The "Vegas Effect" And Its Inflationary Impact

Sep 17, 2021

The “Vegas Effect” And Its Inflationary Impact

Is Atlantic City’s fate America’s destiny?

This week we explore:

• The fallacy of “free money” and its true cost to investors

• Why (and how) so many Americans are conditioned to keep running to the tables to gamble even knowing they’re likely to lose

• How I make sure I stay away from gambling and focus instead on winning

“Show me a gambler and I'll show you a loser.”

— Mario Puzo

It's amazing what you might see when you view the world through the lens of history, especially when it repeats itself so regularly.

This week marks another year around the sun for me as I celebrated my 52nd birthday yesterday.

As family is extremely important to me, the celebration was taking my daughter from our home in Pennsylvania to the Jersey Shore to spend the evening with my brother and his wife.

It’s a drive I used to make often when I was young, and because it happens to run through Atlantic City, it tied together not only recent ideas which we’ve been writing about, but a different perspective of where we as a country may be headed given recent trends and new developments.

When I was growing up, my father bought a house in Brigantine, New Jersey along the shore. To get there, one must drive through Atlantic City. As a kid, I loved crossing the bridge into the shore town because it meant a summer of beach and sand and freedom from having to go to school.

My father bought the home when I was just 7 years old in 1976. He had inside information that the New Jersey Casino Control Act was about to be passed. He anticipated home values would shoot up significantly as people looked to vacation and gamble along the East Coast rather than Las Vegas.

As with most things involving casinos, that dream initially looked like it was happening. But anyone who has driven through Atlantic City recently can tell you that 45 years later, the city revitalized by gambling in the 1970's is now ridden with slums, dilapidated buildings and crime.

It’s not what one would call “in-demand housing.”

What fascinated me as these memories became clear this past weekend as I was crossing the Brigantine Bridge was thinking about the devaluation mindset that occurred in the 1970’s and the long term erosion of Atlantic City, and then connecting that to the same devaluation mindset I see happening all around us today and where we may end up culturally 40 years from now as the consequences from today’s devaluation mindset change the trajectory of our future.

Back then, Atlantic City was the poster child for the changing perspective on gambling. The dollar was being devalued by Fed Chair Arthur Burns at the direction of Richard Nixon.

Today it’s NFT’s, Meme Stocks, and online sports betting that signal the movement and Jerome Powell at the wheel steering the dollar lower and seeking to create inflation.

These policy actions encourage gambling.

Gambling is running rampant in our culture right now. It was impossible to watch a college football game, the US Open Finals, or the Opening weekend of the NFL without seeing a commercial for sports gambling every commercial break.

The sheer volume of advertising encouraging people to gamble on sports is remarkable.

But why?

This is the question history hit me smack in the face with. Why do we go through cultural periods when gambling is not only legalized, but encouraged, and becomes the pervasive mindset?

I believe that debt creates a poverty mindset.

There are deep parallels to the 1970’s and to where we find ourselves today. Back then we had a weakening dollar, inflation on the rise, and massive debts from a war in Vietnam.

Today we have a weakening dollar, inflation on the rise, and massive debts from a war in Afghanistan.

This inflationary erosion encourages a “what do we have to lose anyway,” gambling mindset.

Debt causes the need for inflation to allow governments to pay down debt with diluted dollars.

The ensuing inflation encourages risk taking and dissuades saving.

Crossing through Atlantic City also reminded me of another time in my life.

When I was a senior in college, I bartended at a New Jersey nightclub to pay my way through college. I was saving money, so I was able to afford my college tuition. But one night, when the bar was rather empty and the staff was let off early, my friends headed down to Atlantic City to play blackjack with our tip money.

That night would lead to me learning the hard way the truism that all gamblers eventually come to learn…

The house always wins.

Gamblers always lose. I should know, because when I was a younger man I used to be a gambler.

I believe that experience as a young man has helped fuel my passion to help people change how they think about saving, investing and gambling.

It’s also a very big reason why I have decided to save my money by holding physical gold where I can be the house, while most everyone else will “pay the vig” charged by inflation.

It’s also a very big reason why I have decided to save my money by holding physical gold where I can be the house, while most everyone else will “pay the vig” charged by inflation.

The BIG Picture

There are two quick stories to highlight from this past weekend on my trip to the Jersey Shore.

The first involved my sister-in-law as she and I went out to get sandwiches for the family at the same Aversa’s Italian bakery on Brigantine Island.

The place was very busy and had a line of twenty people at the deli.

As I looked down on the ground I noticed a penny on the floor. My first inclination was to pick it up, as I had been taught as a boy. But rather than bend down I pointed the penny out to my sister-in-law and suggested we see how many people would notice the penny, and then not bother to pick it up.

Interestingly, over the next 20 minutes, I noticed at least 10 people who noticed the penny, and then actively decided it wasn’t worth the bother. People don’t pick up pennies anymore because they’re deemed worthless.

No doubt the way we feel about pennies today is the way many already feel about $1 bills and will undoubtedly feel decades from now.

I was reminded of the lessons of my childhood. When I was a boy I was taught, “a penny saved is a penny earned.”

In fact, when I was young my father insisted that I take 10% of all the money I ever received and put it into the bank, where I couldn’t spend it. For a 12-year-old boy with an inclination to spend everything I had, it was a double-win scenario.

Back then, in the 1980’s, interest rates on savings accounts paid a healthy 10%. Not only did I get the benefit of having money that I couldn’t touch, if I kept saving I would get the benefit of compounding interest.

I learned at an early age that putting money in the bank and letting it work for you and continue to accrue on its own ultimately makes you more money.

As I was thinking about my own childhood this past weekend, I realized that while this was true of my formative teenage years, the good idea of putting money in the bank during the 1980’s was actually not as great an idea in the 1970’s.

The 1970’s were the most inflationary period in the US over the last 100 years. During this time the US Dollar would devalue dramatically. This was largely due to going off the gold standard in 1971.

In an inflationary environment you don’t want to save, you want to borrow and spend, because the dollars you don't spend today will be worth less tomorrow.

An inflationary mindset is a disease that once it catches can spread in pandemic fashion. As prices rise, we feel we are better off buying and borrowing today rather than saving for tomorrow.

The reality of this mindset was very evident nearly everywhere I went this weekend.

As I looked down the shore at the giant casinos that were built in the 1970’s, I got the eerie feeling that I was looking at our country's future and to what our culture is teaching our children.

This is the outcome of inflation on our culture. It makes far more sense to gamble today and attempt to get rich quick before the money we are gambling with becomes worthless.

This is the simplest explanation for the ridiculous valuations investors are now gambling into. Anyone who believes they are “investing” in today’s markets is ignoring the reality that fixed income no longer pays any yield, that stocks have entirely detangled from their fundamentals, and that the market is being propelled by novice retail investors who are taking big risks and seeking big rewards.

To me, this is the definition of gambling. I learned the hard way that gambling is easy to get hooked on even though it is a losing proposition.

It leads me to the second story that Atlantic City stirred up for me when I was a senior in college in 1991.

One night, the bar I was working at to pay my way through college was slow and the staff was let go early. One of my friends suggested we go to Atlantic City to gamble on blackjack.

As we entered Bally's casino, we could feel the excitement. This was my first time in a real casino and I instantly loved the energy. People were having fun!

We got to the casino at about 1 am and the four of us sat down at a blackjack table. I only had $160. I pulled out $40 and bought 8 red chips. I figured that was all I was willing to lose.

Unfortunately, an hour later and three more $40 buy-ins and I was completely tapped out. Naturally, I was done and wanted to go home.

The problem was that my friends had been winning and didn’t want to leave the casino. But I had driven and was in no mood to stay. Rather than let me leave, my friends did the natural thing. They each spotted me $20. This way we could all stay and continue playing.

Not surprisingly, thirty minutes later and we all wished we had left. Not only did I lose the additional $60 I had borrowed, my friends all got cleaned out too.

But as I was putting on my jacket to leave and wondering how I was going to pay everyone back, something happened which changed my life forever.

The guy who had been sitting next to me said, “Hey, Kid, you can’t leave. I haven’t lost a hand since you sat down.”

While my friends and I had been playing with our red chips and $5 per hand, this guy had been playing with $25 green chips, and he had a dozen or so stacks lined up in front of him.

He tossed me one of the green chips and said, “Here, keep playing.”

I begrudgingly accepted the charity and promised I would pay him back if I won.

As I began to ask for change into red chips he said, “why not just play the whole $25?” He had a point, it was his money anyway and if I lost the hand he wasn’t gonna get anything back anyway.

And so I did. I played the next hand for $25.

Amazingly, I hit a blackjack which paid 1.5 to 1. After paying back my neighbor I was now sitting with $37.50 in front of me.

He suggested, “Why not let it ride?”

Again it was hard to argue with his logic, especially since it was 3 am in the morning and I had three friends that were all broke and pressuring me to head back home. They also wanted me to let it ride so I could lose and we could all leave.

And then the magic happened. At least it was magical in the moment. I proceeded to win nearly every hand I played over the next 60 minutes.

After paying back each of my friends, and putting my initial $160 back in my wallet plus another $200 of winnings I had squirreled away in red chips in my right jean pocket, I was left with $900 in front of me and on the table.

The time was just before 4 am.

Back then the casinos didn’t stay open all night. They shut down for two hours from 4 am to 6 am for cleaning. I was informed by the dealer that the next hand would be the last hand.

Which left me with a choice. I could leave up with $1100 in winnings, or I could do what I had done to get to this point over the last hour and I could bet big.

I was hot and the choice was easy, especially as my friends who had all wanted to leave an hour before, were rooting for me on every step of the way.

The table limit was $500.

I carefully stacked my red chips, counted out 100 of them and I closed my eyes and slid it to the bet line and said to my friends, “only tell me if I need to hit.”

My friends all gasped as the first card the dealer dealt me was a 4. The air in the room lightened when the next card I received was a 7.

When the dealer turned over a 5 as her top card the whole casino seemed to be cheering me on. Everyone yelled in unison it seemed, “double down!”

As the clock struck 4 am, and realizing if I lost I would give back everything I had won, I shoved another $500 onto my spot and meekly said, “I’ll double down.”

What happened next was like a movie happening in slow motion that I will never forget. The dealer dealt me a beautiful King of clubs which left me with 21. The dealer eventually pulled a 17.

At 20 years of age, I won $1000 on one hand of blackjack.

Fortunately, it was the very last hand of the night and the casino also closed. To this day my friends all remember the night I turned $25 into over $2000.

However, I remember the rest of the story.

You see, my first experience in the casino got me hooked. It also made me believe I could do it again.

But I couldn't. Over the course of the next month I traveled back to Atlantic City several times looking to replicate my first experience. Not only did I give back all that I had won that night. I also proceeded to lose another $1500 on top of it.

For a time, gambling consumed my every thought. Every time I found myself with free time, rather than focus and study, I would run to Atlantic City. I was stuck with a poverty mindset.

I find a lot of similarity to the trading craze that is happening today. Unfortunately, the good times likely won’t last.

Truthfully, it’s a mindset that took me many years to shake. The debt I then encumbered to pay for school when I could have paid it off took me even longer to repay.

Had the story ended differently and I lost that last hand of blackjack, my entire life may have turned out much differently. I may have never been hooked on the idea of making easy money gambling, and may have never learned the lesson that has informed my investing approach as I’ve matured.

Gambling is a losing proposition.

I believe it’s because of this event in my life that I am so committed to saving today. It’s also why I am deeply concerned about what I see happening all around me.

We’ve become conditioned to believe that markets only go higher. The reality is the opposite. Twice in the last 20 years the markets have wiped out 50%.

In March of last year, the markets dropped 20% in a matter of weeks. “Buy the dip,” “stay in the market,” and “just hold on” are the prevailing mindset.

But investing in extreme valuations is not investing at all. Investing at extreme levels is no better than gambling.

Great investing is about buying low and selling high. It requires us to sell something that’s expensive and buy something undervalued.

But our policymakers, our politicians and even our parents are now encouraging an all-in mindset.

Americans are being conditioned to become gamblers.

Gambling used to be discouraged and frowned upon. Teenagers now trade crypto and big banks now market to tweens and gambling is now approved of.

The fact that sports gambling is being so heavily promoted is simply another sign of our devaluation.

Think about how far we have come in just 20 years. At the turn of the century, gambling on sports was considered taboo, reserved for degenerates and wild weekend getaways with the boys.

In 2001, Pete Rose, arguably the best hitter in the history of baseball, was banned for life from baseball by Commissioner Bart Giamatti and will never be permitted into the hall of fame. Why? For gambling on baseball.

We have come full circle. The mindset of the 1970’s is back, and gambling is hotter than ever.

Today sports gambling is not only tolerated, but encouraged, and by the very same major sports leagues that were loathed it 20 years ago.

Kids watch these games. Sports superstars are heroes to our kids.

What if gambling becomes the reason for our kids to watch?

Betting sites like DraftKings and FanDuels work hand in hand with professional sports leagues. In fact, DraftKings is an official partner of the NFL and FanDuels is the official betting sponsor of the NBA.

One commercial I saw this past weekend promoted the speed at which one could micro-bet, betting on every play of the game. “This way you can always get in on the action, even when you are short for time.”

These sites also incentivize the behavior. They offer deposit bonuses matching you up to (and sometimes more than) 200% on each deposit. They can do this because, as we all know, the house always wins.

This “Vegas Effect” is not just impacting gambling, its mentality is seeping into the culture and affecting investors from every walk of life as well. I believe the devaluation mindset could be affecting our country’s long term trajectory.

But while many are focused on the get-rich-quick moment and gambling mindset that inflation encourages, I am focused on what is surely coming next.

Extreme debt is followed by extreme inflation. Extreme inflation erodes financial assets. The rising interest rates that ensue will destroy levered up firms' and individuals' balance sheets.

The amount of leverage in the system has never been greater - and why I believe “investing” has become gambling for too many.

Over the last few weeks, we have written about China and their long term approach to the future development of their country (and its citizens).

They recently limited video games for minors to 3 hours per week. This week, China allowed Evergrande, one of the largest real estate firms in the world, to default on debt payments.

But it’s the most recent news out of China that really put this all into perspective for me and why I wanted to share this personal story with you.

This week, they clamped down on gambling laws in Macau, an “autonomous region” of China, causing an $18 billion loss in Macau’s top gaming stocks overnight.

It seems China feels so strongly about the dangers of the Vegas Effect spreading to its own borders that it is encroaching on Macau’s autonomy.

Perhaps China is more keenly aware of what we should all pay attention to:

Gamblers in the long run always lose. The house always wins.

Best,

Adam Baratta

Editor in Chief

Brentwood Research