Happy New Year to everyone. We’re going to kick off 2025 by re-releasing an expanded and improved version of our 2021 white paper where we challenged Nassim Taleb’s assertion that Bitcoin was worth zero. The official release will be on Twitter/X in the middle of the week. We’re asking everyone to like and repost so that this important work gets maximum exposure. DKI premium subscribers will have early access. The current White House is taking on junk fees. DKI supports this. We explain how we can be for mandatory disclosure of junk fees and against government mandated pricing. Holiday retail sales rose, but since the increase came largely from the wealthy on the high end and aggressive discounting on the low end, we’re not convinced it means the economy is in great shape. Analysts have missed the mark on earnings estimates so badly for the past three years that they now expect 2024 earnings to be slightly above where 2022 estimates started and below the initial 2023 expectation. Despite massive downward revisions, the market has risen to near-highs. Yardeni Research @yardeni generously offered one of their charts to make the point. In our educational “Thing”, we explain the sometimes-misleading language of valuing bonds.
This week, we’ll address the following topics:
- Announcing the Second Edition of Our Bitcoin White Paper
- Hidden Junk Fees vs. Mandated Pricing
- Analysts Miss the Mark on 2024 S&P 500 Earnings
- Holiday Retail Sales Up: Fueled by Discounts and Wealthy Shoppers
- Breaking Down Bonds: The Yield-Price Relationship Explained
We got some bittersweet news this week. Intern, Alex Petrou, will be moving on from DKI. He received a full-time paying offer from someone I know and respect. It’s the right move for him, and he leaves with our appreciation, our applause, and an invitation to return at any point in the future. His bright intellect, outstanding humor, and positive attitude made Alex a meaningful contributor at DKI. While it’s hard to lose good people, that is the purpose of an internship. They provide DKI with work that helps us produce excellent content. It’s my job to help prepare them to succeed when they’re ready to leave. Moving on to a better position is the best demonstration that we are living up to our commitment to our young interns.
We are now joined by Joshua Reaves from the same University of Tennessee finance program that brought us Andrew Brown. Embracing the principle of “next man up”, Joshua contributed to this week’s 5 Things and has already pitched great ideas for next week’s version. Legendary Michigan football coach, Bo Schembechler, used to say “the expectation is for the position, not the man”. It meant that if the team lost a starter, the next man to take that position was expected to perform like a starter. Given his fast start, it’s clear Josh understands this.
Ready for a week of debating the real value of Bitcoin? Let’s dive in:
1) Announcing the Second Edition of Our Bitcoin White Paper:
Over three years ago, Nassim Taleb published a white paper claiming Bitcoin was worth zero. In late 2021, Deep Knowledge Investing responded with a white paper challenging his arguments. Since then, Bitcoin has faced significant events, including a mining ban in China, Operation Chokepoint, ETF approval delays and approvals, and multiple countries discussing adding Bitcoin as a strategic reserve. Throughout it all, Bitcoin’s price has crossed $100k multiple times—both up and down.
Given these developments, we’re excited to release the second edition of our Bitcoin white paper. This updated version retains the original analysis, incorporates new events and data, and includes a new chapter on Bitcoin’s evolution as a payment system. We’ve also added fresh charts and visuals to make the material more engaging and accessible for a broader audience.
This work is a collaborative effort, and we want to acknowledge the contributions of the Deep Knowledge Investing team and advisors. Analysts Jordan Canik and Danny Pfeiffer provided invaluable research and insights, while Intern, Andrew Brown, offered macroeconomic analysis and charts to support the work. Intern, Alex Petrou, contributed a detailed chapter on Bitcoin’s payment layers, and Board Member, Howard Freedland, ensured the paper was clear and concise. Additionally, Peruvian Bull @peruvian_bull lent his technical expertise and feedback on Bitcoin and fiat currency.
We’re releasing the updated white paper this week. If you find it compelling, please like, share, and spread the word. Your support is vital in elevating this conversation. Stay tuned!
We like Taleb’s work. We just disagree with him about Bitcoin.
2) Hidden Junk Fees vs Mandated Pricing:
Hidden junk fees and mandated pricing shouldn’t be confused. Addressing junk fees is about ensuring transparency for consumers, while mandated pricing often interferes with markets and creates more problems than it solves.
Junk fees—those sneaky “resort charges” or “service fees” added at the last minute—are universally hated, and for good reason. They mislead consumers and stifle fair competition. The government is right to crack down on companies that advertise misleading prices.
The Federal Trade Commission’s new rule banning hidden fees in ticketing and lodging industries is a step in the right direction. It ensures that businesses must display the full price upfront. According to the FTC, failing to “clearly, conspicuously, and prominently disclose the total price” is now considered deceptive and unlawful. The rule takes effect in late March or early April, giving consumers the clarity they deserve.
Has anyone else ever been surprised when the hotel bill is inflated by resort fees for a gym you never used?
DKI Takeaway: Mandated pricing, however, is a different matter. Setting caps on things like overdraft fees might sound appealing, but when governments try to set pricing, it almost always backfires. Banks could respond by increasing other fees, scaling back services, or terminating newly unprofitable accounts harming the very people the rules aim to protect. Government action should protect transparency and empower consumers without dictating prices. Let the market determine pricing—just make sure everyone knows exactly what they’re paying for.
3) Analysts Miss the Mark on ’22, ’23, and ‘24 S&P 500 Earnings:
Wall Street’s crystal ball is looking foggy. Analysts predicted a strong 2024 for S&P 500 earnings, yet we’re more than a year behind where they thought 2023 earnings would land. The broader market is trading on optimism, but reality paints a pricier picture. Seven mega-cap stocks—Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta—make up more than 30% of the index and have delivered stellar earnings. Their success props up the entire market while masking underperformance elsewhere. Strip them out, and things look much less rosy. This concentration raises red flags. A handful of winners shouldn’t carry the weight of 500 companies, yet that’s the precarious position we’re in. With the market leaning so heavily on a few giants, the risks of a broader pullback increase if these leaders stumble.
Graph from Yardeni Research shows how wrong the ’23 and ’24 estimates were.
Two years ago, DKI showed how inaccurate the ’22 and ’23 earnings estimates were.
DKI Takeaway: The lack of market breadth has been well-documented in other places. We’d like to make an alternative, but equally important point. In 2021, DKI warned that inflation was too high and not transitory. We concluded that the Fed would need to raise interest rates and that earnings estimates in 2022 and 2023 were too high. At the time the 2022 estimate for S&P 500 earnings was around $230, and the 2023 estimate was above $250. The current 2024 estimate is a little over $240. That means more than two years after DKI highlighted unrealistic earnings expectations, the 2024 estimate is barely above where 2022 was and BELOW where these same analysts expected for 2023. These estimates keep falling and the market is slightly below all-time highs. It might be a good time to think about how much net exposure you want in your portfolio. If that’s confusing to you, reach out and we can help.
4) Holiday Retail Sales Up: Fueled by Discounts and Wealthy Shoppers:
This year’s holiday retail sales have seen remarkable growth compared to previous years. Total spending increased 3.8% over 2023 with online spending contributing 6.7% growth between Nov. 1st and Dec. 24th. Even with a holiday season 5 days shorter than last year, sales handily beat forecasts of 3.2% growth and last year’s 3.1% increase. With reduced seasonal selling days and an already cautious consumer, retailers like Target, Walmart, and Dollar General focused on discounts to push sales. Strategies like rollbacks, intense promotion, price reductions, social media campaigns, and efficient ‘buy online, pick up in store’ systems were used to boost revenues. Despite total spending growth, the spending was uneven with wealthier consumers spending more, driving much of the growth.
Affluent households benefiting from the rising stock market, pushed luxury sales up by over 12%, with higher-end retailers like Costco and Williams-Sonoma raising revenue guidance. Lower-income households focused on bargains, with retailers that cater to these households dropping revenue guidance or filing for bankruptcy such as Kohl’s and The Container Store, respectively.
The wealthy are propping up retail sales. Others are looking for sale prices. Source.
DKI Takeaway: The University of Michigan’s consumer sentiment survey highlighted the quick recovery of high-income sentiment, while low-to-middle-income individuals don’t feel they are thriving. Newell Brands CEO Chris Peterson highlighted this as a “real bifurcation” in spending patterns, forcing them to focus on more well-off consumers, something DKI has been writing about for the past two years. The retail sales growth since 2020 has increasingly come from higher-income households, highlighting a continued spending disparity. Even if retail sales are up, the aggregated statistics are misleading and reflect a consumer sentiment that varies widely among those who are not wealthy. Congressional overspending is leading to more inflation. The consumer’s purchasing power continues to be diluted, forcing them to purchase discounted items and signaling weaker organic demand.
5) Breaking Down Bonds: The Yield-Price Relationship Explained:
When Wall Street says, “bonds are up,” what they typically mean is that yields are rising; not prices. Confusing? Absolutely. But here’s the deal: Bond prices and yields move in opposite directions. Think of them like a seesaw:
- When bond prices rise, yields fall because the fixed interest payment on the bond represents a smaller percentage of the higher price.
- When bond prices fall, yields rise to reflect the greater return needed to attract buyers.
Let’s look at a real-world example: During the European debt crisis, Greece’s financial stability tanked. Investors demanded higher yields (returns) to hold Greek bonds as the risk of default skyrocketed. The price of Greek bonds plummeted because no one wanted to buy risky debt without a higher payoff.
Meanwhile, German bonds—considered safer—also saw yields rise, but to a much lesser extent. The market perceived Germany as highly unlikely to default, so bond prices dipped slightly, and yields only nudged higher. This spread, or difference in yields, between Greek and German bonds became a barometer for market anxiety. The wider the gap, the more investors feared Greece’s default and fled to the relative safety of German bonds.
Bond descriptions can be complicated, but it really is this simple.
DKI Takeaway: When the Federal Reserve cut the fed funds rate, bond investors projected higher long-term inflation and demanded a higher yield to own the 10-year Treasury. Bond prices fall when yields rise, and yields rise when risk increases. When Wall Street says, “bonds are up,” they usually mean yields are climbing. Now you can forget the confusing jargon and focus on the real story!
Here’s the video version: https://youtu.be/oryKuY_O9IM
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