Jackson Hole
When is a summit not a summit? I would say, when it’s just a phone call.
That’s too hard for our central bankers and not serious or important enough, so they are pretending to go to the Jackson Hole Summit this year by calling it the “Jackson Hole Summit”. In fact, nobody is going to Jackson Hole at all and they are having a few video calls.
It is with great delight I imagine Jay Powell announcing to Mrs Powell, “I’m off to Jackson Hole” when in fact he’s going into the next room and turning on his laptop.
Obviously, I write this newsletter from the International Space Station (when I’m not golfing on the surface of the moon). I put on my astronaut outfit, count down from ten and start writing away disrupted only by the occasional phone call from NASA HQ asking about the view. It’s a lot more fun, except that my keyboard keeps floating around and the air’s a bit thin, otherwise it’s an ideal environment.
I’m convinced it’s a sign, “let’s just pretend and nobody will notice”, pretty much the story of central banking really.
Change is happening
Finance professionals preparing for the latest technology changes.
In 2011, Swedish tech entrepreneur and generally accepted loony Rick Falkvinge sold everything he had and put it all into bitcoin. The internet did not hesitate. He was mocked remorselessly for months. Bitcoin was $10 then, and his ride was not a smooth one. He wrote a blog post at the time:
“Some people have ridiculed the bitcoin currency because you can’t use it to buy a hot dog on the corner. The legacy banking system is much more suited to everyday tasks due to inertia and the networking effect. In this observation, they are entirely correct, and yet they are but a millimeter in that observation from drawing the conclusion why the uptake and value of bitcoin will skyrocket once people understand just how revolutionary it is.”
He saw change coming and he saw the evolution of money and went for it in a way that very few people would. Few people see change coming or perhaps, more specifically, they do not want to see it or do not want to understand.
Simple dismissal of new technology for vacuous reasons does not work. You must do your research and know definitively why you are rejecting something, otherwise keep an open mind.
The finance industry remains, frankly, very snotty indeed about bitcoin. The ridicule and disbelief are alive and well. I think mostly that is because it does threaten existing, entrenched finance models.
“ …..and the reason that we don’t invest, is that your Bit Coins are threatening my very warm corner of regualtor-protected rent seeking. Thank you very much and goodbye.”
There is a long way to go but remember, genuine alpha only exists where other people will not go. Once the masses are here, owning bitcoin will be like owning Westpac shares, generally dull with occasional bursts of massive disappointment.
I choose Westpac because only three years ago their market capitalisation exceeded bitcoin. Now they stand at US$32 billion, bitcoin stands at $210 billion. You don’t read about this in the press because you only read that bitcoin goes backwards.
To be fair to Westpac, it’s not all bad. Their VC arm invested in US crypto-exchange Coinbase in 2015. When they cash that out, it will be a huge chunk of change, even for them.
There are bright lights even in the darkest corners.
Top Dog
If you are top dog in the world, then your currency is top dog. In fact, that’s how you prove it.
The current top dog, the US Dollar, is profoundly embedded. Until very recently, every international payment was routed via the New York Federal Reserve through the SWIFT system. So at some point you have to touch dollars, even if you are in New Zealand paying someone right next door, in Chile.
It’s actually a crazy system for everyone but the US.
China and Europe are working hard to build parallel systems, projects that have been going on for years. Some examples of their progress:
- Trade between China and Russia is now conducted 46% in USD (a few years ago it was over 90%). 17% is Yuan, 30% is conducted in Euros
- Rosneft (the largest Russian oil producer) now settles in Euros, not dollars (where it can).
The Chinese are also opting out of US Treasuries. Clearly they are still by far the largest holder and by dumping them they would hurt themselves, but excess reserves now go into gold and not to support the USD.
Since the start of the year the United States Treasury has issued over $3 trillion in debt and only $200 billion of that was taken up by foreigners, a mere 7%. The appetite for dollars is in long term decline.
It’s not just China. Europe too is looking for another way. They launched an alternative to the SWIFT payment system last year to facilitate trade with Iran which the US had blocked. As you can see, trade with Russia is ticking along nicely in Euros.
Don’t expect the dollar to collapse yet though, it is still responsible for 85% of the world’s trade.
Germany
Of all the world’s developed countries one of the wealthiest is surely Germany. You can measure per capita, you can measure absolute GDP but not until you go somewhere can you really discern if a place is wealthy.
Go to Germany, it is rich.
Go to America, you think it is rich. Then you arrive and realise it’s a just place where some very rich people live.
Another benchmark I like to use is holidays. If the Germans are there, then you are somewhere good. If the Americans are there, you are probably in Prague.
So using that holiday heuristic, which is a obviously a sound and well tested barometer, we can compare the two bond markets.
First to Germany, last week bids for their 30 years bonds outstripped demand three fold. The highest ever. German credit, like their holiday destinations, is deemed by the market to be the best.
The US treasury on the other hand had far lower demand for their bonds. That’s not to say they couldn’t sell them, they absolutely could, but there is no question whose debt is preferred in the market.
All it takes for catastrophe is for US bonds to fail to catch bids. At which point, the Federal Reserve will do the bidding and it’s Weimar Republic time.
Years, not months, but it’s coming.
And finally………we’re doing it for the young people
Euro-degenerate Mario Draghi was in action this week. He was President of the ECB during a period in which the balance sheet increased to over 50% of Euro GDP. The man who vowed to do “whatever it takes” to save the Euro as he moved quickly to protect monopolies, bail out banks and line the pockets of his friends in banking. Now he’s retired, the tune is different.
In his own words:
Don’t you see? It’s about the young people. The one’s I left a gigantic debt bomb because my generation didn’t want to diffuse it or pick up the bill. The one’s my bond buying crowded out of the economy. You know the guys and girls I mean, the ones with no prospects, no job and nothing but legacy debts.
Even better his prescription is “new rules for the future”. If only we had more rules, this would never have happened.
Here he is arriving to give his speech, do you see the crowds of cheering young people? Average age: 60.
