A Phenomenal Year

Doug Nolan

2017 was phenomenal in so many ways. The year will be remembered for a tumultuous first year of the Trump Presidency, the passage of major tax legislation and seemingly endless stock market records. It was a year of synchronized global growth and stock bull markets, along with record low market volatility. It was the year of parabolic moves in bitcoin and cryptocurrencies. “Blockchain the Future of Money.”

Yet none of the above is worthy of Story of the Year. For that, I turn to this era’s Masters of the Universe: global central bankers. 2017 was a fateful year of central bank failure to tighten financial conditions in the face of bubbling markets and economies. Fed funds ended the year below 1.5%, in what must be history’s most dovish “tightening” cycle. The Draghi ECB stuck to its massive open-ended QE program, though reluctantly reducing the scope of monthly purchases. In Japan, the Kuroda BOJ held the “money” spigot wide open despite surging asset markets and a 2.7% unemployment rate. As for China, the People’s Bank of China was an active accomplice in history’s greatest Credit expansion.

Loose global financial conditions fed and were fed by record Chinese Credit growth. After almost bursting in early 2016, the further energized Chinese Bubble attained overdrive “terminal” status in 2017. Importantly, another year passed with Beijing unwilling to forcefully rein in rampant excess. The situation becomes only more perilous, with global markets increasingly confident that Chinese officials dare not risk bursting the Bubble. Powerful Chinese and global Bubbles were instrumental in stoking Bubble excess throughout the EM “periphery.” In the face of mounting fragilities, “money” inundated the emerging markets. What is celebrated in 2017 will later be recognized as dysfunctional.

Coming into 2017, there was some concern for a tightening of financial conditions. U.S. unemployment was below 5% and consumer price inflation was on the rise. A U.S. tightening cycle was expected to support the dollar, while a strong greenback risked pressuring currencies and liquidity conditions in China and EM generally. As the year progressed, however, it became apparent that seemingly nothing would budge the Fed from their commitment to an ultra-dovish gradualist approach to rate “normalization”.

And with virtually all assets experiencing price inflation at multiples of financing costs (short-term rates and market yields), financial conditions only loosened further as the Yellen Fed hesitantly took three little baby-steps (boosting rates a mere 75 bps). A 70 bps 2017 jump in the two-year did not inhibit a four bps decline in 10-year Treasury yields. Of course, the flattening yield curve was interpreted as a warning against further Fed “tightening”. In reality, historically low global bond yields were an indication of extraordinarily loose financial conditions, along with perceptions that central bankers would ensure finance remained loose for years to come.

December 19 – Business Insider (Camilla Hodgson): “Corporate borrowing helped push global debt issuance to a record $6.8 trillion this year, according to… Dealogic. Borrowing by corporates — which accounted for more than 55% of the $6.8 trillion — and governments reached a new high in 2017… ’The debt issuance is pretty much off the charts everywhere,’ AJ Murphey, head of capital markets at Bank of America Merrill Lynch told the Financial Times. ‘Latin America had a good year. Asia had a great year. And yet we see money coming from other regions into the US and European markets,’ he said.”

December 20 – ETF.com (Drew Voros): “As of last Thursday, the amount of new assets flowing into U.S.-listed ETFs totaled $466 billion, putting the milestone of $500 billion in new assets for the year closer into view, which would be almost double the previous annual record of new ETF assets. What’s more, combined with performance, the asset inflows grew the ETF market to $3.4 trillion—almost $1 trillion bigger than where the market sat a short year ago.”

December 28 – Bloomberg (Patrick Clark): “Your home may not have made the same gains as stocks or bitcoin, but it still was a robust year for the U.S. housing market. The value of the entire U.S. housing stock increased by 6.5% -- or $2 trillion -- in 2017, according to… Zillow. All homes in the country are now worth a cumulative $31.8 trillion. The gain in home values was the fastest since 2013…”

December 26 – Bloomberg (Tom Metcalf and Jack Witzig): “It’s pretty simple: in three decades since the Cboe Volatility Index was invented, 2017 will go down as the least exciting year for stocks on record. There are three trading days left and the VIX’s average level has been 11.11, about 10% lower than the next-closest year. It’s tempting to say nobody thinks it will last, but that would be to ignore the walls of money that remain stacked up in bets that it will. Going just by the sliver represented by listed securities, about $2.4 billion is in the short volatility trade as of this month, the most on record. Hundreds of billions more are betting against beta in things like volatility futures.”

When the Fed initially adopted crisis-period QE to reliquefy financial markets, they were clearly on a slippery slope. After the Fed in 2011 revealed its “exit strategy,” I titled a CBB “No Exit.” What I did not anticipate was that the Fed would in a few years again more than double balance sheet holdings to $4.5 TN. In 2012, with Draghi proclaiming “whatever it takes,” I wrote that it was a “pretty good wallop of the can down the road.” I never thought it possible that the Germans would tolerate year-after-year of massive ECB monetary inflation. Yet when I ponder a historic failure of central bankers to tighten conditions in 2017, my thoughts return to chairman Bernanke’s 2013 “the Fed is prepared to push back against a tightening of financial conditions.”

The epic untold story of 2017: markets achieved high conviction that the Fed and the cadre of global central bankers would not tolerate even a modest tightening of financial conditions. No amount of stock market speculation would provoke tightening measures. Even as equities markets overheated, chair Yellen unequivocally communicated the Fed’s lack of concern. Greenspan’s old “asymmetrical” on steroids. To be sure, markets harbor no doubt that a 20% S&P500 decline would spark a robust Federal Reserve crisis response.

As such, booming equities put no pressure on bond prices. Market concern for a destabilizing fixed-income deleveraged episode disappeared. Indeed, the greater the risk asset Bubble the more certain the bond market became of an inevitable redeployment of QE measures. And with bond markets well under control and confidence in central bank market liquidity backstops running high, why wouldn’t the cost of market insurance sink to record lows? Writing flood insurance during a drought. Moreover, with cheap insurance so readily available, why not push the risk-taking envelope? Build lavishly along the beautiful coastline.

Throughout the markets, speculative forces became only more deeply entrenched and powerfully self-reinforcing. It was a veritable tsunami of “money” into passive equity index, corporate bond and EM ETFs. Why not? Markets are going up, while active managers might adjust to the risk backdrop and underperform index products. It was a year where it never seemed so patently rational to uphold faith in central banking and “invest” in “the market”.

Markets are dominated by Greed and Fear. When central banks banish the latter, one’s left with an overabundance of the former. I chuckle these days when thinking back to the late-eighties as “the decade of greed.” And when it comes to The Year of Greed, most would think of “still dancing” 2007 or “dotcom” 1999. But in terms of global excess across various asset classes, ’99 or ’07 Can’t Hold a Candle to 2017. Booming equities, strong returns in fixed income and still about $10 TN of global sovereign debt sporting negative yields. Phenomenal.

The S&P500 returned 21.8% (price and dividends). The DJIA surged 25.1%. The Nasdaq100 gained 31.5% and the Nasdaq Composite rose 28.2%. Facebook rose 53.4%, Amazon.com 56.0%, Apple 46.1%, Netflix 55.1%, Google/Alphabet 32.9% and Microsoft 37.7%. Tesla jumped 45.7%, Micron Technology 87.6%, and Nvidia 81.3%. The Nasdaq Computer Index gained 38.8%. The Semiconductors (SOX) rose 38.2%, and the Biotechs (BTK) jumped 37.2%. The Homebuilders (XHB) gained 32.7%. The Broker/Dealers (XBD) gained 29.2% and the Banks (BKX) rose 16.3%. Bank of America gained 33.6%, Citigroup 25.1% and JPMorgan 23.9%.

Globally, Japan’s Nikkei gained 19.1%. Asia bubbled. Major indices were up 21.8% in South Korea, 27.9% in India, 36% in Hong Kong, 20% in Indonesia, 48% in Vietnam, 18% in Singapore, 22% in China (CSI 300), 15% in Taiwan and 14% in Thailand. In Europe, Germany’s DAX gained 12.5%, Italy’s MIB 13.6%, and Franc’s CAC 40 9.3%. Notable EM gains included Turkey’s 47.6%, Poland’s 23.2%, Hungary’s 23.0%, Brazil’s 26.9%, Chile’s 34.0% and Argentina’s 77.7%,

This has been going on for so long now that it’s all accepted as normal. Three decades of financial innovation and evolution have witnessed virtually the entire world coming to be dominated by marketable finance. In the U.S., Total Securities (Debt and Equities) are approaching $90 TN, or about 450% of GDP. This compares to cycle peaks 379% in 2007 and 359% in early-2000. And the greater the inflation of this historic financial balloon, the more convinced the markets become that central bankers won’t dare take the punchbowl away. It was as if 2017 was the year that central banks convinced the markets the party doesn’t have to end. Let the good times roll. Roll the dice.

Not to be a party pooper, but it’s not a good idea to rouse a crowd of drunks with the idea that plentiful “hair of the dog” will be available to nurse through any potential hangover.

I miss former ECB President Jean-Claude Trichet’s “we never pre-commit.” Especially in a world dominated by marketable finance, central bank pre-commitments will be embedded in market perceptions, expectations and asset prices. Yet the world’s central bankers made the most outlandish pre-commitment ever – they committed to years of ultra-low rates, long-term yield control, liquidity abundance, and unwavering market backstops. Recessions and bear markets will no longer be tolerated. “Whatever it takes.” “Push back against a tightening of financial conditions.” Justify it all by fixating on (slightly) “below target” aggregate consumer price inflation – in a maladjusted globalized economic structure replete with extreme inequities and overcapacities.

Bull markets forever. Capitalism without downturns. Enlightened monetary management coupled with stupendous technological innovation. It all came together to ensure a Phenomenal 2017. Enjoy, but don’t for a minute allow yourself to be convinced it’s sustainable. The underlying finance is phenomenally unsound. Crazy late-cycle excess. Inflationist central bankers have actively promoted the greatest inflation and mispricing of financial assets in human history. Notions of endless cheap debt have manifested Wealth Illusion of unparalleled global dimensions.

Whether in U.S. equities, European fixed-income or Chinese apartment prices, Bubble psychology this deeply embedded is resolved only through pain, dislocation and crisis. I never bought into the comparisons of 2008 to 1929 - nor the “great recession” to the Great Depression. 2008 was for the most part a crisis in private Credit, with government debt and central bank Credit (fatefully) unscathed. In contrast, the bursting of the super-Bubble in 1929 unleashed a global systemic crisis of confidence in finance and policymaking more generally. In important respects, 2017 reminds me of reckless “caution to the wind” late-twenties excess in the face of darkening storm clouds both domestic and global.

Conventional wisdom on Japan is wrong

Solving its economic problems means doing something about private sector surpluses

Martin Wolf

Why is Japan finding it so difficult to raise inflation to its 2 per cent target? Why has its monetary policy become so extreme? Why is Japan’s public debt so remarkably high? The answer is that the country shares challenges confronted by other high-income economies, but in extreme form. This does not mean its situation is disastrous. It means that conventional wisdom is misleading.

Despite the efforts of the Bank of Japan, year-on-year inflation (without fresh food and energy) is only 0.2 per cent. Yet nearly five years have passed since, in concert with the government, the BoJ declared its intention to hit a target of 2 per cent inflation. Then, in April 2013, it announced “quantitative and qualitative easing”, which unleashed a huge expansion of its balance sheet. In January 2016, it announced a modestly negative rate on new bank reserves. In September 2016, it announced “yield curve control”. It has even said that it would continue to buy assets until inflation “exceeds the price stability target of 2 per cent and stays above the target in a stable manner”. That is a commitment to future irresponsibility.

Yet even all this has failed. This is not because these measures — supported by expansionary supplementary budgets — have failed to stimulate the economy. The rate of unemployment has fallen to 2.8 per cent, a level last seen in 1994. The Organisation for Economic Co-operation and Development has forecast growth at 1.5 per cent this year, up from 1 per cent in 2016, and it expects growth of 1.2 per cent and 1 per cent, in 2018 and 2019 respectively, both slightly above potential. Moreover, gross domestic product per head grew at close to the average rate of OECD members between 2012 and 2016. (See charts.)

Yet the anchoring of inflation expectations appears so strong — at about zero in Japan — that wages and prices remain sticky. Does this matter? In an inescapably slow-growing economy, such as Japan, near-zero inflation does limit the effectiveness of monetary policy in a downturn, since it makes it harder to deliver negative real interest rates. Yet recent experience suggests monetary policy still works. The failure to raise inflation appears no disaster.

Two more important challenges exist. On one of these, current orthodoxy is right. On the other, it is wrong.

Where orthodoxy is right is on productivity. Given Japan’s demography and currently low unemployment, raising productivity is essential, though increasing participation of women and older people also matters. Fortunately, Japan enjoys room for productivity improvement: its average productivity per hour is among the lowest of the high-income countries; big business is far more productive than smaller firms; and manufacturing vastly more productive than services.

Where orthodoxy is wrong is on public deficits and debt. It is true that gross debt is 240 per cent of GDP and net debt about 120 per cent. Without elimination of the structural primary fiscal deficit (now close to 4 per cent of GDP), debt ratios are likely to rise still further in future. It is not surprising that official institutions — the OECD, the International Monetary Fund and the Ministry of Finance — agree on structural tightening. Yet there are two objections. 

The first is that the BoJ holds more than 40 per cent of all Japanese government bonds. It can continue to hold this debt forever, should it need to do so. It can also continue to pay no interest on commercial bank reserves if it wished. It need only change required reserves. More fundamentally, the Japanese public is the creditor: it is not hard to see ways for the government to manage its liabilities to the public. When the government ceases to run primary deficits, it could, for example, convert its debts into irredeemable low-yielding bonds.

The more important point is that the government’s persistent deficits are simply the mirror image of the private sector’s huge and persistent financial surpluses. There is no point in discussing how the government will eliminate the former without indicating what is likely to happen to the latter.

One possibility is for Japan to run far larger current account surpluses. In 2015, for example, that would have required a current account surplus almost twice as big, at close to 6 per cent of GDP. Foreigners would surely not have liked that. The alternative is for the Japanese private sector to invest more or consume more (or both). The problem with the first option is that Japan’s private sector already has an exceptionally high investment rate, especially for a high-income country with structurally low growth. The difficulty with the latter is that Japan’s household savings rate is already close to zero. Consumption will only rise if household income does.

The solution is not to tax consumption, as respectable opinion suggests. The solution is to tax savings. Uninvested and undistributed profits need to be turned into consumption. That could be done by “expensing” investment, while (quite logically) eliminating depreciation allowances.

Conversion of uninvested and undistributed corporate profits into private consumption would eliminate the private sector surpluses and so the need for offsetting public sector deficits. In the absence of such policies, efforts to close the fiscal deficits are likely to fail, since, as has happened so often before, they are likely to tip the economy back into recession. In the absence of some such reform, the Japanese private sector is doomed to lend to the government the money it cannot currently use, in the sure and certain knowledge that it will never get back in full what it has lent.

Fiscal tightening is the respectable solution to Japan’s soaring public debt. On its own, however, it cannot work.

The Death of Volatility?

By Tim Taschler, CMT, Sprott Global Resource Investments

On November 21, Venezuela failed to make $247 million in coupon payments on its dollar bonds due in 2025 and 2026. These bonds now trade at around 22 cents on the dollar, a decline of 78 percent below par. Recently, the SOX (semiconductor index), Figure 1, gave up six weeks of gains in three days.


Figure 1: Semiconductor Index (SOX)
Source: StockCharts.com as of December 1, 2017

Although the above two examples show that volatility (i.e. potential big moves in an asset or a market) still exists, it remains at all-time lows. Volatility (frequently referred to as vol) in the S&P500 is a record low 6.4.[i] For reference, in 2008 volatility soared from 20 to over 60 as the global financial crisis unfolded. During the 1987 crash, volatility spiked to over 170 (with the Dow down 20 percent in one day).

These past several years, spikes in volatility (as measured by the VXO volatility index) have been relatively sharp, but are quickly sold. As JPM’s quant Marko Kolanovic put it via ZeroHedge: “Shorting volatility is a multi-year alpha generating strategy utilized by the largest pension funds, asset allocators, asset managers and hedge funds alike that has profited from selling into short-term vol spikes (similar to ‘buying the dip’).”

Figure 2, below, shows the VXO volatility index from 1986 through today.


Figure 2: VXO Volatility Index
Source: StockCharts.com as of December 1, 2017

So what is selling volatility?  You can do it via volatility futures or by selling options (puts and calls) on stocks and ETFs. When I was an option trader on the floor of the CBOE in the late 80s, we sometimes referred to selling vol as “picking up nickels in front of a steamroller.”  In other words, it worked for long periods because everyone knows that steamrollers are slow movers although, every now and then, you are flattened.

In 1987, the 20 percent plunge in the Dow (Figure 3) began several days before as the market fell 14 percent into October option expiration Friday, a time when monthly puts and calls expire. Many think that one of the main culprits of the crash was the advent of portfolio insurance, something new at the time that used option positions to hedge portfolio risk. Whatever the cause, several days of selling brought on more selling until a panic ensued and the markets plunged.


Figure 3: Dow Jones Industrial Average (1987)

Source: StockCharts.com as of December 1, 2017

Now, focus on the VXO in 1987 (Figure 4), when it surged from an average of about 25 to 172.79 over a three day period – an almost a 700 percent increase.

Figure 4: VXO Volatility Index (1987)
Source: StockCharts.com as of December 1, 2017

What most people don’t realize is that during the crash, the price of both calls and puts went higher, even as stock prices went lower. Puts should go up as the underlying asset price moves lower, but one would expect calls (bets on higher prices) to go down with stock prices. However, with the massive surge in volatility, calls and puts went up, purely as a function of volatility. Many people got hurt that day. I saw many people that were covered call writers (buy the stock and sell a call for income – and what is touted as downside protection) hurt badly when the stock they owned went down in price and the call they had sold short went up in price. People who did this on margin (borrowed money) had to add cash to their account to avoid liquidation, usually at terrible prices that locked in large losses.

Today, it’s not just income-seeking ETFs, mutual funds and pension funds selling volatility, but also mom and pop (Figure 5).




Figure 5:Who is selling volatility?

Volatility is a function of the natural unpredictability that all financial markets reflect. Today there is no fear, none. People sell volatility without recognition of the risk. As the gentleman in the article above said, “Today I just sat back, ate some popcorn and cashed in my profits.”  It’s that easy.

But the problem with picking up nickels in front of a steamroller is that complacency sets in; people stop watching the steamroller, and a sudden shift in dynamics causes the steamroller to speed up unpredictably. Having been on the exchange floor in 1987 and watched the carnage, which included bankruptcies and grown men sitting on the trading floor in tears, I can’t sell volatility. Sure, it can work for days, weeks, months, and now, years, but it can end violently and wipe out all of one’s profits, and more, in a heartbeat. Nevertheless, here we are, in late 2017, with “the largest pension funds, asset allocators, asset managers and hedge funds alike,” along with mom and pop, shorting volatility.

I think that the recent press release and Tweet (Figure 6) from President Trump sum up just how much complacency there is.


Figure 6: President's tweet and statement reveal complacency

It is amazing that the President of the United States is talking about a 350 point market drop (the Dow), one that represents only a 1.4 percent decline (Figure 7) as if it were a meaningful decline – 1.4 percent, really?  Note that the market closed down only 40 points (0.17 percent) on the day. Yet, people believe they should sue ABC for all the damages. It is a sign of the times.


Figure 7: Dow Jones Industrial Average
Source: StockCharts.com as of December 1, 2017

Here we are with a total global debt of over $217 trillion, an amount equivalent to 325 percent of world GDP (i.e. debt is now 3.25 times greater than global annual production). At the same time, money has flowed from active money managers to passive funds (Figure 8) such as the SPY (S&P500) and DIA (Dow Jones Industrial Average) ETFs. Indexing is all the rage as markets go up and volatility is nonexistent.


Figure 8: Cumulative flow into passive vs. active funds

I’ve watched the markets closely since the late 1980s and this year’s price action stumps me. It has been a bit similar to 1999. However, I don’t remember seeing large spikes in selling pressure, causing the major indexes to lose 1 percent or more in a matter of hours (or minutes) only to stop and reverse. Sellers disappear and a steady bid pushes prices higher until the losses are all but erased – just like Friday’s 350-point plunge being bought and the Dow closing down only 40 points.

It’s remarkable and unprecedented. Volatility is not dead, just dormant. It will return, and the result will probably be much worse that the current vol-selling crowd anticipates.

[i] Using SPX 100-day realized (actual) volatility

Getting Technical

Commodities: The Next Hot Investment?

By Michael Kahn

Commodities: The Next Hot Investment?
Photo: Oliver Bunic/Bloomberg

Commodities may be the market to watch this year. After nearly a decade of underperforming financial assets—specifically stocks—it could well be time for the resurgence of hard assets.

The Bloomberg Commodity Index, which tracks more than 20 commodities in energy, agriculture, industrials, and precious metals, seems to be on the verge of breaking out to the upside (see Chart 1). Indeed, the index set its low point back in January 2016, which was also when the current leg of the bull market in stocks began.

Chart 1
Commodities: The Next Hot Investment?

Rising off a low point doesn’t necessarily mean a bull market is in place, of course. Indeed, the commodities index has traded more or less sideways since May of that year. The good news for the bulls is that it also formed a base or consolidation zone that could serve as the launching pad for a real bull market ahead.

The chart shows where major-component commodities scored their individual peaks and troughs. This is important to know because various commodities, such as sugar and aluminum, do not correlate with each other very well. Also, energy comprises more than 30% of the index’s weight, making it a big mover for the overall asset class.

What stands out most in the chart are the apparent coincident bottoms about two years ago in gold, oil, and copper. That alignment arguably shows that a true bottom is already in place and all we need now is the “all clear” signal on the charts in order to really get excited.

I am not quite as impressed by gold’s recent rally over the past month. As I outlined last month, this particular market remains below significant resistance in the $1,390-$1,475 area. (It traded at $1,320 Thursday afternoon.) I will concede, however, that gold has made technical improvements since that time.

A good deal of gold’s, and silver’s, strength is due to the sharp decline of the U.S. dollar over the past few weeks. Gold and most commodities are priced in dollars, and a weaker dollar translates into higher commodities prices, all else being constant. We’ll take a closer look at the greenback in a little while.

Crude oil did, in fact, break out above its own resistance zone of $55-$60. (It traded at $62 Thursday.)

Copper shows the sharpest gains since late 2016, and it scored a major trendline breakout to confirm a true bull market is indeed in place. The problem with copper right now is that it is high relative to its trend—and that puts it at risk for a pullback.

Indeed, commercial hedgers in this market, according to the Commitments of Traders report from the Commodity Futures Trading Commission, are in a rather bearish net short position right now. This is the so-called smart money, and it appears a bit apprehensive.

But that alone doesn’t signal the end of the rising trend, at least not yet.

The U.S. dollar index, which tracks a trade-weighted basket of currencies, cracked a rather important support level last month (see Chart 2). This puts it on a downward path to take out last year’s low of 91.01 and head toward the 89 level. (It traded at 91.85 Thursday.)

Chart 2
Commodities: The Next Hot Investment?

I derive the 89 target from several technical retracement levels of the 2014-15 rally. The more important point is that there is still downside pressure on the dollar that could last several weeks. Such a decline could spark a breakout in the Bloomberg index, gold, and a few other commodities.

From the fundamental side, Bloomberg’s commodity index team also sees strong performances ahead for crude oil and industrial metals, including copper. “All cylinders firing for industrial metals in 2018 thanks to dollar weakness and strong global purchasing managers’ indexes,” the team wrote in its December report.

It also forecast that agricultural commodities have greatest potential upside surprise, as global grain demand is set to outstrip supply. Technically, they have been depressed and flat for so long that it would not take much of a breakout to get a rally going.

Because stocks still have gas in the tank, correction possibilities aside, we may not see the actual performance ratio of commodities to financial assets change direction. It could just flatten out.

That would still be a win for commodities bulls, and it pays for investors to now consider adding a little bit of their favorites to their portfolios. And if stocks do stumble, it would be all the more reason to take a few commodities bites.

Michael Kahn, a longtime columnist for Barrons.com, comments on technical analysis at www.twitter.com/mnkahn. A former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, Kahn has written three books about technical analysis.

¿Cuándo desaparecerá el dólar como moneda de reserva mundial?

Jim Rickards

(OroyFinanzas.com) – La misma fuerza que hizo del dólar la moneda de reserva del mundo ahora está trabajando para destronar al dólar. El 22 de julio de 1944, marcó la conclusión oficial de la Conferencia de Bretton Woods en New Hampshire. Allí, 730 delegados de 44 naciones se reunieron en el Hotel Mount Washington en los últimos días de la Segunda Guerra Mundial para idear un nuevo sistema monetario internacional. Los delegados presentes allí eran muy conscientes de que los errores del sistema monetario internacional después de la Primera Guerra Mundial habían contribuido al estallido de la Segunda Guerra Mundial.

Estaban decididos a crear un sistema más estable que evitara guerras comerciales con vecinos y otras disfunciones que pudieran llevar a guerras con armas de nuevo. Fue en Bretton Woods que el dólar se designó oficialmente como la moneda de reserva más importante del mundo, una posición que todavía ocupa en la actualidad. Bajo el sistema de Bretton Woods, las principales monedas tenían una paridad con el dólar. El dólar en sí estaba valorado en 35 dólares la onza de oro. Indirectamente, las otras monedas tenían un valor fijo en oro debido a la paridad del dólar con el oro.

Otras monedas podían devaluarse frente al dólar, y por lo tanto contra el oro, si recibían permiso del Fondo Monetario Internacional (FMI). Sin embargo, el dólar no podía devaluarse, al menos en teoría. Era la piedra angular de todo el sistema, destinado a ser anclado permanentemente al oro. De 1950-1970, el sistema de Bretton Woods funcionó bastante bien.

Los socios comerciales de los Estados Unidos que ganaban dólares podían cobrar esos dólares en el Tesoro de Estados Unidos y recibir oro a la paridad establecida.

En 1950, los Estados Unidos tenían alrededor de 20.000 toneladas de oro de reservas. En 1970, esa cantidad se había reducido a cerca de 9.000 toneladas. La disminución de 11.000 toneladas fue debida a que los socios comerciales de Estados Unidos, principalmente Alemania, Francia e Italia, cambiaban sus dólares por oro.

El auge y declive de la libra esterlina como moneda de reserva mundial

La libra esterlina del Reino Unido se había declarado el papel moneda de reserva dominante a partir de 1816, tras el fin de las guerras napoleónicas y la adopción oficial del patrón oro por el Reino Unido. Muchos observadores asumen la conferencia de Bretton Woods de 1944, como el momento en que el dólar estadounidense sustituyó a la libra  esterlina como moneda de reserva líder en el mundo. De hecho, la sustitución de la libra esterlina por el dólar como moneda de reserva líder en el mundo, fue un proceso que tomó 30 años, desde 1914 hasta 1944.

El verdadero punto de inflexión fue el período de julio a noviembre de 1914, cuando un pánico financiero causado por el inicio de la Primera Guerra Mundial llevó a los cierres de las bolsas de valores de Londres y Nueva York y desató una loca carrera alrededor del mundo por obtener oro para satisfacer y financiar obligaciones. En un primer momento, los Estados Unidos no tenían suficiente oro en sus reservas. La Bolsa de Nueva York estaba cerrada, así que los europeos no podían vender las acciones estadounidenses y convertir los ingresos de las ventas en dólares, en oro. Pero a los pocos meses, las exportaciones masivas estadounidenses de algodón y otros productos agrícolas al Reino Unido produjeron enormes excedentes comerciales. El oro comenzó a fluir en sentido contrario, de Europa de nuevo a los bancos de Wall Street de Estados Unidos. Estados Unidos comenzó a hacer enormes préstamos para financiar la guerra para el Reino Unido y Francia. Al final de la Primera Guerra Mundial, los Estados Unidos se habían convertido en un importante país acreedor y una fuente importante de oro. El porcentaje del dólar como moneda de reserva mundial sobre el total de reservas de divisas empezó a elevarse.

El académico Barry Eichengreen ha documentado cómo el dólar y la libra esterlina oscilaron como monedas de reserva mundial los 20 años posteriores a la Primera Guerra Mundial, con una a la cabeza de la otra como moneda de reserva. De hecho, el período comprendido entre 1919-1939 fue realmente uno en el que el mundo tenía dos grandes monedas de reserva, el dólar y la libra esterlina operando una al lado de la otra. Por último, en 1939, Inglaterra suspendió los envíos de oro con el fin de concentrar sus recursos para luchar en la Segunda Guerra Mundial y el papel de la libra esterlina como una reserva de valor confiable disminuyó en gran medida al margen del comercio de las zonas especiales del Reino Unido como Australia, Canadá y otras naciones de la Commonwealth.

La conferencia de Bretton Woods en 1944 no era más que el reconocimiento de un proceso de dominio del dólar como moneda de reserva mundial que se había iniciado en 1914. La importancia del proceso por el cual el dólar reemplazó a la libra esterlina durante un período de 30 años, tiene enormes implicaciones actualmente.

¿El fin del dólar como moneda de reserva mundial? ¿Será el yuan la nueva moneda de reserva mundial?

La pérdida del papel del dólar como moneda de reserva mundial no es necesariamente algo que pasará de un día a otro, sino que es más probable que sea un proceso lento y constante. Los signos de esta tendencia ya son visibles. En el año 2000, los activos en dólares eran alrededor del 70% de las reservas mundiales. Hoy en día, la cifra comparable es de aproximadamente el 62%. Si esta tendencia continúa, se podría ver fácilmente una caída del porcentaje del dólar por debajo del 50% en un futuro no muy lejano. Es igualmente obvio que un importante país acreedor está surgiendo para desafiar a los Estados Unidos. Así como Estados Unidos resurgió para desafiar al Reino Unido en 1914. Ese papel hoy en día lo tiene China. Los Estados Unidos tuvieron entradas de oro físico de 1914 a 1944.

China tiene entradas de oro físico hoy. Oficialmente, China informa que cuenta con 1.054 toneladas de oro en sus reservas. Sin embargo, estas cifras fueron actualizadas por última vez en 2009, y China ha adquirido miles de toneladas métricas desde entonces, sin comunicar estas adquisiciones al FMI o al Consejo Mundial del Oro (World Gold Council-WGC). Sobre la base de los datos disponibles de las importaciones y la producción de las minas chinas, es posible estimar que el gobierno chino tiene reservas de oro de 8.500 toneladas métricas. Suponiendo que la mitad de esto es propiedad del gobierno, con la otra mitad en manos privadas, entonces las reservas de oro del gobierno chino real superan las 4.250 toneladas métricas, un incremento de más del 300%. Por supuesto, estas cifras son sólo estimaciones, ya que China opera a través de canales secretos y no informa oficialmente sobre sus reservas de oro excepto en raras ocasiones. La adquisición de oro de China no es el resultado de un patrón oro formal, pero está adquiriendo oro en el mercado en secreto.

Están usando la inteligencia y los recursos militares, las operaciones encubiertas y la manipulación del mercado. Pero el resultado es el mismo. El oro está fluyendo a China hoy en día, así como el oro fluyó a los Estados Unidos antes de Bretton Woods.

Los BRICS son los aliados de China para destronar al dólar como moneda de reserva mundial

China no está sola en sus esfuerzos por lograr la condición de acreedor y adquirir oro. Rusia ha duplicado sus reservas de oro en los últimos cinco años y tiene poca deuda externa. Irán también ha importado grandes cantidades de oro, en su mayoría a través de Turquía y Dubai, aunque no se sabe la cantidad exacta, porque las importaciones de oro iraníes son un secreto de Estado.

Otros países, entre ellos miembros del BRICS (Brasil, India y Sudáfrica), se han unido a Rusia y China para construir instituciones que podrían sustituir a los préstamos del Fondo Monetario Internacional (FMI) y los préstamos para el desarrollo del Banco Mundial. Todos estos países tienen claro su deseo de liberarse del dominio del dólar.

La libra esterlina se enfrentó a un único rival en 1914, el dólar estadounidense. Hoy en día, el dólar se enfrenta a una serie de rivales – China, Rusia, India, Brasil, Sudáfrica, Irán y muchos otros. Además, existe el derecho especial de giro (DEG), que también se podría usar para disminuir el papel del dólar. Los Estados Unidos están poniéndoselo fácil a sus rivales con sus permanentes déficits comerciales, los déficits presupuestarios y una enorme deuda externa.

¿Cuáles son las implicaciones para su cartera?

¿Cuáles son los efectos para una moneda de perder el estatus de moneda de reserva mundial?

Volvamos a la historia: durante los años de gloria de la libra esterlina como moneda de reserva global, el valor de cambio de la libra esterlina era notablemente estable. En 2006, la Cámara de los Comunes británica (House of Commons) produjo un índice de precios de 255 años para la libra esterlina que abarcó el período 1750-2005. El índice tuvo un valor de 5,1 en 1751. Hubo fluctuaciones debidas a las guerras napoleónicas y la Primera Guerra Mundial, pero incluso en una  fecha tan tardía como 1934, el índice fue de sólo 15,8, lo que significa que los precios sólo se habían triplicado en 185 años. Pero una vez que la libra perdió su ventaja de papel moneda de reserva por el dólar, la inflación explotó. El índice alcanzó el 757,3 en 2005. En otras palabras, durante los 255 años del índice, los precios se incrementaron en un 200% en los primeros 185 años, mientras la libra esterlina fue la moneda de reserva mundial, y subieron un 5.000% en los 70 años que siguieron.

Inflacion de la libra esterlina en 200 anos

La estabilidad de precios parece ser la norma para el dinero con la condición de moneda de reserva, pero una vez que se pierde esa condición de moneda de reserva mundial, la inflación es lo que sigue.

La caída del dólar como moneda de reserva se inició en el año 2000 con la llegada del euro, y se aceleró en 2010 con el comienzo de una nueva guerra de divisas. Este descenso está siendo amplificado por el surgimiento de China como un importante acreedor y sus reservas de oro.

Por no hablar de las acciones de una nueva alianza anti-dólar que consiste en el BRICS, Irán y otros. Si la historia es una guía, la inflación de los precios en dólares estadounidenses que vendrá después tendrá que ser alta.

En 1925 poema The Hollow Men, de TS Eliot dice: “Ésta es la manera en que el mundo se acaba / No con una explosión, sino con un gemido.” Aquellos que  esperan un colapso repentino, espontáneo del dólar, seguramente se equivoquen. El colapso del dólar ya ha comenzado. El tiempo para adquirir el seguro contra la inflación es ahora.

2018: A Year of Tenuous Stability

The year ahead promises to be a lively one, full of discrete conflicts and crises. Or so it would seem. Sure, the world is complex, and when we analyze it we tend to do so by breaking it down into its constituent parts North America, South America, Europe, and so on. But studying these regions in isolation can obscure the bigger picture.
The world is interconnected, so our understanding of it must involve the bigger themes that bind its countries together. In identifying these themes, we can lay out the compulsions and constraints that shape the global system and drive major events. In other words, we can predict what will happen next.
The world is too rich to be reduced to a single theme, but if it could, the theme would be disintegration. In every major region, the systems that have been in place either since the end of World War II or since the collapse of the Soviet Union are beginning to fall apart. Faith in these systems was badly shaken by the global financial crisis in 2008 and, to a lesser extent, the collapse of oil prices in 2014. For nearly a decade, the leaders of these regions have tried to manage the political and economic fallout from these crises.
In 2017, a year of only tenuous stability, some of the symptoms of the recent crises began to subside while others grew worse. New symptoms emerged. 2017 was not a year in which the global system broke down, but neither was it a year in which leaders were able to solve the problems that called into question the systems that govern the global order. These problems continue to shape some of the most important geopolitical issues in 2018 namely, the future of Europe, China’s rise and the new configuration of the Middle East.

Europe’s Fragmentation

To say Europe, as a whole, is disintegrating is somewhat misleading. The integrity of the European Union, though, has been under duress since 2008, as has the rationale behind its creation that monetary, regulatory and legislative integration could bridge the deep-seated differences that have historically divided the Continent. The global economic crisis of 2008 revealed structural divides within the bloc, and as its wealthier members refused to rescue its poorer members, the economic crisis morphed into a political crisis.

The financial crisis also aggravated the divide between the elites and the lower classes within EU member states, galvanizing domestic political forces that rejected the right of Brussels to govern. Since then, Britain has voted to leave the bloc, and euroskeptic parties have gained prominence on the mainland. Meanwhile, the EU has lost credibility with non-member states, particularly those of Central and Eastern Europe, which increasingly took advantage of being on the outside looking in, free as they were to float their own currencies and tailor their own regulatory environments toward competitiveness. In other words, Europe entered an era in which sovereign states began once again to reassert their sovereignty.
These trends largely continued through 2017 as Europe’s economy largely stagnated and as anti-EU forces on the right continued to rise. Technocrats in Brussels, meanwhile, were unable to reconcile the bloc’s inherent internal contradictions.
And so it is that after nine years the EU still cannot function as it did pre-crisis. It is unable to make core decisions collectively, and now its defining features are regional and social tensions fueled by economic issues and different cultural values.
In 2018, we do not expect these trends to accelerate dramatically, nor do we expect to see anything as profound as the Brexit. But neither will the trends reverse. Europe will instead focus on coping with its new reality. And if it cannot spark more economic growth, the status quo will be further tested.

China’s Wary Rise

In China, disintegration has been a threat throughout history. But as in Europe, the threat has intensified since 2008, when it became clear that China’s economic rise was not unstoppable. The government is trapped between conflicting economic and political realities. It cannot sustain breakneck growth on a foundation of low-wage exports, but it does not yet have the middle class needed to boost domestic consumption to levels that would insulate it from downturns in distant consumer markets. The reforms required to put the economy on sound footing would be extremely painful, risking major job losses that would threaten the political standing of the Communist Party. China’s leaders have tried to split the difference by keeping the economy humming with credit-driven growth while implementing only modest reform. But this has merely left the country with enormous debt bubbles and a looming housing crisis, and only slightly closer to addressing its underlying problems.

The risks of instability remain.

Thus, in 2017, the Communist Party consolidated its grip over society under President Xi Jinping, who spent much of the year purging rivals, reining in wayward economic sectors and warning that China had entered a "new era" marked by slower growth. He has become China’s most powerful leader perhaps since Mao Zedong and the underlying driver of his power consolidation was the threat of disintegration.

There was a sufficiently widespread belief among Chinese elites that reconciling the country’s deep internal contradictions required a strongman at the helm. If political repercussions from China's post-2008 economic path are inevitable, then the only option is to try to contain the political fallout through authoritarian means, or so the thinking in Beijing goes.

The shortcomings of Xi’s authoritarianism are inevitable, and signs of a backlash will begin to emerge in 2018. Xi is already seeking to take advantage of the new political environment and the window of stable growth to double down on painful reforms. But the reforms themselves, particularly reducing industry capacity and introducing measures to cool real estate markets, will slow China’s growth, leading to job losses and discontent. Beijing will also attempt to streamline bloated industries by picking winners and losers. Some of the losers will have political clout and an axe to grind. Xi and his allies will respond forcefully to any signs of dissent. Xi is too powerful to be taken down in the near future, but the near future will be tumultuous anyway.
The Middle East

The Middle East has never been a picture of consistently strong and coherent political structures, but its recent woes are less a result of the 2008 financial crisis than others’. Still, economic problems, such as those stemming from the brief crash in oil prices after 2008 and the structural shift in oil markets in 2014, have accentuated its political problems. Hence the Arab Spring, which helped to create the Islamic State and the vacuum of authority in Syria, Iraq and Yemen. Political pressure within such pivotal Middle Eastern states as Saudi Arabia, moreover, has aggravated regional rivalries all while the U.S. tries to divest itself somewhat from the region.

In 2017, disintegration laid the groundwork for major changes in the region. The Islamic State’s territorial ambitions in Syria and Iraq have been quashed, reopening a vast vacuum of authority in the region. Saudi Arabia succumbed to a generational political crisis. The main beneficiary of both of these developments has been Iran.

With its unmatched influence in Syria, Iraq and Lebanon, Iran is uniquely positioned to fill the vacuum left by the Islamic State. And Tehran’s historical rival, Saudi Arabia, is too weak and too internally occupied to decisively counter Iran or to even maintain solidarity in the Gulf Cooperation Council. This will embolden Turkey and Israel to play a bigger part in shaping the coming geopolitical order.

 Conclusión   Disintegration, of course, is not the only defining characteristic of 2018. Other, small themes will mark the world’s regions too. In East Asia, for example, events will be driven increasingly by the emerging competition between China and Japan and by efforts of the region’s heavyweights to adapt to a less pronounced U.S. presence a dynamic that will become manifest no matter how the crisis on the Korean Peninsula unfolds.

In Europe, divisions between the eastern and western parts of the Continent will become more pronounced, as illustrated by growing competition between Germany and Poland.
In the Middle East, attention will be overwhelmingly focused on Iran, which sees a rare opportunity to cement an arc of influence spanning all the way to the Mediterranean. But each of these, in their own way, attest to much broader if more subtle processes underway. It’s in these larger themes that we’ll find the changes on the horizon.

The Year in Fitness: Exercise, Add Intensity, Live to See Another Year


Robert Marchand, age 105, in January 2017 in his bid to beat his record for distance cycled in an hour.

The overarching message of this year’s exercise-related science was that physical activity, in almost any form and amount, changes the arc of our lives.

But much of this research also hinted that there may be something unique about pushing yourself at least a little extra that alters and ramps up the benefits of exercise, beginning deep within our cells.

Oh, and several studies also helpfully told us that hot baths are a fine idea for those of us who work out, even if the weather is warm.

But intensity was the theme of 2017. One of the first studies I wrote about this year detailed the career and physiology of Robert Marchand, a diminutive French centenarian who took up competitive cycling as a retiree and began setting age-group records.

But after a physiologist revamped his once-leisurely training, adding some strenuous pedaling, Mr. Marchand decisively bettered his own records and, at the age of 103, set a new world mark for the most miles pedaled in an hour by a centenarian.

His efforts help to belie a number of entrenched beliefs about older people, including that physical performance and aerobic capacity inevitably decline with age and that intense exercise is inadvisable, if not impossible, for the elderly.

Other studies this year reinforced the notion that age need not be a deterrent to hard exercise and that such workouts could be key to healthy aging. An animal study that I wrote about in July, for instance, found that frail, elderly mice were capable of completing brief spurts of high-intensity running on little treadmills, if the treadmill’s pace were adjusted to each mouse’s individual fitness level.

After four months of this kind of training, the exercised animals were stronger and more aerobically fit than other mice of the same age, and few remained physically frail. Perhaps most striking, “the animals had tolerated the high-intensity interval training well,” one of the scientists who conducted the study told me.

But of course, mice are not people. So it was another study this year that to my mind provided the most persuasive evidence that strenuous exercise alters how we age. In that study, which I wrote about in March (which became my most popular column this year), scientists at the Mayo Clinic compared differences in gene expression inside muscle cells after younger and older people had completed various types of workouts.

The greatest differences were seen in the operations of genes after people had practiced high-intensity interval training for 12 weeks. In younger people who exercised this way, almost 275 genes were firing differently now than they had been before the exercise. But in people older than 64, more than 400 genes were working differently now and many of those genes are known to be related to the health and aging of cells.

In effect, the intense exercise seemed to be changing muscle cells in ways that theoretically could affect biological aging.

At this point, I should probably pause and explain that intensity in exercise is a relative concept. The word intense can seem daunting, but in practice, it simply means physical activity that is not a cinch for you.

For research purposes, intensity is based on percentages of someone’s heart rate maximum. But you and I can ignore these technicalities and pay attention to how we feel. Many scientists have told me that exercise is considered easy if you can talk and sing while participating in it.

During relatively moderate exercise, singing becomes difficult.

And during intense exercise, you will find it difficult to speak without gasping.

But, again, intensity is relative. If you have barely exercised in recent years, five minutes of climbing stairs will constitute an intense — and effective — workout.

If, on the other hand, you regularly stroll during the week, you might consider increasing the pace of those walks for a few minutes at a time, until you no longer can easily converse. The latest science suggests that your cells will thank you.

And afterward, other science says, reward yourself with a warm soak. Several ingratiating studies this year indicated that luxuriating in warm water aids in recovery from strenuous exercise and also, surprisingly, helps us to acclimate to hot-weather workouts.

But as always, the most compelling exercise-related research this year reminded us that activity of any kind is essential for human well-being. One of my favorite studies of 2017 found that people reported feeling happiest during the day when they had been up and moving compared to when they had remained seated and still.

Another memorable study concluded that, statistically, an hour spent running could add about seven hours to our life spans. These gains are not infinite. They seem to be capped at about three years of added life for people who run regularly.

But the results have inspired me. I trained for and ran a half marathon in 2017 and will run another in 2018. I am not fast. But I aim to be persistent. If Mr. Marchand can gain fitness and speed after turning 100, why should not those of us with still a half-century or more to spare?

Happy New Year, everyone.

Why Bitcoin Can’t Be Money

By Patrick Watson

Everyone is talking about bitcoin, even people who otherwise know little about investing.
That’s probably a bad sign for bitcoin.
Recently, I had a conversation with my 89-year-old father. He likes reading newspapers, so this year I got him a Wall Street Journal subscription. Now he’s up on the financial news.
A few weeks ago, he asked the big question: “What is bitcoin?”
I told him what I knew: Bitcoin is a digital currency, designed to be scarce, anonymous, and secure, that it’s price has gone vertical, that some people think it will one day replace dollars.
He was with me until that last part. A private, digital-only currency didn’t make sense to him.
I pondered that conversation driving home… and I think he was right. Bitcoin may be useful and valuable, but it won’t replace fiat currencies anytime soon.

Photo: Getty Images

Power Mining
Now, on with our topic.

Unless you’ve been hiding under a rock, you know bitcoin prices have gone bananas. I’m not even going to quote any numbers. Anything I say will be laughably wrong by the time you read this.

Could some virtual currency that only exists on a computer screen really be worth these crazy prices?

Maybe. If you think it will become a major medium of exchange, bitcoin is far underpriced.

That’s a big “if” we’ll discuss in a minute. First, let’s look at some more practical issues.

Bitcoins enter the digital world when someone “mines” them by solving certain math problems. Mining operations have turned from college students sitting at their laptops to huge enterprises that use massive computing power to run ever more complex math calculations. Some of the computers dedicated to solving those math problems fill entire buildings.

Photo: Getty Images
Bitcoin’s anonymous inventor, who called himself Satoshi Nakamoto, built scarcity into the system. Mining gets more difficult as time passes and the supply increases. No one will ever hit a mother lode and double the bitcoin supply overnight.
As the math gets more complicated and the computers have to work harder, bitcoin mining consumes an increasing amount of electricity. And that’s starting to be a problem.

Here’s science writer Eric Holthaus at Grist last week:

In Venezuela, where rampant hyperinflation and subsidized electricity has led to a boom in bitcoin mining, rogue operations are now occasionally causing blackouts across the country. The world’s largest bitcoin mines are in China, where they siphon energy from huge hydroelectric dams, some of the cheapest sources of carbon-free energy in the world. One enterprising Tesla owner even attempted to rig up a mining operation in his car, to make use of free electricity at a public charging station.
That’s pretty crazy, but it gets crazier.
In just a few months from now, at bitcoin’s current growth rate, the electricity demanded by the cryptocurrency network will start to outstrip what’s available, requiring new energy-generating plants. And with the climate conscious racing to replace fossil fuel-based plants with renewable energy sources, new stress on the grid means more facilities using dirty technologies. By July 2019, the bitcoin network will require more electricity than the entire United States currently uses. By February 2020, it will use as much electricity as the entire world does today.
This is an unsustainable trajectory. It simply can’t continue.

Not to put too fine a point on it, but this is bonkers.

I have not independently verified these claims. In the comments section at the bottom of Eric’s article, many expert-sounding people dispute them. So maybe he’s wrong.
Still, the broader point seems right. Bitcoin mining and transaction processing consumes a lot of power, and we don’t have infinite amounts of it.

A trend that can’t continue, won’t—so something will change it. Here’s a partial list of possibilities:

  • Computers could get faster and more energy efficient

  • We could find new sources of cheap, abundant electricity

  • Bitcoin’s price could fall and make mining unprofitable

  • Another, less energy-consuming cryptocurrency could take bitcoin’s place

  • Governments could try to outlaw bitcoin and shut down the miners

Of those, government interference is probably bitcoin’s greatest threat. Governments don’t like the anonymity, because it facilitates tax evasion, money laundering, smuggling, and other illegal acts.

But there’s something even more basic to consider...
What Is Money?
You can’t talk about bitcoin for long before you get to the “What is money?” question.

My favorite answer: Money is simply the most liquid asset in a given place and time. Almost everyone accepts it as payment because they trust it, and they trust it because they know others accept it.

Could bitcoin or another cryptocurrency ever reach that status? Maybe, but it will have to cross a very wide moat.

Pull a Federal Reserve Note from your wallet. Look closely and you’ll see a legend about legal tender:
Your dollar bill is legal tender for all debts, public and private. The government says everyone must accept it, so we do.

Nothing prevents us from accepting other currencies as well. You can trade chickens for cows, or vice versa, if everyone agrees. But you’ll still have to report any taxable gain in dollar terms and pay tax in dollars. That’s the “public” part of the legal-tender legend.

In the modern world, governments define money because they have the raw power to define how you must pay your taxes. They can and will use force to make you pay—and deadly force if you resist too hard.

The IRS doesn’t accept cows, chickens, yen, gold, or bitcoin. It demands dollars. Don’t have any? Get some or go to prison.

Photo: Getty Images
As long as we pay a significant part of our income in taxes,

  • We must all own whatever currency the government accepts as payment, in quantities sufficient to pay our tax obligations.

  • Business accounting must use government-dictated currency as the unit of account.

That means most people will default to using the same currency for personal spending and investing. This gives government-issued money an automatic advantage over bitcoin or any other competitor.

When national governments start accepting bitcoin for tax payments, you can fairly call it “money.” Until then, it’s simply another risk asset like gold, stocks, or pork bellies.

Is bitcoin a risk asset you should own? Probably not, unless you are prepared for some serious pain whenever the price heads south.

I don’t know when that will happen. Bubbles get way bigger than anyone thinks possible, but at some point, they all pop. This one will too.

See you at the top,