Tag Archives: Bitcoin

SEMI-MONTHLY FISCAL/MONETARY UPDATE – SOMETIMES A SIMPLE VIEW WORKS BEST, + BITCOIN UPDATE

articles,

 

SEMI-MONTHLY FISCAL/MONETARY UPDATE – SOMETIMES A SIMPLE VIEW WORKS BEST, + BITCOIN UPDATE

Economics seems like such a complex subject, as represented by PHDs and pundits. Some of you may remember Martin Zweig, a very successful money manager who made his name by predicting the 1987 crash. More than that, his investment mantra, “Don’t Fight the Fed” has proven to be one of the simplest, but most durable, tools in capital management. While everyone seems to be celebrating two quarters of 3% GDP growth (not “great”, but better than 2%), and debating whether the economy will continue to strengthen or weaken once again, everyone seems to be forgetting that Central Banks around the world have enlarged their collective balance sheet by something like TEN TRILLION DOLLARS since the financial crisis of ’07–08. In an effort to stave off a deflationary collapse, the Fed, the European Central Bank, the Bank of Japan, the Swiss National Bank, and the Peoples Bank of China have created new currency (something like “cryptocurrency”), and bought all kinds of fixed income securities as well as equities. This has, as designed, inflated the bond and stock markets, keeping interest rates very low (still negative on trillions of fixed income securities) and elevated the stock markets to record highs. Janet Yellen and other economists are mystified as to why all this newly created capital has not stimulated inflation in wages and groceries, ignoring the fact that inflation has been huge in the capital markets, real estate, art and other asset classes with the notable exception of gold (so far). The “wealth effect” for the upper class at least, has allowed the for the purchase of a Van Gogh painting for a cool $450M and apartments in the Big Apple for $60-100M. Grocery and apparel prices have not inflated, but the creation of $10 trillion of fresh capital has had its intended inflationary consequences in the form of asset prices.

Now comes the test, as the Central Banks begin to “normalize”, reduce their balance sheets, and pull back the Keynesian accommodation that helped to avoid an even larger financial crisis back in ’08. Our SIMPLE point here: If Central Banks provided $10 trillion dollars of freshly printed currency, which no doubt was a major contributor to the steady (though anemic) economic growth of the last seven years and the straight line upward in the stock and bond markets, it seems reasonably predictable that the removal of that “accommodation” will reverse a lot of that economic progress and asset inflation.

Do not despair, however. In our view, the stock and bond markets will not collapse, and THE REASON IS SIMPLE. THE CENTRAL BANKS WILL CAPITULATE, and back off their intended “normalization”. Within a matter of months, the sale of securities by our Fed, and the reduction of purchases in Europe, Japan, China, and Switzerland, will create a year to year reversal of something like a trillion dollars, annualized, of buying power, and that will weaken the worldwide economy. At that point, the politicians will scream “do something”, and the Central Banks will back off their QT (Quantitative Tightening). The result will be the “can kicked down the road” once again. Unfortunately, though, each financial “heroin hit” has to be bigger than the last to maintain the economic “high” (anemic though it may be), so the accommodation will need to be even bigger. Of course the long term downside consequences will be even more dramatic but that is a story for another day. The bond market, with the ten year note still at a historically low 2.6%, (“disbelieving” the strengthening economy), and the gold market which has been firming over the last month or so (anticipating the next round of accommodation), may well be signaling exactly this scenario.

Regarding Bitcoin: Now down about 50% from its peak (about the time we last wrote about it, on 12/19 at the high), we stand by our analysis (from 8/1 and 9/5 at much lower prices, and again on 12/19) The search function on our Home Page will bring up those articles for you). The youtube link below humorously summarizes the situation.  Blockchain technology no doubt will have its applications, but Bitcoin and its 1300 brothers and sisters, amounting to hundreds of billions of dollars of newly “mined” currency, is not going to have material staying power. Watch this video, more truth than fiction.

https://www.youtube.com/watch?v=aeMv9uKpAZg&feature=youtu.be

 

 

 

 

 

https://www.youtube.com/watch?v=aeMv9uKpAZg&feature=youtu.be

SEMI-MONTHLY FISCAL/MONETARY UPDATE: BITCOIN REVISITED: THE FLAW IS REALLY SIMPLE!!

articles, ,

BITCOIN REVISITED: THE FLAW IS REALLY SIMPLE !!

On September 5th of this year I wrote an article about Bitcoin, which you can access below: After you have read the previous article, you can return here for my new conclusion. Good luck, and HAPPY HOLIDAYS !!

SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD VS. BITCOIN – ONE WILL BE UP, THE OTHER DOWN

The price of bitcoin is several times higher now, but I stand by this article. The FLAW in the whole cryptocurrency “bubble” is as follows. While the number of bitcoins that can be created is presumably limited, which would therefore provide the long term value as a currency ( just as with gold over the last four thousand years) the number of competing cryptocurrencies is not limited. Three months ago there were something like 800 competitors to bitcoin, combining to create a total worth of about $125 billion. Now there are more like 1100 “bitcoin like” alternatives, in total worth perhaps $400 billion. In the 1920s, during the Weimar inflation in Germany and Austria,  when a loaf of bread cost 1,000,000 German marks, a mark was therefore worth one millionth of a loaf of bread. If a Bitcoin is worth $20,000., for example, that means the dollar is worth one twenty thousandth of a Bitcoin. That doesn’t sound to me like the US Dollar is worth much, especially if a computer can issue thousands of similar currencies that dilute the Dollar even further.

When the books are written five or ten or twenty years from now about the financial follies of the early twenty first century, the Bitcoin (and competing cryptocurrency) mania will be viewed as one of the “ringing bells” before the bubble burst. One man’s opinion, FWIW.

Roger Lipton

 

SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD VS. BITCOIN – ONE WILL BE UP, THE OTHER DOWN

articles,

SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD VS. BITCOIN – ONE WILL BE UP, THE OTHER DOWN !!

The general equity market was lackluster in August. The price of gold bullion firmed steadily through the month, endng up 4.2%. Our gold related portfolio, largely driven by the performance of the mining stocks, outperformed on the upside. As we have pointed out before, the gold mining stocks have the potential to multiply  by many times, since they are so cheap, historically, versus the price of gold bullion, which is still down substantially from its high of $1900/oz. in 2011. The weakening of the US Dollar which began in June continued through August.  A weak dollar is not a necessity for gold (and the mining stocks) to go up in price but, all other factors being equal, should prove to be a positive for us.

The rise of crypto-currencies, the most prominent of which is Bitcoin, has no doubt attracted your attention as journalists breathlessly describe the fortunes being made by “investors” in this new “asset class”.  I believe there is a relevance of this development to our investment in assets related to gold, the only “real” money. Please bear with our, longer than normal, discussion which provides a background on Bitcoin, then finally its relevance to gold related investments.

BITCOIN, AND CRYPTO-CURRENCIES

Currency is most often defined as a form of money, circulated through the economy and used as a medium of exchange for goods and services. Most broadly used currencies have been  issued by governments, which these days, unbacked by anything tangible except taxing power, are themselves a crypto-currency.The universal acceptance of gold, for literally thousands of years, provided credibility for the currencies that were backed by gold. Over thousands of years, the longest lasting currencies were those convertible into a proven store of value, most often gold and/or silver, therefore controlling the amount issued, and providing predictable purchasing power of those units of value. Several years ago I created a three minute youtube video, on this subject, that discusses why “Warren Buffet (who dislikes Gold) is Wrong” which you can watch at    https://www.youtube.com/watch?v=ah7Y2rHuhCs  .There has never been an unbacked “fiat” currency that has lasted. It is just a question of time until the politicians of the day dilute the currency into oblivion as they try to satisfy their constituents.

The best known cryptocurrencies currently are Bitcoin and Ethereum. You should know, though, that (per James Grant’s Interest Rate Observer) “there are now 840 cryptocurrencies, worth $123.4 billion. Two weeks ago, there were 828 cryptobrands, worth less than $90 billion”.

One of the requirements of a desirable currency is the knowledge an owner has as to what quantity of goods of services that “unit of exchange” will be worth. Look at it simplistically. Let’s say we have a closed “society”, call it a “residential community” with 100 homes for sale, and the total amount of currency that is circulating within that society is $100M. Depending upon how many residents want a new home, there will be transactions at an average price, perhaps at an average of $1M per home. Let’s say then, that the government, or some other issuing agency, puts $1 billion more value (in cryptocurrencies or oil or bananas or whatever) into that community and distributes it among the residents. It’s obvious that those homes are going to be worth a lot more “money”, therefore the previously existing currency (U.S.Dollars, in the US, these days) will have been severely depreciated. It is ridiculous to assume that new currencies, issued by governmental agencies or the “quant” creators of Bitcoin and the others will not inflate the assets of existing goods and services over time, in essence diluting the previously issued currency as far as its previous purchasing power. It is just a question of degree, and time before the newly issued currency circulates within the society.

The proliferation of individual competing cryptocurrencies, as well as the enormous volatility in price of such currencies, by their very nature, invalidate these cryptocurrencies as predictable stores of value or units of exchange. Nobody can know from one day to the next, let alone over months or years, what the purchasing power of Bitcoins or the others will be. Speculators might want to “roll the dice” in terms of what Bitcoin might sell for tomorrow, or next week, but I suggest that nobody in their right financial mind would put a “serious” amount of money into Bitcoin as more than a speculation for a short timeframe. Of course, a “serious” amount of money or time will vary among investors. Some vendors such as Spirit Airlines have accepted Bitcoin as payment, but you can bet that they have converted that Bitcoin into a more “stable” currency ASAP.

The proliferation in recent years of cryptocurrencies is a commentary on (1) an unfortunate human inclination to try to make “a quick buck” through speculation (2) a search for an alternative to governmentally issued cryptocurrencies which have had no backing since Richard Nixon closed “the gold window” in 1971 (3) a “reach” for a return by investors frustrated by federally suppressed interest rates on their savings accounts.

The essence of my conviction is that Bitcoin (and the others) will fade from existence over time, and speculators will lose their “investment” in these “tulips” of the 21st century, since there is no limit to the number of these types of currencies that can be issued. While the amount of governmental Central Bank digitally created currencies also have no limitation, at least the taxing capability allows the government to provide some sort of value to the currency after the ……… hits the fan.

BITCOIN VS. GOLD

This discussion very much also relates to my conviction regarding the long term ownership of gold related assets as a store of wealth and potential medium of exchange. It is likely that the cryptocurrencies have siphoned off a certain amount of capital that is looking for a safe haven away from government’s prying eyes. It is possible that the gold price will “go parabolic” just about the time that the Bitcoin frenzy winds down.

I remember a CNBC TV segment a few years ago, when Larry Kudlow, the well regarded financial commentator, had his nightly show, he invariably talked about his intense disapproval of the ownership of gold, which had started to slip from its all time high at $1900/oz. Gold, he said, had no “utility”, it was a psychological game and therefore very dangerous. See my youtube video, referred to above, @  https://www.youtube.com/watch?v=ah7Y2rHuhCs. So one night in 2012 or 2013, he was doing a segment on Bitcoin, which had just started to emerge, and he said: “Bitcoin is ridiculous, it has no backing, now if you backed it with Gold, you would really have something”. I sent him an email, saying “Larry, I’m confused, help me out”. He never responded.

I believe that when the books are written (possibly after my lifetime) and the fiscal/monetary follies of the early 21st century are described, Bitcoin and the other cryptocurrencies, including those currently being issued by worldwide Central Banks, will be described as “ringing the alarm bell” at the beginning of the financial revolution to follow. My advice to readers, which you have no doubt already concluded, is to avoid the cryptocurrency “asset class”, except perhaps as the rankest of speculation. It’s hard to know whether your capital will last longer in Bitcoin or in a Las Vegas casino, but the result will be the same. Those casinos weren’t built by customers walking away with much in the way of winnings.

CONCLUSION

Just in the last few days it is becoming apparent, that, as crypto-currencies trade at new highs, governments, including China, are cracking down on their usage. Many “investors” in Bitcoin and others are using this currency as a tax avoidance mechanism, which provides predictable unhappiness for governments around the world. On the other hand, gold is being continuously accumulated by Central Banks including China, Russia, and many others, to the tune of hundreds of tons annually. It is my opinion that, when Bitcoin and its imitators get disillusioned, a significant portion of that capital will flow to the ultimate “safe haven” investment, namely gold and its related investments.

SEMI-MONTHLY FISCAL/MONETARY UPDATE – IS BITCOIN “THE NEXT BIG THING” ?

articles

BITCOIN MUST BE THE “NEXT BIG THING”, RIGHT?

Financial headlines are trumpeting the “money” that is being made by owners of Bitcoin, the revolutionary cryptocurrency. As this is written, Bitcoin traded for over $4,000/unit which is many times the value of just a couple of years ago, and a quadruple in 2017 alone. Something is clearly going on here, so the question naturally becomes what to do about it. Should you buy it and, if you buy it, how long should you hold it?

CURRENCY, DEFINED

A Currency is most often defined as a form of money, circulated through the economy and used as a medium of exchange for goods and services. There are privately “branded” currencies such as airline miles and credit card points that can be used for a limited number of purposes,  but most broadly used currencies have been  issued by governments, who have a number of ways of potentially “backing” the value of that currency by offering to exchange the currency for a broadly accepted “package” of goods or services. Most notably, from 1863 to 1933, paper “gold notes” were exchangeable into a fixed weight of gold, so the quantity of notes (currencies) was limited by the amount of gold that the government owned. The amount of notes (currency) that was issued by a government could grow as the economy grew, and the amount of gold mined, and then owned by the government, could grow proportionately. The universal acceptance of gold, for literally thousands of years, provided credibility for the currencies that were backed by gold. The fixed weight of gold exchangeable into the U.S. Dollar, for example, allowed the notes (currency) to be used as a “store of wealth”.  Governments, as opposed to the creators of cryptocurrencies today,  can at least “back” their currency, in ways to be determined by the crisis of the day, by  taxing their citizens. Over thousands of years, the longest lasting currencies were those convertible into a proven store of value, most often gold and/or silver, therefore controlling the amount issued, and providing predictable purchasing power of those units of value. Several years ago I created a three minute youtube video, on this subject,  that discusses why “Warren Buffet (who dislikes Gold) is Wrong” which you can watch at  https://www.youtube.com/watch?v=ah7Y2rHuhCs .  Of course, in the history of the planet, there has never been an unbacked “fiat” currency that has lasted. It is just a question of time until the politicians of the day dilute the currency into oblivion as they try to satisfy their constituents.

The best known cryptocurrencies currently are Bitcoin and Ethereum. You should know, though, that (per James Grant’s Interest Rate Observer) “there are now 840 cryptocurrencies, worth $123.4 billion. Two weeks ago, there were 828 cryptobrands, worth less than $90 billion”.

IT’S SIMPLE

One of the requirements of a desirable currency is the knowledge an owner has as to what quantity of goods of services that “unit of exchange” will be worth. Look at it simplistically. Let’s say we have a closed “society”, call it a “residential community” with 100 homes for sale, and the total amount of currency that is circulating within that society is $100M. Depending upon how many residents want a new home, there will be transactions at an average price, perhaps at an average of $1M per home. Let’s say then, that the government, or some other issuing agency, puts $1 billion more value (in cryptocurrencies or oil or bananas or whatever) into that community and distributes it among the residents. It’s obvious that those homes are going to be worth a lot more “money”, therefore the previously existing currency (U.S.Dollars, in the US, these days) will have been severely depreciated. It is ridiculous to assume that new currencies, issued by governmental agencies or the “quant” creators of Bitcoin and the others will not inflate the assets of existing goods and services over time, at the same time depreciation the previously issued currency. It is just a question of degree, and time before the newly issued currency circulates within the society.

The proliferation of individual competing cryptocurrencies, as well as the enormous volatility in price of such currencies, by their very nature, invalidate these cryptocurrencies as predictable stores of value or units of exchange. Nobody can know from one day to the next, let alone over months or years, what the purchasing power of Bitcoins or the others will be. Speculators might want to “roll the dice” in terms of what Bitcoin might sell for tomorrow, or next week, but I suggest that nobody in their right financial mind would put a “serious” amount of money into Bitcoin as more than a speculation for a short timeframe. Of course, a “serious” amount of money or time will vary among investors. Some vendors such as Spirit Airlines have accepted Bitcoin as payment, but you can bet that they have converted that Bitcoin into a more “stable” currency ASAP.

WHY BITCOIN NOW?

The proliferation in recent years of cryptocurrencies is a commentary on (1) an unfortunate human inclination to try to make “a quick buck” through speculation (2) a search for an alternative to governmentally issued cryptocurrencies which have had no backing since Richard Nixon closed “the gold window” in 1971 (3) a “reach” for a return by investors frustrated by federally suppressed interest rates on their savings accounts.

THE ESSENCE OF THE PROBLEM

The essence of my conviction that  Bitcoin (and the others) will fade from existence over team, and speculators will lose their “investment” in these “tulips” of the 21st century, is that there is no limit to the number of these types of currencies that can be issued. While the amount of governmental Central Bank digitally created currencies also have no limitation, at least the taxing capability allows the government to provide some sort of value to the currency after the ……… hits the fan.

BITCOIN VS. GOLD

This discussion very much also relates to my conviction regarding the long term ownership of gold related assets as a store of wealth and potential medium of exchange. It is likely that the cryptocurrencies have siphoned off a certain amount of capital that is looking for a safe haven away from government’s prying eyes. It is possible that the gold price will “go parabolic” just amount the time that the Bitcoin frenzy winds down.

LARRY KUDLOW HAD IT RIGHT

I remember a CNBC TV segment a few years ago, when Larry Kudlow, the well regarded financial commentator, had his nightly show, he invariably talked about his intense disapproval of the ownership of gold, which had started to slip from its all time high at $1900/oz. Gold, he said, had no “utility”, it was a psychological game and therefore very dangerous. (See my youtube video, referred to above, @  https://www.youtube.com/watch?v=ah7Y2rHuhCs. So one night in 2012 or 2013, he was doing a segment on Bitcoin, which had just started to emerge, and he said: “Bitcoin is ridiculous, it has no backing, now if you backed it with Gold, you would really have something”. I sent him an email, saying “Larry, I’m confused, help me out”. He never responded.

AND SO IT WILL BE WRITTEN

I believe that when the books are written (possibly after my lifetime) and the fiscal/monetary follies of the early 21st century are described, Bitcoin and the other cryptocurrencies, including those issued by worldwide Central Banks, will be described as “ringing the alarm bell” at the beginning of the financial revolution to follow.

IN CONCLUSION

My advice to readers, which you have no doubt already concluded, is to avoid the cryptocurrency “asset class”, except perhaps as the rankest of speculation. It’s hard to know whether your capital will last longer in Bitcoin or in a Las Vegas casino, but the result will be the same. Those casinos weren’t built by customers walking away with much in the way of winnings.

SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD SLOWLY RISES – BITCOIN “ADJUSTMENTS”

articles, , , ,

SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD SLOWLY RISES –  BITCOIN “ADJUSTMENTS”

The price of gold bullion firmed a bit through the month of July, with gold bullion up about 2.3% for the month. The chartists could say that a base has been formed to support a major move upward. The gold mining stocks were up somewhat more, reflecting the operating leverage from the change in price of their end product. Our major position in the miners continues to be our  emphasis and, as we have pointed out before, has the potential to multiply our portfolio value by many times. The weakening of the US Dollar which began in June continued through July. A weak dollar is not a necessity for gold (and the mining stocks) to go up in price but, all other factors being equal, should prove to be a positive for us.

We talked last month about the steady increase in the monetary base that has been created by Central Banks worldwide, and that this financial experiment will undoubtedly end badly. An increasingly dangerous corollary of Central Bank currency creation is the purpose to which those funds are put to work. What is not well known is that Central Banks have been buying hundreds of billions of dollars of equities. Since major Central Banks cumulatively hold over $11 trillion of foreign currency reserves, it is natural that they should want to diversify those reserves away from the currencies which are being continuously diluted. Along with steady buying of Gold (which we suggest is the “real money”), the Central Banks are adding equities to the mix/

The Bank of Japan has been buying Japanese ETFs at the rate of $53 billion per year, and now holds over 71% of those ETFs. The bank is now one of the top 5 owner of 81 companies within Japan’s Nikkei 225 index. As reported by Grant’s Interest Rate Observer, the Japanese Financial Services Agency (Japan’s SEC) is now “paying close attention” to this phenomenon.

The European Central Bank has been buying 60 billion euros worth of bonds monthly, and Mario Draghi recently announced a continuation (A hesitancy to back off?) In the meantime, Deutsche Bank CEO, John Cryan, has said: “There has been absolutely no price discovery now in corporate bonds….which is a very dangerous situation”.

The Swiss National Bank has been steadily buying equity securities, including US based companies. Equity securities, as of Q3’16, comprised 20% ($128 billion) of their of their $643 billion in foreign exchange reserves, up from 7% in 2009, including investments of $1.7 billion in Apple, 1.08 billion in Exxon, and $1.2 billion in Microsoft.

Here in the US, our Fed has talked about beginning to unwind our $4.2 trillion balance sheet by no longer reinvesting the funds from securities that are maturing. The result of this form of money “tightening” can only be a guess, especially with an already soft economy.

These are serious amounts of capital being put to work in an increasingly dangerous way. To some extent, Central Banks are biased toward continued equity (and bond) buying, because their absence from the marketplace would cause a price decline and trillions of dollars of “paper losses” on their respective balance sheets. I learned a long time ago (the hard way) that when you become “responsible” for supporting a particular market, the best possible strategy is “get out of the way” and take the current loss before it inevitably becomes much larger. The key question, at this point for Central Banks, now becomes “Sell to Whom?”.

Lastly,  a Wall Street Journal  Headline this morning reads: Bitcoin RIval Arises From Sector Spat. I will write more about Bitcoin, and the other “Cryptocurrencies” in the near future. As a preview: I believe that years from now, books will be written about the current fiscal/monetary world we are living within, and the cryptocurrrencies will be appropriately viewed as symptomatic of the tail end of the financial folly. Stay tuned on this subject and, in the meantime, be careful out there.