Bitcoin And The Theory Of Money; Hedge Fund Quiz

BTC Keychain bitcoin buy EthereumBTC Keychain via Flickr (CC BY 2.0)

Bitcoin is not only irredeemable, but also unbacked. That is a big difference—in favor of the dollar. (Keith Weiner of Monetary-Metals)

Read an analysis of Bitcoin as money (Bitcoin has no backing.  I think of Bitcoin as “Token” money. What are your thoughts?

Get The Full Risk Parity Series in PDF

Get the entire 10-part series on Risk Parity in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues

Also read:

Also, the developer of Bitcoin provides his understanding of the theory of money.  As a review read: On the Origins of Money_5 Menger

For those who are interested and are in NYC:

Blockchain Technology Versus Fiat Currency

The next CMRE event will be held on October 3 at the University Club in New York City: Blockchain Technology Versus Fiat Currency.  Speakers will include noted author George Gilder, co-founder of Etherium Joe Lupin, thought-leader Saifedean Ammous, and more.

Topics will range from an introduction of blockchain technology, economic implications, the politics surrounding private currencies, and the role of gold. Full program to come.

Check back on for more information and to purchase tickets.

Myrmikan July 2017 Performance Update - Timing The Crash

The S&P 500 rallied another 1.9% in July, bringing its year-to-date performance to a blistering 10.3%, an annualized return of 19.8%, and this in the eighth year of a bull market!

The beginning of the post-crash bull was easy to explain—the Federal Reserve guaranteed the debts of all of the Wall Street banks, and the QEs showered the most aggressive financial actors with free funds. It is not correlation but an axiom that the net present value of a discounted cash flow must rise when discount rates fall (especially when that cash flow is guaranteed by the central bank).

But that axiom works in reverse as well, and more subtlety than most realize. It isn’t just that rising rates lower the raw calculation of net present value of every firm, but every debt-laden customer in the economy finds his purchasing power reduced: his mortgage payments increase, and auto payments, student loan payments, credit card payments—he finds his cash flow squeezed ever tighter. Even if he’s been clever and taken out fixed-rate debt, all this does is shift the burden of higher payments to someone else, a pension fund perhaps.

What, then, can explain the current market? The Fed began raising rates in December of 2015, twenty months ago. The Fed Funds Rate has increased from an absurd 0.12% to 1.16%, during which time the S&P 500 has soared by 25%. Earnings have also increased, it’s true, but how can that continue if the consumer is forced to stop spending?

The current retail Armageddon partially reflects the mad drive for scale engendered by our banking system—in which everyday low prices reflects the quality of the products—but also a consumer being forced to retrench. Payless has closed 800 stores so far in 2017, RadioShack 550, Rue 21 400, The Limited 250, Family Christian 240, along with Macy’s, JC Pennny, Sears, Micheal Kors, Sports Authority, Ralph Lauren— the list goes on.

The weakness is not just in retail. According to a July report by CNN:

U.S. vehicle sales have lagged behind 2016 levels every month this year. If that performance continues, this year will mark the first since 2009 that industrywide sales declined.

General Motors (GM) reported a 5% drop in sales last month, as did Ford Motor (F), which recently replaced its CEO. Sales at Fiat Chrysler (FCAU) were off 7%.

Or consider the real estate market. Kiplinger reports:

Housing starts rose to a seasonally adjusted annual rate of 1.215 million in June, a rise of 8.3% from May. . . . Sales fell 1.8% in June and were 0.7% above a year ago.

The cheer-leading article dismisses the glaring incongruity to conclude that sales fell only because there isn’t enough inventory, meaning “more folks will ultimately have to rent instead of buy.” Why, then, are rental prices falling as well?

According to an article by Doug French at the Mises Institute, “346,000 new rental apartments in buildings with 50+ units are expected to hit the market” in 2017, 17% higher than in 2016 and 63% higher than the 1997-2016 average. But, a housing analyst reveals:

[T]he prices of apartment buildings nationally, after seven dizzying boom years, peaked last summer and have declined 3% since. Transaction volume of apartment buildings has plunged. And asking rents, the crux because they pay for the whole construct, have now flattened.

An anecdotal look at rents in New York using Trulia reveals that the large, ugly buildings are offering 1-2 months free rent upon signing. So rents are, in fact, falling, even if the mechanism by which they are falling allows the companies to tell their analysts and shareholders that “asking rents” are flat.

When cash flow disappears, assets become worthless along with the financial assets backed by them. According to UBS, for example, 20-25% of the 1,100 shopping malls in the U.S. will close within the next five years. And the bubble has not yet even burst! It will be much worse. And what will happen to all the owners of REITs? And subprime auto loans? And equities?

Everywhere ones looks, one sees the classic signs of a maturing credit bubble: massive overcapacity being added despite falling cash flows. Overall, pre-tax, corporate margins in Q1 2017 fell to 15.6% from a cycle high of 17.9% in Q3 2014.

Let us pause here to reprise, again, the words that Republican Senator Elihu Root delivered in opposition to the Federal Reserve Act, words the Wall Street Journal ought to publish daily in its masthead:

With the exhaustless reservoir of the government of the United States furnishing easy money, the sales increase, the businesses enlarge, more new enterprises are started, the spirit of optimism pervades the community. Bankers are not free from it. They are human. The members of the Federal Reserve Board will not be free of it. They are human. All the world moves along upon a growing tide of optimism. Everyone is making money. Everyone is growing rich. It goes up and up, the margin between costs and sales continually growing smaller as a result of the operation of inevitable laws [emphasis added], until finally someone whose judgment was bad, someone whose capacity for business was small, breaks; and as he falls he hits the next brick in the row, and then another, and then another, and down comes the whole structure.

The question, remains, however, why asset prices keep increasing in the face of rising rates and a maturing bubble. It has been always thus, in fact. Few remember that the Fed began raising its target discount rate in June of 2004, from 1% to 5.25% by July 2006. The economy began to fray a year later and didn’t crash for another year after that, four years after the initial hike.

In the previous cycle, the Fed began raising its target rate in 1994 after lowering it to 3% in response to the savings and loan crisis. Its rate reached 6% by 1995, but the market didn’t care. Greenspan then lowered the Fed’s rate to 4.75% through 1999 stoking the Clinton internet bubble until finally, in a panic, he spiked it to 6.5% in 2000, at which point the market collapsed forthwith.


QUIZ: What has caused or one of the MAIN reasons that companies like Amazon keep gaining strength?  Hint: What Bezos does is meaningless.

Article by CSInvesting

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About the Author

In my peripatetic life I have been a ruby smuggler, commodity trader, securities analyst, investment banker, and entrepreneur. Each role taught me more about value investing. - John Chew - The Editor

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