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10 Takeaways from My Chat with Michael Saylor

Many of you tuned in this week to watch the conversation between me and Michael Saylor, founder and CEO of business intelligence company MicroStrategy….

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This article was originally published by US Global Investors

Many of you tuned in this week to watch the conversation between me and Michael Saylor, founder and CEO of business intelligence company MicroStrategy. More recently, the MIT grad has become a major Bitcoin evangelist, regularly appearing at conferences and on financial news programs to discuss the significance of the first and biggest crypto.

As of June, MicroStrategy reported holding more than 105,000 bitcoins, which at today’s prices would be valued at approximately $4.8 billion.2

Below are 10 takeaways from my conservation with Michael:

1. Gold miners could learn a thing or two from Bitcoin miners.

Bitcoin miners do two things in particular that gold miners could use in their own business model. One, thanks to blockchain technology, they have the ability to validate their newly minted coins as having never been used to launder money or finance terrorism. And two, they HODL (“hold on to dear life”) their coins. Gold producers could similarly use blockchain to validate their metal’s authenticity and assure potential buyers it was not produced using child labor. What’s more, if they believe gold is so valuable, producers should take a page out of Bitcoin miners’ playbook and HODL gold.

2. If you like gold, you may like Bitcoin as well. And vice versa.

Gold and Bitcoin have obvious differences—one is physical whereas the other is digital; one has been around for millennia whereas the other wouldn’t legally be able to drink if it were a person—but they share some important similarities that might appeal to the same investors. In another Frank Talk, I argue that both assets fit the definitions of money. And as Michael points out, they’re both self-sovereign bearer assets, not subject to monetary debasement.

3. Expect and appreciate the volatility.

Investors who are new to crypto should be aware that this asset class is still very volatile. Take a look at the following table, which shows each asset’s standard deviation for the one-year period. Gold and S&P 500 stocks are the least volatile with standard deviations of ±1% over one trading day and ±3% over three days. Now compare that to Bitcoin. It would be a nonevent for the crypto to gain or lose 4% over one day, gain or lose 14% over three days. HIVE Blockchain is even more volatile. It’s well within the norm for its shares to go up or down 33% over three trading days.

Standard Deviation for One Year
click to enlarge

4. Be like Howard Hughes.

Starting in the 1960s, the eccentric investor (among many other things) Howard Hughes began buying up property around Las Vegas because he knew developers would pay top dollar it. Michael suggests we should think of Bitcoin in this way. Supply is capped at 21 million coins, and there are currently 8 billion people. “Everybody’s going to want to own this stuff,” he says, the implication being that investors may want to own it today.

5. Bitcoin today is like the internet in 1997.

Bitcoin is a vast tech network that’s growing as rapidly now as the internet was in the late 1990s. “I think there are 115 million people [using] Bitcoin right now,” Michael says, “and we’re adding 2 million users a week.” Name another investment asset with that type of growth.

6. Despite claims to the contrary, Bitcoin is an environmentally sustainable industry.

Earlier this year, Michael and Elon Musk created the Bitcoin Mining Council to monitor, among other things, energy usage among Bitcoin miners. For its first report, the group surveyed about 30% of the worldwide network and found that the energy used by miners was about 68% renewable. “There isn’t any other major industry that uses more sustainable energy than Bitcoin,” Michael says. Further, the Bitcoin network’s energy consumption is negligible relative to total global consumption.

Global Bitcoin Mining Energy Use is Comparatively Negligible
click to enlarge

7. Bitcoin may be the only investible “cryptocurrency.”

First of all, Michael believes the word “cryptocurrency” is a misnomer when applied to Bitcoin. It is not a currency, he says, but an asset and digital property. This is an important distinction. As digital property, it’s the “least likely [asset] to be impaired, least likely to be taxed and easiest to borrow against or to generate yield on,” Michael asserts. I happen to think an argument can also be made for Ether, as the Ethereum network is the foundation upon which decentralized finance (DeFi) applications are built, but there are many people who agree with Michael that Bitcoin is the only investible crypto.

8. Bitcoin could become a $100 trillion network.

You read that right. Michael believes that the Bitcoin network could eventually be valued as high as $100 trillion. If you do the math, you’ll find that for that to happen, each bitcoin would need to be worth more than $4.7 million.

9. You don’t have to invest all your money in Bitcoin, just the money you want to keep.

That’s a direct quote from Michael. He’s kind of known for the line, in fact. As much as I like the quote, I urge investors not to exclude gold, which has a centuries-long track record as a highly liquid asset. I think it’s notable that influential big-name investors such as Ray Dalio have recently come out as supporting Bitcoin. In Dalio’s case, though, the Bridgewater Associates founder says that were he given the choice between Bitcoin and gold, he would still pick gold. And in case you missed it, artificial intelligence (AI) tech firm Palantir reportedly stockpiled $50 million worth of gold bars in preparation for a “black swan event.”

10. HIVE has had an ESG strategy since day one.

ESG (environmental, social and governance) can no longer be considered a fad. Being a fund manager with years of experience in metals and mining, I’ve seen environmental impact disclosures go from being rare to frequent, optional to required. That’s why, since day one, HIVE has had an ESG strategy, mining Bitcoin and Ether using only 100% low-cost, green renewable energy sourced in Iceland, Sweden and Canada.

 

Frank Holmes has been appointed non-executive chairman of the Board of Directors of HIVE Blockchain Technologies. Both Mr. Holmes and U.S. Global Investors own shares of HIVE. Effective 8/31/2018, Frank Holmes serves as the interim executive chairman of HIVE.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 6/30/2021: Tesla Inc.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

Precious Metals

Your cash will lose at least 5% of its purchasing power in the next year

Earlier this week, Fed Chair Jerome Powell announced that the real yield on dollar cash and cash equivalents is likely to be -5% or less over the next…

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Earlier this week, Fed Chair Jerome Powell announced that the real yield on dollar cash and cash equivalents is likely to be -5% or less over the next 12 months. Yes, your cash balances will lose at least 5% of their purchasing power over the next year, and that's virtually guaranteed. So what are you—and others—going to do about it?

Assumptions: This forecast of mine optimistically assumes that 1) the first Fed rate hike of 25 bps comes, as the market now expects, about a year from now, and 2) the rate of inflation slows over the next 12 months to 5% from its year-to-date rate of 5.9%. Personally, I think inflation next year likely will be higher, if only because of the delayed effect of soaring home prices on Owner's Equivalent Rent (about one-third of the CPI), the recent end of the eviction moratorium on rents, and the continued, unprecedented expansion of the M2 money supply.

I'm a supply-sider, and that means I believe in the power of incentives. Tax something less and you will get more of it. Tax something more and you will get less of it. Erode the value of the dollar at a 5% annual rate and people will almost certainly want to hold fewer dollars than they do today.

I'm also a monetarist, and that means I believe that if the supply of dollars (e.g., M2) increases by more than the demand for dollars, higher inflation will be the result. We've already seen this play out over the past year: the M2 money supply has grown by more than 25% (by far an all-time record) and inflation has accelerated from less than 2% to 6-8%. Massive fiscal deficits have played an important role in this, but so has an accommodative Fed. Between the Fed and the banking system, 3 to 4 trillion dollars of extra cash were created over the past 18 months. At first that was necessary to supply the huge demand for cash the followed in the wake of the Covid shutdowns. But now that things are returning to normal, people don't need or want that much cash. Yet the Fed continues to expand its balance sheet, and they won't finish "tapering" their purchases of notes and bonds until the middle of next year. That means that there will be trillions of dollars of cash sitting in retail bank accounts (checking, demand deposits and savings accounts) that people will be trying to unload.

If we're lucky, the inept and feckless Biden administration will be unable to pass its $1.5 trillion infrastructure and $3.5 trillion reconciliation bills in the next several weeks. This will lessen the pressure on the Fed to remain accommodative, but it's not clear at all whether it will encourage the Fed to reverse course before we have a huge inflation problem on our hands. Non-supply-siders (like Powell) view an additional $5 trillion of deficit-financed spending as an unalloyed stimulus for the economy. Supply-siders view it as a virtually guaranteed way to increase government control over the economy and thereby destroy growth incentives and productivity.

Amidst all this potential gloom, there are some very encouraging signs, believe it or not. Chief among them: household net worth has soared to a new high in nominal, real, and per capita terms. Also, believe it or not, the soaring federal debt has not outpaced the rise in the wealth of the private sector. See the following charts for more details:

Chart #1

Chart #1 is a reminder of just how low today's interest rates are relative to inflation. Terribly low! In normal times, a 4-5% inflation rate would call for 5-yr Treasury yields to be at least 4-5%. yet today they are not even 1%. The incentives this creates are pernicious: holding cash and/or Treasuries implies steep losses in terms of purchasing power. That in turn erodes the demand for cash and that fuels more spending and higher inflation.

Chart #2

Chart #2 shows the growth of the non-currency portion of M2 (currency today is about 10% of M2). Currency in circulation—currently about $2.1 trillion—is not an inflation threat, because no one holds currency that they don't want. The rest of M2, just over $18 trillion, is held by the public (not institutions) in banks, in the form of checking, savings, and various types of demand deposits. For many, many years M2 has grown at an annual rate of 6-7%. But beginning in March of last year, M2 growth broke all prior growth records. As the chart suggests, the non-currency portion of M2 is about 25% higher than it would have been had historical trends persisted. That means there is almost $4 trillion of "extra" money in the nation's banks. This extra money has been created by the same banks that are holding it: banks, it should be noted, are the only ones that can create cash money. The Fed can only create bank reserves, which banks must hold to collateralize their deposits. Today banks hold far more reserves than they need, so that means they have a virtually unlimited ability to create more deposits. And they have been very busy doing this over the past 18 months. 

For most of the past year I have been predicting that this huge expansion of the money supply would result in rising inflation, and so far that looks exactly like what has happened. People don't need to hold so much of their wealth in the form of cash, so they are trying to spend it. But if the Fed and the banks don't take steps to reduce the amount of cash, then the public's attempts to get rid of unwanted cash can only result in higher prices, and perhaps some extra spending-related growth. It's a classic case of too much money chasing too few goods and services. And Fed Chair Powell has just added some incentives for people to try to reduce their cash balances. He's fanning the flames of inflation at a time when there is plenty of dry fuel lying around.

Chart #3

Now for some good news. Chart #3 shows the evolution of household balance sheets in the form of four major categories. The one thing that is not soaring is debt, which has increased by a mere 20% since just prior to the 2008-09 Great Recession. 

Chart #4

With private sector debt having grown far less than total assets, households' leverage has declined by 45% from its all-time peak in mid-2008. The public hasn't had such a healthy balance sheet since the early 1970s (which was about the time that inflation started accelerating). Hmmm....

Chart #5

In inflation-adjusted terms, household net worth is at another all-time high: $142 trillion. 

Chart #6

On a per capita and inflation-adjusted basis, the story is the same (see Chart #6). We've never been richer as a society.

Chart #7

Total federal debt owed to the public is now about $22 trillion, or about the same as annual GDP. It hasn't been that high since WWII. So it's amazing that, as Chart #8 shows, federal debt has not exploded relative to the net worth of the private sector. As I've shown in previous posts, the burden of all that debt is historically quite low, thanks to extraordinarily low interest rates. 

Chart #8

Chart #8 adds some color to my prior post, "What's wrong with gold?" What it suggests is that gold prices are weak today because the market is anticipating higher short-term interest rates. The red line shows the yield on 3-yr forward Eurodollar futures contracts (inverted), which is a good proxy for where the market thinks the federal funds rate will be in three years' time. Gold peaked when forward interest rate expectations were at an all-time low. Why? Because super-low interest rates pose the risk of higher inflation. With the Fed now talking about raising rates (albeit sometime next year, and very slowly thereafter), gold doesn't make as much sense because forward-looking investors are judging the risk of future inflation to be somewhat less than it was a few years ago.

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Economics

First Weekly Outflow From Stocks In 2021

First Weekly Outflow From Stocks In 2021

After a tremendous stretch of non-stop weekly inflows into mutual funds and related investment products…

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First Weekly Outflow From Stocks In 2021

After a tremendous stretch of non-stop weekly inflows into mutual funds and related investment products since before the start of 2021, the latest week showed net selling of equities for the first time this year.

According to EPFR, net flows into global equity funds turned negative in the week ending September 22 to the tune of -$28.6BN vs +$45BN last week (which was one of the top 3 largest inflows on record), alongside the sizable drawdown in markets in the start of the week (if not the end). This was the biggest outflow from US stocks since Feb 2018. Offsetting the equity outflow was a massive $39.6BN going into cash (the largest since May’21), a modest $10.0BN into bonds (the smallest in 9 weeks), and a small $84MM into gold.

A more detailed breakdown of the equity flows by geographic segment:

  • US: largest outflow since Feb’18 ($28.6bn)
  • Japan: largest inflow in 8 weeks ($0.5bn)
  • Europe: largest outflow since Dec’20 ($1.8bn)
  • EM: inflows past 7 weeks ($2.6bn)

By style, the outflows were focused on US small cap ($2.9bn), US value ($3.3bn), US growth ($9.8bn), US large cap ($14.2bn).

By sector, the selling was pervasive with ever sector seeing outflows: energy ($0.2bn), real estate ($0.2bn); outflows materials ($12mn), coms svs ($0.1bn), utils ($0.2bn), hcare ($0.1bn), financials ($0.5bn), consumer ($1.0bn), tech ($1.2bn).

A key driver for the outflow according to BofA is pessimism over passage of $1tn BIB (Bipartisan Infrastructure Bill) scheduled Sep 27th & $3.5tn BBB (Build Back Better) Reconciliation which caused 2nd biggest outflow ever from infrastructure funds and largest consumer funds outflow YTD.

As Bank of America notes, we also had the first outflow from tech funds - the perennial market generals - since June.

The net selling was concentrated in the US market, although investors also net sold Western European shares. While Europe saw a total of $1.8BN in outflows, Goldman shows that demand for German equities has cooled ahead of this weekend's federal elections as shown in the bank's chart below.

Modest net selling of global EM benchmark products was more than offset by net inflows into country-specific products, including China-dedicated funds. By sector the largest net outflows (scaled by AUM) were from industrials.

Flows into fixed income products also cooled slightly (though remained positive), while FX flows favored CNY.

The question, as BofA's CIO Michael Hartnett suggests, is whether this is the end of the torrent of institutional and retail buying observed YTD. It matters because as the Bank of America strategist notes, global equity flows & global equity prices have been 93% correlated since ‘02, with both at all-time highs although in ‘21 equity inflows are much higher (>90%) than price (12%).

The BofA strategist also notes that despite the massive inflows in 2021, broad global indices such as NYSE (US stocks, ADRs, bond ETFs), S&P500 equal weighted, and ACWI ex-US have been stuck in elevated holding patterns for the past 6 months.

Finally, while the Monday meltdown may explain the outflow, how does one explain the latest week meltup? Well, as Hartnett explains, confirming the "bubble zeitgeist", majority of traders are “full-invested bears” but the anecdotal ratio of clients in “melt-up” vs “melt-down” camps currently 8:2, hence bullish price reaction to China/Fed/fiscal events this week, i.e., a vast majority are BTFDers.

According to the BofA CIO, history says the best way to hedge “bubble” is via “long leadership, long distressed” barbell, i.e. long leadership of bull (today = IG, tech, biotech…) & long distressed, cyclical plays (today = EM, energy, small cap) as investors chase laggards (the only market that outperformed Nasdaq in ’99 TMT bubble was Russia).

Tyler Durden Fri, 09/24/2021 - 17:00
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Economics

Stocks Shrug As Taper Tantrum Sparks Bond Bloodbath; Beijing Batters Bitcoin

Stocks Shrug As Taper Tantrum Sparks Bond Bloodbath; Beijing Batters Bitcoin

US equity markets rebounded from Monday’s pukefest on Evergrande…

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Stocks Shrug As Taper Tantrum Sparks Bond Bloodbath; Beijing Batters Bitcoin

US equity markets rebounded from Monday's pukefest on Evergrande fears (which actually came to be realized as the giant property developer did indeed default on its foreign dollar bonds). But then headlines about SOEs preparing for collapse and the payment of a local yuan bond's coupon seemed to spark exuberance. A brief taper tantrum ensued in equities after the FOMC statement, which ignited momentum higher and shorts were squeezed as rates spiked. The surge in rates, however, hammered the growthier assets and Nasdaq underperformed, ending the week lower (for the 3rd straight week), while Small Caps (value) outperformed.

In case anyone doubts that algos are running the show - just look at how Nasdaq futs were levitated desperately to get back to unchanged on the week. Additionally, 4450 was the key level for S&P...

...pinned by today's option expiration...

Source: SpotGamma

If one were to guess the S&P's weekly performance after everything that happened – Evergrande's missed coupon payment, Evergrande's EV unit liquidity crunch, more hawkish than expected FOMC/BOE decisions, the FDX/NKE outlook cuts signaling supply chain stress is here to stay, chaos in DC with debt ceiling doubts and complete uncertainty over the size (if any) of a new stimulus bill, crypto carnage, and weak seasonals - we suspect the vast majority of people would have predicted steep declines... as opposed to modest gains.

(h/t @knowledge_vital)

BTFD, right? 'Bad news is good news' right?

After the Monday rout, the short squeeze was unleashed and got back to even on Thursday... running out of ammo again to maintain the lift into Friday...

Source: Bloomberg

Notably the rotation back to Small Caps (value) from Nasdaq (growth) stalled today at a key resistance level...

Energy stocks went from worst to first this week after plunging almost 6% on Monday to ending the week over 3% higher (followed by Financials). Utes  were the biggest losers...

Source: Bloomberg

Evergande's dollar bonds are trading 25c on the dollar and the stocks tumbled another 7% this week (helped by a brief reprieve midweek which was reversed quite quickly) following last week's 30% plunge...

Source: Bloomberg

Oh, and don't forget the debt ceiling debacle looms over all of this...

Source: Bloomberg

Oh, and the market is now pricing in at least one rate hike by the end of 2022...

Source: Bloomberg

Treasury yields rose for the 5th straight week (biggest weekly spike in yields since March). Notably, the move was entirely contained in the last two days which were the biggest 2-day spike since the first week of March. Aside from 2Y, the move was surprisingly uniform with the entire curve up around 9bps...

Source: Bloomberg

2Y yields rose back above FF and 5Y yields pushed up to their highest since February

Source: Bloomberg

30Y Yields spiked up to post-payrolls highs...

Source: Bloomberg

The Dollar ended marginally higher on the week but was whipsawed around on China and Fed headlines...

Source: Bloomberg

Cryptos were clubbed like a baby seal this week, hit on liquidity needs around Evergrande's broad-based degrossing and on China's statement making crypto transactions "illegal". Bitcoin was actually the least bad horse in the glue factory but everything was hit...

Source: Bloomberg

Bitcoin has remained above $40k though for now...

Source: Bloomberg

Bitcoin found support at its 100DMA three times this week...

Source: Bloomberg

A noisy week for commodities saw Crude outperforming along with modest gains for copper while PMs were very modestly lower...

Source: Bloomberg

WTI rallied back above $74, its highest since mid-July...

Source: Bloomberg

And gold ended back below $1800...

Finally, Goldman had a warning this week. Valuation is not typically the cause of a bubble bursting and stocks can stay 'expensive' for a long time.

But over a long time, the returns that you might expect to get from investing in equities tend to be far smaller when you buy stocks at high valuations than when you buy them when they are 'cheap'.

Oh and remember, tapering is not tightening so BTFD!?

Source: Bloomberg

You are here.

Tyler Durden Fri, 09/24/2021 - 16:01
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