Welcome to the Friday mailbag edition of The Daily Cut.

Every week, we get reader questions for Teeka Tiwari, Jeff Brown, Dave Forest, Nomi Prins, Jason Bodner, and the rest of the Legacy Research team. I (Chris Lowe) pass these questions along to them.

And on Fridays, I share with you some of their responses.

First, a comment for Nomi on inflation.

If you don’t already know her, she used to work on Wall Street. But for the last 20 years, she’s been dedicated to helping ordinary investors navigate the distorted markets central banks and governments have created.

Today, one of her readers has a question about the reliability of the government’s main inflation gauge, the Consumer Price Index (CPI).

The Bureau of Labor Statistics (BLS) put together this index. It’s supposed to measure the average change over time of prices urban consumers pay for a basket of goods and services.

This includes food… energy… rent… healthcare… and education.

According to the CPI, inflation is running at 8.3% annually. But one of Nomi’s readers suspects the real figure could be a lot higher…

Reader comment: The CPI has changed over the years. The 1980s CPI calculation would give us something more like 13% inflation.

– Terry B.

Nomi’s response: Thanks for your comment, Terry.

In 1980, the CPI rose 13.5% compared to the previous year. And this April it was up 8.3% compared with a year ago.

But you’re right. Since 1980, the BLS has changed the way it calculates the CPI.

These changes are supposed to account for changes in the quality of goods. For example, faster, more powerful computers. They also account for purchase changes in response to price changes. This is called substitution.

According to the BLS, the changes have removed biases that caused the CPI to overstate the inflation rate. But skeptics view them as a manipulation that allows Washington to report a lower CPI.

These skeptics could be right. It’s in the government’s interest to portray inflation as lower than it really is.

Next up, a question for our “billion-dollar trader,” Jason Bodner.

He also worked on Wall Street before joining us at Legacy. He spent nearly 20 years placing monster trades for some of the world’s wealthiest investors. And he was one of the few guys there authorized to make trades of $1 billion and up (hence his nickname).

Like Nomi, Jason has been writing a lot about inflation lately. And he has advice for dealing with the current level…

Jason’s response: For investors who are wondering what to do until we see inflation come down, I have three recommendations…

  1. Don’t hold too much cash. At the current annual inflation rate of 8.3%, it takes just over eight years for your cash savings to lose half their buying power.

  2. Don’t hold too many bonds. They’re also a money-losing proposition. Right now, the 10-year Treasury note yields 2.7%. That’s better than stuffing cash under the mattress. But with inflation running at 8.3% a year, that’s still an annual loss of 5.6% (8.3 minus 2.7 = 5.6).

  3. Buy lower-volatility dividend stocks. There are plenty of dividend-themed exchange-traded funds (ETFs). I like the iShares Core High Dividend ETF (HDV). It yields 3.1% – more than you’ll get from owning the 10-year Treasury note.

    HDV also has more capital appreciation potential. It’s up 8% year-to-date. That plus the dividend yield is enough to fight inflation and then some. It’s way better than watching your cash rot.

Switching gears… a question for our tech investing expert, Jeff Brown.

In addition to recommending bleeding-edge tech stocks to his readers, he also recommends crypto.

His Near Future Report advisory is showing gains of 186% on bitcoin (BTC) and 302% on ether (ETH) in the model portfolio.

But this year has been rough so far for investors – especially crypto investors.

Bitcoin has tumbled 38% year to date. Ether is down over 51%.

And earlier this month, the collapse of “algorithmic stablecoin” TerraUSD (UST) rocked the crypto market.

This is worrying one of Jeff’s readers about the safety of his holdings at popular crypto exchange Coinbase (COIN)…

Reader question: Business Insider published a piece saying, “Coinbase warns users could lose their crypto holdings if the company goes bankrupt.”

Coinbase’s CEO danced around the statement. He said these losses were unlikely. But still, it sent a chill down my spine. What do you think? Are we at risk of losing everything there if Coinbase goes belly-up?

– Miguel J.

Jeff’s response: Hi, Miguel. Thanks for sending in your question. This has understandably drawn some attention in recent weeks. For full disclosure, I was an angel investor in Coinbase and still hold my entire position. I have no intention of selling.

This story originated with Coinbase’s quarterly filings. In them, the company acknowledged that bankruptcy could pose a risk to folks who relied on its platform to custody their coins.

That shocked many people. Most of us are used to traditional brokerage accounts. They have specific rules about how they must hold customers’ assets.

For instance, customers’ money has to stay in accounts separate from the brokerage’s own assets. That way, creditors can’t seize customers’ holdings in a bankruptcy. Brokerages also must insure their customers’ assets up to $500,000.

It’s different with crypto exchanges. They “custodially hold” customers’ assets. That could expose those assets to any bankruptcy proceedings.

But let me be clear – Coinbase isn’t on the verge of going bankrupt. It’s one of the most successful and well-run businesses in the crypto industry. It has gross margins above 76% and has more than $6 billion of cash on its balance sheet. This is a healthy company. But in March, regulators told all crypto exchanges to report their customers’ assets on their balance sheets.

The situation isn’t as dire as it may sound. As Coinbase CEO Brian Armstrong pointed out, this isn’t something the courts have ruled on.

So in the unlikely event of a bankruptcy, a court would have to decide to include customers’ assets as belonging to the company… which seems unlikely.

If you’re uncomfortable with this kind of risk, there’s a simple solution. To avoid any potential bankruptcy entanglements, you can self-custody your coins in a digital wallet like Metamask or MyEtherWallet (MEW). An even safer option would be a hardware wallet such as Ledger.

That’s all for this week.

If you have a question for the Legacy experts, be sure to get in touch at [email protected].

Have a great weekend.



Chris Lowe
May 27, 2022