This Week in Barrons - 8.25.2013

This Week in Barrons – 8-25-2013
 

Germany Declares Bitcoin Legal Tender – This changes everything…

I absolutely believe that "the only constant is change".  Whether you're speaking of the climate, geography, or just the "Tuesday night bowling league" given enough time – it will change.  Currently, it isn't just the fact that things are changing that is so amazing; it's how fast things are changing and how diverse those changes are.

To be honest, my first encounter with Bitcoin was through my youngest son.  Bitcoin (since its inception in 2009) is the poster child for global, digital currency.  Bitcoin could either become one of the biggest, disruptive inventions of the last 200 years, or a failed experiment costing billions.

Just so we’re all on the same page, in 2008 an anonymous person (or persons) going by the name "Satoshi Nakamoto" laid out plans for a peer-to-peer electronic currency system.  How it works is: a series of computers (called "miners") create units of digital currency, and add them to a ledger that is shared by all the Bitcoin programs around the world.  There is a schedule of when and how many of these digital units get developed, and the total amount created is never to exceed 21 million Bitcoins.

Bitcoin users can "buy" Bitcoins (digital currency units) and use them for transactions – by  "spending" them with any other person or merchant that will accept them.  So in theory (and in practice), what we have here is an alternative currency with some interesting properties.  First off (and the most serious) is that it is completely private.  There is no central banker.  There are no records showing who owns them.  There is no paper trail telling ‘big brother’ what you purchased.  Thus, the first knock against this alternative currency is that it will be used for illegal purposes.  That is usually what you'll hear as ‘main stream’ attempts to downplay the concept and use of Bitcoin.  

They are right.  By being completely transaction invisible, there are those individuals who would use them to buy illegal items.  If you're a heroin dealer and you want to buy opiates from a grower in Asia, mailing a check, or using a credit card is out of the question.  Using cash carries its own problems such as currency conversion, and the banking regulators can immediately look for a trail of large cash withdrawals and deposits.  With Bitcoin you can electronically transfer funds from account to global ledger to merchant account.  So yes, Bitcoins can be used for nefarious purposes.  

But the main reason why so many Governments are scared of Bitcoin is that they can’t control it.  They can't tax it.  It takes the power of a central authority out of the hands of the few and places it into the hands of the many.  This scares governments to death, and rightfully so.  As far as I'm personally concerned, my fears are not based upon anonymity, or the way it can take power away from the banking elite; moreover, I find both of those things quite delightful.  My fears have always been with: 1) Security, 2) Perceived value, and 3) How hard Governments would push back to make it illegal and declare its use "financial terrorism".

The value of Bitcoin has been problematic, as one would expect from a fledgling experiment of this size.  The dollar value of a Bitcoin has swung massively over the years, mostly when a security failure or a hacking took place.  In less than a year it's been as low as $13 and as high as $230.  Because it isn't backed by anything, not even a regulating body or (like with the dollar) the "full faith of the U.S. Government" – it fluctuates based upon perceived value and demand.  People have run from it when there were numerous hacking attempts, and those same people have embraced it in times of crisis like the Cyprus banking disaster.

My stance has always been fairly simple.  I love the idea that governments have pushed back against the Bitcoin system.  Even with this headwind, Bitcoin has forged ahead – trying to come up with something better than the depreciating junk that we currently carry around in our wallets.  But, because it is new, fraught with mishaps, missteps, and wild fluctuations – I haven’t been personally invested or directly involved with it.  Not to mention the fact that I'm sure Uncle Sam would like to make even the idea of it illegal.  

But on Tuesday of this week, something quite amazing happened.  While an ever-growing body of merchants around the world has been accepting Bitcoins as payment for product and services, it was still considered (by most) as being a fad or a short-term trend.  Then (on Tuesday) Germany's finance minister came out and declared that: “Bitcoin is recognized as a unit of account".  This meant that Germany now views Bitcoin as legal tender.  

By having an economy as big and as important as Germany, recognize Bitcoin as a true unit of account (on par with other currencies), Bitcoin has just leapt from the shadows into the limelight.  This is a truly incredible development, but it asks more questions than it answers.  Will Germany come up with some way to try and tax it?  Will Germany attempt to make disclosure of ownership a Bitcoin requirement?  Will other countries open up to it, or fear losing control of their Central banking and declare it illegal?  

Something with as much potential as Bitcoin cannot be ignored.  Yet, it is very hard to embrace as it goes through its growing pains.  Hundreds of people have lost thousands of dollars in Bitcoin exchanges that have been hacked and shut down.  Officials in high offices have declared it to be a terrorist tool.  Social scientists fear it – because if they cannot tax it, they can't promote and pay for social services they so dearly love.  And $200 price fluctuations make it scary for conservative investors.  

I do not currently own any Bitcoins.  That very well may change in the future.  Time may show us that Bitcoin is not only real, but the first model of an even bigger concept where the decentralization of money becomes the global goal.  I don't know.  But from its inception and 5 years later have Germany embrace it as legal tender is certainly reason enough to stand up and take notice.  This could ‘literally’ change everything! 

The Market...

A while back The Ben Bernanke scared everyone into believing that he's going to begin tapering off the QE gas pedal in September.  That sent the market into a tizzy, and we fell 700 points over a couple weeks.  Then, because of the market's fall, some of those that were saying that the taper was indeed coming, have changed their minds, while others began to say that the market wouldn't care if they do because it's all "priced in".

If you equate the DOW 15,600 level to the $85B per month that the Fed is pumping into the system – then if the Fed cuts back to $60B – the appropriate DOW level would be approximately 14,650.  Therefore, for each $20B the Fed stops spending, you can subtract approximately 1,000 DOW points.  This is a very rough estimate, but one that actually makes a bit of sense.

I can make the case for both sides of the ‘taper’ argument, and right this moment I'm still slightly on the side that says that they won't taper in September.  Despite the fact that I know QE hasn't solved the economy (and the Feds know it too), they also know that QE keeps the market buoyant and thus creates the "wealth effect".  Is the Fed willing to reduce that?  In the short term – maybe, but in the longer term, ONLY Fed money can keep this market up because the economy cannot.  Factually: 

-       New home sales plunged 13% this month (a huge drop).

-       Mortgage applications have fallen so much that banks are laying off mortgage application personnel.

-       Middle class consumer retailers – from Wal-Mart to J.C. Penny to Macy’s tell us that the middle class is broke.

-       Only 47% of Americans have a full time job – the rest are part-time.

-       The 2^nd largest employer in the U.S. is a Temp Agency!

-       Obamacare is another huge expense hitting business and the consumer.  After lying about its affordability, virtually every state has declared that health insurance costs will rise dramatically in the New Year.

The economy is weak and going to get weaker.  If the FED removes money from the system, the market will go lower.  But in the here and now, it looks like the market has decided that it’s time for a bounce.  After hitting bottom on Wednesday, we've bounced for two sessions, regaining the 50-day moving average on the S&P and reclaiming 15k on the DOW.  The DOW transports (which have led virtually all the market moves) have turned up. So there's a decent amount of evidence to say we're going higher for a while.

I think we can lean long for a few days considering that we won't get the word about tapering until September 18.  Between now and then we could see them pile on another few hundred points.  I don't for a moment think you can throw caution to the wind and get crazy, but small positions with a decent stop should be okay.  As we approach September 18th we'll want to be more cautious again.

Tips:

A lot has been written in the past weeks about the moves in precious metals.  Gold, silver and the miners have indeed done very well.  Some “rumors behind the news”:

-       The government has gone to war against J.P. Morgan – not directly against it’s silver manipulation (which at times was 1/3 of the total world market) – but enough that it is forcing JPM to clean up it’s act all over the bank.  How long this scrutiny will last is anyone’s guess at this point.

-       It’s tough to say whether silver or gold are leading the market – but on a percentage basis – the winner (thus far) is clearly silver. 

-       With the physical metal (or lack of it) actually becoming involved in the ‘paper’ pricing mechanism (and we all knew ‘eventually’ that time would come), ‘paper pricing’ has been replaced by ‘physical pricing’. 

-       Currently – between Goldman, JPM, Gartman, Bo Polny, Nenner and others net long on the precious metals trade – don’t fight the Fed / or the major investment houses!

My current short-term holds are:

-       FB – in at 25.61 (currently 40.65) - stop at 38.00,

-       FCX – in at 28.47 (currently 31.76) – stop at 30.50,

-       SIL – in at 24.51 (currently 16.62) – no stop

-       GLD (ETF for Gold) – in at 158.28, (currently 135.00) – no stop ($1,395.70 per physical ounce), AND

-       SLV (ETF for Silver) – in at 28.3 (currently 23.14) – no stop ($23.73 per physical ounce).

To follow me on Twitter and get my daily thoughts and trades – my handle is: taylorpamm. 

Please be safe out there! a

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