Let’s be honest. There’s no way your guess is as good as mine.
I never give money to homeless people. I can’t reward failure in good conscience.
Most people wouldn’t even be the main character in a movie about their own lives.
Goldman went public in 1999, it was the beginning of the end of the bank in its greatest form. Further strife lay ahead in 2008 when they were effectively bailed out by the US Government, thanks to some favours from former CEO Hank Paulson.
Looking at each point in turn:
- Does not generate cash flow:
- Entirely true, by design.
- The comparator group they use, bonds, are in a 35 year bull run. Yields are at all time lows. I hardly think getting no cash on bitcoin is worse than getting negative yields on a bond.
- Does not provide earnings through exposure to economic growth:
- True. No direct earnings and no cost base either. So does not benefit from earnings but cannot go bankrupt either.
- Other things being equal though, bitcoin’s value would grow with the economy since it is really a relative pricing mechanism.
- Over time, bitcoin becomes more scarce than almost everything else.
- In particular it benefits from “false growth” that is generated only through the printing of money.
- Does not provide consistent diversification because correlations are unstable:
- It has simply outperformed every asset class on earth since launch. It’s not really correlated with anything for that reason.
- Given the time series of bitcoin is so short, this really is a non-point.
- Lost 37% in one day in March this year, also true.
- Outperforming the S&P 500, Nasdaq, Gold and almost anything else this year, also true.
- Does not show evidence of hedging inflation:
- They were $8 in 2013.
- They are $9,500 now, I suppose that’s not a hedge since inflation has been “low” in that period. I Imagine the answer would be yes if bitcoin were now $20.
- “We believe a security whose appreciation is primarily dependent on whether someone will pay a higher price for it is not a suitable investment for a clients”:
- Are they recommending we buy things that are plentiful and go down in value?
- Profit in all assets depends on someone wanting to pay a higher price. The trick is analysing why they might pay that price.
- Bitcoins are scarce and that scarcity increases with time, so people will pay more for them. It’s no harder than that.
- We believe that while hedge funds may find trading cryptocurrencies appealing because of their high volatility, that allure does not constitute a viable investment rationale
- True, they are volatile.
- True don’t ‘day trade’ cryptocurrency, because you will lose to hedge fund robots
- Otherwise as long as they are volatile and rising what is the issue
Its been a while since Deutsche Bank did anything exciting other than nearly go bust. They remain on life support and eventually the German State will take them over. This week they did do something useful though, their chart about interest rates is fascinating. For nearly 20 years now professional forecasters have been indicating higher rates for 10 year bonds. The dotted lines are the forecast, the solid lines are the outcome.
Now, with rates close to zero, forecasters are forecasting higher once again. If you look closely at the chart, the forecasters have been very often right, while being totally wrong on the longer scale. That is the message of the chart, most analysts are buried in this quarter, next quarter or some other near term marker. Jeff Bezos said of Amazon’s quarterly results “I don’t pay attention to them, they are mostly the result of decisions we took three years ago”.
The better predictions are probably the ones which set out where we are going long term:
– things will be more digital, in an inconceivably huge way.
– there is too much debt and governments will print more money
– the inequality issue is likely to result in wealth and property taxes
– bonds will be so plentiful they will be worth less
– interest rates may well continue to fall in the short term because central banks and governments have no option but to keep them there
Who cares really about next year? The prize is 10 and 20 years. It’s obvious where this is all going but not as obvious what to do about it.
I don’t want your opinion
I just want to know what’s in your portfolio. From Nicholas Taleb and ‘Skin in The Game’. Does it matter what Goldman Sachs say or does it matter what they buy? This week we caught a glimpse of what institutions are actually doing, rather than what they are saying. Since the halving on May 11, the biggest bitcoin fund on Wall Street, Grayscale, has purchased 18,910 bitcoins and miners have produced only 12,337.
So, one fund on Wall Street is buying more than entire the new supply, as we predicted some six months ago. I’ll refer you again to our paper on the halving which is playing out pretty much as we hoped.
It takes a long time for these halving’s to work through the system. Up to six months in fact. We have seen supply tighten, we have seen the bitcoin blockchain crowd with transactions in the 3 weeks post halvening, a queue that only cleared on Saturday, we have seen hash rate drop as unprofitable miners go bankrupt and turn off machines, this will likely continue for some months yet.
Then we will see signs of what reduced supply means but for now, the early signs are already there.
I wrote some weeks back about the scale of the Australian spending on what is known as JobKeeper. It was scheduled to cost $130 billion for the duration of the scheme. Well, it turns out that there was an error in the spreadsheet and the scheme is actually costing half of that. The specific explanation was as follows:
“Treasury was wrong because the epidemiological theoretical models were wrong in projecting a potential 50,000 to 150,000 virus deaths and that daily demand for intensive care beds could hit 5000, 17,000 or 35,000, depending on social distancing restrictions.”
In poker there is a notion of being pot committed. It happens when you’ve invested so much money in a hand, that even with the odds against you, you keep betting. The correct thing to do is stop, the odds are the odds and you should just play those odds. Almost nobody is that disciplined though, certainly not governments and just when you thought you’d saved $60 billion dollars, up pops a pot committed government minister:
“…. the government is willing to extend JobKeeper payments after thousands of Australians were left out of work due to the coronavirus pandemic.”
This was all backed up by the Reserve Bank Governor, who said:
“If the economy’s not recovered reasonably well by then, as part of that review, we should be looking at perhaps the extension of that scheme or the modification in some way”
Pot committed, you see. We were willing to spend $130bn, we only spent $60bn, we didn’t get the result we wanted, bet more.
The problem is of course, as the governor points out, the music will eventually stop unless the can is kicked down the road forever. It might be and that would be universal basic income.
Finally, some further reading for the very keen. Friedrich Hayek is widely referenced in bitcoin circles because of his quote about “taking money production out of the hands of governments”, which bitcoin does. However, he is more famous for one paper, a paper that in the thirty years after he published it (in 1945) was the most referenced academic paper in the world. The Use of Knowledge In Society lays out that almost everything is unknown and unknowable. For example, I do not know how you think or what you think. You might tell me something, it might not be true.
Knowledge about economic preferences though is transmitted between people, through the price mechanism. You signal to me your economic preferences in a microscopic way through what you do and do not buy, where you do and do not work. 7.5 billion people on earth signal in the same way, they signal every nuance. It is a massively, massively complicated system. It cannot be predicted, it cannot be centrally planned.
The point? Don’t interfere. The price system is best left to the collective signalling of 7.5 billion people and will be vastly more accurate as to preferences than any central plan or government intervention. If only 20 economic signals per day were ‘sent’ by every person (it is in fact far more) that would be 55 trillion signals a year, all of which impact the other and feedback on each other. It is not possible to comprehend this but every government and central bank in the world has a ‘model’ that claims to do exactly that.
The world is running a test right now, with the heavily engineered and managed asset classes up against those that are simply left alone. According to Hayek, there is only one winner.