Sequel to the 1990s Dot-Com Boom

Posted On Jul 18, 2016 By Dave Gonigam

  • Pokémon GO triggers epidemic of stupidity
  • But it also signals an epic profit opportunity equal to the ’90s
  • Jim Rickards with a few impertinent words about “all-time highs”
  • Why the last 10 days haven’t changed the big-picture trends
  • Rickards addresses sub-$1,000 gold predictions… and a few more thoughts about a windfall profits tax on gold

“Pokémon GO is the future,” declares Ray Blanco of our science-and-wealth team.

We cringed when he first told us that last week. A future of people whose eyes are glued to their smartphones… tunnel vision for whatever the phone’s camera captures… oblivious to their wider surroundings?

  • Two men chasing a Pokémon in Southern California broke through a fence, falling off a cliff overlooking the Pacific Ocean
  • A teenage girl in Pennsylvania chasing a Pokémon across a busy road was hit by a car
  • A guy in upstate New York was playing the game behind the wheel and smashed his car into a tree.

Everyone survived these incidents, by the way.

If this is “the future,” count us out.

Fortunately, that’s not what Ray meant. From a tech investing standpoint, “it might be 1993 again” — the start of a massive bull run, good for five years or longer.

“You can bet every app developer, game company and device maker from Shanghai to Silicon Valley is paying attention to what happened in the last two weeks.

“This time, instead of Yahoo and AOL… a new generation of tech stocks will lead the way.”

And no, he doesn’t mean Nintendo — the firm that introduced the original Pokémon two decades ago. Or Niantic, the Google spinoff that built Pokémon GO.

But first, in case you’re not sufficiently plugged into pop culture, we should explain what it is that’s breaking people’s collarbones and creating such a stir.

Using the GPS built into your smartphone, you play Pokémon GO by “walking around the real world catching cutesy little virtual monsters like Pikachu and Jigglypuff in places near your phone location and training them to fight each other,” says a description from the BBC.

If you still don’t get it, here’s a clear illustration…

Pokemon Go App

See the little purple cartoon character? It’s not on the street, but it’s superimposed on the smartphone’s image of the street.

No wonder people are walking into traffic and off of cliffs.

“Pokémon GO’s business model is built on microtransactions,” writes James Surowiecki at The New Yorker. “You can download and play the game for free, then pay for items that will help you succeed — for instance, Poké Balls, egg incubators or incense. Microtransactions are at the heart of most popular mobile games, and they can be enormously lucrative.”

Especially in high volume. In less than two weeks, Pokémon GO has been downloaded on 10% of all Android OS phones in the United States.

“As of Thursday,” says our Ray Blanco, “Pokémon GO has already broken the record for peak daily active users, at over 20 million — besting the record set by Candy Crush Saga in 2013.”

Pokemon Go is the biggest US mobile game ever

During this brief span, Nintendo stock more than doubled, and its market cap grew more than $12 billion.

But again, that’s not the opportunity here. Back to The New Yorker’s Surowiecki: “The company is only taking home a small fraction of the profits that the game makes… More important, even given the additional revenue sources, the microtransaction model depends on keeping users playing regularly and bringing new ones in.”

In other words, Nintendo’s success of late is a flash in the pan. But it does signal the arrival of “augmented reality.”

Unlike virtual reality, where you strap on a headset and you’re transported into another world, “augmented reality is the digital world blending seamlessly with the real world around us,” says Ray Blanco — to wit, that picture above.

Short-term implications: “Pokémon GO means Google gets a second chance at Google Glass,” Ray goes on. “It means Google’s $500 million-plus investment in Magic Leap’s VR/AR platform could already have millions of AR-familiar users when it debuts.

“Google Glass version 2 will eliminate the smartphone and make AR part of your everyday life. No adoption curve. No explaining why AR’s amazing. Just world domination from day one.

“Truly widespread AR will be the biggest thing since the launch of the iPhone or the introduction of the personal computer. It’ll have profound impacts on medical research, business travel, art and education.”

Now are you getting a sense of why we might be in for a rerun of 1993 for tech investing?

Credible industry estimates say AR and VR combined will be a $150 billion business by 2020. Even if you go with far more conservative estimates — say, $30 billion — you’re looking at 81,000% growth from last year’s levels.

If you’ve been reading us for a while, you know Ray believes the best opportunities lie not in Nintendo, or in VR headset makers like Facebook, but in the companies whose chips and other electronic wizardry makes VR and AR possible.

It’s still early days. But not for much longer. Not when Pokémon GO is succeeding at augmented reality where Google Glass version 1 failed. For Ray’s introduction to the investing possibilities, look here.

To the markets… where the major U.S. stock indexes are struggling to reach higher into record territory.

At last check, the Dow industrials are barely in the green at 18,538. Ditto the S&P 500, at 2,166. Bank of America’s earnings report beat expectations. Otherwise, trader chatter is focused on Japan’s SoftBank bidding for Britain’s ARM Holdings, the company whose semiconductors are found in most smartphones.

The safe havens of recent weeks are also showing little movement; a 10-year Treasury note yields 1.59%. Gold rests at $1,329.

The lone economic number of the day disappointed but is still solid. The housing market index from the National Association of Home Builders clocks in at 59 for July — less than the 61 the “expert consensus” was counting on, but still solidly above the breakeven level of 50.

“The market has gone nowhere in over a year but has been extremely volatile,” says Jim Rickards — who wishes to throw some cold water on the talk about all-time highs.

Indeed, the new highs now aren’t much higher than the old ones of May 2015.

“The reason for this nondirectional volatility,” says Jim, “is called ‘RoRo,’” which stands for risk-on risk-off. This means that stocks, bonds and currencies have become commoditized. They don’t trade based on intrinsic value on idiosyncratic factors. They all go up together and all go down together, depending on whether investors feel brave or timid.

“This is an extremely challenging investment environment. You can be ‘right’ about a macro thesis but still get it ‘wrong’ just because a headline or geopolitical development crops up and causes a risk-on or risk-off reaction contrary to the main trend.”

In other words, short-term noise can make a long-term thesis look bad… in the short term.

“Our macro view,” Jim reminds us, “is that the dollar, sterling, yuan and U.S. stocks will get weaker while the euro, yen, gold and Treasury notes will get stronger.”

That’s a risk-off situation. But two stories broke that narrative earlier this month. First was that allegedly “stellar” U.S. jobs report. We mentioned the day it was issued that the three-month average looks really lousy — the number of new jobs not even keeping pace with population growth.

Then there was Japan’s Prime Minister Shinzō Abe emerging with a stronger parliamentary majority than expected. The yen weakened on the notion that more “easing” from the Bank of Japan was a sure thing.

“But the BoJ has given no indication that it intends to ease,” says Jim. “As for Abe’s ‘stimulus,’ Japan has the highest debt-to-GDP ratio of any major economy by far — over 240%. Does anyone seriously believe that more debt will stimulate anything after Japan has piled on debt for the past 30 years?”

“The important thing is that the big picture has not changed,” Jim concludes.

“The Fed is still missing its inflation targets. A strong dollar means deflation, not inflation. So the Fed has to weaken the dollar. That means the yen, euro and gold all get stronger. Sterling is the exception, because the recessionary forces of Brexit are too strong to allow the U.K. pound sterling to rally much. As the dollar gets weaker, courtesy of the Fed, gold and silver will get stronger.

“The Fed is still the main event in the currency wars, and we’re watching them like a hawk.”

The precious metals will serve you well, if you’re of a conservative mindset. If you want to play the currency wars more aggressively, youll want to give this a look right away — no long video to watch, either.

“Would like to hear Jim’s perspective,” begins today’s mailbag, “on Harry Dent’s new book, wherein he’s forecasting gold to crash to $250 when the global financial crisis arrives.”

Says another inquiry: “What do you think about what Harry Dent said that gold is going to crash along with stocks?”

The 5: First of all, recognize that if you’re talking about weak gold prices in U.S. dollars, then you’re talking about a strong dollar. That’s a deflationary situation, and we’ve had a lot of deflationary forces at work in the economy the last two years. But going forward?

“Deflationistas like Harry Dent and Gary Shilling see deflation getting the upper hand over inflation because of demographics, technology and deleveraging,” Jim recently wrote in Rickards’ Strategic Intelligence.

“They’re right about deflationary forces, but they underestimate the capacity of governments to force inflation in the end.

“The elites have no choice. Deflation makes the real value of debt go up and destroys tax collections (when prices and wages go down in deflation, government collects less tax). If the value of debt goes up and tax collections go down, the entire house of cards starts to collapse.    Governments can’t allow that. They must have inflation, and they will get it.”

A few weeks ago, Jim described three tools the elites still have at their disposal to achieve the inflation they want. Newer readers can acquaint themselves with his thinking in this back issue of The 5.

Back to the gold confiscation issue from last week.

We mentioned Jim Rickards’ remark that “a windfall profits tax on gold is not something that can easily be accomplished by executive order, because of congressional control over taxation. Such a tax requires legislation, and the legislative process is slow. Gold holders would know in advance and have time to prepare.”

A reader comments: “Yes, the legislative process can be slow. And that’s the way it should be.

“Other times. it’s so fast that ‘we have to pass the bill so that you can find out what is in it.’ In those cases, I fear they’ll have revised 1040 Schedule Ds in mailboxes so fast that the president won’t even get a chance to say, ‘If you like your gold, you can keep your gold.’”

The 5: We hear you. But in fact, the president telegraphed broad plans for Obamacare during a speech to Congress on Feb. 24, 2009. It didn’t pass Congress until March 21 of the following year.

Perhaps a better analogue might be the Patriot Act — legislation that had been sitting on the shelf at the Justice Department for years, waiting for a suitable moment when it could be passed with little public scrutiny or debate. Hardly anyone read that bill, either.

But even in that crisis environment, the Patriot Act didn’t pass Congress until 44 days after the Sept. 11 attacks.

So yes, even in a crisis atmosphere, there will be time to act.

Besides, what’s the alternative?

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. As we go to virtual press, hackers say they’re responsible for outages over the weekend affecting Pokémon GO players.

Nothing too malicious — just one of those “DDoS” attacks that overwhelms the servers with traffic. But it did put a damper on the game’s debut in Canada yesterday.

It’s hard not to trip over Pokémon GO headlines in recent days — surely a sign that “augmented reality” is huge phenomenon, alongside its cousin virtual reality.

It’s still not too late to seize on the investing possibilities of AR and VR. But as they break into mainstream headlines, the window of opportunity inevitably starts to close. Nows the time to seize the early-mover advantage.


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