Contrast Capitalists

I recently visited a jewelry shop in my native town. Even though I have been there quite a few times - i observed some interesting thing. The shop was more than 100 years old. Its larger than most of its neighbors. I have heard about the quality products (gold and silver obviously) they offer. They have loyal customers who extend for generations. You see the cashier's place in the front - there is a person who is easily in his sixties - and you can guess he is the owner. The politeness and attention to details on everything happening around him cannot miss anyone's attention. Behind his chair is photos of this great grandfathers - at least six generation photos. A simple glance at them would reflect they 100 years they were in this business. Their traditional commitment to business and track record is impeccable. There is jewels all over the place. I am sure they pack everything everyday end of business, put it in an iron locker and next morning come again and put them all on display. There has to be some procedure like that to ensure the assets are all safe every single day. A careless mistake on a day, might ruin the whole business in one day.In India - it is very common to see family businesses like this that have been run for centuries. It is not only big entities - even small eateries are run over generations. Even though they had the might and intelligence to spread the business to other parts of the country - it was not a norm to do that. They often restricted themselves to their own cities and towns. They services their community with their needs. It is also very true that they employ people from successive generations. They provide livelihood to families. There is no corporate ascending ladder that you jump fast - it is a stable, slow, efficiently run businesses.

I was in a corporate meeting in my office today. There was a business proposal for a start-up company and someone was explaining the sales pitch to get some investors in. The way it works - you have some idea typically using the internet. You explain the idea to people with money. Make them invest some of their money into your firm. You use that as your seed funding and take your idea to the next level. During the presentations, I just saw something that caught my eye and left me completely mind boggling. Trying to show-case the new start-up in good limelight - they have introduced a notable silicon valley investor as a board member. The intention is to communicate that he is part of the board and his past qualification - it goes on to say investor who has made "successful exits". It left me wondering - why would someone exit his successful business? He should continue to run it, expand it and satisfy his customers. instead why would someone exit (sells) that too multiple times? Can someone be so good at so many businesses. As it turned out - he is just an investor who throws in money at prospective companies only to sell it to someone who can afford to pay more than you had invested. The investor cashes out of that business. In corporate financial sense - this is perfectly rational. The investor provides capital, flips it on a profit when things are good. Wonder - when things are good, why not stick to it and make it bigger? Probably the answer to it is - why take risks when you could sell it and take a handsome return. The whole mentality of buying / selling stocks in the open market has taken a step forward and crept into buying/selling "service" companies. People just do the flips - wonder if they are real businesses that help the society.

In the above two examples - we have seen both edges of capitalism in play. In corporate America - the usual rule is to start a business, take it to the next level where it can be sold. Move on to the next big idea. This is very prevalent in service based companies rather than manufacturing firms. The concept of customer loyalty is organization based. It is the corporate mentality of doing business. In western countries - it is also very common to keep expanding your business. You read business newspapers - every CEO would say they want to multiply the business by 10 times by next year or something similar. Needless to say - you need to talk like this to be a CEO.

It just turns out the whole mindset of an Indian business is completely different from their western counter parts. Ethics and culture are embedded into their business models. 

The biggest con - Bitcoin

As I write this post, its Aug 16th, 2017 the US market is open and trading mid-day and one bitcoin is trading around $4300. What a run it has had so far. The market share of bitcoin is around $70 billion USD. With the Dow and S&P hitting all time highs - giving handsome returns, wonder why investors would ride the bitcoin speculative wave, as everyone knows - it might be very risky. So far - the investor have been handsomely rewarded. How long could this last? Frankly no one knows!

There was a time long long ago - carts were pulled by horses or bulls. Some people contemplated the idea of operating a cart without an animal tied to it. The idea was stupid, it was thought then. The common sense was the cart wouldn't run without an animal in front of it, given what was reality at that time. History turned a new page, with the invention of mechanical motors that would operate a wheel rolling over again and again to cause forward motion. The automobile replaced carts/animals. Even though it was considered dumb at one point of time - humans then conceived that it could happen.

Is Bitcoin such a revolutionary idea that would change the world we live in on how people use money as medium of exchange?

Before we get into what it is going to be, lets see what it is now. Bitcoin as they say it is a "Digital currency". There are thousands of digital currencies on the internet.Not sure if bitcoin is any superior or inferior compared to others. There is also no guarantee this bitcoin is the best digital currency for next few years. They are being traded actively though. Bitcoin stands-out from the rest as most popular of the crypto-currencies. Even after you read multiple articles on digital currencies - it is very hard to get your head around it. Lot of things are more confusing. It is complex to the core. Something like currency should be lot simpler than that.

The biggest characteristics of bitcoin (or any digital currency for that matter) is its finite availability. It could rival to any fiat currency - that the government can print at will.

If there is an unlimited supply of bitcoin - there wouldn't be a market for it. Even though it sounds promising with respect to that fact - there is infinite number of digital currencies available over the same medium. With market forces determining the value or worth of each of them, its quite unstable.

Bitcoin is not used in day-to-day trade. Smart people would call it a financial asset rather than a currency. For now even people who own bitcoin do not consider/think them as as store of value that they plan to keep for their retirement. They think it just like any stock. They want to hold it until they think its a right price to sell. Unlike companies that have factories and machinery- bitcoin has nothing to back itself except the confidence of the bitcoin buyer. It is really a risky speculative trade. People are speculating the price of bitcoin and pushing it higher as more buyers step in than sellers.

Digital currencies would go down in history as the most successful marketing campaign that created lot of hype that would only result in an eventual and complete collapse.

In the 2000 dotcom bubble - many companies that were valued very heavily went to zero. In my opinion - bitcoin and other digital currency are no different. They will and have to go to zero. Investors would lose every bit in this speculative bubble. Of course some would make money. But the concept of digital money is fundamentally flawed.

The bitcoin endorsers use the word "Mining" that is intentionally distracting. I just checked the dictionary meaning of mining. It is digging up the earth for coal or other minerals like gold. Mining of minerals has always been an occupation since human beings first arrived on this earth. Some people took the effort to get some thing out the ground that was rare and attractive, sold it to someone who is willing to pay the price of it. This has happened generations after generations for centuries. Since the bitcoin community wants to equate the process of creating a new bitcoin - they smartly enough, borrowed a word from the real money - gold. Put in a word mining - to get the feeling to the public as though this is being "mined". They apparently "mine" bitcoins from multiple computers and by solving difficult mathematical problems - that is what they say. This is no replacement for mining something that is tangible like precious metals. Using the word mining is completely illogical for crypto assets.

The mere fact that its not being accepted to buy any significant purchase of merchandise like grocery, furniture or a hair-cut proves that its not a currency - at least yet. People exchange the bitcoins for dollar or Euro. Rather than the bitcoin itself - the dollar value behind the currency is what makes it attractive. There might be some one who is selling drugs online and would want to accept bitcoin for the convenience of being anonymous - that would at this stage be an exception and not an example. So far, the universal acceptance is not there. None of the central bankers have really backed this so far. With a large population in Africa, Asia and Latin America completely unaware of technology - a platform that offers digital currency is no where in the picture.

Gold has been a commodity all along human history. It has been elevated to money for centuries for its unique properties unlike any other metal on the periodic table. During the last bull run - it touched a high of $ 1900 for an ounce. If bitcoin can go until $4300 and possibly even more - When this bubble finally burst spectacularly- this money would flow back to the ultimate safe haven asset which is gold. It bitcoin can hit the numbers what it is now - there isn't an upper limit for gold. It could go up multiple times with ease from its current level of $1300/ounce.

What a mess?

Alan Greenspan, very famously told this about quantitative easing and zero percentage interest rate that - It was like urinating in the bed in the night. Until you wake up in the morning you don't realize what a mess you have created.

After the 2008 financial crisis - the US Fed announced to the world of the extra-ordinary measures needed to save the global economy from a 1930s style great depression by bringing down the federal funds rate to zero and buying back trillions in treasuries and mortgage bonds to support an ailing economy. We are almost nine years since and have not reached the 1% mark yet. The other Central banks of the world were no different and followed the US Fed with its quantitative easing programs.

If you can recollect what happened in 2007 - this is just before the bursting of the  US housing bubble - everything seems to be going great until one thing happened. The Fed started rising the funds rate aggressively.

It is no different now.

Its like an ailing patient on a ventilator. The patient is just fine until he is on the ventilator. The moment it is taken away - the patient is going to have complications. In medical terms - its called weaning. The patient is taken off the ventilator and the hope is he can live without it. But as soon as there is a complication - which includes unable to breathe and possibility of instant death, the patient is hooked back to the ventilator. That would be a apt description of how the US economic state is now. The 0.25% federal funds rate increase in December of 2015 and then again in December of 2016 were just token increases for the Fed to save its faces rather than for economic tightening. The patient being on ventilator for too long had become the biggest ailment than the initial disease.

With the employment numbers well under the Fed's target and inflation now creeping well above the 2% mark - also with the Dow Jones index hitting 21K - with historic consecutive winning sessions - an act not seen in last 30 years, it can be agreed that the economy is heating enough and warrants a rate hike.

If the Fed reacts, it will burst the monster bubble it created.

If the Fed doesn't react - the bubble would only get bigger and bigger, to cause a 1930 style great depression - which exactly the Fed is taking credit for saving the world from.

The bubble in the silicon valley is very obvious. If the Nasdaq 5k was a bubble in year 2000 - it is a bubble now too with Nasdaq lingering around the 6k mark. The fundamentals have not changed. The start-up environment in the silicon valley is so much heated up - it just doesn't make monetary sense. Recently Snapchat published what it thinks was its valuation of 24 billion dollars - and admitted that it may never be profitable. Any investor that is in sound mental health knows - not to throw a penny to it. If this is not a bubble what else is? Why would you want to invest money on a company which themselves say - it will only take in more money than giving it back. Who would take the loses from those transactions?

Company valuations, particularly start-up companies are simply ridiculous. There is no way - they are worth what they say they are. Investors are going to rush out of the silicon valley and no one will be spared. The party might just be over.

It is very striking that the Snapchat IPO and Dow hitting 21K on the same day - would be recollected in history as the peak moment for the whole big bubble.

For anyone who has lived through the 2003-2008, can easily re-collect the pain from the crash in the US housing prices. Proxy-government entities like Fannie Mae and Freddie Mac had loaded toxic mortgage backed securities with AAA ratings on unsure investors. It was the biggest piece of odourless crap ever assembled as investment material. When everything started collapsing the US government and treasury had to step in to save the market by buying these mortgage bonds - that no one would buy. In the process - the government only managed to increase its own debt. What wasn't good for the investor - was not good for the government. Except that it was left out in the open as the only buyer in the market. The house prices have retraced their path to the top now, thanks to the low lending rates. Now there are lot of hedge funds that have bought in to the real-estate hype and the result would be no different than what happened in 2007/2008. The mere scale of it might be much larger than 2008.

With the government and global Central banks stepping in to the bond market - the whole market is artificially priced. With all the risks mitigated by the policy makers, there isn't a free market for bonds. Why do you want to hold bonds when you could make a lot of money on a stock market running on steroids? In that case - the yields on the bonds fall dramatically and as is the case - the price of bond increases. Sovereign debt funds are squashed with bonds. What is really not priced in is the serious consequence of inflation that could have a lasting effect on bonds sold already. Just imagine the inflation reaches a 4% mark - why would you want to hold to a 10-year US treasury bond that yields 2.5 % or less.  Already the spread between the CPI and yield on the 10-year is bad. So whatever bursts the bubble - one market that is sure to get ruined is the bond market. With the patient in a ventilator for a decade- the bond market was never in fair play.

For the US Fed - It is damn if you and damned if you don't moment finally.

If the recessions in 2000 and again in 2008 were painful - the one that is getting formed in the horizon is bigger than both combined. The bigger the bubble, the bigger the consequences.

This cannot end well. Buckle up folks, it just may be dawn!