Art

Scott is the CEO of Masterworks, a business that allows people to buy fractional stakes in artwork. His claim, which is nominally true, is that art has historically “returned” 23.2% annually.

It’s an interesting business, but more interesting because art actually returns nothing at all. There is almost no better example of an asset with zero yield than art. In fact, because of maintenance costs, art probably has a slightly negative yield.

What in fact is happening is that art is simply monetising the fiat currency that chases it. Many people are sceptical about bitcoin but they are not sceptical about a Picasso, which is no more scarce today than decades ago but has returned over 20% annually since then.

We should not accept this from our money.

So blared Bloomberg on Friday. The chorus of calls for changing the bitcoin consensus mechanism will likely grow in some quarters. Immediately on Ethereum moving to Proof of Stake, the World Economic Forum (those well-connected organisers of global economic dismay) had this on their front page:

None of this makes Ethereum or Bitcoin less investable. It certainly does make them different though and the outright assault on bitcoin’s Proof of Work will continue for quite some time.

The likely path from here is that Ethereum is embraced by the banking and regulatory community as the benchmark of what can be done with this technology. Specifically, high throughput at low cost. Of course all of that simply moves the platform closer and closer to being a centralised database. Even if that happens, it’s still an open source database on which thousands of developers build and create every day and so it will likely innovate faster than any existing solution. What it does mean is that Ethereum cannot compete on the platform of value exchange, which is exactly why it is now being welcomed with open arms by governments and bankers.

Bitcoin’s path is unchanged. It retains its anchor in physical reality through Proof of Work. It will represent an uncensorable store of value and provide value exchange while enduring and surviving all manner of attacks as a result.

Nobody said it would be easy though.

The pension crisis is over

Here is an interesting one. Soaring bond yields have essentially solved the ‘pensions crisis’ brewing in the Western world. In 2015 the 100 largest pension schemes in the US had deficits approaching $US500 billion (AU$745.7 billion) that have now reversed completely and the top 100 funds are in surplus by about $US100 billion.

The reason? Soaring bond yields. Pension funds discount their future liabilities by the equivalent tenure bond yield. As a result their liabilities are now much more heavily discounted than they have been for many years.

This caused those funds to lock in this ‘advantage’, divesting themselves of equities and buying bonds to ensure they have a much lower risk profile that matches their liabilities.

We are always asking “who will buy all the bonds?” I think there are very good reasons to assume that a significant switch out of equities and into bonds is occurring as a result of rising rates.

Vast tracts of pension fund money then will move into assets paying 3.5% against an inflation backdrop of 8%. It seems perverse that an asset now yielding a negative real return, with no asymmetric upside properties, should be so attractive to those looking to build value for the long term.

A growing population of retirees then, living off bonds that the smaller cohort behind them are going to finance? Seems unlikely.

Gilts

In the UK, government bonds are commonly known as Gilts. Historically the pieces of paper bearing the IOUs  had a gilded edge. That gave rise to the term ‘gilt-edged’, which came to mean the instrument was as good as it gets.

It remains true in the market today that government bonds are perceived as the benchmark for a low-risk asset. How do we know? Well even now when assessing investments in equities or venture capital, the risk-free rate chosen to compute the overall discount rate will refer to the return on a government bond.

2022 is a very strange year though. Stocks and bonds are both falling sharply and some bond indices are down well over 20%.

Individual bonds though are falling even more dramatically. Take the UK’s Gilts maturing in 2060, which have dropped 60% since December. That is simply something that doesn’t really happen in bond markets. Fine for bitcoin and risk assets to jump around like that, less fine for the ‘risk free benchmark for everything’.

So the pension crisis is over now that pension funds own bonds that are dropping like stones in the water.

Euro-Trash

Incredibly high. Who could have predicted it? Well, not the ECB.

Their predictions are here from 18 months ago which I think is a suitable time lag to judge them on. Just missed by a factor of six.

They then followed up in 2021 by telling us all how stupid people are. “They just overestimate inflation because they’re kinda dumb and don’t have our sophisticated models. Yeah thickos, you lot don’t have a clue.”

The data sets, army of PhD economists, and raw intellectual horsepower they command are simply overwhelming. Yet, they don’t have a clue. They pretend what they told us last year has been forgotten and that their revised predictions and medicines will be successful despite the failures of the past.

The bottom line is the price mechanism is so infinitely complex it cannot be comprehended. Attempting to control or manage it is simply a fool’s errand that continues only because it enriches so many associated people.

In their latest predictions The Chief Economist of the ECB, Philip Lane was on the record this weekend “…growth in the Euro area would stagnate later this year and a mild or technical recession cannot be ruled out. He said it wouldn’t be like the major recession of 15 years ago”.