This
Week in Barrons – 8-20-2017:
“Toto, I’ve a
feeling we’re not in Kansas anymore” … Dorothy – Wizard of Oz.
What if Bitcoin is
the next Global Currency?
In the movie
The Wizard of Oz, the all-powerful Oz
turned out to be just a man behind a curtain, who used smoke and mirrors to accomplish
his goals. What if our government is the
wizard, and bitcoin is the next global reserve currency? After all, since bitcoin’s inception, the
concept of using block-chain technology to digitally track money-flow has
exploded. I previously thought a global
reset would be accomplished using Special Drawing Rights (SDRs), but what if
the SDR is a ‘diversion’ while bitcoin (or any of the over 200 different
crypto-currencies) is the real deal. Let
me back up.
SDRs were created by the International
Monetary Fund (IMF) in 1969 as a supplementary, international bank of reserved
assets. Every country participating in
the Bretton Woods agreement was required to maintain official reserves of gold
and widely accepted assets in order to maintain their own currency exchange
rate. But on occasions such as the 2000
Internet bubble and the 2009 financial crisis, SDRs were doled out to provide liquidity
and to supplement a member countries' official reserves.
Inside the SDR you have the: U.S. Dollar, British
Pound, Japanese Yen, the Euro, and most recently the Chinese Yuan. I originally thought that the U.S. dollar
would be replaced as the global reserve currency as part of a ‘global financial
reset’ – and the SDR concept would be put in its place. But what if the global financial reset is larger
and more complex than originally thought?
What if it’s impossible for the IMF to accurately calculate each
nation’s net worth? The original concept
had task the IMF with calculating the value of a nation by combining their
physical assets (lumber, oil, minerals, crops, technology etc.) with their existing
worth (citizens and reserves) in order to arrive at a total value for the nation. This ending valuation would then be used to give
everyone a percentage of a new global currency.
Recently, I've been receiving hints that this valuation can be more
accurately arrived at using current crypto-currency & block chain
technology. Instead of estimating mineral
reserves and guessing at intellectual property (IP) – block chain technology can
be used to obtain a more complete digital, map of the money-flow. This could then lead to a more accurate (and
dynamic) valuation of a country and its global standing.
A digital project such as this is beginning
near Dallas, Texas. A Chinese land
developer has purchased 900 acres, and has started to build homes. The digital community has been formed, the $50m
ICO (Initial Coin Offering) launched, no U.S. citizens are involved, and all of
the residents have agreed to use only the crypto-currency to run their lives. This will allow the community to be valued down
to the individual level. The digital
tokens have been created – and the process of monitoring transactions, and
valuing everyone’s personal property, transactions, and IP has begun. Every transaction will be implemented using
the digital currency in order to get a true valuation of each and every
individual. If/when they can show
meaningful results, then the IMF can come out from behind the curtain and introduce
this new digital way of life to the world.
To recap:
-
The IMF would
like a digital reserve currency that would allow every nation to be dynamically
valued.
-
At that point,
every nation’s value and individual citizen’s worth could be converted into tokens
that could be used for trading as well as purchasing goods and services.
Once
accomplished, what would be the value of THAT digital currency (call it bitcoin
for the time being)? Fundstrat Global Advisors
is predicting that a digital currency will hit $6,000/coin by the middle of
next year, and $25,000/coin by 2022. They
arrived at their valuation using Metcalf’s Law – which values a network
according to the square of the number of its users. FundStrat back-tested their model and can accurately
explain 94% of bitcoin’s price movement over the past 5 years using this
calculation.
Standpoint's Ronnie Moas most recently
raised his bitcoin valuation to $7,500/coin by trying not only to account for
the number of individuals within a network, but also the extent to which the individuals
use the digital currency. His 2027
estimate for bitcoin is $50,000/coin, and says: “You can't look at this as a normal situation. We're in an industry that will grow from $140B
to $2T and the individual bitcoin price will move with it. We’re at the same point in the adoption curve
as we were in 1995 when we went from 1m to 10m Internet users. The following year the Netscape browser came
online, and we went from 10m users to hundreds of millions of users overnight.”
The U.S. Government continues to support the
crypto environment by auctioning off hundreds of thousands of bitcoins seized from
people breaking the law. The most
high-profile example came in October 2013, when the FBI raided the online
marketplace Silk Road. Those specific confiscated
bitcoins were auctioned off, and some winners of the auctions are:
-
Venture Capitalist
Tim Draper – who on June 30, 2014 bought 30,000 bitcoins for $647 per coin, and
today is looking at a profit of $115m.
-
Second Market’s
Barry Silbert (who currently runs the Bitcoin Investment Trust) – who on December
9, 2014 purchased 48,000 bitcoins for $378 per coin and today is sitting on a profit
of $197m.
The tide is turning toward crypto-currencies
and governments could be behind the shift.
Japan recently approved bitcoin as a legal payment method. Russia’s largest online retailer (Ulmart) is
now accepting bitcoin, even though Russia won’t explore the cryptocurrency
until 2018. And in the U.S., there is speculation
that the SEC could overturn its rejection of the Winklevoss twins' bitcoin
exchange-traded fund.
I realize that I’ve gone on a little long
about bitcoin, it’s positioning as a potential SDR, and its continued
acceptance. But when comparing it with
our manipulated and over-extended stock market – I’d say almost exactly what
Dorothy said: “Follow the digital yellow brick road.”
For the S&P index, a combined series of
lower highs and lower lows, a break in the downward trend line, and an uptick
in volume and breadth – all point to an ominous week ahead of us. This is
the first time in a long time (see chart above) that I’ve seen a complete
S&P sell-off into the close – with all 100 S&P stocks being down on the
day. This is what it looks like when
investors want out of their positions – at any cost. The only place to ‘hide’ was in bonds, gold
and volatility.
Last week we saw the volatility index (see above)
explode above the 110 level once again. Buying
volatility (UVXY) is a method of hedging that the pros use, leaving only the
retail investor to weather the downward storm.
The financials last week (as characterized
by the XLF pictured above) had their most substantial down day in recent memory.
Any bounce at this point is going to be sold into. Look for gold to continue its uptrend, the
U.S. Dollar to continue moving sideways to down, and U.S. Treasuries to
continue climbing higher. Volatility
looks to move higher, and off of its abnormally low levels of the spring and
early summer. This coming Thursday will be
the annual get-together of top central bankers including U.S. Federal Reserve
Chair Janet Yellen and European Central Bank Head Mario Draghi in Jackson Hole,
Wyoming. Policymakers are expected
to deliberate on why the Phillips Curve (the rule that correlates lower unemployment
to higher inflation) isn't working as it should.
And finally, buckle up – because the latest
rendition of the U.S. Treasury running out of money is about to play out all
over again. The curtain goes up on September
29th, and in the 2017 production – President Trump is playing a lead
role with his quote: “The Federal Government
needs a good shutdown.” The 2011 production
brought down the house – after a nasty showdown led to an unprecedented
credit-rating downgrade for U.S. Treasury debt.
That curtain-call cost the U.S. taxpayers an extra $1.3B in higher
borrowing costs, and coincided with the last 20% stock market correction.
With Congress not coming back to work until after Labor Day, that only gives
them three weeks to work out a deal and pass a bill. Undoubtedly, Congress and the White House
will figure out a way to kick the can further down the road, but the ultimate day of reckoning is
fast-approaching.
By
the way, in terms of the solar eclipse on the 21st - please play it safe.
If you don't have proper glasses, or at
least a #12 welding hood – don’t risk even 30 seconds of looking at the sun. Instead, get a pair of binoculars, and point
the big end at the sun, and focus the small ends above a sheet of paper. You'll be able to watch the entire thing on
that piece of paper with no ill effects.
Tips:
The DOW put in a high on August 7th of 22,118, and then fell back
about 275 points to 21,843. It then
rallied up to 22,024 (a lower high), and fell back to 21,674. If we bounce on Monday and don't make it over
22,024 before falling back again – we would be in a repeating ‘stair step’
lower pattern of lower highs and lower lows.
Such a pattern could get us down to 21,500 and potentially 21,200 before
finding support on the DOW. I’m looking
for a ‘dead cat bounce’ on Monday, and then rolling over and heading lower the
remainder of the week.
The financial ETF (XLF) is only up 4.7%
year-to-date (YTD), and is losing support by the day. The S&P is still up 7.7%, but is getting
its strength from the FAANG stocks that are still up 18% YTD. The Russell Small Cap Index (IWM) is now down
0.4% for the year, and is just shy of entering corrective territory. The retailers (XRT) are in correction mode as
they are down 13.79% YTD. The DOW
transports (IYT) have come down 8% in the past couple of months and are now
flat on the year. If the FAANG stocks begin
to drift lower, they could fall quickly and hard – and take the rest of the market
with them.
The level on the S&P (SPX) that the
bulls need to reclaim is 2,438. If the
SPX can’t reclaim 2,438, then we will see
2,411 and 2,400 after that. If we remain
between 2,438 and 2,411, the markets will behave themselves. If we go below 2,411, institutions will start
to sell hard and fast.
Recommendations:
Bullish Plays:
-
Bitcoin
Investment Trust (GBTC) – also buy Ethereum & Litecoin
-
Paypal (PYPL) –
Sell Sept 15th Put Credit Spread +57.5 / -60
-
EOG Resources
(EOG) – Sell Aug 25th Put Credit Spread +80 / -82
-
Jr. Miners (JNUG)
– Sell Aug 25th Put Credit Spread +15.5 / -17
-
YY Systems (YY) –
Sell Aug 25th Put Credit Spread +69 / -71
-
Weibo Corp (WB) –
Sell Aug 25th Put Credit Spread +85 / -87
-
Shopify (SHOP) –
Sell Aug 25th Put Credit Spread +90 / -92
Bearish Plays:
-
Amazon (AMZN) – Buy
Sept 15th Put B-Fly +940 / -920 / +900
-
Netflix (NFLX) –
Buy Aug 25th Put B-Fly +170 / - 165 / +160
-
S&P Short
Futures (SVXY) – Buying Puts
-
Volatility Index
(UVXY) – Buying Calls
To follow me on StockTwits.com to get my daily thoughts and trades – my
handle is: taylorpamm.
Please
be safe out there!
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