Bitcoin heading into new bull leg?

Bitcoin heading into new bull leg?

Bitcoin was easily the best performing “currency” over 2015, with a 100% rise in price from its low.  A series of bearish media articles and a letter from Mike Hearn, one of the leading members of the community and coders for Bitcoin, sent the coin into a bearish market posture.

Since the letter, and despite significant volatility, Bitcoin has only consolidated on its weekly chart:

A Bitcoin price chart (in US Dollars) from the last year. The consolidation pattern is quite clear.

The question remains, will Bitcoin break out? Or will it crash?  If a gun was held to my head, I would suggest that Bitcoin will be heading into a new bull leg soon, and potentially a long-term one.

More on Gold/Silver Ratio.

More on Gold/Silver Ratio.

On March 22nd 2016, I mentioned:

“As of two weeks ago, gold prices had outpriced silver to a ratio of approximately 83- a ratio which was higher than gold’s peak in the height of the financial turmoil during the Financial Crisis (Nov. 2008). It should noted that Gold then fell against Silver to around 32 by 2011.”

Since that point in time, the ratio has dropped down to approximately 73.70, and silver had its best day in 6 months.  A good trade for the individuals who entered into the market on the short side (short gold/long silver.)

Care is advised for the next 2 to 3 weeks. Not only is it unlikely that the markets would bounce of the exact level (though it may happen), the trade is becoming mainstream.  Gold may now well reverse direction against silver, and if so it will do so rapidly.

I would advise against shorting gold in silver terms at this point in time.  A neutral, or reversal stance would be prudent going into next week.

More Sov. Default & Unrest.

More Sov. Default & Unrest.

Currently around the world we are seeing the threat of looming taxation and wholesale wealth confiscation.  Here are some recent events which paint a stark picture of the rising dissatisfaction amongst local populations:

General market trends..

Meanwhile in places like London, Vancouver, Sydney, and other cities with luxury markets around the world capital outflows from emerging markets have driven the price of housing to breaking point, leading to a rentier economy for many young people who are not buying (although this trend is likely to be over soon.)

The Japanese Yen has significantly strengthened against the US Dollar and the government seems to be rapidly running out of policy options to tackle their enormous sovereign debt.  Indeed, after a period of significant strengthening the US Dollar has retreated, though the trend may continue before too long.

European equities, specifically bank stocks, have taken a hit on account of the rising risks in the single currency zone.

Furthermore, crude oil has fallen once again as Iran harpooned any hopes for restriction of the supply.  As well as decently performing precious metals (especially gold.)

In Europe we have the UK referendum on exiting the European Union which is a major risk factor given its potential for either sparking a punitive trade war between Europe and the UK (and perhaps even the wider Anglosphere) should the vote to leave come out on top.  As this vote approaches on June 23 2016, there will be no easy solution with general mistrust of politicians running high amongst the population.  Even in the event that the UK does vote to remain in the European Union, potential for dissent in the UK will be high.  This is a polarizing issue for the average European citizen, and it extends beyond the UK borders and into continental Europe.

People all over the world are becoming polarized along political and economic divides.

Where to from here?

As Sovereign Debt becomes increasingly unsound, volatility will increase, the lack of debt will restrict a large part of the liquidity into the financial markets. Wild swings will be seen in the prices of many things, especially markets which are highly levered.  Some markets, like housing, if funded by mortgages, may see significant declines in their real value as the flow of new entries into the markets thins.

Currencies can be expected to become increasingly volatile too, as well as equities.

With respect to property rights and political risk: this should be considered a serious potential risk from the perspective of market participants- particularly when taking ownership of foreign held assets (like property).  The political environment right now is simply not conducive to stable investment.

In addition, if stock buybacks decline, we may see the equities market decline in the short term as a result of the diminished inflated demand.  Having said that, companies on solid financial footing with access to strong cash flows may be the only bright spot on the investment horizon going forward.  That is, if anyone is allowed to keep their capital gains.


The perils of linear thinking- UK Steel.

The perils of linear thinking- UK Steel.

Now ask anyone and they’ll tell you the following: I’m a pretty capitalistic guy. I frequently clash on my ideological views with the left.  I adhere to the notion that the individual is, and always has been, the single most important factor in an economy and society- the so-called “rugged individualist“, in my opinion, forms the foundation of our progress as a society. We owe a lot to people like Henry Ford, Albert Einstein, Rene Descartes and Isaac Newton. We are standing on the shoulders of giants.

Where am I going with this you ask? Bear with me, especially if you are on the left of the political spectrum.

I’ve frequently stated that where markets are concerned, there is no single “one strategy fits all” solution. Which is why, of course, any regulatory body, any union, any political group or any central bank simply will fail in their approach at some stage. They tend to be wedded to an ideology* which is only correct in certain situations.  So-called “linear thinking”, the notion that the world is a constant like a linear equation:

y = ax +b

Everything is constant; it lies on a straight line.  You just plug the inputs into the function, get the output out and away we go.  That point is critical to understand some of the biggest policy blunders in history. 

Some people would like to believe that the economy is a simple linear function. In reality there are thousands of variables, even if only a few variables account for the majority of economic output.  The picture above is a 3D contour map- linear models (particularly bivariate linear models) are a primitive mathematical tool in terms of explanatory power, or indeed in terms of policy solutions.

The case for UK Steel tariffs:

My very first blog post was in response to a friend on the left asking how UK Steel could be protected. The first part can be viewed here.  And with that background  I’ll explain, in this instance my reasoning as to, why as a capitalist I view Europe’s (and by proxy the UK’s) inability to tariff cheap Chinese steel as a dangerous thing:

There should be no question in anyone’s mind that we are in trying economic times. The glut of steel coming out of China echoes the aftermath of the previous wave of globalization, where production and consumption was polarized increasingly in specific regions of the world.  China, having a huge overproductive surplus in steel, is now flooding the markets to maintain their industry.

The neo-classical economist would argue that tariffs constrain economic growth and economic development, and this may be true during an economic growth period. This is why, in many ways, Thatcher’s decision to cull the unions was likely to be a good move. It allowed the cost of labour to decrease and for the market to clear- creating renewed prosperity. In many respects the unions were the ones wedded to an ideology back then- the notion that they could extract increasing wages for their labour at expense of the overall society, at a time when real wage increases were not viable based on market characteristics.  This type of thinking can be true in the face of unscrupulous business owners, which I discuss here. Once again, this is not always the case and today it seems the shoe is on the other foot where being unreasonably wedded to ideologies is concerned.

So why would I argue that tariffs are warranted this time? Quite simple really. At some point the probability of and costs borne by social unrest will exceed the costs of implementing a tariff in utility terms. An economy cannot function under mass social unrest or flat-out war. Property rights fall apart (the foundation of capitalism), insurance costs skyrocket, even basic tasks like shifting goods become fraught with danger.  That’s the sort of world which we appear to be heading towards right now and it’s being perpetrated by linear thinkers: people who are focused on one single variable (economic growth) at a time when they should be worried about another (social stability). The economy and markets are neither linear, nor are they bivariate in nature.

*It is worth noting that some things may well be immutable- things like physical observations that follow specific laws that have not changed in all of the time they have been observed. These are the rules that govern our universe; without these physical rules the universe would cease to exist.  Of course, this is not an ideology or a human construct, but rather an adaptive observation based model.

Inflation on the Way?

Inflation on the Way?

Previously I mentioned how it is scary that some governments are offering 25% “low-risk” return on certain investment vehicles going into 2017. Well, that return has now been explained, at least in part, by policy.  As the FT reports:

“Many economists have also changed their views. Economics textbooks used to state that if you raise pay above the value it creates for employers, you reduce demand for labour. In other words, minimum wages cost jobs.

But economists’ opinions are now more nuanced, in large part because of the experience of countries such as the UK, which have so far sustained steady increases in the minimum wage without doing any notable damage to employment.”

The living wage is an attempt to hike the minimum wage on society’s lowest skilled workers, and may coincide with an increase of the monetary base- allowing workers to feel wealthier in nominal price terms while doing little in real price terms.

Why is this justified?

Quite simply, during times where debt accumulation (typically, but not always borne by government) is so high that interest rates extract more from the economy than the economic growth, the only solution is to reduce the debt burden in real terms.

It seems that the UK will be attempting to, at least in part, inflate their debt burden away.  Other solutions lie in stretching debt repayments over a longer time horizon, or forcing haircuts on creditors.

Between Q2 2017 and Q2 2018 (and perhaps moving forward) we might see significant inflation in the United Kingdom which would fit the historical record.  As Ben Bernanke might say, it’s time to start the helicopter engines and get ready for the cash drops.

Of course, there is still the alternative- no stealth jubilee by government and the controlled descent into the abyss of wealth destruction. This would benefit the wealthiest individuals and institutions in society, though neither option is particularly pleasant to consider.

Could this policy be wrong?

Yes, in fact. Historically wealth accumulates in the hands of the few under capitalism. Over time this inherited wealth (or dynasty wealth as I prefer to refer to it) is hoarded and isn’t reinvested (see: Monarchy/Oligarchy etc.)  In the event that most of this wealth is actually being mobilized in useful ways, ie: there is no slack for investment in the productive economy, central bank and government interference will only destroy wealth.

Historically, this has not been the case- there has always been slack, but there are some reasons to think that one day soon, that slack will diminish, making the policy of punishing savers a failed one.  Is it soon? Perhaps.  History will tell, but the stakes are high. We cannot afford to misread the situation.

Gold/Silver Ratio Signals Opportunity.

Gold/Silver Ratio Signals Opportunity.

Recently all of the focus has been on gold, with news that Venezuela shifted reserves to Switzerland, and queues for gold in London, gold has risen substantially.  This has offered up an unusual potential opportunity- the gold/silver ratio.

As of two weeks ago, gold prices had outpriced silver to a ratio of approximately 83- a ratio which was higher than gold’s peak in the height of the financial turmoil during the Financial Crisis (Nov. 2008). It should noted that Gold then fell against Silver to around 32 by 2011.

The gold to silver ratio over the past 10 years (courtesy of 

In fact, taking data going back to the 1980s (silver’s historical peak in real terms) the gold to silver ratio has dropped below the 20 mark.  This suggests a possible market opportunity.

UK Lifetime ISA- Where is the Risk?

UK Lifetime ISA- Where is the Risk?

Upon skimming through the 2016 UK Budget, there are lot of interesting points of discussion (at least to me), however, one of the most interesting on this first read through is the Lifetime ISA, which makes a debut in April 2017.  For anyone who is not from the UK, an ISA is an “individual savings account” and presents the average British saver with a tax-free savings vehicle. Various ISAs are structured in different ways.

The immediate thing that stands out here is that the UK Government is promising British citizens up to 1,000 British Pounds yield on savings of 4,000 Pounds. That’s 25%! This sounds like fantastic news for the average citizen- so why does this yield scare me senseless?

Well, put simply, there is no such thing as arbitrage (risk-free yield). Finance majors with a heavy academic slant, will of course argue the contrary: What about Triangular Arbitrage?  High-Frequency Trading? Put simply, if you think you’ve found an arbitrage opportunity, you either aren’t fully understanding the risks (yet) or you are talking about something with a very low risk to reward ratio- which of course, may not remain in place for very long.

Anyway, armed with this information, it should be obvious to even the most basic investor that sitting on a low-risk investment which returns 25% per annum is quite literally too good to be true.  This sounds like the financial equivalent of the UK Govt. promising everyone an elixir of eternal youth. Or maybe the equivalent of one of those shady web ads. offering an investment strategy which is “guaranteed to turn you into an overnight millionaire!”

So where’s the catch?  It’s easy enough to make make a 37% return swing-trading a volatile asset, over a month or two (and I have), but the explicit understanding is that there are serious risks assumed in doing so and the losses can mount up faster than the gains. Anyway, I’ll discuss the risks and likely aims and risks of this investment scheme below:

What is the purpose of the ISA?

There are likely to be four broad aims with this ISA being floated:

  • Recapitalize the banks at a time when banking is quite a weak sector.
  • Increase savings rates of individuals in a country which is running out of steam as a global consumer.
  • Ween the population off of public pension schemes and ensure they save for their old age (because, like it or not it’s coming and “pensions won’t be there when you get old, pleb.”)
  • Shift under-the-mattress cash savings into the electronic banking system.

These are fairly self-explanatory. Nothing more needs to be said here other than the first and last points being heavily related. (See my writings on the global transition to electronic currency here and here.)

So where is the risk?

Well the first two points above highlight potential risks, one directly and one indirectly. Banking is weak, and in any market which is in systematic decline, it stands to reason that not all market participants will emerge unscathed.  There is a risk of failure and loss of wealth. This is just a normal function of fractional reserve banking which is an inherently unstable system from a mathematical perspective.  To put this into real world context  I know a guy who receives a 15% interest rate on several corporate bonds he holds with a local bank. The caveat of course is he is from Argentina, and the bonds were floated (with a short time horizon to buy into them- about 48 hours) during a banking crisis.

The second point is a little more nuanced. The UK has tremendous debts, borne out of its overconsumption (trade deficit) for many years. It is therefore, not outside the real of possibility, that the GBP will face significant devaluation, and perhaps high inflation rates soon.  If the rate of inflation post 2017 was to exceed 25% then the real yield on this scheme would be negative. (See here for discussion of sovereign default trajectories and how they relate to inflation.)  In short, if the inflation rate per annum (and thus, increase in the basic cost of living) is 26%, then the real yield will be approximately -1%, despite a 25% nominal yield.  In other words you are less wealthy at the end of the year despite a 25% yield on that investment!

Far be it from me to question the actuaries and financiers who put this scheme together, but I have to say: the notion of a 25% return for supposedly little work/risk terrifies me. I’ll be looking to protect what little wealth I have before this ISA comes out.