Flashman Letters

A Bitcoin Primer - Everything you wanted to know about bitcoin but were afraid to ask.

Joe Rogan with a very well informed true believer - starts after about 8 minutes. (2.5 hours)

A long and winding discussion about bitcoin for the completely clueless:

http://www.youtube.com/watch?v=1cexawnOlR8

From Econtalk: (1 hour)

Gavin Andresen, Principal of the BitCoin Virtual Currency Project, talks with EconTalk host Russ Roberts about BitCoin, an innovative attempt to create a decentralized electronic currency. Andresen explains the origins of BitCoin, how new currency gets created, how you can acquire BitCoins and the prospects for BitCoin's future. Can it compete with government-sanctioned money? How can users trust it? What threatens BitCoin and how might it thrive?

http://www.econtalk.org/archives/2011/04/andresen_on_bit.html

Izabella Kaminska from the FT ( 10 minutes)

In this podcast Izabella Kaminska, an avid Bitcoin blogger, questions whether virtual currencies such as Bitcoin could be the future of money?
She also addresses the emergence of such a phenomenon, the purpose it serves, its true potential ...
She arrives at the conclusion, "for now, unfortunately, Bitcoin confuses value with collaborative efficiency. And it is here that its greatest weakness lies."

http://www.opalesque.com/index.php?act=Radio&id=102

Paul Singer has an opinion:

 Bitcoin

 After 37 years in the investment-management business, we are not easily shocked. However, two things about bitcoin have shocked us recently. One is that bitcoin and some of its fellow alternative currencies are finding such favor among investors while gold (the only real alternative currency) is languishing. The second is that the most heated investment-related conversation we have had in many years was with a young person who, when told of our mild dubiousness toward bitcoin, basically lost it and started yelling in its defense. Bitcoin comes with passion and belief – at least at the moment.

 There is no more reason to believe that bitcoin, a computer-generated, algorithm-driven currency of supposed limited supply, will stand the test of time than that governments will protect the value of government-created fiat money. One difference: Bitcoin is newer and we always look at babies with hope.

 If you are looking for an alternative currency, look into gold. It has stood the test of thousands of years as a medium of exchange and a store of value. Better yet, it is not just a computer entry out in the ether somewhere, and it was last seen available at a good price.

 Bitcoin and its relatives speak to understandable impulses (against big government, in favor of freedom and modernity), but we do not see this particular experiment lasting. At least you have to work really hard to dig gold out of the ground.

 

 

Curb your enthusiasm: Marek Dabrowski says that the global economy's glory days are in the past

Consider each of those growth factors. Over the next 15 years, demographic changes will reverse, or at least slow, labor-supply growth everywhere except Africa, the Middle East, and South Central Asia. Europe, Japan, the United States, and eventually China and East Asia will face labor shortages.

Although large-scale migration from labor-surplus regions to deficit regions would benefit recipient economies, it would almost certainly trigger popular resistance, especially in Europe and East Asia, making it difficult to support. Increasing the labor-force participation rate, especially among women and the elderly, might ease tight labor markets, but this alone would be insufficient to counter the decline in working-age

The world economy cannot count on higher investment levels either. The global investment/GDP ratio, especially in advanced economies, has been gradually declining over the past 30 years, and there is no obvious reason why it would pick up again in the medium to long-term. Until recently, falling investment in the developed world had been offset by rapid increases in investment in emerging markets, mostly in Asia. But high rates of investment there are also unsustainable. As in Japan, China’s investment rate (running at almost 50% of GDP since 2009) will decline as its per capita income rises.

The third engine of growth, total factor productivity, will also be unable to maintain the relentless gains witnessed from the late 1990’s to the mid-2000’s. During this time, the global economy benefited from the confluence of several unique developments: an information and communications revolution; a “peace dividend” resulting from the end of the Cold War; and the implementation of market reforms in many former communist and other developing economies. Moreover, global growth received a further boost from the completion of the Uruguay Round of free-trade negotiations in 1994 and the overall liberalization of capital flows.

It is difficult to point to any growth impetus of similar magnitude – whether innovation or public policy – in today’s economy. No new technological revolution appears to be on the horizon. The World Trade Organization produced only a limited agreement in Bali in December, despite 12 years of negotiations, while numerous bilateral and regional free-trade agreements might even reduce world trade overall.

Worse, in the wake of the 2008 financial crisis, sluggish growth and high unemployment in developed countries have fueled demands for more protectionism. Thus, the financial liberalization of the 1990’s and early 2000’s is also under threat.

The far-reaching macroeconomic and political reforms of the post-Cold War era also seem to have run their course.

via www.project-syndicate.org

Where Does This Market Rally Rank?

As you will notice, we are currently at valuation levels where previous bull markets have ended rather than continued.  I recently suggested that we are most likely repeating the secular bear market of the 70′s :

“Despite much hope that the current breakout of the markets is the beginning of a new secular “bull” market – the economic and fundamental variables suggest otherwise.  Valuations and sentiment are at very elevated levels which is the opposite of what has been seen previously.  Interest rates, inflation, wages and savings rates are all at historically low levels which are normally seenat the end of secular bull market periods. 

Lastly, the consumer, the main driver of the economy, will not be able to become a significantly larger chunk of the economy than they are today as the fundamental capacity to releverage to similar extremes is no longer available.”

While stock prices can certainly be driven much higher through the Federal Reserve’s ongoing interventions, the inability for the economic variables to “replay the tape” of the 80′s and 90′s increases the potential of a rather nasty mean reversion at some point in the future.  It is precisely that reversion that will likely create the “set up” necessary to start the next great secular bull market.

via pragcap.com

Turkey is a Distraction Amid Much Bigger Potential Problems

The current problems are not all that different than what we saw during the 1997 Asian Financial Crisis.  The big difference is that the key players in this crisis are not only running much larger current account deficits than they were in 1997, but they’re simply more important economies.  The following chart via Cardiff Garcia at the FT shows the comparison of the key players relative to 1997:

 

In my view, it’s not Turkey, South Africa or Indonesia that should concern us all that much.  It’s not that these countries aren’t substantial, it’s just that the problems driving the crises in these nations could also drive much more important countries into crisis.  In a lot of ways, this is like looking at the Euro crisis.  It’s not Greece that’s really that concerning.  It’s Greece leading to problems in Italy, Spain or another key player that would break the floodgates.  And in this case, what we have is a group of countries that have experienced asset price booms, overinvestment and overvaluation of assets via various forms of financial intermediaries which has coincided with growing current account deficits and potential currency crises.  And the lynchpin in much of this is China because they’re the driver of much of the foreign demand that has driven the booms in these countries.  In other words, so goes China so goes these emerging markets.

But we shouldn’t panic just yet.  As Pawel Morski noted, this is hardly a “crisis” just yet as there are few signs of domestic debt problems.  After all, if we start to see real contagion we’ll likely see credit spreads in emerging markets begin to blow out more broadly.  That’s not happening just yet:

 

via pragcap.com

Bundesbank proposes wealth tax for EU states facing bankruptcy - Gee tbis makes me feel all warm and fuzzy

Eurozone governments facing the threat of bankruptcy should impose a one-off wealth tax on their citizens before seeking help from others, Germany’s Bundesbank proposed on Monday.

The German central bank raised the idea of an emergency capital levy in its monthly report, arguing that it corresponded with the principle of “national responsibility, according to which taxpayers are responsible for their government’s obligations, before the solidarity of other states is called upon”.

via www.ft.com

Banks Don't Lend Out Reserves

Firstly, here’s a short explanation of bank lending. Under normal circumstances, deposits and loans are more-or-less equal across the banking system as a whole. This is because when a bank creates a new loan, it also creates a new balancing deposit. It creates this “from thin air”, not from existing money: banks do not “lend out” existing deposits, as is commonly thought. You can see this clearly on the chart. Until 2009, deposits and loans were roughly equal.

But since 2009 there has been a very evident change.  There is a large and growing gap between loans and deposits. So what is causing this?

Firstly, banks, households and businesses have been deleveraging. That means they are paying off (or writing off) loans and not taking on any more. Damaged banks don’t want to lend, damaged households don’t want to borrow and fearful businesses don’t want to invest. The combination of these three factors means that both the supply and the demand for loans are considerably below the levels prior to the financial crisis. This explains the evident fall in loan creation (red line) in 2009. Though the line is now rising. Seems banks are lending, actually, though not at the rate they were before the crisis.

Secondly, the Fed has been doing QE. QE involves buying assets held by the private sector, both banks and investors. When the Fed buys from banks, the bank simply exchanges one asset (UST or MBS) for another (new reserves), and there is no change in deposits. But when the Fed buys assets from private sector investors, the purchases are intermediated through banks, and the newly-created dollars that investors receive in return for their assets are credited to their bank deposit accounts. Consequently bank deposits rise. This is the reason why the blue and red lines have diverged. Without QE, the two would have remained in sync: we would have seen a fall in both loans and deposits, since money is destroyed when loans are paid off or written off.

But, what about all those reserves on which the Fed is paying interest? Surely this is a major reason why bank lending is so far below deposit creation? After all, if banks can be paid interest on risk-free deposits at the Fed, they won’t want to lend, will they?

This chart appears to support that argument. Sober Look has “added back” to the loan line the excess reserves held by banks at the Fed:

Well, that’s amazing. Loans + excess reserves = deposits. Therefore placing excess reserves at the Fed must be crowding out lending, mustn’t it? So what we need to do is cut the interest rate on excess reserves, preferably into negative territory. Then banks will be forced to lend out the money.

No, just no. Double entry accounting is sufficient to explain this effect. It tells us absolutely nothing about the lending behavior of banks.

When the Fed buys private sector assets from investors, it not only creates new deposits, it creates new reserves. This is because a new deposit (liability) in a bank must be balanced by an equivalent asset. When banks create deposits by lending, the equivalent asset is a loan. When the Fed creates deposits by buying assets, the equivalent asset is an increase in reserves, also newly created. So it does not matter how much lending banks do, if the Fed is creating new deposit/reserve pairs by buying assets from private sector investors then deposits will ALWAYS exceed loans by the amount of those new reserves.

via www.forbes.com

BOJ near limit for bond buys but boost may be needed | The Japan Times

The BOJ’s total assets have climbed to ¥229 trillion, or 48 percent of the nation’s nominal gross domestic product. The central bank aims to increase its balance sheet further to ¥290 trillion by the end of this year.

In contrast, the Federal Reserve’s assets were equivalent to 24 percent of the U.S. GDP. With the central bank reducing its monthly bond buying by $10 billion to $75 billion starting in January, economists polled forecast the Fed will keep cutting purchases and end the program this year.

“It may be too late to prevent long-term rates doing something crazy” should the BOJ hold off on tapering before inflation reaches the target, said Richard Koo, the chief economist in Tokyo at Nomura Research Institute Ltd. The stimulus is leaving Japan at risk of falling into a quantitative-easing “trap” of being unable to taper without a surge in long-term rates and subsequent damage to the recovery, according to Koo, a former Federal Reserve economist.

Japan’s consumer prices excluding fresh food but not energy — the BOJ’s policy target — rose 1.2 percent in November. The core inflation rate has advanced from negative 0.5 percent in March, the lowest in two years. Its goal is 2 percent inflation.

“The BOJ will probably reaffirm that its stance remains the same and explain a slowdown in purchases isn’t a deliberate reduction,” said Daisuke Uno, the Tokyo-based chief strategist at Sumitomo Mitsui Banking Corp., a unit of Japan’s second-largest financial group by market value.

“If the tax hike badly hurts the economy, the BOJ will provide additional stimulus without any hesitation.”

via www.japantimes.co.jp

Green Means Stop

The release Wednesday of the European Commission's energy strategy for the next decade and a half comes amidst an ever-louder chorus of concern that European energy policy threatens its economy.

The latest and loudest voice belongs to Sigmar Gabriel, Germany's "super minister" responsible for energy and the economy. He warned Tuesday at an energy conference that Germany simply cannot continue to bear the $32 billion-a-year cost of subsidies for renewable energy, the linchpin of Germany's ambitious planned transition towards cleaner energy sources. German electricity prices, both for individuals and for industry, are among the highest in Europe.

"We have to make sure that we connect the energy switch to economic success, or at least not endanger it," Gabriel said.

via www.foreignpolicy.com

The magnitude is stunning: Should be Interesting

What is notable, if not unexpected, is just how pervasive the parking of offshore capital has been, and confirms that it is not inflow of money that the PBOC has to be afraid of when its internationalizes the Yuan, it is the outflow that will be far more worrisome.

The data illustrates the outsized dependency of the world’s second largest economy on tiny islands thousands of miles away.  As the country has moved from an insular communist system to a socialist/capitalist hybrid, China has become a leading market for offshore havens that peddle secrecy, tax shelters and streamlined international deal making.

 

Every corner of China’s economy, from oil to green energy and from mining to arms trading, appears in the ICIJ data.

But the biggest stunner is the sheer size of the wealth transfer: according to ICIJ estimate, up to $4 trillion in "untraced assets" may have left China since 2000.

Chinese officials aren’t required to disclose their assets publicly and until now citizens have remained largely in the dark about the parallel economy that can allow the powerful and well-connected to avoid taxes and keep their dealings secret. By some estimates, between $1 trillion and $4 trillion in untraced assets have left the country since 2000.

And while the parking of capital abroad is not illegal, it does contribute to concerns about vast corruption in China, which is also why the current Politburo has been scrambling to cut down on superficial among China's higher echelons. At least optically... And certainly not going to the very top, where it appears the bulk of the corruption resides as the initial data dump discloses.

To be sure, this is just the start of peeling away the layers of China's offshore wealth: the ICIJ provides this teaser: "Along with the China and Hong Kong names, ICIJ’s files also include the names of roughly 16,000 offshore clients from Taiwan. ICIJ will continue to publish stories with its partners in the next few days and will release the Greater China names on its Offshore Leaks Database on Jan. 23."

via feedly.com

On the overvaluation of the yuan?

China’s fundamental problem is its excessive savings rate and warped financial system which have skewed its development towards unproductive investment at the expense of consumer spending. China accumulated huge foreign exchange reserves but at the expense of private household wealth, which almost certainly would have been rising at a much faster rate than the paltry return foreign reserves invested in low yielding dollar assets have achieved. China’s undervalued currency allowed it to grab export market share at a fast pace, fuelling strong export income growth that allowed the state to throw money at unproductive investment without debt building up fast. During that period the argument was that the yuan should have been allowed to increase much faster to help the economy decrease its reliance on exports and investment and foster consumer spending.

But the situation now differs because the currency has become overvalued since 2011. The rebalancing from investment towards consumption given the overvalued yuan would be made easier if the currency is allowed to depreciate as capital flows are liberalised fully. This may not be the government’s intention, which for now seems keen on fostering their domestic fixed income market and allowing more capital inflows than outflows. But the higher the yuan, the more difficult it will be for the decimated corporate sector to abstain from cutting jobs and pay. It would then become a race to the bottom between investment and consumption amid weak external demand.

Investors have become aware that China’s growth story has changed over the past couple of years. It’s time to reconsider that the solution to China’s problems could well be different this time around too.

via ftalphaville.ft.com