Two observations about money

[7 min read]

Let’s begin the week with two observations about money. First, it’s no good if you can’t spend it. Second, if you want to preserve purchasing power, sometimes you have to invest your money in an asset that may not be terribly liquid right now. Later, when you need to sell it for whatever passes for money, you’ll be able to.

These two imperatives — preserving value but being able to sell quickly and easily (liquidity) — can be at odds. But where you put your money also depends on what you’re trying to do. Are you trying to make more money? Or are you trying to store value, preferably in asset that doesn’t lose ground to inflation over time?

Enough with the theory. I’m talking about bitcoin and commodities. Bitcoin, as you can’t help knowing if you have any friends who own it, is on a tear. Last I checked, it was nearly US$57,000. That says more about the decrease in value of the US dollar than anything. But it also says that a larger number of institutional investors now believe it’s prudent to hold some of their wealth in a digital asset — one not controlled by a government.

But you wouldn’t spend it, would you? Bitcoin is too volatile at the moment to be used as money. It’s perfect if you’re using it as a vehicle to speculate (undoubtedly some buyers are trying to get rich quickly…but rich in US dollar terms, not BTC terms). However, if you’re a long-term HODLer, you’re banking a change in our financial system — from centralised, government-controlled money, to decentralised, marketplace driven money.

Real assets versus stocks

Meanwhile, take a look at the chart above. It’s the ratio between the S&P GSCI Commodity Index and the S&P 500. Or, to break it down in simple terms, the ratio between stocks as an asset class and real assets like oil, gas, coal, wheat, corn, lumber, coffee, cocoa, sugar and gold. What is this chart telling you about money?

Well first you can see how cheap commodities were relative to stocks in 1999. This was one year before China entered the World Trade Organisation. A huge surge in demand was just over the horizon. This would trigger the three phases of Australia’s commodities boom over the next decade. First, a surge in prices based on demand, second a surge in investment to meet the higher demand and third, a surge in production based off the previous investment.

The 2008 GFC dealt a hammer blow to ALL equities. But the strong performance of commodities lasted until around August of 2011. That’s when the gold price peaked. Then, in October of 2014, the oil price collapsed. From there, it was curtains for commodities.

Until now. The global shutdown in response to the pandemic almost one year ago coincided with a cyclical low in commodities relative to the S&P 500. Since then, you’ve seen breakouts in individual commodities like lumber and copper. Copper futures, for example, went over $4/pound for the first time in nine years on Friday (since September of 2011, to be precise).

So what? So what if this is a cyclical change in financial markets away from overvalued equities and toward undervalued commodities? The chart says a reversal is due. And trillions in pandemic stimulus and spending may finally starting to be show up in assets other than stocks.

It MAY be showing up in the real economy, as pent-up consumer spending increases. And it MAY final show up in state-sponsored infrastructure investment/spending. The weather-related blackouts in Texas last week could be the catalyst for several trillion dollars in new spending by Uncle Sam.

And then there is the mysterious drop off in COVID-19 cases, hospitalisations, and deaths in the US. In the US, COVID-19 hospitalisations are down 56% from their peak on 6 January. New cases per day are down 73% from their peak on 11 January and are at their lowest level since late October of 2020. And thankfully, deaths attributed to COVID-19 are down 43% from their peak on 26 January (at 3,449) per day.

It’s a Biden miracle! The dramatic fall in cases may have something to do with revised guidance on PCR testing issued by the World Health Organisation on 20 January (the day of Joe Biden’s inauguration). The science isn’t settled. But it’s possible the high number of cycles in PCR tests was generating a high number of false positive test results, thus overstating the number of infectious COVID-19 cases.

Or, it could be that natural immunity is higher than testing would indicate. That’s the view of Dr Marty Makary from the Johns Hopkins School of Medicine and Bloomberg School of Public Health. Dr Makary reckons the US could have herd immunity by April. His article published this weekend in the Wall Street Journal is sure to raise hopes (and eyebrows).

What if the end of the pandemic is nearer than we thought? What if a combination of natural immunity, plus the vaccination of the most vulnerable, plus the success of vaccines against variants from the UK, South Africa, and Brazil, means COVID-19 numbers are on the decline across the board?

It would be good news to everyone except power-drunk public officials and politicians. COVID-19 has been a godsend to would authoritarians the world over. If it quickly recedes as a public health risk, you’ll see how desperately they hang on to the emergency powers they granted themselves.

What about financial markets? Rising bond yields and commodity prices are ‘pre-incident indicators’ of inflation. Central banks assure us that they have things under control. But don’t be so sure. And remember, inflation may, for a time, look like a bull market in the form of rising asset prices.

But monetary endgames inevitable destroy a lot of wealth. In The Bonner-Denning Letter, Bill and I have argued that wealth preservation from these levels is more important than making more speculative gains. It’s a hard emotional position to maintain. Don’t give up now.

Regards,

Dan Denning,
Editor, The Rum Rebellion

Peak Lunacy?
Bill Bonner

We are still skipping ahead in the as yet unwritten ‘Big Black Book of Financial Disasters’. Thumbing over a few pages, we find this passage describing 2021:

‘As the US economy became more dependent on fake money…it also came to be weirder in other ways. Investors, for example, were willing to put their money into projects with no products…no profits…and no hope that earnings would ever justify the price.

It was as if they came to favour schemes which — like their money itself — had no measurable substance.’

Yes, Dear Reader, we will not escape the judgment of history. It will come down on us like a hammer on an egg.

Puzzling announcement

And today, colleague Dan Denning alerts us to a fascinating ovum.

On Wednesday, The Motley Fool tweeted:

‘We’ve got BIG NEWS! We’re buying $5 million in Bitcoin on our own balance sheet.

‘That’s right. $5 million.’

Whoa! We must be near peak lunacy. When otherwise sane and sensible people begin to wager on a project with ‘no measurable substance’, the hammer cannot be far away.

Motley Fool is a financial and investing advice firm…our analysts would say that it ‘operates in the same space’ that we do. And it’s been around almost as long as we have, providing what we presume is decent advice.

But where we bob…Motley Fool weaves. It is a company of optimists…of forward-looking alpha seekers, with a cheerful demeanour and respectable social standing.

Your editor, on the other hand, fits in neither in Washington nor on Wall Street. He feels like an imposter in a business suit…suspects most new technology is a waste of time…and sees armed Greeks peeking out of every wooden horse…

And while your editor and his small group of colleagues — Dan, Tom Dyson, and Joel Bowman — look at the macro picture, connecting the dots to understand what is really going on, the Motley crew focuses on micro analysis (trying to find the best stocks), à la Warren Buffett.

Which is why Motley Fool’s announcement is particularly alarming.

‘Have the Fools lost their minds?’ is our first question…to which we respond in the negative — ‘Probably not.’

‘Is this an investment move…or a publicity stunt?’ is the follow-on interrogatory.

We don’t know.

Greater fool

When it comes to bitcoin, traditional investment analysis is as useless as a Senate Committee. There is no way to add up bitcoin’s anticipated earnings and discount them to present value. There are no earnings…never will be.

Which makes this a macro play…and an exceptionally reckless one, in our opinion. Bitcoin has gone up 80% this year. The Fools are betting that it will go up more. Why? Because it has gone up!

Pure hopium, in other words…the Big Mo…you buy something, hoping that there is a greater fool who will later buy it from you at a higher price.

This is not the way the man from Omaha would do it.

And who is that greater fool?

Well…maybe it’s MicroStrategy CEO Michael Saylor.

We wrote about him 20 years ago, when he said something particularly idiotic.

‘Information wants to be free,’ said he…providing a slogan for the dreamers of the dotcom bubble era.

Information may want to be free. But MicroStrategy, which provides software for various business applications, keeps its own info in chains…renting it out only to paying customers.

And the ‘Information Revolution’ for which Saylor carried the flag two decades ago was largely a flop.

Growth rates did not go up; they went down. People did not get richer; most got poorer. The world was not turned into an enlightened Eden in the 21st century; it became a mess of war, debt, and dopiness.

And now, French researcher Michel Desmurget finds that our IQs go down in direct proportion to the number of hours we spend enjoying our electronic diversions.

Yes, that is what the Information Age has wrought so far. We are dumber, more impoverished, and more ready than ever to trade something for nothing.

For what is an ‘investment’ with no investment return? What is something worth when it has ‘no measurable substance’?

Intoxicating fumes

And what’s this? Here’s Saylor again…ringing a bell. Bitcoin.com reported in December:

‘MicroStrategy started buying large amounts of bitcoin in August via Coinbase’s institutional service, making the cryptocurrency its primary reserve asset. After exhausting its own excess cash, the company raised funds by selling $650 million worth of convertible senior notes to buy more bitcoin, causing Citigroup to downgrade its stock. At the current price, MicroStrategy’s 70,470 bitcoins are worth more than $1.6 billion.’

Yes, MicroStrategy embarked on a macro trade to fluff up its balance sheet — trading real business earnings for the intoxicating fumes of a cryptocurrency.

And then, Saylor — a certified genius…a Musk without Tesla — went further, borrowing hundreds of millions to buy more! And he scored a big success.

No kidding. It sounds like a joke. It sounds like someone is pulling our leg so hard, it’s coming out of its socket. But Saylor has doubled his company’s investment in the last two months!

Raving lunacy

Caution: The events described in this Diary are not things you want to try at home…not without a psychiatric professional standing by.

Instead, it’s the sort of raving lunacy people get up to when prices are fake, markets are fake, and interest rates are fake…

The fools begin frothing at the mouth and eating the rug.

And they make money…for a while.

This week we will skip ahead a little further, to when the meds kick in…

Regards,

Bill Bonner,
For The Rum Rebellion