On Bitcoin, Gold and Monetary Policy

This negative article on bitcoin indirectly brought together a few disparate thoughts for me. The article's position/bias is clear - the digital currency, which has grown significantly vs. the dollar  is a speculatively bubble:


What is even more interesting, however, is the set of comments which mostly defend bitcoin. These online comments, to me, show exactly the misconceptions which drives bitcoin, gold and many arguments about US monetary policy. Let us begin!

1) Misconception: Bitcoin is a valid and perhaps best currency because it is not manipulated, transparent and free from government control.

Gold shortage?

Given the new gold backwardation, bulls have returned back in force (1, 2, 3) to explain how this will push gold higher. But does backwardation correlate with flat price?

Digging into ING US (VOYA)

After taking a position in ING US (NYSE: VOYA) at about the $25/share level, I have been fortunate to participate in the rise to above $30. The original target was around the 40-50$, with stop around $20, the ipo price. The recent rise and earnings report make this a good time to reevaluate the thesis.

The firm posted an operating gain of $0.71/share, but on a net basis lost $0.56/share. Why? In a phrase, variable annuities (p134-135). Variable annuities took a (408.4) million capital (loss) related to hedging. How can such "hedging" turn a respectable gain into a loss that reduced book value by a billion+? 

The next catalyst for GDX

I've been pretty negative on gold miners (GDX), both because of the perceived weak hands involved on the long side and the terrible capital allocation policies/rising breakeven costs of the miners. At the risk of falling into confirmation bias, the recent articles about renewed gold hedging could be the next catalyst for further gold weakness (this month's strength notwithstanding).

While the exact magnitude and effect of such selling may be difficult to predict, it is something that I believe will grow in intensity the longer gold stagnates and/or remains volatile. Taking the analogy of a new speculator who has taken multiple large illiquid long positions (and indeed higher forward buying), gold miners would rather not lock in mediocre profitability (or indeed loss) going forward. If the analogy holds, the components of GDX will hedge more if/as gold falls more as the pain grows, exacerbating the fall and creating that reflexivity that Soros speaks of.

Are Emerging Markets Diversified?

GMO's most recent yearly forecasts seem like what most people think - negative on most bonds and most US equities, but most positive on emerging market equities (but interestingly, not their debt):

How to pick a fund manager

Perhaps it is actually harder to pick a manager than to pick investments. The general statistics against active management are well-known. In 2012, for example, 63% of large cap mutual funds failed to match the market (even worse for hedge funds).

As a result, the full choice set for selecting investments includes both asset class as well as manager, and the probability of choosing a good asset class And a good manager is less than a good asset class itself. Given that most investors usually time managers incorrectly, are there some nontraditional metrics which would work?

Lampert's Folly?

Edward Lampert's credentials are impeccable - Yale Skull & Bones, Goldman Sachs risk arbitrage under Robert Rubin (Secretary of the Treasury under Clinton), and of course the billion dollar hedge fund ESL Investments that he founded. Billionaire at 41, he even talked his way out of a kidnapping during negotiations to take over Kmart. Before 2007, his culminating merger of K-Mart and Sears was applauded by both the markets and many commentators.

Since then, however, SHLD has floundered. What happened?

Conflict of Interest - Unfair but Necessary?

Misaligned incentives seem to be a common trait in selling financial products. After issuer-paid credit ratings and stock exchanges which cater to high frequency traders, even data releases are not immune to such practices. Thomson Reuters is now under investigation for releasing a well-known customer confidence survey two seconds earlier to select clients for a $6K/month fee. In terms of information fairness, they issue is clear - high frequency traders have a huge advantage other short term traders without such information. However, what is the alternative?

Single Family Rentals - Institutional Herding Continues?

I originally got interested in single-family rentals with the spinoffs of Silver Bay Realty (SBY) and Altisource Residential (RESI) in the last half year or so. These companies buy single-family homes with the intention of renting them out. Given that mortgage rates (<5%) are less than rental yields (>5%), it is typically cheaper to own than rent. On face, these companies provide a compelling statement - they effectively arbitrage low mortgage rates with the fed with tight credit standards for mortgages and have an implicit put in stabilizing housing prices.

But how much does this translate to company profits? Rental yields are usually < 10% to begin with pre-leverage (RESI presentation, slide 13) and mortgage/upkeep are ongoing while renters may leave and so profits depend on 1) maintaining a steady stream of renters while 2) keeping costs low.

Shibor - Canary in the Coal Mine?

I'm surprised that the recent Shibor spike hasn't (Shibor is the Chinese version of LIBOR) sparked more concern. After staying at less than 4% for the last year, the 3-month rate has surged to above 5%. The overnight rate has spiked even further to 13%. To put things in perspective, 2011's top five banks by profits included four chinese banks. What is happening?

One major explanation being posited is that this is just the next step in the Chinese government's attempt reduce credit expansion/leverage in the system. However, what if this is a different signal - that of a funding crisis? Such a crisis was prelude to the US-led recession of 2008.


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