A subscriber has some observations and questions about bitcoin

A subscriber has some thoughts and questions about bitcoin and Libra

Since the big up and down of bitcoin a year or two ago, where my 21 YO neighbor was telling me how I need to get in on this, I only saw it as the biggest Ponzi scheme ever and the prototype for the mark of the beast. Not that I have any financial expertise – I’m not suggesting bitcoin can’t be profitable for some but, I also can’t help wonder why the anti-fiat money people don’t ask the simple question. Who is willing to take lots of “worthless” dollars and give in return this electronic hocus pocus? I mean we are not talking about gold bricks, rare classic cars, art, property or whatever. It’s pixilated characters on a screen?

Having this idea in my head along with your analysis about the gov’t buying assets [actually, private central banks], I wasn’t sure exactly how to phrase my search. The correlation [of cryptos rising], while gov’t debt is on the rise may suggest that those who are giving up the dollars are in fact funding the gov’t debt. You mentioned this about the Libra and I just transposed it to bitcoin to help my search and found this article –

https://www.newsbtc.com/2019/06/27/bitcoin-price-rising-alongside-negative-yielding-government-debt/

Is bitcoin essentially a financial instrument created by the bankers to get more money to buy debt? Unlike the Libra that is being set up as the new currency with backing from the same players that run our current system.

Alex

These are all actually very reasonable questions. Let’s address them.

As for bitcoin being a ponzi scheme, I would disagree in that an asset’s value is based on what people believe it to be. Thus, if investors believe bitcoin to be worth $10,000 or $100,000, and the supply and demand equation support those levels, then that’s what btc is worth.

Beware of the shill articles

Income-generating assets like stocks and sports teams move higher as sovereign debt levels rise and interest rates fall. I will not make that same claim about assets like gold and bitcoin, which is short-term at best.

The average NBA team is worth $1.9 billion, up 13% over last year and three times the level of five years ago. The New York Knicks lead the way, worth $4 billion by Forbes’ count, up 11% from a year ago. (And owner James Dolan says he’s been offered even more: a cool $5 billion.) The club is tied with the New York Yankees as the second-most-valuable U.S. sports franchises after the Dallas Cowboys, which is worth $5 billion.

NBA Team Values 2019: Knicks On Top At $4 Billion – Forbes, Feb. 6th

Beware of relying on the shill article to determine a relationship between price action and some other condition. There may be a high positive correlation for a time, but they may be completely unrelated the next time. The shill will always find a way to put a positive spin on his objective.

First, let me discuss the typical shill articles that populate the crypto and gold spheres. Let’s look at the one this subscriber sent.

Bitcoin Price Rising Alongside Negative-Yielding Government Debt

This is the typical flimsy research that asset shills put together. Bitcoin will rise and fall on its own merits, so if the amount of negative-yielding debt levels fall from here, don’t make the mistake and assume btc will also decline. I bet that if the amount of sub-zero debt drops, this writer will talk up btc, because he will argue that with rising yields, economic collapse is just around the corner and btc will be the asset of choice.

You see the circular logic. This is the same type of shilling that takes place in the gold bug community. It is all designed to promote an agenda, and it starts with you accepting the logic and buying the product.

All other things being equal, when interest rates fall, the prices of income-generating assets rise. This is especially true of assets that are priced off the yield curve. But it can also hold water with other types of assets like gold, silver, and bitcoin, which do not generate income. However, it has been my experience that this relationship with non-income generating ones is often far than perfect. We have seen instances where gold has risen in a rising rate regime (late 1970’s, mid-2000’s) and falling while rates dropped (early-mid 2010’s). The same can be said about bitcoin (rising during the latest Fed tightening and rising in this dovish cycle), so I will never assume that there is a relationship between interest rates, debt levels, and bitcoin. It is a simple, short-term one at best.

Is bitcoin just another way to help support sovereign debt generation?

I marvel at the amount of generated vitriol directed at Facebook with its proposed Libra. I find it amazing that many of the crypto shills have sided with Facebook’s blockchain creation. If the authorities embraced Facebook’s Libra with open arms, the crypto shills would have raised hell. But the manufactured opposition has provided Facebook with an unexpected partner; the blockchain enthusiasts that support all things blockchain.

Chris Pirnak

I do find the timing of bitcoin’s creation quite interesting. We now have a new asset sector that is worth hundreds of billions; all auspiciously timed to coincide with the explosive rise in sovereign debt generation. All assets help to sustain the current system, so the more in total value we have available, the more debt that the world can absorb. The young folk, who have been shut out of home ownership and the sharp rise in stock values now have an asset they can call their own. Good for them. The elites are happy and so are the crypto bulls.

My only concerns with bitcoin as a currency rests in its decentralized nature. There is no debt backing it and it is too volatile to ever be a currency. If bitcoin became the global currency, the economy would collapse, because mathematically, there is not enough available and its price volatility would render business contracts too risky to undertake if priced in bitcoin.

A stable coin is needed and it seems to me that Facebook has delivered the Libra, which addresses all of bitcoins shortcomings (as a transaction currency), while working with the existing global hierarchy. It will be backed by debt and the amount of Libra will rise over time. As a globalized stable asset, I can imagine contracts of all sorts eventually being negotiated with Libra.

I marvel at the amount of generated vitriol directed at Facebook with its proposed Libra. I find it amazing that many of the crypto shills have sided with Facebook and its blockchain creation. If the authorities embraced Facebook’s Libra with open arms, the crypto shills would have raised hell. But the manufactured opposition has provided Facebook with an unexpected partner; the blockchain enthusiasts that support all things blockchain.

I can’t help but think how this dialectic process was probably planned a long time ago.

A subscriber has been seeing more articles calling for a Real Estate correction; Here’s my take

I know analysts have been chomping at the bit all decade to call a top in residential real estate, yet it continues to drift higher. This chart does not demonstrate anything bearish.
A lot of analysts are advising to sell our real estate now. Should we?

I have been seeing more articles like this one attached calling for a Real Estate correction.

ARE REAL ESTATE ETF’S THE NEXT BIG TRADE?

Recently, at a seminar held for my pension plan, one of the key-note speakers advised plan members to start unloading real estate holdings as the cycle is coming to an end over the next 12 months – despite low interest rates.

What’s your response to their advice.

Gary – USA

Before we analyze the research article, I want to let the reader know that the author’s site offers a lot of paid services and has posted a YouTube video about how to take advantage of the 2019-2020 bear cycle. He claims to be an expert on Southern California real estate, so I will refer to the area’s housing market.

Los Angeles real estate may look expensive, but I wouldn’t look at this chart and conclude I should sell my holdings, let alone initiate a short trade
California’s population currently stands at 39.9 mm. Its 6 mm new residents since 2000 have been heading to the cities.

In April, 6,438 homes changed hands in LA County—up 12 percent over a month earlier. But that was still roughly 1 percent under the number that sold in April 2018.

CoreLogic analyst Andrew LePage points out in the report that, across all of Southern California, the number of sales in April was almost 15 percent below average for the month. Total sales have declined year-over-year for nine consecutive months.

Experts initially pinned the region’s underwhelming sale numbers on rising mortgage interest rates, which raised monthly payments for most buyers. But rates dropped significantly in winter and have remained at relatively low levels since then.

Instead, LePage says the high cost of buying may simply be enough to keep many would-be home shoppers out of the market.

“The slowdown in price growth and sales over the past year suggests that despite a healthy economy, the cost of homeownership has outpaced incomes for many,” he says.

As expensive as homes are now, the median sale price across all of Southern California ($527,500) is still 13 percent below where it was just prior to the Great Recession, when adjusted for inflation. One potential reason home prices haven’t yet hit that level is that it’s tougher for cash-strapped buyers to borrow huge sums of money.

LA home prices back up over $600k, Curbed.com (May 29th)

Okay. Let’s dissect this analysis by looking at the article the email subscriber references. The author bases his research on his experience with the Southern California market. Specifically, he writes;

A subscriber recently mentioned getting into a real estate ETF so we started going over the data which may suggest the Real Estate sector could become the next big trade over the next 12+ months. The news that the US Fed may decrease rates in an attempt to front-run global economic weakness and real estate market weakness may result in a waterfall event in local and regional real estate markets.

Overall, our research has been focused on one of the hottest markets anywhere in the US, California. Los Angeles, Ventura County, Orange County, San Diego, and San Francisco make up the entire massive Southern California real estate market. The California real estate market is a fairly strong indicator for weaker market segments because the number of transactions taking place across the 400+ miles spanning San Francisco to San Diego represent multiple trillions of dollars, vast segments of consumers and types of housing as well as an incredibly diverse economic landscape ranging from coastal regions, farming regions, cities, technology hubs, agriculture and dozens of others

I am not so sure that concentrating on one market, albeit a large one, can afford a person the ability to make a conclusion about the entire investment sector. Here in the Washington D.C. area, things look okay to me.

Moreover, this analyst is concerned about some sort of waterfall event in residential real estate. That’s a big guess. Recall those who employ the gambler’s fallacy to conclude that another 2008 is coming soon. Okay, let’s continue.

This next paragraph is the basis for his thesis about dumping our real estate.

Our concern is that a rate decrease by the US Fed may be interpreted as a “move to attempt to abate fear” instead of a “move to support the markets”. If this decrease in rates does happen and at-risk homeowners fear the Fed is trying to push buttons to adjust the consumer environment toward a “buying bias” and sellers become scared, then the race to sell faster (decreasing prices to attract buyers) may become the norm. In other words, in an effort to support the markets, the Fed could take actions that remove the floor from the markets as sellers attempt to get the best price possible before buyers become aware of the “race to the bottom” in terms of pricing.

Another hazy assumption. How does he make this conclusion? Few home sellers  will view what the U.S. Fed does with any real concern. Any sellers are guided by what their Realtors say and mortgage rates are coming down. The demand is still there, just based on population growth alone.

Subscribe to his cycles analysis

People are still pushing this cycles stuff, as it sells.

This analyst is still working with what I would consider an anachronism; the investment cycle. Specifically, he has a paywall that will enable you to see his proprietary research. Just like all the other cyclists and market timers. But the problem with all these analysts is that they refuse to see the elephant in the room.

We have laid out all the points that indicate the owners of the central banks have decided to keep things moving along, and will do whatever it takes to make certain asset prices move north. Higher asset prices plus unlimited central bank debt buying will enable the world to digest all the sovereign debt issuance and keep rates low. Before this whole thing blows up, we will eventually see negative rates across the board. The central banks will try everything before any disaster. Keep that in mind if you are predicting a real estate or stock market crash.

So, because he believes residential real estate is going to fall, he recommends buying SRS – ProShares ULTRASHORT REAL ESTATE at some point in the near future. Okay, let’s take a look at the chart. The ProShares UltraShort Real Estate (SRS) seeks daily investment results, before fees and expenses, that correspond to two times the inverse (-2x) of the daily performance of the Dow Jones U.S. Real Estate Index.

The SRS has been a falling knife for years. This is just the 3-year weekly chart. I deleted the 200 week mva as it was much higher and distorted the graph.

Next, I took a look at the top weightings in the Dow Jones U.S. Real Estate Index (DJRI). Here is what I came across:

American Tower (AMT) – Owner and operator of cell towers and infrastructure
Crown Castle (CCI) – Crown Castle is America’s largest provider of shared communications infrastructure, with more than 40,000 cell towers and approximately 70,000 route miles of fiber
ProLogis (PLD) – Currently the world’s largest owner of warehouses and distribution centers
Simon Property Group (SPG) – Simon Property Group, Inc. is an American commercial real estate company, the largest retail real estate investment trust, and the largest shopping mall operator in the US.
Equinix (EQIX) – Specializes in internet connection and data centers.
Public Storage (PSA) – The largest brand of self-storage services in the US
Welltower (WELL) – mostly invests in seniors housing, assisted living and memory care communities, post-acute care facilities, and medical office buildings. It also owns hospitals and other healthcare properties outside the United States.
AvalonBay Communities (AVB) – a publicly traded real estate investment trust that invests in apartments
Equity Residential (EQR) – A publicly traded real estate investment trust that invests in apartments.
SBA Communications (SBAC) – Owns and operates wireless infrastructure, including small cells, indoor/outdoor distributed antenna systems, and traditional cell sites.

Based on his belief that residential housing is due for a correction, this analyst claims that the SRS is primed for a big jump. But, based on the top 10 weightings for the DJRI, I have to conclude that this is the wrong investment to trade. The DJRI has only a muted connection to residential real estate. Moreover, the DJRI’s weightings in residential RE is based on apartment buildings, not single family housing.

Conclusion

I see little reason to think that residential real estate is going to waterfall like last decade. Moreover, I would not take this person’s advice on how to trade whatever he thinks is coming to real estate.

  • The Fed would never let that happen, and it would open the financial flood gates, as it would get the blame.
  • Moreover, the Federal government would stand ready to offer whatever tax incentives and subsidies were needed.
  • The U.S. city population continues to rise much faster than what housing is available. You can thank open borders for that. This trend is also taking place in most of the large cities in Western Europe and the former Commonwealth nations.
  • This analyst’s selection of the SRS is a poor choice for shorting the housing market. Since you and I have determined that interest rates are coming down, the stocks and REITs that comprise the DJRI will directly benefit from dovish Fed policy. These businesses will be even more attractive with low rates. These companies run cell towers, call center, warehouses, shopping centers, hospitals, and other infrastructure. This is why the performance of SRS has been an unmitigated disaster. Buying the SRS is like shorting the stock market. Go to the casino instead; you will have better odds.
  • Home sales may have topped out, but I am certainly not calling a top in home prices. The whole market dynamic is different from last decade. Rising interest rates were the cause of last decade’s debacle and the Fed will not make this mistake again. In fact, we will see sub-1% 10-year rates in all the former Commonwealth nations. All other things being equal, I think real estate will be a disaster… to those who continue to rent.
  • Most areas in the U.S. are just breaking even with last decade’s top in nominal prices, but that was 13-14 years ago. Adjusted for inflation, many areas are still down by up to 20% or more.
  • Maybe the analyst’s prediction will one day be correct, but not before  seasoned investors have paid down mortgages, derived tax benefits, and earned rental income.
  • If I believed that residential real estate was going to fall, I would build up cash positions and pay down debt, so I could take advantage of the lower prices. Selling real estate is expensive;  out and back in is at least 10% of the houses prices. This amount is even higher if you have to spend money to fix up a property for sale, because many times you will not get your money back out.
  • I normally do not recommend investing in real estate via REITs. They may be okay in a passive portfolio, but their dividend yields are way too low for my taste. Direct ownership of the property is much more profitable in the long run.
  • There are clearly some areas that are extremely overpriced (e.g. Toronto, San Francisco, Manhattan, Vancouver, San Jose), so stay away from these areas for investment. Just use common sense. If you have to live there, then don’t overpay.