Category Archives: Economics & Politics

The Seen and Unseen–Understanding Interest Rates

If you read Economics in One Lesson by Henry Hazlitt, you will have an understanding of the seen and unseen in economics. Then think about how the consensus could be (not definitively) wrong about higher long-term interest rates. Read Hoisington’s 4th Quarter Report.

What did you learn?

Short Squeeze

Posted for Reference

It’s the short squeeze of a vegan’s paradise. Shares of Beyond Meat (NASDAQ:BYND) jumped another 21% yesterday on an earnings beat, or really a loss beat, the company losing only $6.6 million on total net revenues of just over $40 million. The company now has a market cap of over $9 billion, and short borrowing costs keep rising. 51% of the company’s float is still being held short, which means the short squeeze can continue if the positions can’t be maintained, which would be especially relevant if the broader market starts to fall while Beyond keeps rising. There is about $800 million left in short positions on the stock. The short side is down about $400 million since January, while the stock is up about 650% since its IPO at $25.

Daniel Lacalle@dlacalle_IAQE is disinflationary because it perpetuates overcapacity and unproductive debt, yet it is massively inflationary on risky assets because the objective is to make rising government spending cheap. Hypernflation created in financial assets as sovereign bonds artificially inflated

Price is set at the margin

Bitcoin is not money. Gold IS money because its marginal utility does NOT decline. Read an excellent short article: https://monetary-metals.com/the-ultimate-stablecoin-report-18-nov-2018/

We have covered several times Warren Buffet’s pointed (and disingenuous) comment that gold has no utility. It just sits, and there is a cost for it to sit. And an opportunity cost.

So why do people buy something which has no utility and no return? One, which we discuss a lot, is speculation. They buy whatever’s going up, in an attempt to cash in on the rise. So let’s not dwell on this.

A second reason is fear of counterparty default. Third, is gold is a non-expiring hedge for monetary collapse and/or a currency regime change. This is a broader version of simple counterparty default.

Right now, General Electric is in the news. Its investment grade rated bonds are trading like junk bonds. This is like an echo from the past. Bear Sterns retained its investment-grade rating until just before its demise.

GE has about $115 billion in debt. If it defaults, that could put fear into a lot of investors. They will certainly buy Treasury bonds (which are defined as risk free). Will they buy gold, which is the only financial asset which is truly free of default risk? Maybe.

However, in addition to GE we know that a significant fraction of bonds out there are issued by so-called zombie corporations, whose profits are less than interest expense. Rising interest rates can only have increased the percentage, though the increased cost kicks in with a lag (as each bond matures and must roll). In addition to the problem of rising default risk from these companies, there is the risk if enough hits at once, that the credit market they depend on, goes no bid again as it did in 2008.

Of course, if their bonds are impaired then their equities are worthless. Stocks will be crashing in this scenario.

We raise the issue of price being set at the margin to make a point. In this scenario, the marginal buyer of gold will not be the speculator. It will be the mainstream investor who is desperate to protect himself from a financial system going mad again.

When will this happen? Watch for news of GE and other major debtors sinking deeper into trouble.

As to systemic default risk, i.e. monetary collapse, it’s early yet. There are some peripheral currencies like the bolivar and lira that could go away soon. But their troubles are widely known, and visible far in advance. We would not expect their demise to have much impact on the world’s monetary order (though of course it is horrific for the people who live in Venezuela and Turkey).

Other currencies are also in trouble—we have written a lot about the franc. It is impossible to predict the timing of such a thing, though our gut feeling is that it is still a ways out.

As to the de-dollarization, loss-of-reserve-status, end-of-petrodollar, gold-backed-yuan, SDR-to-replace-USD ideas, we say: rubbish. The dollar will get stronger from here, if not in terms of gold then as measured by other currencies. Panicky people in Istanbul do not think “let me buy Brazilian reals, Russian rubles, Indian rupees, and Chinese yuan” because someone coined the glib term “BRICs”. They do not think “I will buy me some Saudi riyal because, petro.”

They buy USD.

So we end on a conclusion we have reiterated many times. When gold goes to $10,000 it is not gold going up. It is the dollar going down.

It is inevitable that the dollar will go down. Keith just gave a talk at an Austrian economics conference in Madrid “There Is No Extinguisher of Debt” (paper to be published soon). The collapse of the dollar is baked into the mathematics.

People could buy gold today at an 88% discount from that price. But do yourself a favor. Watch any politician on TV. Watch a Republican promise to “grow our way out of the debt”. Or watch a Democrat promise a free university education to everyone. Watch even many libertarians promote a Universal Basic Income(!)

If you think they don’t understand, you are right. But the vast majority of voters support these politicians. The voters, too, don’t understand. And the investors too.

Buying gold is a non-expiring hedge. But only people who perceive a need to hedge, will buy the hedge. The rest may think that stocks are a bargain here, being down almost 7% from the high last month. So far in this incredible boom following the crisis, every time people who bought the dip were rewarded.

Are we getting close to the point where it won’t be? If GE is any indication, if GE will have a contagion effect (remember that word?) then the answer is likely yes.

Blockchain Future; Create Your Own Case Studies

Create your Own Case Studies

Look at the date of the report like Coach, Inc. (“COH”).  Do not read the

report.   Then download the 10K close to the date of the report and try to

do your own analysis BEFORE you read the author’s thesis.   Yes, it is work, but

you will learn more than reading the report and then looking at the financials.  Most will simply skim the report.

Case Study on Managing A Company

View the Town Hall Meeting At Barrick Gold

https://www.barrick.com/news/news-details/2018/town-hall-with-john-thornton/default.aspx

Q218-Town-Hall-Presentation

Q218-Town-Hall-Transcript

A very interesting presentation of how Barrick is planning its future.

CORRECTION

I have often mention gold as a “Store of Value.”   I never defined my terms.

I apologize.  A better explanation by Keith Weiner of www.monetary-metals.com

Store of Value Fallacy
And this leads us to make one final, if tangential point. We often hear people talk about gold as a “store of value”. If you have a tank, that is a store of water. A grain silo is a store of wheat. In both cases, what is being stored is a quantity of a commodity. In this sense, a vault is a store of gold.

However, economic value—as we see above—is whatever the bidder is willing to pay. Gold’s moneyness does not come from it commanding the same amount of wheat today as it did last year or 2000 years ago. In fact, its purchasing power of wheat is not fixed. Over the last ten years, pricedingold.com shows that wheat has ranged from about 0.9 grams gold per bushel to 3.6g. The highest price during this time is 4X the lowest.

One reason for gold’s moneyness is that we value the next ounce of gold—the marginal ounce—the same as the last one. Proof of this extraordinary claim is observed in the extraordinary fact that virtually all gold ever mined in 5,000 years of human history is still in human hands. Gold is not produced to be consumed, but to be held. And we keep on producing, regardless of how much has already been produced.

In other words, we measure the value of gold like we measure the value of all other things in the economy—in gold. Gold does not have constant purchasing power (perhaps we should use scare quotes “purchasing power”). It has a constant price. The price of gold is always 1. This is not expressing a tautology. It is expressing that gold has constant marginal utility.

Gold is the steel meter stick of measuring economic values. Even if we climb in elevation (quantity) the meter (ounce) does not shrink.

Value Investors Struggle–What Happened?

IWY “Value” shares (Brown line) vs. IWF “Growth” shares

What is going on? https://www.threepartadvisors.com/audio

Active Managers Horizon Kinetics  Worth a careful read.  Note the underperformance of several famous investors.   Did they ALL become stupid at the SAME TIME?

Indexation-The-Jury-is-Almost-In

Perspective Jesse Felder Chartbook July 31 2018 (1)

Perhaps a way to beat the ETF driven overvaluation is to search for companies that are in few indexes such as TPL or CVEO, for example.  And search for owner-operated companies. Owner_Op_Paper  With founder or owner-operated companies, there is less float so fewer of these companies end up in ETFs.   When you see that Blackrock is a majority owner in a stock that you own but the stock represents only .003% of their five trillion dollar portfolio, you have a festering problem.   Look for those founder led companies that treat shareholders fairly:

https://youtu.be/WDWQXaqsyr8  Berkowitz of Fairholme speaks to students.  My gosh, the interviewer is irritating.

 

 

 

Bitcoin, Blockchain, and Money

Another interview with Caitlin Long

https://caitlin-long.com/

  1. Blockchain for Dummies
  2. Repo_Markets_Handbook
  3. Repo3

Free Course: https://mises.org/library/economics-bitcoin-primer

But THE book to get, read, and study is

AMAZON REVIEW

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 https://www.dollarcollapse.com/value-investors-endangered/

Bitcoin is a speculation:https://www.ineteconomics.org/perspectives/blog/jim-chanos-cryptocurrency-is-a-security-speculation-game-masquerading-as-a-technological-breakthrough

GABELLI ON INVESTING TODAY

https://www.youtube.com/watch?v=Cxj2TqRvTT8

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 http://brooklyninvestor.blogspot.com/

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: https://www.recode.net/2018/4/24/17275202/bitcoin-scam-cryptocurrency-mining-pump-dump-fraud-ico-value

COUNTER-ARGUMENT:  https://www.forbes.com/sites/ktorpey/2018/04/24/founding-paypal-ceo-bill-harris-says-bitcoin-is-a-scam-heres-why-hes-wrong/2/#2d9379a166b9

Where have we seen this type of behavior before?

UPDATE: Friday April 27th 2018

Read: http://thecharlieton.com/whitney-tilson-why-the-hell-didnt-i-listen-to-charlie-munger/

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: www.cnbc.com/video/2018/04/26/kases-whitney-tilson-talks-the-art-and-pain-of-short-selling.html. 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: https://seekingalpha.com/article/4166837-lessons-15-years-short-selling-veterans-advice

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 http://bit.ly/Shortconf, 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
WTilson@KaseLearning.com

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: https://monetary-metals.com/falling-productivity-of-debt-gold-and-silver-report-15-oct-2017/

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

https://www.project-syndicate.org/commentary/america-low-saving-rate-weak-fundamentals-by-stephen-s-roach-2018-02