POITOU, FRANCE – Our in-house expert left us this morning; we have no update on his cryptocurrency speculations.
He and his family boarded the 6:22 train to Paris, en route back to Florida.
About a half hour after we had taken them to the station, the phone rang:
“Uh… Dad… the train has stopped. They’re saying something about a cow on the tracks.”
Suddenly, all his careful rehearsals were upstaged. The plot had changed.
The tracks had been laid, sturdy and straight. The locomotive – a new one – was strong and dependable. The conductor knew his job. The passengers were in their places.
All was set for a trouble-free run on the Limoges-Poitiers line. But the cow miscued. As it turned out, the train hit the poor vache… the connection was missed, and the whole script had to be rewritten.
Things do go wrong from time to time.
The actors get on a clear stage, expecting a smooth reading of Macbeth. And then… without warning… some clowns rush the proscenium and you have A Night at the Opera.
The plot looked like it might be changing in the stock market yesterday, too.
Voices shouting out their buy and sell orders had a new tone. Doubt. Not fear. Not panic. Just doubt.
The Dow fell 203 points, a bit less than 1%.
“Equity rout deepens,” reports Bloomberg, either exaggerating or anticipating.
According to no less an authority than the president of the United States of America – and we can’t think of less of an authority – the U.S. financial picture has never been brighter.
Stocks are still near record highs. Unemployment is below 5%. Inflation is below 2%.
As for stocks, they have never, ever been higher, according to stock market analyst John Hussman of Hussman Funds.
Corporate profits can be jiggered and jived by accountants. But not sales, says Hussman. And right now, the price-to-sales (P/S) ratio for the S&P 500 is telling us that stock prices are more expensive than they were at their pre-cash peaks in 1929, 1999, and 2007.
Margin debt – the debt brokerage customers take on to lever up their gains – is at a record high, too. And national debt. And corporate debt. And consumer debt.
What could go wrong?
Are you kidding?
The days of theater fires and unplugged cables are supposed to be over. Now, we have the Fed carefully guiding, controlling, and protecting its fantastic show.
If even a sparrow, watching from one of the booms or stage supports, should get woozy and fall, the Fed will be there to catch it.
And we have the Republican Party, too – the party of blue suits, cronies, economic growth, and financial prudence. It’s in charge of both houses of Congress, making sure the politicos don’t flub their lines.
And, of course, we have Donald J. Trump in the White House, a no-nonsense impresario-in-chief with vast private-sector experience with excess debt.
So rest easy…
And to make things even better, we have the cryptocurrencies – the biggest innovation in the money world since the minting of the first gold coin about 3,000 years ago.
Now, at last, we have real money.
But wait… If the feedback from Dear Readers in the mailbag is any indication (see below), the cryptos can trip up, too.
One reader says: “Cryptocurrency is [no] different than the fake money of all the currency issued by governments.
“I am happy for your son making such a killing on bitcoin but it seems you are now promoting that which you have been against for the few years I have been reading you. How is this any different than fake stocks, cash, etc.?”
“Zero intrinsic value,” says another. “It’s a digital asset created out of thin air. It’s not a currency. It’s too volatile for that. [Value investor] Howard Marks slammed it today. I agree. It’s electronic trading at its worse. And it’s criminal. For thugs and scofflaws.”
And another: “[Cryptocurrencies] are not a permanent store of value if there is no limit on how many competing cryptos can be created. The ‘limited supply’ argument is clearly brand-specific, and there is no limit on supply overall. Anybody can create their own crypto and take away market share from a particular crypto brand, and its value with it.
“Users will have to stay light-footed and be ready to hop from one to another quickly to avoid losing value when consumer interests shift to the next one. I can also see dollar value in cryptos as a speculation, but I don’t want to find myself in a position where I am desperate to sell something of no intrinsic value to another sucker.”
And this: “More on blockchain [the technology underpinning cryptocurrencies] and Creepocurrencies. The government creates dollars out of thin air. Creepocurrencies are created out of thin air. Unless one of the creepocurrencies backs the value of its faux currency with real silver or real gold, what’s the difference?”
One reader compared cryptos to a chain letter: “The gist of the chain letter is that you pay to participate by sending the person at the top of the 10-person list $10 or whatever amount the chain letter required as a buy in.
“You then removed the name at the top of the list to whom you sent your $10, placing your name at the bottom of the list and then ‘selling’ five copies or whatever number the chain letter required of the NEW list with your name and address now on the list to your friends and neighbors.”
Some of these questions have answers.
For example, gold also has little intrinsic value. It can be used as jewelry. But gold jewelry would have little value were it not for the monetary value of gold.
Real money has real “intrinsic” value only as real money. It’s scarce… it’s fungible… it’s divisible… it’s durable… and it’s transferable.
There is a “chain letter” effect with cryptos, as with any investment fad. The people who get in early get money from the late arrivals. But the Ponzi quality is incidental rather than essential to the main cryptocurrency story.
As for the lack of gold or silver backing, economist George Gilder takes up this issue in his book The Scandal of Money.
He concludes that cryptocurrencies work just like gold because they are similarly anchored by the ultimate real-world constraint: time.
New bitcoins are “mined” when high-powered computers run by free-market entrepreneurs solve complex mathematical puzzles. Each puzzle takes about 10 minutes to solve and requires lots of computer processing power… and electricity.
According to one study, the amount of electricity spent mining bitcoin every day is comparable to Ireland’s daily power consumption.
So establishing an operational link to gold is unnecessary. Plus, we’ve seen – from the experience of e-gold, a precursor to bitcoin that was backed by physical gold – that the link provides an easy way for the feds to control the currency. Better off without it.
Does that mean cryptocurrencies will be the great success their backers expect?
We don’t know.
Cryptocurrencies are not an investment. And not yet a convenient or reliable form of money. They are still just an experiment. A work in progress. Early adopters could get rich… or get wiped out.
We’re as curious as anyone; we want to see how it turns out. In the meantime, we’ll hold on to our gold…
…and watch for cows straying onto the tracks.
BY CHRIS LOWE, EDITOR AT LARGE, Bonner & partners
As Bill has been warning, complacency lasts… until it doesn’t.
Today’s chart is of the VIX Index.
It measures investor fear levels based on the price they’re willing to pay in the options markets to insure their portfolios.
A higher VIX shows fear levels are rising… and investors expect more dramatic price action in stocks ahead.
A lower VIX shows that fear levels are falling… and investors see more tranquil waters ahead.
The VIX has been trading at levels not seen since 2006.
That changed this week when the index spiked 71%.
It’s the biggest percentage spike so far in 2017.
– Chris Lowe
Wall Street Needs You to Borrow More
Wall Street brokerages are pushing customers to take out loans backed by the value of their stocks. The brokerages make a killing, but here’s what happens when the market sinks.
Can Bitcoin Be Killed?
This week, readers have been wondering if it’s possible to “kill” cryptocurrencies like bitcoin. Colleague and self-described “bitcoin bull” Teeka Tiwari takes up the question.
The Quants Are Weakening
Quantitative funds (quants) use computerized strategies and complex algorithms to place profitable trades. They have grown increasingly popular in recent years… but now may be losing some of their luster…
As Bill mentioned, the mailbag has been dominated by crypto debate recently (catch up here). Today, more thoughts on the world of cryptos…
I would like to know why you feel bitcoin and cryptocurrency is any different than the fake money of all the currency issued by governments. For a few years now I have read and believed, like you, that without real work and real production, real wealth is not created.
I am happy for your son making such a killing on bitcoin but it seems you are now promoting that which you have been against for the few years I have been reading you. How is this any different than fake stocks, cash, etc.?
– Tracy T.
Cryptocurrencies have zero intrinsic value. It’s a digital asset created out of thin air. It’s not a currency. It’s too volatile for that. Howard Marks slammed it today. I agree. It’s electronic trading at its worse. And it’s criminal. For thugs and scofflaws.
– Patrick V.
What is to stop the Federal Reserve from setting up a Bitcoin account and just buying as much as they want with “printed” Federal Reserve Notes? They could even bid up the price to astronomical levels, and then dump their bitcoins back on the market rapidly causing a crash in the dollar-denominated bitcoin price of epic proportions.
This could even be used by them to shake the public’s trust in cryptocurrency in general. Would they even have to disclose that they were buying bitcoin to the public or to Congress? I highly doubt it. Perhaps central banks all over the world will start to hold Bitcoin as a “reserve.” Interesting times we are living in. I love your work.
– Vince W.
Gold’s value versus the dollar keeps changing. The dollar’s value in terms of what it can buy keeps changing. But, at least the dollar changes value somewhat slowly, which gives it some use as a medium of exchange. Various crypto-coins keep changing rather drastically in terms of the dollar and one another.
Cryptocurrencies would seem to have no real value as a medium of exchange because of their volatility. Would you want to depend on a currency which one day might just buy you a meal, and a short time later might buy you a new car? Or maybe vice versa? I wouldn’t. Until they become somewhat stable, they are only a speculation. And what happens if a N. Korean EMP missile knocks out the internet?
– Chuck B.
The most valid defenses of bitcoin and cryptocurrencies revolved around how they’re better than fiat currency, which I find valid. I also like their function as a medium of exchange. However, they are not a permanent store of value if there is no limit on how many competing cryptos can be created. The “limited supply” argument is clearly brand-specific and there is no limit on supply overall. Anybody can create their own crypto and take away market share from a particular crypto brand, and its value with it.
Users will have to stay light-footed and be ready to hop from one to another quickly to avoid losing value when consumer interests shift to the next one. I can also see dollar value in cryptos as a speculation, but I don’t want to find myself in a position where I am desperate to sell something of no intrinsic value to another sucker. Unless the currency is convertible into something of value (an oil company crypto convertible into gasoline), how can it do anything but go to zero when somebody else takes market share away? I’m all for private market-based money if I can get it!
– Sandra K.
There is something missing in this Bitcoin narrative and, in fact, in all narratives concerning our current global economic dysfunction: Cheaters. The global mess is not due to bad ideologies like capitalism, socialism or some other “ism” nor incomplete economic policies: Austrian or Keynesian. It’s about a class of people shamelessly stealing from everyone else and lying about why they’re doing it. That’s cheating. Negative interest rates are cheating. Stock buybacks are cheating. Credit default swaps are cheating.
I believe that Bitcoin will be allowed to succeed only long enough to get everyone excited about a fiat-cash-less society while the governments prepare their own global, digital currency and payment system. When all is ready, Bitcoin will be crashed hard by the cheaters whereupon they’ll then reveal their own stable, global, digital, SDR payment system guaranteed by “the full faith and credit” of all “responsible” governments. Don’t be surprised if the BRIC [Brazil, Russia, India, and China] countries join early.
– Steve S.
I too appreciate your attempts to wrap your mind around cryptos and understand them. The comparisons made with gold are legit and accurate but only in theory. Gold is not a figment of a geeky non producer’s mind who grew up teething on a smartphone. It is here and it will always be here in a real physical way. The way I see the Cryptos is as a dependent entity, like lichen dependent on tree bark, the crypto is completely positively absolutely 100% dependent on the world wide web.
One electromagnetic pulse of epic proportion… POOF!… Gone… with everything else.
– Bob K.
The technology behind cryptocurrencies is where the future lies rather than the currencies themselves. The cryptocurrencies may, indeed, be limited by the number of bitcoins that can be minted, but who is restricting the wild proliferation of other cryptocurrencies and exchanges they are being traded on? Bitcoin gets too pricey? Just create another cryptocurrency and be the first to own it and later sell to the next biggest fool.
I fear the cryptocurrency craze will not end without some more major casualties. Wait until some hacker figures out how to access an exchange or somehow break into the system.
– D. L.
A Silicon Valley insider just issued this warning: American auto giants like Ford and GM are doomed.
That’s because these iconic companies are about to be completely upended by a transformative new piece of technology that’s right around the corner. And early investors in this bleeding-edge tech will make a killing. Learn more here.