Category Archives: Economics & Politics

Bitcoin, Blockchain, and Money

Another interview with Caitlin Long

  1. Blockchain for Dummies
  2. Repo_Markets_Handbook
  3. Repo3

Free Course:

But THE book to get, read, and study is


This book is the missing treatise on “Why Bitcoin?”. It is not technical from a coder’s point of view; however, it is technical on its treatment of economics.  If you never heard of Bitcoin. If you are a long-time holder of Bitcoin. This book is for you.

The book fills a gap on three fronts. First it helps those of us who became enamored with Bitcoin through individual and economic freedom explain our viewpoint in a succinct manner. Second, it serves as a philosophical on-ramp to the multitudes of speculators who flooded into Bitcoin in the past 6 months or so. It provides them a concrete reason to transform their time-preference (a key economic theme in the book) from trader to HODLer. Lastly, it is for people who have never heard of Bitcoin or have heard of it but don’t know or understand much about it. It provides these folks with the very best reason for converting at least some of their government-backed fiat money into the sound/hard money of Bitcoin.

Another overriding theme in the book is security. Without it there is no such thing as financial freedom. Near the beginning of the book Ammous explains:

“Should you come out of reading this book thinking that the bitcoin currency is something worth owning, your first investment should not be in buying bitcoins, but in time spent understanding how to buy, store, and own bitcoins securely.”
This is without a doubt the best advice one could possibly give regarding Bitcoin.

In reading the book you may find yourself wondering when he’s going to start getting to the Bitcoin part. The first seven chapters barely mention Bitcoin. Instead there is a gradual discussion of money and economics, including the various popular schools of economics. Ultimately, the conclusion is that Austrian Economics provides the fundamental basis of “Why Bitcoin?” In fact, those of us already schooled in Austrian Economics should celebrate the existence of this book. It can potentially spread the common-sense Austrian view to multitudes of people who otherwise would never learn of it.

If you know someone who bought bitcoins for speculation or to make some quick money buy this book for them and force them to read it. You may even have to go all “Clockwork Orange” on them, strapping them to a chair and pinning their eyes open. They may scoff at first, but they’ll thank you later (yet another benefit of having a low time-preference).

“The Bitcoin Bible”… er.. I mean “The Bitcoin Standard” is essential to read and understand for anyone even remotely interested in Bitcoin. Read it. Then read it again. Then pass it around to everyone you know and if they are reluctant, figure out non-violent ways to get them to read it. So, you probably shouldn’t resort to the “Clockwork Orange” method mentioned above. Just find a way.

If Roger Ver can be “Bitcoin Jesus” (or more accurately “Bitcoin Judas” at this point) then Saifedean Ammous is a “Bitcoin God”. Read his bible with the highest time preference so you can learn to have a low time preference when it comes to Bitcoin itself. BTFD and HODL!

Deja Vu for “Value” Investors

Bitcoin is a speculation:


Bitcoin: the World’s Largest Pump and Dump in History. Who Knew?

The clues and facts add up. Let’s sit and think for a minute:

In what rational universe could someone simply issue electronic scrip — or just announce that they intend to — and create, out of the blue, billions of dollars of value?

Bitcoin tangent

Did you guys notice something really interesting? The financial guys that really love bitcoin are some of the guys that either blew up or closed funds due to poor performance. The two most prominent fund manager bitcoin boosters are like that. It almost feels like they are so happy to have found their Hail Mary pass. And the most prominent guys that have good performance and didn’t blow up tend to be the guys that don’t like bitcoin and think it’s stupid, a bubble or whatever.

Think about that for a second. Oh, and that former hedge fund guy, after bitcoin plunged put his new bitcoin hedge fund on hold (buying high and selling low?). Now wonder he didn’t do well with his hedge fund; if you’re going to be making decisions based on short term volatility like that, you are bound to get whipsawed and lose money.

This is interesting because we can never really understand and know everything. But it is useful to know who you can listen to and who you should ignore. Sometimes, this saves a lot of time! From

Monday, April 30, 2018
Warren Buffett: Bitcoin is Gambling Not Investing

In an exclusive interview with Yahoo Finance in Omaha, Neb., leading up to Berkshire Hathaway’s annual shareholder meeting, which will be held om May 5, Buffett laid out his latest thinking on cryptocurrency investing. He nailed it.

“There’s two kinds of items that people buy
and think they’re investing,” he says. “One really is investing and the other isn’t.” Bitcoin, he says, isn’t.

“If you buy something like a farm, an apartment house, or an interest in a business… You can do that on a private basis… And it’s a perfectly satisfactory investment. You look at the investment itself to deliver the return to you. Now, if you buy something like bitcoin or some cryptocurrency, you don’t really have anything that has produced anything. You’re just hoping the next guy pays more.”

When you buy cryptocurrency, Buffett continues, “You aren’t investing when you do that. You’re speculating. There’s nothing wrong with it. If you wanna gamble somebody else will come along and pay more money tomorrow, that’s one kind of game. That is not investing.”

Buffett’s point is that the assets he lists such as a farm, an apartment house, etc., generate income. Bitcoin does not.

I would add there is another type of asset people hold and that is money. As Ludwig von Mises taught us, money is the most liquid good and people hold because of this liquidity. They know they can instantly exchange it, at a fairly stable price, nearly anywhere for goods and services.

This is where Bitcoin and other cryptocurrencies fail in the money category. They are from an instrument at present that can be exchanged for any good or service and they are far from stable in price. Many people who have purchased Bitcoin over the last 6 months have lost as much as 50% of their purchasing power. That is not a stable asset, not even when compared to the U.S. dollar which is run by the Federal Reserve in crony reckless fashion.

Moreover, the idea of a world where a cryptocurrency is the world’s medium of exchange is a frightening notion. It is quite simply a remarkable way for government to track all transactions and prohibit transactions in specific books and other goods that it doesn’t want individuals to buy.

The idea that the government can’t track Bitcoin is a delusion view held by Bitcoin fanboys.

The Intercept recently reported:
Classified documents provided by whistleblower Edward Snowden show that the National Security Agency indeed worked urgently to target bitcoin users around the world — and wielded at least one mysterious source of information to “help track down senders and receivers of Bitcoins,” according to a top-secret passage in an internal NSA report dating to March 2013. The data source appears to have leveraged the NSA’s ability to harvest and analyze raw, global internet traffic while also exploiting an unnamed software program that purported to offer anonymity to users, according to other documents.
Although the agency was interested in surveilling some competing cryptocurrencies, “Bitcoin is #1 priority,” a March 15, 2013 internal NSA report stated.
-Robert Wenzel

What is money Bastiat?  If you understand money, then the Bitcoin Scam becomes obvious.

Bitcoin is the greatest scam in history
It’s a colossal pump-and-dump scheme, the likes of which the world has never seen.

By Bill Harris Apr 24, 2018

Okay, I’ll say it: Bitcoin is a scam.

In my opinion, it’s a colossal pump-and-dump scheme, the likes of which the world has never seen. In a pump-and-dump game, promoters “pump” up the price of a security creating a speculative frenzy, then “dump” some of their holdings at artificially high prices. And some cryptocurrencies are pure frauds. Ernst & Young estimates that 10 percent of the money raised for initial coin offerings has been stolen.

The losers are ill-informed buyers caught up in the spiral of greed. The result is a massive transfer of wealth from ordinary families to internet promoters. And “massive” is a massive understatement — 1,500 different cryptocurrencies now register over $300 billion of “value.”

It helps to understand that a bitcoin has no value at all.

Promoters claim cryptocurrency is valuable as

(1) a means of payment

Bitcoins are accepted almost nowhere, and some cryptocurrencies nowhere at all. Even where accepted, a currency whose value can swing 10 percent or more in a single day is useless as a means of payment.

2. Store of Value.

Extreme price volatility also makes bitcoin undesirable as a store of value. And the storehouses — the cryptocurrency trading exchanges — are far less reliable and trustworthy than ordinary banks and brokers.

3. Thing in Itself.

A bitcoin has no intrinsic value. It only has value if people think other people will buy it for a higher price — the Greater Fool theory.

Some cryptocurrencies, like Sweatcoin, which is redeemable for workout gear, are the equivalent of online coupons or frequent flier points — a purpose better served by simple promo codes than complex encryption. Indeed, for the vast majority of uses, bitcoin has no role. Dollars, pounds, euros, yen and renminbi are better means of payment, stores of value and things in themselves.

Cryptocurrency is best-suited for one use: Criminal activity. Because transactions can be anonymous — law enforcement cannot easily trace who buys and sells — its use is dominated by illegal endeavors. Most heavy users of bitcoin are criminals, such as Silk Road and WannaCry ransomware. Too many bitcoin exchanges have experienced spectacular heists, such as NiceHash and Coincheck, or outright fraud, such as Mt. Gox and Bitfunder. Way too many Initial Coin Offerings are scams — 418 of the 902 ICOs in 2017 have already failed.

Hackers are getting into the act. It’s estimated that 90 percent of all remote hacking is now focused on bitcoin theft by commandeering other people’s computers to mine coins.

Even ordinary buyers are flouting the law. Tax law requires that every sale of cryptocurrency be recorded as a capital gain or loss and, of course, most bitcoin sellers fail to do so. The IRS recently ordered one major exchange to produce records of every significant transaction.

And yet, a prominent Silicon Valley promoter of bitcoin proclaims that “Bitcoin is going to transform society … Bitcoin’s been very resilient. It stayed alive during a very difficult time when there was the Silk Road mess, when Mt. Gox stole all that Bitcoin …” He argues the criminal activity shows that bitcoin is strong. I’d say it shows that bitcoin is used for criminal activity.
In what rational universe could someone simply issue electronic scrip — or just announce that they intend to — and create, out of the blue, billions of dollars of value?

Bitcoin transactions are sometimes promoted as instant and nearly free, but they’re often relatively slow and expensive. It takes about an hour for a bitcoin transaction to be confirmed, and the bitcoin system is limited to five transactions per second. MasterCard can process 38,000 per second. Transferring $100 from one person to another costs about $6 using a cryptocurrency exchange, and well less than $1 using an electronic check.
Bitcoin is absurdly wasteful of natural resources. Because it is so compute-intensive, it takes as much electricity to create a single bitcoin — a process called “mining” — as it does to power an average American household for two years. If bitcoin were used for a large portion of the world’s commerce (which won’t happen), it would consume a very large portion of the world’s electricity, diverting scarce power from useful purposes.

In what rational universe could someone simply issue electronic scrip — or just announce that they intend to — and create, out of the blue, billions of dollars of value? It makes no sense.

All of this would be a comic sideshow if innocent people weren’t at risk. But ordinary people are investing some of their life savings in cryptocurrency. One stock brokerage is encouraging its customers to purchase bitcoin for their retirement accounts!

It’s the job of the SEC and other regulators to protect ordinary investors from misleading and fraudulent schemes. It’s time we gave them the legislative authority to do their job.

William H. Harris Jr. is the founder of Personal Capital Corporation, a digital wealth management firm that provides personal financial software and investment services, where he sits on the board of directors.

Read full article here:


Where have we seen this type of behavior before?

UPDATE: Friday April 27th 2018


Lesson be humble about what you attempt.

Below is an email from Whitney Tilson from Kase Learning announcing his:

Program Guide-Kase Learning Short Selling Conference-May 3,__ 2018

Attached is the program guide, which includes an agenda for the day and bios of all of the speakers. Registration and continental breakfast begin at 7:15am, the first speaker is at 8:15am, there are morning, lunch and afternoon breaks, and the last speaker ends at 4:15pm, followed by a networking cocktail reception until 7:00pm. The NYAC is on the corner of Central Park South and Seventh Avenue, and it has a dress code – no jeans, shorts, sneakers or t-shirts.

This full-day event is the first of its kind dedicated solely to short selling and will feature 22 of the world’s top practitioners who will share their wisdom, lessons learned, and best, actionable short ideas. I’ve seen many of the speakers’ presentations and they’re awesome! Companies that will be pitched include Tesla, Disney, Kraft-Heinz and Stericycle, plus internet ad fraud and gold.

The idea for the conference is rooted in the fact that this long bull market has inflicted absolute carnage on short sellers, and even seasoned veterans are throwing in the towel. This capitulation, however, combined with the increasing level of overvaluation, complacency, hype and even fraud in our markets, spells opportunity for courageous investors, so there is no better time for this conference.

Reporters from all of the major media outlets will be there, and CNBC is covering it as well. I was on their Halftime Report yesterday discussing the conference: I also just published the fourth, final (and my favorite) article in a series I’ve written entitled Lessons from 15 Years of Short Selling:

I’d be grateful if you’d help spread the word about the conference among your friends and colleagues, and wanted to pass along a special offer: when they register at, they can use my friends and family discount code, FF20, to save 20% ($600) off the current rate.

I look forward to seeing you next week!

Sincerely yours,

Whitney Tilson
Founder & CEO
Kase Learning, LLC
5 W. 86th St., #5E
New York, NY 10024
(646) 258-0687

The “Hunger Games” Economy: The FOUR

Those four companies touch our lives whether we want them to or not.  How did those four firms amass so much power and what does that imply for our futures? 52% of Americans have Amazon Prime while 51% go to church.  You may know of these firms, but you and I probably vastly underestimate them, especially Amazon.

Whether you invest in those companies, you need to understand their effect on other industries.  How is value created and destroyed in the digital age?  While Amazon grows other retailers are barely treading water.  Amazon’s cost of capital is vastly lower than its competitors.

GM has 215,000 employees with a market cap per employee of $231,000 while Facebook has 17,048 employees with a market cap of $20.5 million pr employee. We are in a “Hunger Games” economy. Page 268: “We have a perception of these large companies that they must be creating a lot of jobs, but in fact they have a small number of high-paying jobs, and everybody else is fighting over the scraps.  America is on pace to be home to 3 million lords and 350 million serfs.  Again, it has never been easier to be a billionaire, but never been harder to be a millionaire.”


The Falling Marginal Productivity of Debt

However, we can look at how much additional GDP is added for each newly-borrowed dollar. This is called marginal productivity of debt. This shows a clear picture, a secular decline over many decades. To produce this graph, take change in GDP divided by change in debt.

I encourage you to read:

Add to the above this concerning article on the lack of US savings:

Lecture on Studying Financial History (Russell Napier)

Russell Napier’s Lecture

on Financial History   (60 minutes)

A good lecture on integrating past lessons into today’s current conditions.

A CFA composite book on Financial History: Financial History CFA Institute

If you do study financial history like the period of the Internet Boom then collect books and articles from many perspectives AND look at supply as well as demand. Also, incentives rule.

For example, read several books from different perspectives and the history of interest rates, the history of commodity prices, other equities, interest rate spreads, etc.
















Intrinsic Value–Objective or Subjectively Determined? Bitcoin

A Discussion about Whether Austrian Economists and Value Investors Agree on How Intrinsic Value is Determined.

CSInvesting: Understand that Intrinsic Value is SUBJECTIVELY determined while prices are set by the marginal buyer and seller.  All an investor does is compare price to value.

Essentially, value investing focuses on the comparison of a good’s intrinsic value and its market price and recommends investing in it as long as the asset’s value exceeds its price given a margin of safety.

The first article says in summary: value investing and Austrian economics are nevertheless incompatible, particularly given that value investing’s definition of value contradicts the Austrian value concept.

End-the-Myth-On-Value-Investing’s-Incompatibility-with-Austrian-Economics-by-Olbrich-et-al   I would skim this article.

An Austrian economist who is also a value investor, Chris Leithner rebuts the above statement: “Value investors’ conception and assessment of value are congruent with the Austrian School’s.”

“A value investor” measures value by one of two methods:

  1. First, he/she values a company according to the external prices of its assets. He/she observes, for example, that X Ltd owns quantity Y of land, and that such land has a market price of $Z per hectacre.
  2. Second, the value investor makes plausible (based, perhaps, upon past experience and/or domain specific expertise) assumptions about a company’s future cash flows and, using some rate, discounts them to the present.  He might do these calculations in his head or on a spreadsheet.

The Hinge between the theory of Value and the Practice of Value Investing.

John Burr Williams in his The Theory of Investment Value, 1938 wrote, “With bonds, as with stocks, prices are determined by marginal opinion…..Concerning the right and proper interest rate (discount rate), however, opinions can easily differ, and differ widely….Hence those who believe in a low rate will consent to pay high prices for bonds…while those who believe in a high rate will insist on low prices…Thus investors will be bullish or bearish on bonds according to whether they believe low or high interest rates to be suitable under prevailing economic conditions.   As a result, the actual price of bonds….will thus be only an expression of opinion, not a statement of fact.  Today’s opinion will make today’s rate; tomorrow’ opinion, tomorrow’s rate; tomorrow’s opinion, tomorrow’s rate; and seldom if ever will any rate be exactly right as proved by the event.

How then does Warren Buffett define and measure value? In his 1994 Letter to Shareholders he writes:

We (Charlie Munger and I) define intrinsic value as the discounted value of the cash that can be taken out of a business during its remaining life.  Anyone’s calculation intrinsic value necessarily comes up with a highly subjective figure that will change both as estimates of future cash flows are revised and as interest rates move.  Despite its fuzziness, however, intrinsic value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.

Graham, by the way, would agree with the definition of intrinsic value but he would doubt whether investors could usefully apply it. (Ben Graham, 1939)  “The rub,” writes James Grant in the 6th Edition of Security Analysis (2009), page 18, “was that, in order to apply Williams’s method, one needed to make some very large assumptions about the future course of interest rates, the growth of profit, and the terminal value of the shares when growth stops.”

The entire article by Chris Leithner is an important read: Value Investing and Austrian Economics Leithner


Certainty is not certaintude–Oliver Wendell Holmes

  1. Bitcoin Certitude is not certainty
  2. Bitcoin Adoption and Usage
  3. The Promise and Peril of Bitcoin

The video below–though choppy in the first few minutes–is worth hearing about the psychology of market bubbles.   The interviewer of Bob Moriarty is ignorant of basic economics (Can prices EVER go below the cost pf producing a useful/needed product? Yes or No), but you can follow the discussion.  Note the pushback of the interviewer who is also an owner of bitcoins to Moriarty’s questions.  The psychology is fascinating–the will to believe and suspend judgment.

Other Comments

Bitcoin is up more than 2,000 percent in the last year and now trades above $17,000. Bitcoin futures trading launched this week on the Cboe exchange, gaining more than 19 percent Monday in the first full day of trading.
There are now 1,358 cryptocurrencies in existence, according to CoinMarketCap. Other digital currencies such as ethereum are better designed for programmable “smart contracts” and have quicker transaction times versus bitcoin.

Bitcoin’s scalability is another issue. There is technical limitation on how many transactions that can be processed at the same time. Partly as a result, widespread use of the cryptotcurrency for payments has not occurred yet.
So cryptocurrency investors must honestly ask themselves, is bitcoin really changing the word through blockchain technology innovation or is it mainly speculative asset? It’s the latter.

Kynikos Associates short-seller Jim Chanos, lauded for his prescient negative calls on Enron and Tyco, compared bitcoin to previous fads.

Bitcoin “is a speculative mania. It’s Beanie Babies,” he said at a Schechter event in Detroit, Michigan Wednesday, referring to the toy fad craze during the 1990s.
DoubleLine Capital CEO Jeffrey Gundlach criticized the lack of analytical rigor in the recent “nice round number” $1,000,000 price targets for the bitcoin, which is reminiscent of previous speculative blow-offs.

“I have no interest in this type of maniacal type of trading market,” he said on CNBC Wednesday.

Hedge fund manager Seth Klarman, the value investing giant who often draws comparisons to Warren Buffett, wrote in his classic “Margin of Safety” book an illuminating parable warning against speculation:

“There is the old story about the market craze in sardine trading when the sardines disappeared from their traditional waters in Monterey, California. The commodity traders bid them up and the price of a can of sardines soared. One day a buyer decided to treat himself to an expensive meal and actually opened a can and started eating. He immediately became ill and told the seller the sardines were no good. The seller said, ‘You don’t understand. These are not eating sardines, they are trading sardines.’

Like sardine traders, many financial-market participants are attracted to speculation, never bothering to taste the sardines they are trading. … trading in and of itself can be exciting and, as long as the market is rising, lucrative. But essentially it is speculating, not investing. You may find a buyer at a higher price—a greater fool—or you may not, in which case you yourself are the greater fool.”


Bulls Rampage

Increasing debt for equity swap

Sentiment bullish and prices high relative to the past.


Investing might be considered decision-making under uncertainty. Therefore the following exam.

You must answer BOTH questions correctly to be hired.  You are now in the final pool of candidates to work for a big hedgie fund. Now comes

Question 1:

Imagine playing the following game,  At a casino table is a brass urn containing 100 balls, 50 red and 50 black.  You’re asked to choose a color.  Your choice is recorded but not revealed to anyone, after which the casino attendant draws a ball randomly out of the urn. If the color you chose is the same as the color of the ball, you win $10,000.  If it isn’t, you win nothing-$0.00.

You are only allowed to play once–which color would you prefer, and what is the maximum bid you would pay to play? Why?

Question 2:

Now imagine playing the same game, but with a second urn containing 100 balls in UNKNOWN proportions.  There might be 100 black balls and no red balls, or 100 red balls and no black balls or ANY proportion in between those two extremes.  Suppose we play the exact same game as game 1, but using this urn containing balls of unknown colors.

What is your bid to play this game IF you decide to play?   How does the “risk” in this game (#2) compare to game (#1)?

Take no more than a minute.   So are you hired?!

Answer posted this weekend.

ANSWER (9/10/2017)

A Reader provides a clearer distinction in Question2:

Your second problem is ill-specified for your desired effect . You write that all combinations of red/black balls within the 100 ball population ARE possible; you don’t say they are equally probable. You need to assume them to be equally probable in order for the reader to infer that the expectations are identical between problem 1 and problem 2.

The reason being is that without defined probabilities on the possible ratios the long run frequency of draws from the second bag isn’t calculable. Hence the expected value cannot be computed and therefore cannot be used in comparison to the EV of problem 1 (you need probabilities in a probability weighted average after all).

You could suggest that the offeree has a 50/50 chance of choosing the correct colour (even if the long run frequencies are not known). But this not an argument born from expected value. This is an argument of chance and it assumes the offeree has no additional information from which to make their decision (which is hardly ever the case).

There are 100 possible choices for the proportion of red/black: 100 red balls/0 black balls, 99 red balls/1 black ball etc., 98/2, 97/3     with 100%, 99%, 98%, 97% probability of choosing a black ball all the way………… to 2 black balls/98 red balls, 1/99, 0/100. Put equal weight on them since random.  When computed, the average of the expected payoffs across all these alternative realities, one got an expected value of $5,000, the same as Game 1.

The two games describesthe Ellsberg Paradox, after the example in Ellsberg’s seminal paper.  Thinking isn’t the same as feeling.  You can think the two games have equal odds, but you just don’t feel the same about them.   When there is any uncertainty about those risks, they immediately become more cautious and conservative.  Fear of the unknown is one of the most potent kinds of fear there is, and the natural reaction is to get as far away from it as possible.

So, if you said the two games were exactly similar in probabilities, then A+.  The price you would bid depends upon your margin of safety/comfort.   You would be rational to bid $4,999.99 since that is less than the expected payoff of $5,000.  But the loss of $4,999.99 might not be worth it despite the positive pay-off.  A bid of $3,000 or $1,000 might be rational for you.   The main point is to understand that the two games were similar but didn’t appear to be on the surface.

The Ellsberg paradox is a paradox in decision theory in which people’s choices violate the postulates of subjective expected utility. It is generally taken to be evidence for ambiguity aversion. The paradox was popularized by Daniel Ellsberg, although a version of it was noted considerably earlier by John Maynard Keynes.  READ his paper: ellsberg

Who was fooled?

Anyone not answering correctly or NOT answering has to go on a date with my ex:

The Stock Market: Risk vs. Uncertainty

Life is risky. The future is uncertain. We’ve all heard these statements, but how well do we understand the concepts behind them? More specifically, what do risk and uncertainty imply for stock market investments? Is there any difference in these two terms?

Risk and uncertainty both relate to the same underlying concept—randomness. Risk is randomness in which events have measurable probabilities, wrote economist Frank Knight in 1921 in Meaning of Risk and Uncertainty.1 Probabilities may be attained either by deduction (using theoretical models) or induction (using the observed frequency of events). For example, we can easily deduce the probabilities of the possible outcomes of a game of dice. Similarly, economists can deduce probability distributions for stock market returns based on theoretical models of investor behavior.

On the other hand, induction allows us to calculate probabilities from past observations where theoretical models are unavailable, possibly because of a lack of knowledge about the underlying relation between cause and effect. For instance, we can induce the probability of suffering a head injury when riding a bicycle by observing how frequently it has happened in the past. In a like manner, economists estimate probability distributions for stock market returns from the history of past returns.

Whereas risk is quantifiable randomness, uncertainty isn’t. It applies to situations in which the world is not well-charted. First, our world view might be insufficient from the start. Second, the way the world operates might change so that past observations offer little guidance for the future. Once bicyclists were encouraged to wear helmets, the relation between riding the bicycle—the cause—and the probability of suffering a head injury—the effect—changed. You might simply think that the introduction of helmets would have reduced the number of head injuries. Rather, the opposite happened. The number of head injuries actually increased, possibly because helmet wearing bikers started riding in a more risky manner due to a false perception of safety.2

Typically, in situations of choice, risk and uncertainty both apply. Many situations of choice are unprecedented, and uncertainty about the underlying relation between cause and effect is often present. Given that risk is quantifiable, it is not surprising that academic literature on stock market randomness deals exclusively with stock market risk. On the other hand, ignorance of uncertainty may be hazardous to the investor’s financial health.

Stock market uncertainty relates to imperfect information about how the world behaves. First, how well do we understand the process that generated historical stock market returns? Second, even if we had perfect information about past processes, can we assume that the same relation between cause and effect will apply in the future?

The Highs and Lows of the Market

Warren Buffett, the world’s second-richest man, distinguishes between periods of comparatively high and low stock market valuation. In the early 1920s, stock market valuation was comparatively low, as measured by the inflation-adjusted present value of future dividends. The attractive valuation of stocks relative to bonds became a widely held belief after Edgar Lawrence Smith published a book in 1924 on stock market valuation, Common Stocks as Long Term Investments. Smith argued that stocks not only offer dividends, but also capital appreciation through retained earnings. The book, which was reviewed by John Maynard Keynes in 1925, gave cause to an unprecedented stock market appreciation. The inflation-adjusted annual average growth rate of a buy-and-hold investment in large-company stocks established at the end of 1925 amounted to a staggering 32.13 percent at the end of 1928.

On the other hand, over the next four years, this portfolio depreciated at an average annual rate of 17.28 percent, inflation-adjusted. Taken together, over the entire seven-year period, the inflation-adjusted average annual growth rate of this portfolio came to a meager 1.11 percent. Buy-and-hold portfolios in allegedly unattractive long-term corporate and government bonds, on the other hand, grew at inflation-adjusted average annual rates of 10.18 and 9.83 percent, respectively. This proves Buffett’s point: “What the few bought for the right reason in 1925, the many bought for the wrong reason in 1929.” One conclusion from this episode is that learning about the stock market may feed back into the market and, by changing the behavior of the market, render our “learning” useless or—if we don’t recognize the feedback effect—hazardous.
Is Tomorrow Another Day?

Risk and uncertainty are two concepts that stem from randomness. Neither is fully understood. Although risk is quantifiable, uncertainty is not. Rather, uncertainty arises from imperfect knowledge about the way the world behaves. Most importantly, uncertainty relates to the questions of how to deal with the unprecedented, and whether the world will behave tomorrow in the way as it behaved in the past.

This article was adapted from “The Stock Market: Beyond Risk Lies Uncertainty,” which was written by Frank A. Schmid and appeared in the July 2002 issue of The Regional Economist, a St. Louis Fed publication.

(Source: St Louis Federal Reserve)

Bitcoin and the Theory of Money; Hedge Fund Quiz

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?

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.

TIMING THE CRASH: Performance_Update_2017_07

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

A Lesson on Economics and the Monetary System or Interest on Gold

Even if the mention of a “Gold Standard” makes your eyes glaze over, the video above and the article below show you how a monetary system SHOULD WORK.  More importantly, you learn how the US can extract itself from ever-compounding debt.  Currently, the FED is destroying savers in the name of “helping” the economy.   Learn how credit can expand and contract WITHOUT booms and busts.

The Unadulterated Gold Standard Part I

The Horror of Being a Deep Value Money Manager–KGGAX is Kopernik Global vs. SPY and FANG Stocks