Cryptos and the Everything Bubble

           Over the past couple of weeks, I observed that from my analysis stocks looked extended and could be poised for a correction.  I also noted that gold and silver were beginning to appear more bullish.

           At least in the short term, it seems that these trends are still intact.  US Treasuries are still technically bullish by my measure as well.

           The big news this past week was the pounding that Bitcoin took.  The leading cryptocurrency has fallen from about $59,000 on May 9 to $30,000 on May 19; a decline of nearly 50% in 10 days.

           The decline coincided with calls from government officials for a crackdown on the use of Bitcoin and other crypto-currencies.  This from CNBC (Source:  https://www.cnbc.com/2021/05/21/bitcoin-falls-after-china-calls-for-crackdown-on-bitcoin-mining-and-trading-behavior.html) (emphasis added):

Bitcoin’s price tumbled Friday following an intensified call from Chinese authorities to crack down on mining and trading of the cryptocurrency.

Chinese Vice Premier Liu He and the State Council said in a statement that tighter regulation is needed to protect the financial system.

The statement, released late Friday in China, said it is necessary to “crack down on Bitcoin mining and trading behavior, and resolutely prevent the transmission of individual risks to the social field.”

China’s tough talk comes just a day after U.S. officials pledged to get tough on those using bitcoin to conduct “illegal activity broadly including tax evasion.” The Treasury Department said it will require reporting on crypto transfers of more than $10,000, just as with cash.

Concerns in China centered on a number of issues. Much of bitcoin mining is done there by computer that use massive amounts of energy to solve complex math problems to unlock the cryptocurrency.

Authorities around the world have expressed worries over how bitcoin and its counterparts are used in illicit ways.

“It is necessary to maintain the smooth operation of the stock, debt, and foreign exchange markets, severely crack down on illegal securities activities, and severely punish illegal financial activities,” the statement said.

As part of its efforts to streamline the burgeoning digital currency space, China’s central bank has been one of the first in the world to develop its own digital currency backed by the yuan. The U.S. Federal Reserve said Thursday it will soon release a paper outlining its own research into the central bank digital currency area.

            I have a couple observations and a prediction.

          One, governments and central bankers around the world have severely jeopardized the future of fiat currencies via excess money creation.  Trying to regulate away from cryptocurrencies is likely not as much about stopping illicit activities and more about trying to preserve weakening fiat currencies.

          Two, as I wrote in 2017, cryptocurrencies will likely never be used in every day commerce by a majority of the population because crypto’s lack something that every currency must have – stability.

          In order for a currency to be widely accepted, those using the currency have to have an expectation that the currency will be need to have approximately the same level of purchasing power from one week to the next.  That essential currency characteristic does not exist with the current crop of cryptocurrencies.

          Now for a prediction – central bank forays into the digital currency arena will ultimately fail for the same reason that cryptocurrencies will ultimately fail.  There is nothing backing the currency.

          Central bank digital currencies will be digital fiat currencies.  Should central bank digital currencies be issued in the same massive quantities as fiat currencies are currently issued, the outcome will be the same – inflation, perhaps hyperinflation and a loss in confidence in the currency.

          There are many reasons that central banks and governments would like currencies to be 100% digital. 

          First, it will be far easier for negative interest rates to be imposed.  If all currency resides on a computer server with no option for cash, bankers will be able to easily impose negative interest rates.

          Second, if there are no transactions that take place in cash, there will be no financial privacy.  Central bankers and governments are citing this reason as the primary reason that digital currencies are necessary; to crack down and expose illegal activities.  The reality is should central bank digital currencies become a widespread reality, another of our individual liberties will no longer exist.

          It’s unlikely in my view that we get to this point any time soon.

          One, central banks are just beginning to seriously explore the idea.

          Two, it is unlikely that the populace will stand for a standalone digital currency.  Historically speaking, there is precedent for this.  Whenever currency has evolved from hard money like gold and silver to paper bills, there has been a transition period during which the paper bills have been redeemable for the hard money.

          Should central banks roll out a digital currency, a similar transition period will likely be required to get the population used to the idea.  There would probably have to be a period of time where cash AND a digital currency were used.  Then, when the digital currency was used primarily in commerce, cash could be phased out citing the fact that no one was using cash.

          Given the current level of inflation that we are witnessing, it is unlikely that there would be time to develop a digital currency and move through a transition period.  And, should central bankers attempt to move through a transition period more quickly than the population would tolerate, other, alternate currencies would be developed and used by the population.  These alternate currencies would almost certainly be something tangible like gold or silver.

          Central bankers are trapped.

          The last time we saw inflation at these levels was the 1970’s.  Federal Reserve Chair Paul Volcker prevented economic collapse and subdued inflation by raising interest rates to north of 20%.  Since money is loaned into existence in our fractionalized banking system, high interest rates meant not many borrowed and the money supply contracted.

          Here’s the rub.

          The Fed can’t pursue the same policy today.  Should interest rates move to even a more “normal” rate of 5%, the government could not afford the interest on the debt.

          The Fed has one other problem.  There is no room to cut rates when the current bubble bursts.

          In the early 1980’s interest rates were cut to 8%, the economy seemed to thrive.  After the tech stock implosion in the early 2000’s, rates were cut from 6% to about 1%.  After the financial crisis and stock meltdown from 2007 through 2009, interest rates were cut to nearly 0% and the Fed began to engage in Quantitative Easing or money creation.

          Interest rates remain at near 0% presently and money creation has intensified.

          When this ‘everything bubble’ bursts, the Fed cannot cut interest rates (unless they try to go negative which may be difficult with paper currency being used as noted above), their only option will be even greater money creation which will also be difficult given the current inflationary environment.

          When the ‘everything bubble’ bursts, we could be at the point that there are no alternatives left except take our lumps.  I expect it to be painful.

          Ultimately though, history teaches us that once we get through the downturn, we will probably move back to a sound money system because the population will demand it. 

          Private central banks are pursuing policies that make the wealthy even wealthier while lower income and middle-income workers see a greater percentage of their paychecks going to cover the cost-of-living essentials.

          And those that have saved and invested see the purchasing power of their nest eggs significantly eroded.

          That is why I have advocated for the two-bucket approach to investing since after the financial crisis.  It is now almost certain in my view that we will see inflation followed by deflation.   

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Cryptocurrencies and Other Options

Cryptocurrencies are making headlines of late.

I’ve also had many questions from clients, radio and podcast listeners and webinar participants about the advisability of storing wealth in cryptocurrencies.  In this week’s “Portfolio Watch”, I will address this topic albeit briefly due to space limitations.

For those of you unfamiliar with cryptocurrencies, they are digital currencies that use blockchain technology.

Let’s break that down.  Digital simply means that these currencies exist online; they are not physical nor are they typically backed by anything physical.

Blockchain technology is best described as a time-stamped, unalterable series of data managed by a cluster of computers not owned by any single entity or person.  Each of these blocks of data are linked together using cryptographic principles (chain). 

The blockchain network has no central authority; it is a democratized system.  It is a shared and unalterable ledger, the information is open and available for anyone to see.  On the blockchain, everything is very transparent.

To help understand blockchain, think about it this way, blockchain is a spreadsheet that is duplicated thousands of times across a network of computers. Then imagine that this network is designed to regularly update this spreadsheet and you have a basic understanding of the blockchain.

Information held on a blockchain exists as a shared — and continually reconciled — database. This is a way of using the network that has obvious benefits. The blockchain database isn’t stored in any single location, meaning the records it keeps are truly public and easily verifiable. No centralized version of this information exists for a hacker to corrupt. Hosted by millions of computers simultaneously, its data is accessible to anyone on the internet.

The common denominator among digital currencies is that they pretty much all use blockchain technology.  Each unit of digital currency exists on the blockchain.

I believe the popularity and extreme price movement in Bitcoin demonstrates that the population is actively and intensely seeking an alternative to fiat currency when it comes to storing and protecting wealth.  The chart shows the historical price of one Bitcoin.

Note the current value of about $36,000 after a recent high of more than $40,000.

A little more than 3 years ago, in the November 2017 issue of my client newsletter, I offered my opinion on Bitcoin.  At that time, Bitcoin had nearly quadrupled from $2,500 to nearly $10,000.

Often, as time passes and more research is conducted, an opinion can change, or, at the very least be somewhat modified.  Despite the passage of time and conducting more research relating to Bitcoin, my opinion today remains the same as my opinion in November of 2017.

I view Bitcoin as a speculative investment with no intrinsic value that will never be fully embraced as a currency.  I view nearly every other major cryptocurrency the same way.

There are three reasons for this opinion.

Reason One:  Cryptocurrencies don’t solve all the problems inherent to fiat currencies.

As noted above, although there may be a stated limit on the amount of a crypto currency like Bitcoin that may be created, on a very fundamental level, cryptocurrencies are really just another fiat currency.

While there is an argument to be made about cryptocurrencies being better than fiat currencies because there is a limit on the amount of the cryptocurrency that can be created, the fact of the matter is that cryptocurrencies are not backed by anything tangible like gold, silver, land or industrial goods.

That means they have no real value just like a fiat currency.

It was Voltaire who said that all fiat currencies eventually return to their intrinsic value.  I believe that there is a good chance that will ultimately be true for most cryptocurrencies too especially if there is a proactive reset at some future point which has currency, even a digital currency developed that would be backed by something tangible.

Reason Two:  Cryptocurrencies have become too speculative to be used as everyday currency.

Currency that is used to buy and sell things needs to be stable.

Consider this.

If you are selling something to someone, don’t you want to ensure that the form of payment you receive has value that is relatively stable?

Would you want to sell someone a $20,000 car today taking cryptocurrency as payment knowing that there is a real risk that the $20,000 you received for the car sale might only be worth $15,000 the very next day?

That’s why, at this point in time, cryptocurrencies are a speculative investment vehicle rather than a viable alternative currency.

When you consider what motivates someone to buy Bitcoin or another cryptocurrency, it’s speculation, not an intent to use the Bitcoin in commerce at some future point.

Reason Three:  When one reviews the chart above, it’s fairly obvious that Bitcoin is in a bubble.

Like the bubble that existed in Bitcoin 3 years ago that ultimately burst, this one will probably burst too.

It’s no secret that fiat currencies are being severely devalued and citizens are looking for alternate stores of value.  Despite the allure and novelty of fiat currencies to protect against currency devaluation, I expect that that more tangible assets will ultimately prove to be the best way to protect and preserve purchasing power.

When observing the behavior of one of the world’s richest men, this conclusion seems to be validated.  Bill Gates is now the largest holder of farmland in the United States according to “Forbes” although other individuals own more land, just not farmland.  This from “Summit News”  (Source:  https://summit.news/2021/01/15/bill-gates-buying-up-huge-amount-of-farmland-while-great-reset-tells-americans-future-is-no-private-property/) (emphasis added):

Indeed, Gates is now the biggest owner of farmland in America, according to a Forbes report.

“After years of reports that he was purchasing agricultural land in places like Florida and Washington, The Land Report revealed that Gates, who has a net worth of nearly $121 billion according to Forbes, has built up a massive farmland portfolio spanning 18 states.”

“His largest holdings are in Louisiana (69,071 acres), Arkansas (47,927 acres) and Nebraska (20,588 acres). Additionally, he has a stake in 25,750 acres of transitional land on the west side of Phoenix, Arizona, which is being developed as a new suburb.”

Gates now owns 242,000 acres of farmland across the U.S., mostly “through third-party entities by Cascade Investments, Gates’ personal investment vehicle.”

According to Forbes, it is not known what Gates is doing with the land and Cascade Investments refused to comment on the issue.

In terms of individual land owners, Gates is still far behind media mogul John C. Malone, who is in top spot with 2.2 million acres of ranches and forests and CNN founder Ted Turner, who owns 2 million acres of ranch land.

Amazon’s Jeff Bezos is also “investing in land on a large scale,” according to the report.

Other billionaires are investing in gold (Source:  http://alternativeinvestmentcoach.com/4-billionaires-buying-gold/)

Billionaires Ray Dalio, John Paulson, David Einhorn and Stanley Druckenmiller are all buying gold and publicly stating they are doing so.

I would make the point that Gates, Malone, Turner, Bezos, Dalio, Paulson, Einhorn and Druckenmiller are all storing wealth in tangible assets.

If you are tempted to buy cryptocurrencies other than for speculation, I would resist the temptation and follow the lead of these billionaires with the assets you are using to protect yourself from inflation.

Money Changes Coming?

Lost in the mainstream media coverage of the corona virus situation are the rather radical currency changes being proposed.  It’s no secret to those interested in financial and economic matters that many policy makers and government leaders have long dreamed of a day we have a cashless society.

Following the advice of former White House Chief of Staff and Chicago Mayor, Rahm Emmanuel who said that those governing should never let a crisis go to waste, there have been credible proposals recently to create a digital dollar potentially moving us closer to a cashless society.

While none of these proposals seem to have enough support presently to become reality, one should keep in mind that in the current economic and political environment, things are rapidly changing, and anything may be possible.

In my newsletter to clients this month, the “You May Not Know Report”,  I delve into this issue in greater depth.

The CARES Act passed in response to the corona-virus situation originally contained a provision for the creation of a “digital dollar” which was removed from the bill before final passage. 

          This from “Coindesk” (Source: Source:  https://www.coindesk.com/house-stimulus-bills-envision-digital-dollar-to-ease-coronavirus-recession) (emphasis added):

Proposed legislation meant to shore up the U.S. economy during the coronavirus pandemic includes a recommendation to create a digital dollar.

This virtual greenback would help individuals and families survive the shutdown of businesses and series of “shelter-in-place” orders which resulted in skyrocketing unemployment claims and a potential severe recession.

Under the draft bills shared last week, dubbed the “Take Responsibility for Workers and Families Act” and the “Financial Protections and Assistance for America’s Consumers, States, Businesses, and Vulnerable Populations Act,” the Federal Reserve – the nation’s central bank – could use a “digital dollar” and digital wallets to send payments to “qualified individuals,” consisting of $1,000 for minors and $2,000 to legal adults.

Both bills employ identical language around the digital dollar suggestion.

“The term ‘digital dollar’ shall mean a balance expressed as a dollar value consisting of digital ledger entries that are recorded as liabilities in the accounts of any Federal Reserve bank; or an electronic unit of value, redeemable by an eligible financial institution (as determined by the Board of Governors of the Federal Reserve System),” the bills read.

The Fed would likewise be in charge of the digital wallets, maintaining them for recipients. 

            Any citizen concerned about financial privacy should be highly concerned in my view.

            Presently, there is another bill pending that would resurrect the idea of a digital dollar merely one month after the first run at establishing the digital dollar failed.  (Source: https://www.coindesk.com/digital-dollar-reintroduced-by-us-lawmakers-in-latest-stimulus-bill) (emphasis added):

Congresswomen Rashida Tlaib (D-Mich.) and Pramila Jayapal (D-Wash.) introduced a new proposal to have the federal government issue $2,000 per month to residents by minting a pair of $1 trillion coins and using these to back the payments.

The Automatic BOOST to Communities Act (ABC Act) also brings back the idea of a digital dollar, describing the concept using similar language to a series of bills introduced last month.

Under the ABC Act, Congress would authorize the Federal Reserve to create “FedAccounts,” meaning “Digital Dollar Account Wallets,” which would allow U.S. residents, citizens and businesses located in the country to access financial services.“No later than January 1, 2021, the Secretary shall offer all recipients of BOOST payments the option to receive their payments in digital dollar wallets,” Thursday’s bill read.

As a side note, the bill contains some provisions that are, at least from my viewpoint, alarming.  The Automatic BOOST to Communities Act would give each of these individuals a $2000 initial payment for each member of a household, followed by $1,000 each month for each household member until 12 months after the pandemic ends.  The payments would be made in digital dollars and loaded each month to a BOOST debit card.

Payments under this proposal would be made to  taxpayers, dependents, non-citizens and individuals with no bank account, no Social Security number or no permanent address.  At the risk of offending my readers by offering an admittedly subjective opinion, that is totally, completely and utterly absurd.  Even more delusional is the notion that this program can be funded by minting two trillion-dollar coins.

History teaches us that the money printing rooster always comes home to roost.  This bill, should it pass, will just make that day happen that much faster and take away financial privacy in the process.

            But the bill does confirm that worldwide the idea of digital money is gaining steam worldwide.

            China is presently testing a digital currency.  “The Guardian” recently reported that as of the first of May, China is testing a digital currency in some parts of the country.

            In recent months, China’s central bank has stepped up its development of the e-RMB, which is set to be the first digital currency operated by a major economy.

It has reportedly begun trials in several cities, including Shenzhen, Suzhou, Chengdu, as well as a new area south of Beijing, Xiong’an, and areas that will host some of the events for the 2022 Beijing Winter Olympics.

Digital payment platforms are already widespread in China, namely Alipay, owned by Alibaba’s Ant Financial, and WeChat Pay, owned by Tencent, but they do not replace existing currency.

          Of course, cryptocurrencies originating in the private sector using blockchain technology have been around for the past decade.  Despite their longevity relatively speaking, they have not been widely used in commerce largely due to their wild price fluctuations.  Total crypto-currency market capitalization is now about $250 billion. 

            Despite the fact that crypto currencies have not been widely adopted by the world population, they have provided governments and central banks with a model to follow.  And, they are pursuing it with a vengeance.

            This from “Seeking Alpha”:

In addition to the Facebook attempt to create a digital currency, other “higher profile” efforts have also been made to bring on the digital age. For example, Sherrod Brown, a Democratic Senator, has pushed for the Federal Reserve to get into the game and produce “digital dollar accounts and wallets for all citizens.” Senator Brown attempted to get this into some of the Covid-19 legislative efforts.

In Sweden, the Riksbank, Sweden’s central bank, has looked into the possibility of a digital currency. Already, it is reported that 87 percent of money transactions in Sweden are done digitally by means of private payment companies. So, the move would not seem to be that great.  Bloomberg news even had a story on the Marshall Islands and the efforts being made to create its own digital currency.

            But it’s not just central banks looking to move to digital.  The International Monetary Fund, the central bank of central banks, is also moving toward digital.  Much of this discussion is taking place in the context of replacing the US Dollar as the world reserve currency.

            If you’re not a client of my company, but would like a complimentary copy of the may newsletter to explore this topic in more detail, give the office a call at 1-866-921-3613.