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Billionaire Bill Gates talks about his splurges, including his Porsche

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Gates has since sold the Porsche 911, but he’s added a few more fast cars to his collection, including a Porsche 930 Turbo, a Jaguar XJ6 and a Ferrari 348.

As for his second big ticket item, “eventually, for my travel, I got a plane,” he told DeGeneres, “which is a huge indulgence.”

He’s not the only billionaire who has splurged on a private plane. Mark Cuban, John Paul DeJoria and Tilman Fertitta have all made the same investment. At the end of the day, “time is the one asset we simply don’t own,” Cuban told Men’s Fitness. That’s why a “brutally expensive” private plane that “saves me hours and hours” is completely worth the price, he says.

What Gates has that the other billionaires may not also have, though, is “a trampoline room,” he told DeGeneres. It has, he assured her, “a very high ceiling.”

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Don’t miss: Melinda Gates: This is the one thing I wish everyone knew about Bill

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Why this rate-driven sell-off is hitting tech stocks hardest

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A Model X is on display at a Tesla showroom on February 13, 2021 in Beijing, China.

VCG | Visual China Group | Getty Images

What’s behind the drop in tech stocks? A model Wall Street uses to value stocks is flashing caution.

Tech stocks are in a correction. The Nasdaq 100, the largest 100 nonfinancial stocks in the Nasdaq, is 10% off the historic high it hit just three weeks ago, but many big names are down close to 20%.

Tech in correction
(% from 52-week high)

  • Xilinx 23%
  • PayPal 22%
  • AMD 21%
  • Nvidia 19%
  • Apple 17%

What’s going on? The market is worried interest rates will be shooting up and the Federal Reserve may not be able to control it.

Why would a rise in interest rates hurt stocks, particularly high-flying technology stocks?

It has to do with the way Wall Street values stocks. The market is a discounting mechanism: It is a way of trying to figure out what a future stream of cash flow — or earnings — is worth today.

This model, known as the Discounted Cash Flow model, is at the heart of the problem for technology stocks.

How DCF works

Stocks compete with other investments like bonds and cash. If you have $100 now, is it better to invest in stocks, bonds, cash or something else? Investors look at the time value of money. The sooner you own money, the sooner you can invest it. If I have $100 right now, and I can invest it and receive 2% today in a bond, that means I will have $102 next year. A hundred dollars a year from now doesn’t help me, because I can’t invest it.

What does this tell us? It tells us that a dollar today is worth more than a dollar in the future because that $100 has become $102 if I invest in a bond.

What is a dollar invested today worth in a stock that you might want to hold for, say, five years? Most stocks are valued based on how much cash they can generate in the future. Discounted cash flow uses a formula to figure out the present value of an expected stream of future cash flows.

That’s not an easy thing to figure out. The first thing you need to do is figure out how much cash flow the company might generate, say one year from now.

The problem is, no one knows exactly how much cash a company is going to generate a year from now. It depends on many factors, including the economy, management, competition and the nature of the business. The further out you go, the harder it gets. It’s much harder to estimate cash flow five years out then one year out.

Second, you have to make a guess on the discount rate. Simply put, what is the opportunity cost of owning alternative investments? That would be the minimum required rate of return you would accept. Usually, it is the prevailing interest rate.

Finally, you discount those expected cash flows back to the present day.

Discounted cash flow: An example

Here’s a greatly simplified example. Suppose you have XYZ company that is generating $1 million in cash this year and is expect to generate the same $1 million in cash flow growth every year for the next five years:

XYZ: Cash flow projections

  • Year 1: $1 million
  • Year 2: $1 million
  • Year 3: $1 million
  • Year 4: $1 million
  • Year 5: $1 million

Total cash flow over five years: $5 million

You have $5 million in cash flows. But wait: That is $5 million over five years. Is it really worth $5 million today?

It is not, because inflation erodes the value of money: $1 million in five years is not worth as much as it is today, or even one year from now.

So we need to discount what that future $1 million will be in present dollars. To do that, we need to make a guess about interest rates.

Let’s say interest rates are 2%.

Using a complex formula, the discounted cash flow of that $5 million would be considerably less, say $4.71 million. In other words, when assuming interest rates of 2%, the value of that $5 million cash flow — the present value — is $4.71 million.

Here’s the problem with rising rates and stocks: As interest rates go up, the present value of that $5 million goes down.

Let’s say rates go from 2% to 4%, or even 6%. The discounted cash flow — the present value — of that $5 million would go down:

$5 million cash flow, 5 years
(present value)

  • 2% interest: $4.71 million
  • 4% interest: $4.45 million
  • 6% interest: $4.21 million

The higher rates go, the lower the present value of that future stream of earnings.

It gets even worse when you are dealing with high-growth equities like many technology stocks.

That’s because many tech stocks have rapid growth assumptions built into them. Instead of cash flows that would always be $1 million a year, for example, many would have expectations of growing 10%, 20%, 30% or more.

In this case, a rise in rates would eat into the present value of the investment even more.

Let’s say that company is growing cash flow 10% a year for five years. Assuming a 2% interest rate, the present value after five years would be about $6.30 million, but change the interest rate to 4% or 6% and the numbers go down:

$5 million cash flow, 5 years
(present value, 10% growth)

  • 2% interest: $6.30 million
  • 4% interest: $5.93 million
  • 6% interest: $5.59 million

This is an even bigger decline, on a dollar and percentage basis, than when there was no growth in cash flow.

Stocks compete with bonds

Peter Tchir of Academy Securities told me this was the heart of the problem: Higher rates lower the present value of the expected cash flow, and that means investors will be looking to pay less for a stock.

“Companies relying on future cash flow growth experience much greater risk as rates rise, and that has been the part of the market that has really driven returns in the stock market,” he said. “That is why some parts of the market, like the Nasdaq 100, which is heavy in technology stocks, is getting hit much more than the Dow Jones Industrial Average, which has less companies expecting outsized growth.”

The bottom line, Tchir says, is that bonds are competing with stocks as an investment, and bonds are starting to become more attractive: “If interest rates keep going up, I can make more investing in 10 year Treasurys than I could a week ago, and that makes other investments look less attractive.”

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Retailers pay to fly goods from China as U.S. port backup delays deliveries

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Containers are seen on a shipping dock, as the global outbreak of the coronavirus disease (COVID-19) continues, in the Port of Los Angeles, California, April 16, 2020.

Lucy Nicholson | Reuters

Companies such as Peloton are facing a costly logistical nightmare as record congestion at ports around the world cause delays.

Global shipping data from MarineTraffic showed a ship with 197 containers of Peloton bikes and merchandise circled at anchor just outside the Port of Los Angeles between Dec. 22 and Jan. 2., when it was allowed to dock — after Christmas.

“The ship, and Peloton’s expected supply time, lost 12 days due to this while their product was nearly within swimming distance of shore,” Import Genius trade data analyst William George said. “This is a crazy illustration of the problem Peloton and other U.S. importers are struggling with.”

The combination of a record number of containers arriving at the Port of Los Angeles — the busiest container port in the Western Hemisphere due to its proximity to Asia — and Covid-19 is slowing down imports to the U.S. Around 800 of the International Longshore and Warehouse Union’s 15,000 members have been out of work due to Covid, according to data from the union.

The congestion at ports has some companies forgoing maritime shipping in favor of airfreight to get popular or seasonal items on store shelves faster. Air rates are more expensive than shipping via ocean freight, but they’ve been dropping in recent months, according to online international freight marketplace Freightos.

400% increase

“While air cargo had its period of volatility in the first few months of Covid, tracking a 400% increase between February and April 2020, ocean freight has become a bottleneck in global supply chains, making air cargo a more viable option in some cases,” Freightos Chief Marketing Officer Eytan Buchman said.

Some of the congestion at U.S. ports is expected to ease as more longshore workers get vaccinated against the coronavirus. Just 5% of longshore workers have received vaccinations so far, Port of Los Angeles executive director Gene Seroka said. He added that the port is lobbying “all levels of government” for more vaccines to help ease congestion.

CH Robinson air freight

Source: CH Robinson

Peloton, which declined to comment for this article, referred CNBC to the company’s quarterly shareholder letter released last month. The letter said profit margins during the last three months of the year — which include the critical holiday shopping season — were squeezed by $100 million due to higher shipping costs.

“The global increase in shipping traffic has added significant delays to all sorts of goods coming into US ports, including Peloton products,” Peloton CEO Josh Foley said in the Feb. 4 letter. “These unpredictable delays have resulted in painful delivery reschedules for many people as Peloton Bikes, Treads, and accessories have been held at Port for upwards of five times longer than usual.” 

Peloton’s December shipment struggle is just one example of the variety of goods getting held up at U.S. ports.

Waiting to dock

Thirty container vessels were at anchor outside the ports of Los Angeles and Long Beach as of Monday, according to MarineTraffic data. More than 30 container ships are expected to arrive in Los Angeles by the end of March, and at least 27 ships are slated to dock in Long Beach in that time.

Among the anchored vessels waiting to unload at Los Angeles is the APL Charleston, which carried the delayed Peloton deliveries in December. The ship arrived again fully loaded with Chinese exports on Feb.18.

Capt. Adil Ashiq, executive of MarineTraffic’s U.S. western region, said the delays in December were not unusual.

CH Robinson air freight

Source: CH Robinson

“It is a reality many vessels, supply chain and logistics providers are currently facing at the Port of Los Angeles and Port of Long Beach,” Ashiq said in an interview. He added that the median time a container ship spent anchored outside the dock last week was just over 7.5 days before it could head inland.

“Now that the APL Charleston is back at anchorage, she may face similar circumstances as she did from her previous port visit in December, but of course this is shipping so anything can happen,” Ashiq said.

The bottleneck at ports has added costs to maritime shipping that make airfreight, which is normally significantly more costly, look like a relative bargain, especially when factoring in the time saved. Prices on air shipping have also dropped dramatically in recent months.

The price of a 250-kilogram air shipment traveling from China to the U.S. has dropped from about 60% of the cost of a full container to around 36%, Ashiq said.

“In other words, for the right type of cargo, and certainly the right value, air is absolutely becoming a more enticing option, with both capacity and far faster transit times,” Freightos’ Buchman said.

Hot tubs and bikes

The time saved in transporting a product justifies the cost for some clients who are trying to meet consumer demand, Seko Logistics Chief Growth Officer Brian Bourke said.

“If you want to ship a hot tub via ocean from Shanghai to New York, that will cost you around $1,000 for the transportation for a lighter hot tub, but it will take a minimum of 35 to 45 days,” Bourke said. He added that doesn’t include an additional seven to 14 days if you need to book in advance. Airfreight costs around $2,000 to $3,000 to ship, depending on the weight, he said.

“But it will only take you three to four days to get your hot tub,” Bourke said. “So, paying two to three times will save you four to seven weeks right now. Ultimately the math makes sense for certain shippers right now.”

Canyon Bicycles USA Transportation Manager Kim Peterson said the company is shipping most of its inventory via water, but added that its most popular bikes are being shipped by air to meet a demand surge.

“Air is faster, and we need to meet the demand of our customers,” Peterson said. “While I could pay an additional $1,000 to $2,000 to get my product in (an ocean) container at the head of the line in China, it doesn’t matter because the cargo then sits in the LA congestion.”

60 to 75 days

Shipping by ocean took 20 to 30 days before the pandemic, Peterson said. Now it’s about 60 to 75 days while airfreight takes three to five days.

“It’s a huge difference,” Peterson added. “We have a backorder in Asia right now,” he said. “We can’t wait. It would have an impact on sales.”

Shawn Richard, Seko’s vice president of global airfreight, told CNBC he doesn’t expect the high congestion levels to abate anytime soon.

“We are regularly flying 65-inch televisions in from China to the U.S.,” Richard said. “We saw a 40% increase in airfreight in December. Large items like hot tubs were also being transported. Our ocean freight teams are now selling airfreight.”

Richard added that large home-recreation items like ping pong tables and exercise equipment such as treadmills would typically be shipped by ocean because of the cost. Now they are moving by air because of a demand spike as the pandemic has people locked indoors, looking for ways to stay fit and entertain outside.

“Barbecue equipment and associated goods such as lawn/patio furniture, inflatable pools, filter equipment, and everything that could be used to improve the shelter at home experience in lieu of family vacations are now moving by air,” he said.

The lack of reliability has stretched the functionality of logistics and supply chains to their limits.

“We see those industries who need expedited shipping being pushed into the air versus the ‘hurry up and wait’ on the ocean front,” said Matt Castle, vice president of airfreight products and services at C.H. Robinson.

Recreation vehicles and parts that used to ship by ocean have shifted to airfreight, he said. “One of the things I never thought we would see being moved by air was vacuum cleaners. It’s a hot item now with so many people at home.”

Seasonal deliveries

Castle noted that the move to air shipping was sparked by a combination of factors: companies with a narrow seasonal window for selling products and production-based industries looking to restore some sort of rhythm and catch-up on inventory.

“The ocean congestion is compounding that need to meet orders and driving demand for airfreight,” Castle said.

Stephen Svajian, CEO and co-founder of Anova Culinary — which sells its precision countertop combo-ovens and cookers to Costco, Target and Amazon — said they are increasing their airfreight orders given the surge in demand fueled by the “restaurant experience at home.”

“We decide on what products to air freight based on the retail set date and consumer expectations. We don’t want to be out of stock and not fulfill orders,” Svajian said. “There is more pressure to use air this year because of delays on the ocean.”

Companies outside the U.S. are also shipping more products through the air. Castle said he is also seeing companies in Europe making the switch. “That market is very strong. There is a lack of container capacity everywhere.”

Ag exports

Air is also becoming an option for U.S. exporters struggling to transport their products overseas. Carriers make far less shipping exports from the U.S. to China — $744 per container versus $4,922 for Chinese exports bound for the U.S. The time and money saved by not having to load, unload and clean empty containers makes up for the lost money on the route back to Asia.

It’s also costing U.S. farmers who are struggling to ship their commodities overseas. Their access to international markets “is being severely undermined by the unprecedented dysfunction and cost of ocean transportation services,” Agriculture Transportation Coalition executive director Peter Friedman said.

Seko’s Richard added that spices and perishable commodities like lobster started shipping by air to China as early as October.

However, there doesn’t seem to be a quick fix to unclog U.S. ports, which leaves companies like Canyon with few options.

“In the cycling world, when the sun comes out, people want to take a ride on a bike,” Canyon’s Peterson said. “Demand is still high. It’s quite obvious, we will have to continue and do more air.”

Correction: This report was revised to correct the name of one of Anova Culinary’s customers. It’s Costco.

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Why central banks want to get into digital currencies

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Intense interest in cryptocurrencies and the Covid-19 pandemic have sparked debate among central banks on whether they should issue digital currencies of their own.

China has been in the lead in developing its own digital currency. It’s been working on the initiative since 2014. Chinese central bank officials have already conducted massive trials in major cities including Shenzhen, Chengdu and Hangzhou.

“China’s experiment is very large scale,” said J. Christopher Giancarlo, former chairman of the U.S. Commodity Futures Trading Commission. “When the world arrives in Beijing next winter for the Winter Olympics, they are going to be using the new digital renminbi to shop and to stay in hotels and to buy meals in restaurants. The world is going to see a functioning [central bank digital currency] very soon, within the coming year.”

The U.S. is playing catch-up. In late February 2021, Fed Chairman Jerome Powell said the U.S. will engage with the public on the digital dollar this year.

Advocates contend central bank digital currencies can make cross-border transactions easier, promote financial inclusion and provide payment system stability. There are also privacy and surveillance risks with government-issued digital currencies. And in times of economic uncertainty, people may be more likely to pull their funds from commercial banks, accelerating a bank run.

Watch the video above to find out how central bank digital currencies could become the future of global finance.

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