1. This Bitcoin Billionaire Has Lost His Faith in Bitcoin.

     

    Regular readers know my view of bitcoin. I’ve said all along that it has no utility other than as a token for criminal transactions. Bitcoin is slow, expensive, non-scalable and non-sustainable. It is not suitable as money because the money supply it represents is inelastic once the last bitcoin is mined (and we’re already getting close to that point).

    I also called the bitcoin bubble. Last December when the price was $8,000 and rising rapidly, I said in a television interview, “bitcoin could go to $20,000” but would then fall back to earth. That’s exactly what happened in the weeks following. Since hitting $20,000, bitcoin has fallen over 60% and now trades around $7,500, although the price trend is still down.

    Having said that, I never doubted that certain individuals personally made lots of money in bitcoin. If you bought 1,000 bitcoins at $100 each and sold at the top, you made almost $20 million. The problem is that you didn’t make that money with hard work, ingenuity, invention or some value-added product. You made it from the suckers who came in behind you and paid bubble prices until the bubble burst.

    That’s not a great model for any economy and it has led to immense hardship for those who took home mortgages or hocked their store inventory to invest at prices of $10,000 or higher. Just to rub salt in the wound, one of the genuine bitcoin billionaires now says that, “Bitcoin may have trouble evolving and keeping up,” and that other cryptocurrencies such as Ether are “too untested” for general use.

    As this article explains, this particular bitcoin billionaire was the head of the Japanese-based Mt. Gox cryptocurrency exchange that went bankrupt in 2014 and lost over 850,000 customer bitcoins (worth about $6.8 billion at today’s prices). He served time in jail, has now been released, but due to quirks in Japanese bankruptcy law, he still has control of bitcoin valued at over $1 billion.

    This particular bitcoin billionaire no longer believes in bitcoin. It might have been nice for the unfortunate bitcoin losers if he had said that four years ago.

     

    Accredited investors interested in learning more about Jim Rickard’s private placement in the world’s first predictive data analytics startup that combines human and artificial intelligence with complexity science should check out his offering at Meraglim HoldingsClick the link to learn more.

  2. One Of the Most Successful Stock Investors Of All Time Sees a 40% Crash.

    Not all investors are created equal. Some just buy and hold, which may be OK in the long run, but it subjects you to 50% declines periodically. If those declines come just as you’re getting ready to retire and the market takes 10 years to recover, that’s not a great outcome.

    Other investors are more like day traders. They usually lose money because emotion gets in the way of good trading and the commissions are high. Some investors try hard but underperform index funds because they miss out on the one or two big winners that account for most of the gains in an index.

    Then there are a small number of active traders who really do beat the market and produce huge gains for their investors. Warren Buffett, Ray Dalio and Bruce Kovner all fall into this category. Another consistent winner who has made huge profits for a long period of time is Scott Minerd, the Chief Investment Officer of Guggenheim Partners.

    Guggenheim is a family office, not a hedge fund, so Minerd is not as flashy and does not get as much publicity as some of his hedge fund peers. But, his long-term track record is just as good.

    What is Minerd saying about the stock market today? According to this article, he’s expecting a 40% crash in stocks and massive debt defaults in the next recession. Minerd says stocks might continue to go up this year, but as the economy runs out of steam and as interest rates rise, a major crack-up is coming soon. That’s a dire warning from a very savvy investor.

    I wouldn’t bet against it.

    Accredited investors interested in learning more about Jim Rickard’s private placement in the world’s first predictive data analytics startup that combines human and artificial intelligence with complexity science should check out his offering at Meraglim HoldingsClick the link to learn more.

  3. Investors Have Been Warned About This Bad Sign. Now It’s Here.

     

    One of the oldest jokes in economics is that “the stock market has predicted nine of the last five recessions.” That’s a reference to the fact that stock markets tend to decline about six months before a recession, but they also decline at times when there is no recession. This makes the stock market an unreliable predictor of recessions even though stocks actually do signal recessions consistently.

    However, certain indicators have much better track records at predicting recessions than others. One of the most accurate is an inverted yield curve. The yield curve is just a graphical representation of interest rates at different maturities. Generally the yield curve is upward sloping because longer maturities have higher interest rates. That makes sense because when you buy a 30-year bond, you’re taking more risk than when you buy a two-year note (because of inflation and risk of default), so investors want to get compensated for the extra risk with a higher interest rate.

    An inverted yield curve is when the curve slopes downward. This means that long-term interest rates are lower than short-term interest rates. That’s a very bad sign. In an inverted yield curve situation, short-term rates are higher because the Fed is raising interest rates and tightening monetary policy by reducing its balance sheet. But, long-term rates are low because the market believes the Fed is tightening too much and the economy is headed for a recession.

    If a recession is coming next year, you might be glad to take a lower interest rate on a two-year Treasury note because that rate will look attractive when unemployment goes up and other rates head back towards zero. If rates head down next year or the year after, you can also pick up a nice capital gain on your Treasury notes; that’s another reason to accept a lower rate today.

    This article reports that a small section of a specific yield curve (the overnight indexed swap rate or “OIS) has now inverted. The OIS is not the same as the Treasury yield curve (but, it’s similar) and it’s only one small part of the yield curve.

    So, it’s not time to sound sirens and ring alarms quite yet. But, it is a troubling sign for future growth and should be watched closely.

    Accredited investors interested in learning more about Jim Rickard’s private placement in the world’s first predictive data analytics startup that combines human and artificial intelligence with complexity science should check out his offering at Meraglim HoldingsClick the link to learn more.

     

  4. If You Can’t Win a Trade War, Try Winning a Currency War Instead.

     

    The article above talks about China’s “nuclear option” in the trade wars. That’s a reference to China’s massive holdings of U.S. Treasury securities and the possibility China could dump them on the market and drive up U.S. interest rates.

    The so-called nuclear option is a dud as the prior article explains. But, that does not mean China is out of bullets in a financial war. China cannot impose as many tariffs as Trump because they don’t buy as much from us as we buy from them. China cannot dump Treasuries because there are plenty of buyers and the president could stop the dumping by freezing China’s accounts if things got out of hand in the Treasury market.

    As this article explains, China is considering using a real nuclear option to counteract the trade war by fighting a currency war. If Trump imposes 25% tariffs on Chinese goods, China could simply devalue their currency by 25%. That would make Chinese goods cheaper for U.S. buyers by the same amount as the tariff. The net effect on price would be unchanged and Americans could keep buying Chinese goods at the same price in dollars.

    The impact of such a massive devaluation would not be limited to the trade war. A cheaper yuan exports deflation from China to the U.S. and makes it harder for the Fed to meet its inflation target. Also, the last two times China tried to devalue its currency, August 2015 and December 2015, U.S. stock markets crashed by over 11% in a matter of a few weeks.

    So, if the trade war escalates as we expect, don’t worry about China dumping Treasuries or imposing tariffs. Watch the currency. That’s where China will strike back. When they do, U.S. stock markets will be the first victims.

    Accredited investors interested in learning more about Jim Rickard’s private placement in the world’s first predictive data analytics startup that combines human and artificial intelligence with complexity science should check out his offering at Meraglim HoldingsClick the link to learn more.

     

  5. China’s “Nuclear Option” In the Trade Wars Turns Out to Be a Dud.

     

    A global trade war is now in full swing. Many nations are involved, but the chief antagonists are the U.S. and China. China set up the conditions for a trade war by unfair dumping of steel on world markets and the theft of over $1 trillion of U.S. intellectual property.

    President Trump fired the first shots with tariffs on steel, aluminum, solar panels and dishwashers. China retaliated with its own tariffs. Trump answered back with further tariffs on $50 billion of Chinese imports. China then imposed more tariffs on U.S. goods to match Trump’s $50 billion. Trump raised the ante another $100 billion like a poker player with a good hand and lots of chips.

    At this stage, China can’t keep going with tariffs. They only import about $150 billion of U.S. exports. At the rate they’re going, they’ll run out of goods to impose tariffs on. Trump can keep going because the U.S. imports so much more from China than they buy from us. For China to keep fighting, they need an asymmetric response; they need to fight the trade war with something other than tariffs.

    This article takes a look at China’s holdings of over $1.2 trillion of U.S. Treasury securities. Some analysts say China can dump those Treasuries on world markets and drive up U.S. interest rates. This will also drive up mortgage rates, damage the U.S. housing market, and possibly drive the U.S. economy into a recession.

    Analysts call this China’s “nuclear option” when it comes to fighting a financial war with Trump. There’s only one problem. The nuclear option is a dud.

    If China did sell some of their Treasuries, they would hurt themselves because any increase in interest rates would reduce the market value of what they have left. Also, there are plenty of buyers around if China became a seller. Those Treasuries would be bought up by U.S. banks, or even the Fed itself.

    If China pursued an extreme version of this Treasury dumping, the U.S. President could stop it with a single phone call to the Treasury. That’s because the U.S. controls the digital ledger that records ownership of all Treasury securities.

    We could simply freeze the Chinese bond accounts in place and that would be the end of that. So, don’t worry when you hear about China dumping U.S. Treasuries. China is stuck with them. There is no nuclear option in the Treasury market.

    Accredited investors interested in learning more about Jim Rickard’s private placement in the world’s first predictive data analytics startup that combines human and artificial intelligence with complexity science should check out his offering at Meraglim HoldingsClick the link to learn more.