BITCOIN AND OTHER - November, 2024

 People are asking what I think of Bitcoin. Here is what I tell them.

Bitcoin is close to $100,000. Crypto market cap is $3.2T and slightly falling for a few days. GDP of the world was $105T in 2023. 3% "market penetration" is not material but should be watched.

In the long term, (Stephanie) Ouellette says it’s viewed as a hedge against political and financial risks, and an opt-out from devaluation of fiat currencies.

Cash is anonymous money. Bank wire is transparent money. Bitcoin is sort of anonymous bank wire. But is it?

It is interesting that SEC allowed crypto ETFs (moral hazard is material). People have social agreement (at least for now) that BTC has value and exchange this thing for real cash. It is no brainer for governments to tax the trade. It is no brainer for financial institutions to design products and start collecting the fees (I would not do this simply because it's from the problem class of mixing turds with raisins). Initially, illusion was that you can hide it from officials. Nope. After introduction of VAT it takes time to tax all sale (very long time). Similar here - you legitimize it first, then you tax it. Gradually but surely. It's not alternative to anything anymore. It becomes quite systemic.

What will happen to the state if everyone wake up one day and realize that crypto is worthless? Nothing. 3T of "wealth" will simply evaporate. It is getting material and with time tax returns should show where this wealth sits geographically and which places are at higher risk because of positive and negative wealth effects.  

How can it be hedge against devaluation of fiat currencies, when it is pegged to them with value in the eye of (herd) beholder?

Lindy strengthens BTC longevity with each passing year. The best bull thesis I read came on VIC but it's main premise was "it will continue to grow" because it has no intrinsic value, therefore, bubble is impossible. Yeah, it's some kind of social agreement. More interesting is what could be a catalyst to BTC demise: a) Satoshi himself may undo it; b) herd may migrate to another better designed coin; c) significant portion of Bitcoin ownership is still unreported and the process is gradual, however, with each percentage of legitimization the demise is closer.

Random notes and thoughts that I cared to write down or copy/paste in the last few months:

• R* difference between EU and US supports long term EUR underweight.
• When Russians will be back to sports and culture again? It's as if they do not care but expect a harsh efforts after the deal. If they do not retreat back to their territory, Russians should stay canceled. Should is not necessarily would.
• Fed and markets are confident about low oil. Trump will unleash the supply, legitimize fossils again. Oil will be cheap forever. The only worry is 2000km range of BYD car. However, oil is inflationary hedge.
• Howard Lindzon: In the US though the mix of technology, money and culture make things move very fast. But I believe something changed/broke with web 2.0 and ZIRP. The mobile/social web and ZIRP sped things up to a tipping point of bad habits, bad cap tables, bad practices and bad behavior. This is a theme I have been fleshing out on our weekly ‘Trends With Friends’ podcast.
• Slow rate reduction may give time to adjust, muddle through and reduce risks of serious accident like Lehman. Human error probability is lowered.
• I think the market now cannot carry two opposite ideas at the same time in his head. A big chunk of the market is overvalued, while there is chunk where market is ruthless though odds are really unknown. It's probably algos.
• If lower 40% begin to struggle, even if the remaining 60% is booming, situation could be declared as crisis. However, impact on stock market could be quite isolated to a few businesses working with the population under crisis.
• It struck me that AI now is good at seeing 6-12 months ahead, which explains quick big moves in stocks after earnings releases (good reads recently on negative earnings trends algo trading). No the business is not going bankrupt and nobody knows anything. You simply have to be patient for 12-36 months (and 2x money expectation) when you are reasonably sure on mean reversion.

NEWSPAPER READING - September, 2024

As an intro I will post this piece. Grant's Daily Aug 22: "That’s (FED's balance sheet) down $65 billion from this time last month, and 20.4% below the March 2022 peak. 20% in 2 years. That is pace of normalization. Took few month to build and then decades to unwind. 20% in 2 years." Sounds about right - that's the pace of life. If you cut rates, effect will be felt in a few years.

How do I feel in terms of financial security?

In its August consumer survey, Mizuho found that both low- and high-income Americans alike are trying to get as thrifty as possible, which means eating out less and searching for discounts wherever they can.

I thought in previous post that thrift is coming and similar language in quarterly reports will stay for some quarters to come. Our household's annual income went up roughly twice in the last 5 years (from 6 figures). We were doing ok even before Covid, however, I feel uneasy to order a tap beer for 4-5, while 10 years ago it was 2 and 1 in plenty of places 15 years ago here. I mean normal tap beer. In Tenerife, you could still buy a glass below 2 but it's a different beer. My point is that such a rapid bout of inflation left a deep scar on psyche of 98% of consumers. The process of "frog boiling" (gradual adjustment until the effect will wear out) will take time.

In the background, AI will be eating high earning jobs. Those jobs will have the best ROI to replace first. My feeling is that "universal income" is coming and will be paid by taxing M7. I hope that BRK has nothing to do about it, while M7 should see enormous assault on multiples in the next 5 years. In the next few quarters, there should be a few material (in terms of number of layoffs) stories published. They are coming. Thrift may stay for longer. Internet was a clear enhancer for all, while AI is a replacement for human. Technology and robots replace lower skill jobs, while AI will replace middle skill jobs.

NEWSPAPER READING - August, 2024

When Covid hit, first impulse was to spend cash on home. When all opened up, first impulse was to spend on experiential. Good question (for quite some time) - what's next? Looks like (Walmart, Q2) it could be simple life or picky cash spending avoiding big outlays (which was overdone in 2020-2021) and cutting on experiential (2023). Sounds very organic, given all the recessionary (almost 2 years) background. Most of people simply balance the cashflow while Covid induced printed money cash surplus ended. People with cash may simply need a break from everything until life will continue as before the Covid.

Low expectations about the future (contrasting normal current confidence - h/t end of July, Authers) is probably an ongoing hangover from GFC, which was catalyzed/reminded by Covid and, especially, the uncertainty induced by AI, and polarization of US because of growing inequality. It is clear that internet was an obvious tailwind (1995) for all but AI put in jeopardy many higher earning professionals. [I added this after rereading the post: this sounds very bullish because people are not yet complacent, they still remember.]

On sustainability of margins: China Shock, once it started happening, lifted both the profit share of GDP and the Gini coefficient of inequality to the highest levels since the Second World War. Obvious, that current state of event are towards more inflation and smaller margins.

To grease the wheels (and feed the Skinner's pigeons), its probably 1-2 25bps cuts this year and same next year, at best. Hopefully (cheering for muddle through).

Stanley Druckenmiller used to say - cyclical stocks are the best economists he knows. Back in December 2018, he cited the sharp selloff in cyclical stocks such as autos, home builders, banks and retailers as a warning sign that the Fed has tightened interest rate too much. Shortly after, the Fed pivoted, ending the tightening cycle. Now, there are plenty of pockets with their own (relatively) good (home builders, banks) and bad (discretionary retailers) lives. Do nothing is the path of least resistance.

Thought about going long yen a year ago. Thought about it a few month ago. In hindsight, everything is obvious - once it reached 160, it took it a month or so until "blew up".

At this time it seems that majority of experts and forecast agree again, like in December.

Oil is the Jocker at the moment.

NEWSPAPER READING & MACRO PICTURE - Q2/2024

 I will post a string of random things, which caught me in the last month or so. Highlighted the topic which attracted my attention.

Fight of fiscal vs monetary continues. It could also be called as massive market manipulation and people misinformation.

Monetary will cause internal (maturity wall?) or external shock (Japan? China?), which will cause easing. Real asset should be in demand in inflationary panic (ht Hugh Hendry), which should follow because of fiscal vulnerability, as in UK. Such thinking is probably impatient as may sound like a trade for next 6 months. It is rather for next 5, maybe more years. 

I cannot forget the fact that quarterly non-financial profit after tax in US jumped to $2T in Q1/22 (and stayed there) from roughly $1T in Q4/19 (and many quarters before). Hm, maybe this somehow could be related to the $2-3T US annual fiscal deficit? 

After tax and interest profit margins vs. net profit margins. Tax went down, interest also (until 2022). Fiscal problem and higher for longer will be strong headwind to markets even if multiples are sustained. More like a reminder. However, S&P is probably really different now - less leverage, better businesses, which could justify elevated margins. No doubt they benefited from low interest and reduced profit taxes but they will be harmed much less by the reverse (and could be enormously benefiting from 5% interest on cash). Profit tax is the one to watch. In some places it was increased to fund the defense spendings.

John Hussman: There’s no question that innovation should be rewarded enough to preserve incentives. But my impression is that corporate profits and extreme wealth, particularly among mega-cap companies, have become a sort of “capture” or “rent” that reflects network effects, social dynamics, and general technological efficiencies that were no part of that entrepreneur’s invention, and might be better characterized as public goods. End of quote. Another reason to watch the profit taxes. It is easy to imagine e.g. 10% public goods tax and sounds attractively in some circles.

AI: The reduction in the cost of knowledge production will transform information economics.

Bloomberg Economics did a more thorough analysis of data going back to 1969. Economists Eliza Winger and Anna Wong found that aggregate spending showed few signs of slowdown before prior recessions. “Rather, spending slows moderately only when a recession is already underway,” they wrote. And it’s precisely a slowdown in goods — durable goods — which appeared to have some signaling value ahead of downturns. Services was found to be often “insensitive to recessions.”

John Authers: In other words, the bet is on that AI has raised the profit share, or the proportion of revenues that companies can keep as profit, a number that tends to mean-revert, and has underwritten a continuing secular rise in earnings growth. That’s a big assumption. End of quote. Katsenelson had a timely reminder about price of cars in 2022 and situation now. There will always be those who want to grow at the cost of profit (which will come later, after the land grab).

Howard Marks, April 30: What does matter in this department is whether rates will stick in the range of 3.0% to 3.5% for the next 5-10 years, as I think, or return to the 0-2% range that prevailed most of the time from 2009 to 2021. If it’s the former, it should follow that equity returns will be lower than they were in that halcyon period; leveraged investment strategies will be less advantaged; and returns from credit will be markedly better than they were. That’s about all I can say, but it’s a lot. End of quote.

NEWSPAPER READING & MACRO PICTURE - Q1/2024

WEB claims that thinking about macro is waste of time. However, he spends a few hours per day reading newspapers (vaguely remember that it could be even 3-4 hours daily). Somehow I cannot force myself to pay for content when there are plenty of free quality content and I would simply have no mental processing capacity to read more if I buy additional daily readings. I spend roughly 2 hours per day on "newspapers" and X. It took me more than 20 years to figure out what is useful to read and definitely it is different for every person. Those few hours is probably 70% macro, 30% business news. A few days after reading I do not remember almost anything what I read but still hope that something is sticking to the wall. You really need only one or two good insights per year.

Times are unclear and hopefully not nuclear. So far so good. The storm is coming - since 2009. In 2020 seemed like it's here. Still, bank strategists are very afraid of 2000 and 2008.

For those with ADD, fiscal policy so far is winning: 

[QT + Interest Rates] < [Budget Deficits + FED's talks]

Longer version: 

QT (-$1.4T from peak, $7.5B remain) + Interest rates (net interest for non financials in Q4/24 hit Q2/99 level and going down) < $2T budget deficit (NOW, in $23T economy) + Fed's talk (vague promise to cut acts as "Powel's Put"). Mr. Market is saying that if troubles start surfacing, QT/interest induced constrains are easily removable. Major central banks are shrinking balance sheet at roughly annual 8-10% pace. With success.

Last few weeks have brought a number of very good posts on bi-polar facts, which well explains no need for rate hikes. Last week the FED/ECB "promised" something in June. My take is that June will become September. Cuts were promised and priced in, therefore, there should be - at least 1, though it's 50/50. It's the election year.. In 2007, circumstances were different but the first cut was in September, after 9 no action meetings, 15 months after maxing out. In 2023, the last increase was in June.

Essence is always in risk vs. reward and position sizing. My take is that probably now we have a similar probability of sustained 20% jump and 30% fall in S&P (even 50% would be understandable in the latter case but so far nobody came up with a bull thesis and bear is simply not working). The US health for the next 6 months seems perfectly intact. 

5% risk free is a very good deal at the moment. 10%+ listed 1x leveraged senior/junior portfolios also look attractive (OCSL and similar). I also like dry powder they have for any dislocations. Leverage now simply pays for the high management fees.

I cannot do much because 2/3 of money are tied in private investments but 1/2 of the remaining 1/3 is yielding safely (almost) 7-8% weighted. It's good that I do not have to solve another 1/3 problem.