I recommend listening to the interviews several times over the next few days. Note how you can apply what he says. His understanding of European history (many centuries of horrific wars) will probably mean that many European states will want to remain in the European Union–thus, a weaker dollar than expected.
Let us not, in the pride of our superior knowledge, turn with contempt from the follies of our predecessors. The study of the errors into which great minds have fallen in the pursuit of truth can never be uninstructive.” – Charles Mackay
Extraordinary Popular Delusions and the Madness of Crowds
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.
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:
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.
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 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.
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.”
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 www.cmre.org for more information and to purchase tickets.
Ecclesiastes tells us: “The thing that hath been, it is that which shall be; and that which is done is that which shall be done: and there is no new thing under the sun.” Myrmikan Research applies this principle to the subject of credit bubbles.
The ancient Greeks discovered that debt could magnify wealth. The debtor feels richer from the use of the borrowed property, while the lender feels richer from the compounding interest yielded by his claim. Both indulge in consumption more freely. As long as the accumulating claims remain contingent, the bubble grows. But, eventually, someone asks to be paid, and the expandingclaims on wealth must be reconciled to tangible wealth, much of which has been consumed.
The first recorded credit bubble popped in 594 B.C. Athens. Threatened with a civil war of creditor versus debtor, the Athenian ruler Solon pulled down the mortgage stones to free the debtors and devalued the drachma by 27% to relieve the bankers. Every credit collapse since – from the Panic of A.D. 33 to John Law’s Mississippi Bubble to the Great Depression and many others besides – has followed Solon’s template of debt default and currency devaluation.
“The natural remedies, if the credit-sickness be far advanced, will always include a redistribution of wealth: the further it is postponed, the more violent it will be. Every collapse of a credit expansion is a bankruptcy, and the magnitude of the bankruptcy will be proportionate to the magnitude of the debt debauch. In bankruptcies, creditors must suffer.” – Freeman Tilden, 1936
And against what is currency and debt devalued? Carl Menger, founder of the Austrian School of economics, was the first to explain that money is liquidity and that gold is the most liquid asset. Thus, gold has served as the reference point of value since the origins of money and is that against which currency must be devalued to relieve debts. Paper promises depreciate.
“The faith is lost. All with one impulse people rush to seize the gold itself as the only reality left—not only people as individuals; banks, also, and the great banking systems and governments do it, in competition with people. This is the financial crisis.”
– Garet Garrett, 1932
Myrmikan Research chronicles the collapse of the current, global credit bubble – the largest and broadest in history – analyzing current events from the perspective of Austrian economics and placing them in historical context. Many links to books:http://www.myrmikan.com/research/
A Value Investor/Analyst, http://www.hacketts.com/ Click on Sampleslink on the left and read examples of company research. If you want to be a professional analyst, his research sets a high standard. Note the format: Thesis stated right up front. He eats his own cooking too.
Gavin Andresen, Chief Scientist of the Bitcoin Foundation, talks with EconTalk host Russ Roberts about where Bitcoin has been and where it might be headed in the future. Topics discussed include competing cryptocurrencies such as Dogecoin, the role of the Bitcoin Foundation, the challenges Bitcoin faces going forward, and the mystery of Satoshi Nakamoto.
Bitcoin is as a SCAM by design as I have voiced many times over several months in that even when a large percentage of people have their holdings stolen the price is stable enough to continue to entice new entrants into exchanging hard earned fiat currency for bitcoins via the ramblings of the clueless mainstream press, investors who will also at some point lose the value of all of their holdings.
As I have pointed out several times before bitcoin ultimately has a destiny with extinction because in order to continue verifying bitcoin transactions then bitcoin miners need exponentially greater processing power to achieve this, where today a bitcoin miner would need to invest in order of $20,000 to have any hopes of breaking even, costs that looks set to double every year where a decade from now break even mining operations would require an investment of more than $40 million which would imply far fewer mining pools that would in effect OWN the bitcoin craptocurrency and through the block verification process even be able to re-write who owns what.
Ultimately this means that the bitcoin mining will become the sole enterprise for criminal enterprises as no legitimate enterprise would be able to cover the costs of verifying bitcoin transactions (blocks) and thus earning new bitcoins, thus leaving bitcoin mining wholly to criminal gangs operating bot nets in control of millions of infected computers that would each mine fragments that would periodically be harvested by the bot nets.
So bitcoin holders don’t be surprised when you come to open your wallet.dat file that you find it is empty!
Bitcoins are the product of socially naive programmers’ fantasies. They thought they could substitute algorithms for ethics, digits for legality, anonymity for custom, and dreams for responsibility. Ultimately, they thought they could substitute impersonalism for personalism. They were wrong. They merely launched a tulip mania.
If the advocates of crypotocurrency have a case for a free market social order, then they should advocate not buying Bitcoins until such an order exists. Money develops out of a social order. They have put the cart before the horse: a new monetary system before the institutional arrangements to support it. This was Mises’ argument regarding the regression theorem. A comprehensive monetary order that will replace the existing one is not going to be designed by obscure programmers. It will be the product of human action within a prevailing social and legal order.
Here is the problem in one sentence: a modern division of labor economy is very close to all or nothing. You cannot have a monetary system that does not apply across the board, yet still defend the concept of the division of labor through competitive pricing. You cannot have a currency that applies to illegal drugs, programming services, and almost nothing else, and expect that currency to replace the existing currency, which is a fiat money-based currency. There has to be a transition from the fiat-based currency, in which there are hundreds of billions of transactions a day worldwide, which in turn provides a comprehensive system of pricing and information feedback, in order for the present system of the division of labor to be maintained.
Any suggestion that Bitcoins can move from the modern system of integrated currencies, prices, and contracts, to get to an equally comprehensive system in which you could make a pencil, without the pricing system that is provided by the existing fiat money order, is simply utopian.
Most of all, Mises argued, socialism has no means of pricing capital. There are no capital markets.
The same is true of the as-yet nonexistent Bitcoins economy. It cannot do without the pricing system provided by central banking. It cannot produce goods and services without converting Bitcoins’ digital fiat money into the banking system’s fiat money. You cannot produce real goods with virtual money.
You have no capital markets without the monetary system. Capital markets are all based on contract. Bitcoins are based on a rejection of contracts. Capital is based on responsible owbnership: public claims on assets, enforceable by law.
Bitcoins are based on a rejection of enforcement by law.
Bitcoins relate only to consumer goods, and hardly any. Yet even these cannot be delivered by sellers without selling Bitcoins and buying dollars to fulfill contracts. Sellers cannot replace sold assets unless they have bank money to buy them in the real world economy. This economy operates in terms of real money, which today is central bank money.
Bitcoins represent zero threat to the central banks. Bitcoins are used by most owners as ways to make money: to buy more dollars than they paid. It is just another investment asset — one based initially on a complete fantasy, namely, that Bitcoins will somehow remove people from central banking.
Bitcoins are valued in terms of dollars. The mania is fueled by their rising dollar-denominated price. They provide an investment medium for high-risk speculators. They are nothing more than a way to get into a tiny market, and then ride the wave up, as more people get into it. There is no payoff in terms of the economic value of autonomous Bitcoins that are held only because they will serve as an alternative currency. They are held as a way to make money by selling to the greater fools, who will pay real money — dollars — for them.
It’s tulip bulb market. It rests entirely on getting back into the dollar economy.
Bitcoins will have no impact at all on the monetary base. They will have no impact on the capita; markets.
Capital is valued in terms of central bank money. Bitcoins will not change this, for they cannot reduce the size of the monetary base. They do not pull money out of the fractional reserve banking system. The quantity of real money is in no way affected. The investors remain in the central bank economy, in which capital is priced. Capital is not priced in terms of Bitcoins.
This is why Bitcoins’ economy today cannot produce even a broken pencil. It is giving Bitcoins far too much credit to say that they can produce a broken pencil. There is almost no division of labor based on stand-alone units of Bitcoins. To move to Bitcoins’ realm of virtual money for real products, other than maybe programming services, is a fantasy.
Questions About Bitcoin By Staff Report – December 09, 2013
Bitcoins: A Fully-Compliant Currency The Government Can Love … All of bitcoin’s benefits to the establishment revolve around its blockchain. In simple terms, a blockchain is a registry of all transactions carried out in bitcoins. Thus is resolved the problem of double-spending one particular bitcoin: It can’t be done (at least in theory) due to the blockchain. But the blockchain is in fact a register – a trail – of bitcoins. So it’s a relative cinch to piece together each and every transaction of any particular wallet in the bitcoin universe. And since exchanges need detailed personal information about a bitcoin user in order to comply with money-laundering laws before issuing a new user with a wallet, the government or other interested parties could determine what any one particular person has been doing in the bitcoin marketplace. – Blacklisted News/Gonzalo Lira
Dominant Social Theme: Are you ethical? Okay, then go live in a “green” hut and give government every cent you’ve got so the bureaucrats can reintroduce feudalism.
Free-Market Analysis: Let’s start with bitcoin. Then comes a bigger announcement … We’ve been skeptical of bitcoin for years. The smug techno-geekness of bitcoin’s backers irritated us, especially when we realized what they were supporting – a system that keeps track digitally of every single transaction ever made on the Internet.
You can see above that Gonzalo Lira has figured it out, as well. Those who blithely defend bitcoin without fully evaluating both the pros and cons of its technological stance are doing the freedom movement a, well … disservice, in our humble opinion, and apparently Lira’s, too.
That makes at least two of us against the rest of the libertarian world that is still a good deal enamored of this monetary marvel. Of course, it doesn’t hurt that bitcoin has recently hovered around US$1,000 a coin, a price that has sent people scurrying to garbage heaps to try to dig up old bitcoins now worth millions in aggregate.
One of these stories received wide attention recently. A fellow supposedly discarded an electronic cache of bitcoins years ago and then decided to search a dump to see if the coins were still there. This story – and we have our doubts about it – was all over the mainstream media, which is not a good sign.
Does anyone really believe that if bitcoin was a subversive, government-altering currency the mainstream media would be covering it so closely, or The Bernank would be issuing positive-sounding statements about it?
One of the main sources of bitcoin’s super-secret protection is DARPA’s TOR facility. It always struck us as a bit odd that bitcoin users were depending on a military protocol for their protection – especially Silk Road.
Then there’s the initial bitcoin Creation Myth. This has to do with an inscrutable Japanese techno-genius dropping bitcoin rules into the ether where they were gradually discovered and applied by a growing number of enamored acolytes.
The blockchain has always bothered us because what is indecipherable now may not be in a decade. Who knows how technology changes anonymity over time? We did find out that doyenne of alternative currencies, UNESCO”s Margrit Kennedy, has been preaching LETS trading systems that are backed enthusiastically by her former UN employer – probably because they also demand a general ledger. This is most helpful, of course, when the government wants to investigate for non-payment of taxes, etc.
It always seemed to us – throughout this ongoing bitcoin mania – that gold and silver were perfectly good alternatives to a wretchedly complex digital system. Granted, they are not directly as fungible as bitcoin, but they’ve been around for millennia. That’s more than bitcoin’s few years.
For all these reasons, we had reservations, which continue today, about bitcoin. Is it a system developed and placed on the Internet to anticipate the expansion of REAL alternative, digital currencies? Is it a kind of Trojan Horse, meant to provide the banking industry with a way to nullify a potential challenge – and regulate it – before something else comes along that is more challenging?
These may sound kind of hypothetical, but this iteration of The Daily Bell has certainly tried to speak to the expansion of alternative investing by setting some specific criteria. One powerful criterion would be “ethical” – as has been mentioned in past articles – and involves picking and choosing investments based on their ability to support freedom and free markets.
Bitcoin may offer profitability, but perhaps there is a “cost” attached that might – just might – involve a reduction of personal and monetary freedom in the long term. Does this sound counterintuitive? Perhaps so. But despite its success, High Alert Capital has not recommended it or taken a position in it thus far and probably won’t in the near future.
WHY MOST PEOPLE WILL NEVER GET OUT OF BITCOIN WITHOUT MAJOR LOSSES
There may be some Bitcoin traders who think they will be able to pick the top in the Bitcoin market and then get out. It will never happen that way.Here’s why: The market will “train” such traders to stay in the market. Over the weekend, Bitcoin plunged by more than $300. It is now climbing back up. This is not the first huge plunge from which Bitcoin has recovered. There have been several others and it is typical of speculative stocks/investments. I have seen this pattern occur many,many times. Without getting into the long technical explanation as to why these plunges occur during an ongoing bull market, suffice to say that it trains traders to hold on during dips and buy even more. The problem with this is that it will be impossible for traders to differentiate between the final real plunge that starts the bear market and a short-term bull market plunge. The trader will end up being in at the top. He will wait for the price to climb back so that he is “even” but it never will.
Yes, we go through one of these “crashes” every few months or so only to rise to a higher level soon after. I’ve been through a half-dozen of these already. What’s nice is I get to pick up cheap coins on the pullbacks.
And Mises-hater Max Keiser leads his merry band of groupies over the cliff:
One argument is that managed money is bearish on gold. Whoa! So they were bullish in 2011 when gold hit $1,900 and now, after seventeen months, they are bearish? The chart below sure doesn’t support the sagaciousness of the “managed” money.