💸 A Colossal Generational Wealth Transfer Has Begun

What’s on the Menu 🍴

Today’s newsletter is a little longer than usual…

Because we’ve got a few vital topics to cover!

Without any delay, let’s jump into today’s buffet of dough-growing intel:

• Remove That Tinfoil Hat - Part 1 (Blackrock) 🕵️‍♂️

• A Colossal Generational Wealth Transfer Has Begun 💸

• Is An Airbnb Bust Going To Crash The Housing Market? 🏚️

• Setting the record straight: SEP-IRA advice for business owners 📽️

Today’s newsletter is a 7 minute read.

Remove That Tinfoil Hat - Part 1 (Blackrock) 🕵️‍♂️

It greatly amused us last week when we saw a new conspiracy theory emerge on social media: that Nvidia is committing financial fraud with help from Blackrock and CoreWeave.

Calling “fraud” and throwing in mentions of Blackrock, a favored target of conspiracy theorists lately, is certainly a recipe for tons of likes/shares/retweets!

But we care about truth here at the Daily Dough, and investing results usually depend on getting it right.

We believe that it’s HIGHLY UNLIKELY that Nvidia is committing financial fraud.

Did Nvidia recently receive a large order from a cloud infrastructure company called CoreWeave, in which Nvidia owns a small equity stake? Yes.

Did Blackrock, which owns 7% of Nvidia, help CoreWeave finance that purchase order? Yes.

Are these actions a tangled web of fraud intended to pump & dump NVDA stock? No, we think that’s very unlikely.

Let’s start with Blackrock (which is publicly traded under ticker BLK):

Blackrock is the largest asset manager in the world, with over $8 Trillion in AUM. Roughly 27% of its assets are actively managed, while 73% are passive index tracking assets:

Most of Blackrock’s assets are tied up passively holding stocks, Treasury bonds, and other liquid assets on behalf of individuals, endowments, and retirement plans.

Blackrock is not a gunslinging hedge fund that stampedes in and out of individual stocks on a whim.

It DOES however consistently sit atop the share ownership list of most large publicly traded companies, because those companies make up the major market indices.

Blackrock is a top 5 holder of almost every single stock in the market precisely because its large ETFs are designed to deliver the same performance as broad market benchmarks.

If you’ve ever bought an iShares ETF such as IVV, IWM, TLT, AGG, etc then you’ve purchased a Blackrock managed ETF.

Does Blackrock use their ownership positions as leverage to influence companies in areas such as Board decisions, social causes, etc? YES.

And that is a legitimate criticism and something that needs to be closely monitored.

But just because Blackrock ETFs collectively own 7% of NVDA stock doesn’t mean that Blackrock is convincing NVDA management to commit fraud.

Blackrock isn’t out for a pump & dump. They MUST continue to own stakes in significant S&P 500 companies, especially ones such as NVDA that carry large index weightings.

Two years ago Blackrock owned 172 million shares of NVDA. Last quarter they owned 182 million shares of NVDA (its S&P 500 weighting has increased over the past two years).

Next quarter Blackrock will continue to own hundreds of millions of NVDA shares because their quarterly ownership changes are minor unless a stock is booted from a major index.

Other firms such as Vanguard and Fidelity also show up as large holders of almost every publicly traded stock due to their large market share in managing people’s retirement assets.

In fact, Vanguard is actually the largest shareholder of NVDA with 201 million shares (8%).

If you look at the top 20 stock holdings of Blackrock or Vanguard, they almost exactly mirror the top 20 stocks in the S&P 500 index. That’s not a coincidence, it’s passive investing!

Chances are your 401k or IRA have ETFs managed by one of these behemoths. They buy stock on your behalf and show up as the share owner. The buy/sell decisions in passively managed funds are mostly automated.

Here’s where it gets a little more confusing though: Blackrock does run some actively managed private equity & credit funds that don’t just passively track an index.

And one of those actively managed funds did recently participate in a loan to CoreWeave:

Note that Blackstone (a different private equity firm often confused with Blackrock) led the loan offering, along with a hedge fund called Magnetar Capital.

Blackrock likely provided, at most, a few hundred million of this loan to CoreWeave.

The press release for the loan facility dropped on August 3rd, more than a month AFTER Nvidia’s Q2 had already ended.

It’s extremely unlikely any of this money could have even made it into Nvidia’s Q2 numbers since recognizing revenue requires both a purchase order and at least some fulfillment of an order under accounting rules.

It’s likely that this CoreWeave money will go towards Nvidia GPUs in Q3 and Q4 this year. But it’s possible that CoreWeave gave a purchase order ahead of the facility being fully funded.

So let’s play devils advocate.

Nvidia reported $13.5 billion of quarterly revenue in Q2 2023.

Even if BLK’s loan portion was immediately used to purchase GPUs, and even if the GPUs were immediately shipped & recognized as revenue by NVDA (unlikely), it wouldn’t have been that significant as a percentage of the quarterly revenue.

Some might say “yeah but the entire $2.3 billion loan in aggregate is material to NVDA’s quarterly revenue”.

True, but why would firms like Pimco and Carlyle risk participating in a scam transaction when they don’t appear to have owned any NVDA stock?

Why would any of these firms risk hundreds of millions each on a pump & dump scheme?

That’s a lot of upfront capital at risk for an uncertain outcome even if you’re certain a company will beat earnings estimates. The market often reacts unexpectedly.

Case in point: NVDA didn’t even close higher after Q2 earnings results were released!

Clearly none of the conspiracy theorists have ever sat in an investment committee at a large investment firm.

A company like Blackrock that manages almost $9 Trillion in assets, with 20,000 employees across 30 countries, does not risk the entire golden goose for a one day capital gain.

When you think about the incentives it becomes obvious that Blackrock wouldn’t engineer fake revenue to help some other company beat their quarterly guidance.

We can’t think of ANY case of accounting fraud that involved this many separate, large firms.

Could CoreWeave and Nvidia still be masterminds behind financial fraud?

Stay tuned because we’re diving into the mysterious CoreWeave-Nvidia relationship in Friday’s Daily Dough!

A Colossal Generational Wealth Transfer Has Begun 💸

Millennials have received quite the reputation for falling behind on building wealth.

Generations before them would say millennials spend too much money on avocado toast and Starbucks.

But, between the 2008 financial crisis, rising cost of living, inflated childcare costs, and the pandemic, they’ve had their share of difficulties.

This has left many people wondering where the generation will end up financially.

At quick glance, it’s easy to see the colossal amount of wealth the Baby Boomer generation has built compared to others.

Gen X is not looking too bad either on their wealth building journey.

Now, older generations will argue back that they had it rough too. They had to deal with multiple wars, recessions and periods of very high inflation and mortgage rates.

It’s true, they did have many economic issues to contend with as most generations do.

However, Baby Boomers specifically have had a few major thing going for them.

1. A major decline in overall interest rates leading to an extraordinary bull market in bonds

2. An overall strong housing market led by healthy appreciation from low interest rates

3. A strong stock market fueled by low interest rates and major technology advances

It’s hard to even argue that the stock market hasn’t significantly helped them build a lot of wealth. The pieces have just come together beautifully for the Boomers.

Now that leads us to the epic wealth transfer that no one is thinking about.

Millennials may have a rough go right now on affordability of living, but, their Baby Boomer parents are deciding to “spread the wealth” while they are alive.

As seen by this survey, more than 1 in 3 Americans have received help from their parents for buying a home.

Especially younger adults aged 18-29. 79% of them have received financial help!

Of course, not all Millennials have wealthy Baby Boomer parents. This needs to certainly be recognized.

But generally speaking, we’re talking about over 75 TRILLION dollars of wealth. A large chunk of this wealth will be inherited if it’s not spent down.

Not to mention, from a financial planning perspective, many Boomer parents have it as a TOP goal for their kids to inherit their wealth and/or they want to help their kids while they’re alive.

Even more important, there are incredible tax benefits for people to inherit assets.

Certain assets (like real estate) that are inherited get what’s called a “step-up in basis”.

So, that home that your Baby Boomer mom bought 20 years ago for $100,000 that is now worth $500,000? You inherit the home with a $500,000 tax basis upon her death.

So, it’s a BIG tax incentive for Baby Boomers to make sure certain assets simply get inherited this way.

Baby Boomers might just save Millennials with a wealth transfer of epic proportions.

Is An Airbnb Bust Going To Crash The Housing Market? 🏚️

The fear is rippling through Twitter about Airbnb posing risk to the housing market.

Some people believe that the short-term rental market is cooling its jets in a big way.

Those who binged on buying homes and leveraged up to have a portfolio of rentals, could end up facing struggles if demand isn’t there.

Here is a listing of a short-term rental where the owner blatantly discloses that the home is NOT cash flow positive.

So, could negative cash flowing, over-leveraged rental owners end up giving up and selling their homes if vacancies tick up?

There are concerns that this could flood the market with too much inventory and housing prices could come down significantly if it comes to fruition.

But… is this fear being overdone?

For one, inventory is what we NEED in this housing market to find some equilibrium as housing prices truck back to all-time-highs.

New home sales have decoupled from existing homes as no one will move and give up their low interest rates on their mortgages!

The demand for new home sales says enough right now: if more existing homes came on the market, the demand might be there to support it.

Not only that, the bulk of mortgages in the United States are locked in at favorable rates:

So, this alone could help short-term rental owners keep their homes and be able to simply shift to long-term rentals (which is better for the consumer anyway as rent becomes more reasonable!).

The truth on the Airbnb bust and how it’ll affect the housing market will probably lie somewhere in the middle.

More inventory will not be the worst thing for us while inventories are historically low. New home sales show us that housing demand exists.

Short-term rentals becoming long-term rentals would open up more housing at market rates for those seeking it.

Plus, we need to see Airbnb actually show us this slowdown in their earnings report before we should start to freak out.

Setting the record straight:
SEP-IRA advice for business owners 📽️

SEP-IRAs are common with solopreneurs and small business owners. They allow you to invest for retirement AND get a tax deduction.

But as usual on social media, it's easy for people to either present the wrong financial info, or maybe leave out some important details.

This is where I come in to make sure you have all of the facts on SEP-IRA contributions.

Delicious Bites 😋

• Have housing prices really changed that much?

• How Youtuber TechLead scammed his own followers out of millions

• BTC adjusted for M1 money supply paints an interesting picture

• Six Red Flags Pointing to China’s Economy Slowing Down

Food For Thought 🧠

"A lie can travel halfway around the world while the truth is putting on its shoes."
- Mark Twain

DISCLAIMER: We are not investment advisors, and this content is for educational purposes only. We don’t offer financial, legal, or tax advice. Nothing we say is a recommendation to buy or sell any assets. Trading and investing are extremely risky, so please be careful and do your own research.