to go down a different road. So in this world, there's this whole concept of accredited investors, or people who have enough money in an account to be able to become a pattern day trader.

What is the minimum amount of money you think it would take to be in your world and actually make money?

Jake Moilanen

Let's separate the type of way of making money. So either you have the public market versus the private market. So in a private market you need to be accredited to go invest in. It's not to say that credit investors make any better decisions in the large population. I can tell you for a fact that in most cases, they do not. They just can handle a massive drawdown unlike most people. That's different.

Just to say on the private market real quick. You need to have, I've done the math on this quite a few times, at minimum 10 private investments, most likely 20 investments to really be able to realize an expected return that's positive.

The reason for that is, if you're doing a private investment most of the times it is a startup. Startups are not great. 64.8% of all startups will not return the money back. It's that, let’s call it a third that has the lion's share of the returns. Now the nice thing about that is very asymmetrical. What that return profile looks like. If you hit it out the park, you're talking hitting 100X as opposed to 5%. It is a massive windfall.

That should hopefully make up for all those losses you do incur. I think for the private market, the biggest thing is you just need to build a right, large, a lot of checks. Average minimum check size in most cases is 25k for most angel investments. You're talking that you're going to need 250 to half million dollars to have a chance minimum to be able to do anything on the on the startup world. Now flipping over to the public market side.

Robert Hansen

An extra million dollars on top of that to be accredited.1.5 million-ish just to get started. Minimum.

Jake Moilanen

You can say a million. You can take some of that cash and put it into a private investment. That would still count towards net worth. It should still so count. But still, yes, it's a lot of money. Now on the public market side. Well, there's a very good reason why there is a day trading limit. I don't know the exact number. But somewhere around 90% of day traders will wash out. They will blow up their account.

The biggest issue is that they take on too much risk for what the current position is. They see the ability to triple their money by buying a Tesla, call away all the money and there's earnings coming up. That doesn't work out too often. But they will take that risk anyways. Sometimes you get lucky, which is some of the worst things that ever happen. If you're a day trader. You get lucky at the beginning, that's probably the worst thing to possibly happen because you take on way more risk than you really need to.

But for you to really understand your risk levels of how much risk you're taking on is something that the average person does not know how to do. I do think the 25k limit for pattern day trading is a very good thing. There's ways you can get around it. I believe you can do Forex without that minimum. There's a few ways you can get around it. But it is there for a reason. I do think in general that having some of these regulations is effective and actually saves a lot of people a lot of money.

Robert Hansen

Why not have it based on the types of trades? You can't do anything that can get you to zero. Or it has to be some percentage of your net worth as opposed to a hard number like that. Because maybe someone's willing to take 50% of their money off the table just to go and do this because they feel very confident they can do it. Well, fine. But you can't go to zero.

Jake Moilanen

I think a lot of times you do have different margin requirements based off the type of things that you're trading. If you're trading, if you're doing options, your margin requirements are, you can't get as much margin versus say a regular common stock. You can have much higher margin. Now even look at Robin Hood and some other ones when you had the Wall Street bets types that was all coming out.

Well certain stocks that had a higher margin requirement because they are inherently more risky. They did it at a stock by stock level. I think that is actually a very good thing because the premise is trying to protect you against yourself. I think that actually was a very good thing. That is occurring. It is just not very obvious.

Robert Hansen

Another thing I thought that was interesting was when the Associated Press got compromised. Their Twitter page got compromised. They started saying something about some stock. Suddenly that stock shot through the roof then it sold out.

That's something that the average investor maybe could weather. Because they're not going to be focused on this algorithmic analysis of what the AP is saying in that split second that that all went through. Whereas a robot is going to assume it's correct and go for it. Maybe there's some upside to being a normal schlub with just a little bit of cash in the bank.

Jake Moilanen

Computers do. They move fast. But the nice thing is they have proper risk controls in place. It's all programmed in. They don't make nearly as many mistakes as a human does.

Robert Hansen

Tell me about Seek and Destroy algorithms. I've read a bit about them. But they seem like if someone were really, really good at this, they could completely crush everybody else in the market.

Jake Moilanen

Seek and Destroy algorithms are a way that a lot of hedge funds will go make a little extra money. Pretty much, if you have, say, a major support level, they know that people know there's a support level. They say if it goes below this level, I know this is probably going to go down, so I want to get out the stock.

What Seek and Destroy algorithm does is it quickly does a giant sell order to go take out all those stops. You can see all those orders on what it calls on the book. You can go see that there's a bunch of people that are below this level that are willing to sell it, or they want to sell if it goes below this level. They will go take all of them out then pop it back up. Then people also get FOMO. They jump right back into that trade but now at a higher price. The hedge fund was able to make that delta.

That is a very common technique. You see it. That's done all the time. To tell you the way to get around it, what I do is that you can do some advanced orders. You can pretty much do it based off of a moving average as opposed to a pure stock price move. When you see those little blips real quick, it goes down, it goes up, you don't get hit by that. It actually is much more effective to at least avoid those Seek and Destroy algorithms.

Robert Hansen

But ultimately, you said you wanted to sell at some price points.

Jake Moilanen

That’s a stop. What we are saying is say you have Apple. If Apple goes below $100. Okay, I need to get out. I want to sell this because I don't want to take a big loss. Which is a very smart thing. You should always have stops on everything. Never not have stops. But what happens is, the algorithms know that there's a lot of people below that $100.

There's a very much a psychological level of round numbers. As soon there's a bunch of people below that number, they would have stops in place, take them all out, get them to go sell. Then they can shoot it back up. A lot of times people will come back into the market at a worse price and be worse off for it.

Robert Hansen

The current thing I'm hearing from economists in general is the rental generation. They're not going to own literally anything. It started with the blockbusters. You don't own your own videotapes anymore. Now we have Uber. You don't own your own car anymore. You certainly don't own your house. There's just no way you can afford that. That's truly a pipe dream for most people.

Where does the natural conclusion go? What else can rent seekers own that they don't already own of people's things? I mean, we have literally jeans you can rent those. Rent the rack. We're really getting to the point where you don't own anything at all.

Jake Moilanen

Yeah. The sharing economy has definitely taken hold. People are way more comfortable with the idea of that they don't actually own something. They let someone else use it. It will be interesting to see if that trend persists over the long term or if that's short term.

Maybe it is one of the things with this current generation in the fourth turning. It is definitely a theme that we're seeing. I don't know where it stops. I think we're starting to see. WeWork founder, he is trying to do the same thing now with the single family residences. That movement is still going.

Robert Hansen

There is something to be said about. I saw one model where it's a house that you own. You technically own this thing. But you can basically pack it, put it on the back of a truck and ship it over to Los Angeles. Now they put it in this stack of these houses. Now you live in Los Angeles. You want to start living in San Francisco, you pack up your house, and you move it over. Truly portable.

Living like that does seem to make some sense. You don't own the land. You may own the things inside of it. You may not even own the structure. You certainly don't own the truck that takes you to and fro. But it gives you a lot of autonomy to go wherever you want. But I'm curious how those people are going to think about things like money. What do you even do with money? Do you even really need money? Because other than a handful of dollars to pay your rent and watch Netflix, what are you even doing with it?

Why does someone want to be super wealthy in United States when they basically get all the same things? They can travel anywhere they want. They can live anywhere they want. They can work anywhere they want. Everything's digital. Everything's over zoom. Why do I care about making a million dollars a year versus 50,000 a year?

Jake Moilanen

I think what we're seeing in society right now is that a lot of people have stopped trying to follow the path that you're supposed to follow. You graduate high school. You go to college. You go get a career. You go have 2.5 kids. That paradigm is starting to shift. People are realizing that you don't have to follow the typical, traditional path. I love it. I think that's one of those things that, this movement has been going for a while. I first was even made aware of it when I read The 4-Hour Workweek.

That was mind blowing to even think that you could possibly do that. Given the fact I'd been very traditional up to that point. I do think that movement is going to continue. I think it's a great thing to see. I do think that you're going to see a lot more fractional ownership. Look at even homes. There's even some of the crypto techniques. You can start buying fractional shares of homes now. It's almost like an easier way of doing a timeshare. I do think that this trend is here.

Robert Hansen

I have a quick anecdote about that. I was once talking about that book to a friend of mine. He already lives that life to some degree. Which I thought he'd find it interesting about that book. I’m like, “Oh, have you ever read The 4-Hour Workweek?” He's like, “Yeah, I can't see working two more hours a week.” They're definitely out there.

You talked a little about the United States being very short sighted. But I also think companies are very, very short sighted. Is there a way that we could build a better type of a company? Something that isn't profit driven over the next three months, thinks maybe in the 10 years out, let's say. Or maybe even just a year out. Focused more on really growing a business. What it takes to get the fundamentals right. Focusing on the R&D for the first half of the year instead of just two weeks before they have to start selling whatever's in the back of the truck.

Jake Moilanen

I think that it'd be great. I think one of the challenges especially with the stock market, if you're a public company, you are quarter to quarter. To really be able to do something big sometimes, either you have to be able to handle the pain of having your share price get crushed, which is not always easy. Especially when you have to report to a board of directors. Or else you have to do something like what Dell did. Which they go private then they go restructure. Do what they need to do and then re-go public. I think that's typically what we're seeing.

There are companies out there that are trying to take a much more long term view. The problem is that a lot of times they are getting penalized for it. Which is unfortunate. I think the whole idea is, I think Warren Buffett is doing very well with Berkshire Hathaway where his permit tries getting only people that are going to hold the stock for the long term. I think that he's done a very effective job with that. He pretty much says that he does not care about quarter to quarter.

You almost have to have that as part of your culture if you're going to really be able to do that well. I don't think that's something that many founders or CEOs are willing to go do. Just because it is very difficult.

Robert Hansen

Especially because they're bonused on quarterly earnings for the most part. Or stock movement. Or something like that. It's an ugly loop. It basically means that you're stuck in this hell of trying to make sure your quarterly profits are getting up. Which is good for shareholders but terrible for the business.

Jake Moilanen

I think a lot of CEOs are professional CEOs. They were not founders. I think the major difference I have seen is that people that have been founders and ran a public company, they do have a longer term view. Where professional CEOs that come in, they approach making most of their economics through bonuses. I think that's where you see a lot of the detriment.

Robert Hansen

I've been saying this for a while. I'd love to hear whether you agree with this or not. The human body, I think, is very similar to a company in the sense that we have genetics and we have epigenetics. Genetics would be your operating agreement when you're starting a company. Your shareholders agreement with two or three founders, co-founders. Maybe some employment docs. It gets started. That's about it. Your LLC documents with the state. It's five or six things that have to get done for any real company.

But as soon as you start taking on additional things like contracts with vendors, contracts with customers, contracts with new employees, contracts with the state. Or something that you have to do above and beyond what you're normally asked to do. Or God forbid if you go public. You are now taking on the epigenetics. This is very similar to a virus. Your body got reprogrammed. You didn't necessarily want it to go this way. Or maybe you were okay with it at the time. You thought it'd be great to do this. Your body now is doing something different than it was originally designed to do.

To me, people don't spend enough time thinking about what this thing, this code that they're injecting into their body, this code that they're injecting in their company in this case, is going to do for the company. What incentives suddenly get changed? There is as a bunch of different examples of this.

For instance, let's say you have insurance. What are you supposed to do? Are you supposed to get worse at everything because your insurance is going to pay for the downside? Is that really what we're saying?

Well, no, because the insurance isn't going to give you the money if you keep screwing up. They'll give you the money once because accidents happen. But they're not going to keep reinsuring you year after year if you are constantly a liability for them. What are you supposed to do now?

Well, now you're supposed to not trigger your insurance. You're supposed to do everything right is what you're supposed to do. Insurance basically is a way to punish yourself so you do the right thing. The occasional downside of you not doing the right thing.

These are the little pieces of code that get injected in companies. Some of them are good. Some of them are terrible. I've seen a lot of agreements with employees that are terrible agreements. You're basically adding a bunch of liabilities to this company. Not assets. True liabilities to the company. How do you get from an IPO being this hugely detrimental thing to being potentially a positive thing for the company beyond the short term financial windfall?

Jake Moilanen

I think there's a lot of benefits being a public company. You have more access to capital. You have more liquidity. We talked about the DCF models of valuing a company. When you have more liquidity, the discount rate is reduced. The value of the company goes up. There's a lot of benefits to that for shareholders.

But those benefits have to now weigh against the downside of that. Which is, you have to report quarterly earnings. You have complete visibility to every one of what you're doing. Your competition see what you're doing and actually know your numbers. It is a difficult thing to balance. I think a lot of companies have to decide what is the direction they want to go. I think ultimately, a lot of founders, a lot of the investors, ultimately might see an IPO, because that's their big liquidity event. That is the ultimate. That is the goal.

I think if you don't want to have that as the goal, when you set up a company, you need to be finding investors that are okay with not having that massive liquidity event. May be okay having a company into perpetuity, and living off of dividends. It's almost an agreement that you need to make with your investors from the get go. If you don't, then you're pretty much going to be beholden to them and having those liquidity events down the road.

Robert Hansen

You think that there's a way to do maybe a B Corp, a new type of corporation? Where you're like, this is not necessarily a for good company, but this is a for the good of the investors company.

Jake Moilanen

I think yes. For sure. There's some companies that have now had the ESG distinction, or they say they are ESG. Investors inherently know that if you're an ESG company, you're not going to be for profit in all cases. There's a lot of debate if that's a good thing or a bad thing. But I think a lot of people do want to have people doing the right thing for society, actually trying to protect the environment and also being good stewards or good citizens within the country as well.

I think as an investor, you have to decide where do you fall? Are you a pure capitalist? Or are you also trying to maybe make some money but with a little bit less but also do good? I think at the end of the day, it really comes down to making sure you pick those right investors from day one.

Robert Hansen

The idea of the market being driven by capitalism is an interesting one. But I'm not sure it's right any more. Once upon a time, we used to say if you're investing in a company, especially a stock, you're giving the common man and every person who happens to have a little money in their pocket, the ability to share in the upside of a company they had some belief in. But now it seems like everything's driven by volatility. You really have very few people investing in companies because they believe in the fundamentals.

You have a lot more people investing in whether they think it's going to go up or down today. That's moving away from capitalism and more towards the sport of watching this ping pong back and forth. Which is incredibly interesting but also not what I typically call capitalism where you are seeing this upside related to building something.

Jake Moilanen

I think that is a challenge right now. That you are seeing that people care more about the price action as opposed to the fundamentals. That absolutely does occur. I think in the short term, the market is a voting mechanism. It decides is it going to go up or going down? However, over the long term, the intrinsic value will come out. It really depends on the type of investor. Are you an investor? Were you looking for that long term which you are going after the fundamentals? You're looking at what the current economic conditions are. Is this going to improve and cause this company to succeed? Or are you looking at it trying to capture a small move in the company and make a buck?

Now, it's interesting. Being in venture capital, I see both sides. I'm a day trader but I'm also in venture capital. In venture capital, I have this very much fundamental belief that it has to be fundamentals that are actually going to drive this. Because in the private market, there's no short term trade. You're putting your money in, and it's gone until they actually have a liquidity event of some sort. In the public market, liquidity is a downside. You can get in and out real quick. You don't have to have nearly as much conviction behind a company.

Now there's long term capital gains. There are reasons why you might want to hold it longer, because there are there are some tax benefits to it. But ultimately it's a different mindset of what you're looking at. I think over the long term, a private investment is a much better one because you you're forced to take the long term view. There's really three ways of getting alpha as an investor. You either have to have an information advantage. You know something about inside information that the average person doesn't know. You can’t do that legally in the public market.

However on the private market, you can do it all day long. The other option is having analytical advantage. You have that same data, but you are better at analyzing to know if this is actually a good thing or a bad thing. Now, you can do that in both the private market, although it's a little bit more difficult. But you can also do it very much so in the public market. But there's a lot of really good people, a lot of smart computers, a lot of money there thrown at it to analyze it more effectively.

The third thing is having a behavioral advantage. You don't get FOMO. You don't get fear of missing out. You don't see a massive drawdown, panic and sell. Now, the private market has a big advantage that you inherently remove that behavioral component. Because as long as you don't have FOMO when you first get in, that's one thing to worry about, once you're in, you're in. There's nothing you can do from behavioral standpoint. It's out of your hands. You've effectively removed yourself from that equation. Maybe you do some activist things. But really, there's not a whole lot.

On the public market though, I can tell you what, animal spirits are a real thing. Humans are irrational. They will go and sell when they shouldn't. They'll go buy when they shouldn't. They almost inherently do the wrong thing because that's just human nature.

Robert Hansen

That's interesting. The whole buy low, sell high thing. People will think that they're doing that. Then they actually get in there. They get freaked out. Too excited.

Jake Moilanen

Yeah. One thing is always interesting. People are very successful when they are paper trading. When they have no emotion about it because it's not real money. Then as soon as it actually flips over to real money, they fall apart. This happens over and over again.

Robert Hansen

Wow. That's scary.

Jake Moilanen

That's interesting. One of the things that I think about is I know that I'm human. I have that bias. One of the things I try doing is, I have this hybrid model where I mix both human element of making decision about where things are going to go. But then I have a computer that helps me go manage the trade. Once I go do the order, say I'm going to buy Apple, it flips over to now my program that goes and runs and manages the trade for me.

I remove the human component to it, that behavioral component, and let the computer which looks at the cold, hard numbers. Is this a good straight sell? Or do I need to exit it? I found that using that technique has been definitely much more successful.

Robert Hansen

As long as the stock doesn't go to zero. There's no reason you can't hold on to it forever too. You can wait it out because stocks generally do rebound.

Jake Moilanen

They do. But look at 2001. How many stocks never came back?

Robert Hansen

As long as it doesn't go to zero?

Jake Moilanen

I think even there's so many stocks out there that have had 90% draw downs. They're unlikely, unless you hold it for 100 years, that they're ever going to get back up to that point. I do agree with that in a normal market condition. But there are times when that does not hold true.

Robert Hansen

Is there any other got you that people should be aware of? Well there's really fun ones. Like in certain places, trading doesn't happen that day. Your algorithm set up to do something very specific on a specific day, but the markets closed. You literally cannot do that thing.

Jake Moilanen

Yeah. There's lots of things out there. I can go on for hours on this one.

Robert Hansen

All right, I'll leave it at that. Can you tell us about SPACs. There has been a lot in the news about it. New way to go public very quickly. Can you?

Jake Moilanen

SPACs actually existed quite a bit, even 10, 15 years ago. Maybe a little bit longer. They were very popular back then. They just started coming back into vogue in 2020 and 2021. There are a lot of benefits to it for the target company.

But there's usually not a whole lot of benefit for you as an investor or trader to go put money into that SPAC. Unless you are one of the few that actually get in very early. They just come and say, my money is just going to sit here and you're going to make money. You can't lose money.

Because either you're going to get a target company. You choose if you want to go to the tech company, or you get money back plus some interests. I think we're definitely seeing SPACs come down. Most, I'd say 99% of people don't understand how a SPAC actually works. Even truth be told, I couldn't tell you all the details of how a SPAC works either. But I know that it's probably better to steer clear of them as a trader investor unless you're going to be putting money in initially.

Robert Hansen

The way I've been effectively told that it works is more or less just, there's a company. Let's say you have $100 million idea. Their SPAC is worth $10 million. You're basically buying their $10 million from them of their value of the company. If the stock goes up by $100 million, because you're adding $100 million, it's no big deal.

It's $10 million off of that additional raise. Now you're left with $90 million plus whatever the original company's worth. Which it's nothing. It's an IPO shell. Now you have $90 million to go walk around and build your company with.

Jake Moilanen

Yeah. It is a way for companies to go public sooner and actually have some increased cash on hand. There are definitely some benefits if you're the target company. Many SPACs pretty much didn't have a target company. Apparently I think Donald Trump, they lost his SPAC because they couldn't find a target company and hit return all the capital.

A lot of them don't want to do that. Because there's a whole lot of work to get it set up. If you can't find a target company, then effectively all that goes away. A lot of times they take deals that are probably less than ideal because they're running out of time.

Robert Hansen

I know that there's a very big expense associated with going IPO. Like it is a million dollars plus about a year's worth of work with people sitting in your office constantly over your shoulder, looking at every single thing. What does it typically take for a company to use a SPAC to take their company?

Jake Moilanen

It is still a big endeavor. It is not the same level of an IPO. You don't have to do as many roadshows but you are still having to go through the whole process. It is a daunting process. I know a number of companies that it has taken them at least six months to go do. But it is a bit simpler. It's a bit easier. Because you don't have to do all that work. But it is not a golden bullet, you can just go do that and you can circumvent all the other tough things about an IPO.

Robert Hansen

Somewhat easy but not easy, easy. There's certain companies I've run across that I felt like they should probably go public. But them getting a million dollars and spending a whole year doing it. It's probably unlikely they would be able to cross that bridge.

Jake Moilanen

Most companies need to get into multibillion dollar range before it's even worth it, from overhead point of view, to actually go do. One of the challenges is, how do you make companies able to go public earlier? I think that's one of the challenges. You always look at the private market versus the public market. The public market, a lot of value creation historically occurred when a company went public. Think Google or Facebook. When they went public, they were relatively low market cap.

Most of the value creation occurred while there were public. However, because the bar has gotten so high for a lot of these companies to go public, a lot of these companies are staying private longer. What's happening is that all the value creation for those companies are occurring while it's private, which locks out, as you mentioned earlier, locks out anyone less than an accredited investor from it.

There needs to be some way for companies go to go public sooner with a lower overhead. It costs a company somewhere around $3 million to maintain compliance from a regulatory standpoint. Per year. Per New York Stock Exchange for instance. If you're $100 million top line company, that's a huge chunk of it. It's not reasonable unless you are into that unicorn range to go public.

Robert Hansen

Got you. We've been hearing a lot in the news about the rate of employment. What do you think the true rate of employment is? Or how is that measured today? How should it be measured?

Jake Moilanen

Great question. I don't know. There's a quick answer. Going back to the inflation question a little bit earlier. I do think that we are seeing it's not as nebulous as it was before. I think we had to have a chance of actually having a soft landing. Which is, I would never have actually thought in the early days. The traditional definition of a soft landing is reducing inflation, but not increasing unemployment.

I think a more accurate way of thinking about it, for me at least is that, you won't see the job openings come down but maintained steady unemployment numbers. That's what we're seeing today. I do think a lot of that is the true number is coming down. Anecdotally I can see a lot of companies that had big hiring plans, from a technology perspective, are all freezing. They are not retracting the job postings off the websites. It is definitely coming down. I couldn't tell you exactly where it is. I do think that it is reasonably accurate though.

Robert Hansen

There was one comment I saw. Basically, the amount of people who are employed is a useful metric. But the amount of people who are not employed actually accounts for two totally large, different group of people. One is people who are looking but can't find. Another group is people who aren't even looking. Totally given up from the whole thing.

But that first group is a fairly distinct group. Those people are actively sending resumes, are trying to go to job interviews, or at least I would say they are even if they're not doing a good job of it. But the way the US government tracks that is they say, well, if they haven't had a job within the last three months, they fall into that second bucket where they're not even looking. But that's actually not true. That just means that they still haven't found a job.

Jake Moilanen

The unemployment benefits have run out.

Robert Hansen

It seems like the true unemployment rate is probably wildly miscalculated. As far as people who want a job and simply can't, for whatever reason, figure out how to get one compared to people who ran out of unemployment benefits.

Jake Moilanen

Yeah. I got an anecdotal, but I've seen quite a few people go to gig working. They are technically unemployed still. They have no W-2 income yet they are generating 1099 income. I do think that people inherently at some point, if they can't get a job after three months, they're going to be going to Uber. They're going to go run, make deliveries. They're going to take a different way of actually generating income.

I do think that they are getting somewhat employed. They have some income coming in. Just might not be a true W-2 type income.

Robert Hansen

Two quotes I wanted to read you. Which I'm sure you've probably read both of them. Treasury Secretary Janet Yellen admitted that she was, “Wrong about the path that inflation would take.” German Vice Chancellor Robert Habeck said, “Because we didn't know, to be honest, and nobody knew how this gas market is intertwined,” meaning with the entirety of the market.

First of all, were those things, do you think, investors knew? Well that inflation was heavily tied and gas was heavily intertwined?

Jake Moilanen

It was very well known that inflation was not transitory. I don't know as much about the gas side. But I don't think anyone had any preconceived notions that things are way worse than what the Fed was letting on.

Robert Hansen

If that's the case, where you feel like your cohort of traders knew this fairly well. This was common knowledge. Which I think it was. I feel like I knew this information and I'm not at all what you are. How did we end up with these people in these jobs? I mean, this isn't a random pattern day trader who had a couple of bucks to throw at some bad ideas. These are the heads of the monetary systems for two major countries in the Western Hemisphere.

These people sound like idiots. They sound like they have nobody who's informing them of what's really going on out there. They're throwing darts at the wall. How did this happen? I mean, shouldn't there be some stopgap? Shouldn’t they have some cabinet made of actual professionals who can tell them that this is what's going to happen?

Jake Moilanen

I think they did know. I think that inflation is a self-fulfilling prophecy. They probably had to maintain a script that inflation was not occurring. I do think one of the reasons how a lot of them got elected is, we don't get the best actually going into the public sector. They're not going to hold an office or be in the cabinet. They're probably just going to be making money. If they are any good at all, they're going to be out there on the private side making money.

We don't get the best and brightest. The people that do, unfortunately, take a step back. People are motivated by a few different things. It's either family, it is power, or it is money. Unfortunately, for mostly the political side, they are more focused on power as opposed to money. The people that really, really understand the space well, and very, very competent are more focused on money. They're going to go stay private and not be a public official.

Robert Hansen

They will probably avoid it if they were even offered the position.

Jake Moilanen

I know I would.

Robert Hansen

That's terrifying. Another version of that same thing. I once heard that once upon a time, the best and brightest went to politics. Then they went to Wall Street. Now they're in ads. What are you left with in politics? You got the C team. By those two comments alone, as far as financial fiscal understanding, either they're singing a song unrelated to how they actually feel and how they think. I hope is true. I hope they're lying. Or they really don't know what they're doing. Either way, I don't want them in charge. That's scary.

How does the average young budding capitalist get rich? What would you do if you're talking to a 20 something who just got their first job, and by the time they are in retirement age they're famously wealthy.

Jake Moilanen

I guess to find rich. Alright. There's three ways of thinking about this. Over $100 million. I'll give the quick depending on where you want to end up in your career. If you want to make a pretty good likelihood of success you need to be diversified, or you need to be in something that is going to have a high likelihood of outcome. More people have become millionaires off of real estate versus anywhere else.

If you're trying to get into a low millionaire type status, go into real estate. If you're wanting to get in, call it about 50 million to maybe 100 million if you're lucky, that's probably better to be an investor. You have a diversified portfolio. You're broad. You're going to do well over time. To become super-rich, a billionaire status, you need concentration. To do that you need to have founded a company. It is very few individuals that have ever gotten to billionaire status investing.

Almost everyone that's ever gotten to a billionaire status has done it through founding a company. Had that concentration to get them to that level. But the problem with that is that most companies fail. You're taking a lot of risk on to go do that. If that works out, you'll be filthy rich. But there's a good chance that you end up with nothing or very, very little. I think it just depends on where you want to be in that spectrum.

Again, also now if we're looking at private versus public. I would probably focus on private initially given I think most value creation and wealth generation occurs on the private side today. That might not always be the case. Especially as you see companies starting to tokenize themselves. They might be able to go public sooner. But at least today, you need to be on the private side. Because that’s where most of the generation of wealth does occur.

Robert Hansen

I have heard some very crazy stories about the real estate market. Where people will buy up some set of hotel blocks in some semi third world country. Not exactly third world. But certainly not downtown LA. They will befriend all the politicians, pay off whatever it takes. Then suddenly laws get passed and make it impossible for anyone else to create those things. Now they have a monopoly of those apartment blocks.

Then they'll set up a resort with some friends. Maybe don't even fund the resort. They just tell their friends, hey, as long as you basically put your thing here, I'll give you these tax breaks with the local authorities. Suddenly, this thing that was maybe this minor investment overall is worth 50 100, 1000X what it was originally worth. Because there's nothing left. This is all the land you're going to have. There might be some other clever ways that people could get to the hyper wealthy.

Jake Moilanen

There’s always all kinds of clever tricks out there to do it. There's a million ways to get very, very rich. The problem is finding the right one. A lot of it also you have to look to see what is your actual demeanor. Your style that's going to be a good fit for you.

Are you more conservative by nature? Then maybe you have a more diversified portfolio type approach. Are you more aggressive? Then maybe you go all in on one company. Maybe you're just very clever. You can find one of those loopholes that allows you to scale very, very quickly your real estate empire. I think the challenge is picking out the right way for you.

Robert Hansen

You also mentioned power in the transitory nature. I think that there is something to understanding the bellwethers. Understanding where things are going. If you can see what inflation really looks like, you can hedge against these things.

Where do people go to find out about these things and get better at investing? If you were to give a hit list of things that you would say you've got to go read these things on a regular basis. Because this is where the real knowledge is coming from. These are the real economists who seem to know what they're talking about.

Jake Moilanen

There's a lot of noise out there. Trying to hone in to the ones that actually have signal. I think I spend half my time looking at just trying to find what actually has signal. I have systems setup in place so that I can start slipping through. What is actually a good Twitter account, for instance, versus not a good Twitter account? Which actually is getting value actually improving my actual returns, my equity curve versus who's not.

That is a very iterative type process. It changes over time. I think if you're looking for a higher level, I do think the ISM or the Manufacturing Index is a great way to understanding where the manufacturing is going. Because that is a really good precursor to where the S&P is going over the next six months. If it's above 50, there's good chance the S&P is going to be up higher than it is today. There are these techniques that that you can look at.

I think a lot of it is really first starting to understand macro then having an idea of what levers go pull. What happens to the value of the dollar if interest rates goes up? Or inflation goes up. Understanding how all those levers pull. I think probably the best source for a lot of this, to understand it. Ray Dalio did this amazing thing called The Economic Machine. Which is this video that shows how the economy works. It's a 30 minute video. But it's really well done.

That gives you a nice overview. Then you need to start honing in on those specific aspects that you see in that video. You'll get a much better clear picture of where things might be going.

Robert Hansen

What do you think? Is it going to go up? Is it going to go down? What do you think the economy is going to look like in another six months, a year?

Jake Moilanen

Great question. First off, I don't know. Outside percentages, I give the edge that the stock market is higher in six months than it is today. I do think there's a very good chance that we have reached a near term bottom. Whenever you start seeing news come out that's negative and yet the market goes up, that's usually a pretty good sign that we're getting close to bottom. Now the bottom in the market is, markets are inherently discounting mechanism.

They're looking at where things are going to be in six months. Actually how things are in six months. They’ll still dip for the next six months. But the market thinks it's going to be better after that fact. That's why the prices might be going up. It's always interesting to look in the market. The stock market is about six months ahead on the real estate.

If you look at a REIT, see where that actual price of that REIT is going. That was a six month precursor to what actually is going to happen in the actual real estate market. You see this across the board.

Robert Hansen

Any other big signals that you pay attention to?

Jake Moilanen

I follow the semiconductors. Semiconductors are the lifeblood of technology today. That is the core component that where everything goes. I heavily follows the semis in which direction they're going to see where NASX is going to go. I think that’s a very good precursor.

Robert Hansen

All right. Well this has been great. How do people find you? How do they get in touch with you?

Jake Moilanen

I don't use that much but I'm on Twitter. My last name. Moilanen. Or LinkedIn. I don't have a ton of socials.

Robert Hansen

Well, hopefully people will reach out to you. You are definitely one of the smartest guys I've met in this space. I want to thank you for joining me on this episode of the RSnake Show.

Jake Moilanen

Absolutely. Thanks for having me.

Robert Hansen

Thanks for coming.