Market Thinking

making sense of the narrative

The world’s most expensive pizza

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Way back in 2010 – like before the Ipad – a computer programmer used Bitcoin to buy a Pizza. The cost? 10,000 Bitcoin. Yes, 10,000. That is $630m at today’s exchange rate. That’s some pizza.

This week we saw the NASDAQ launch of Coinbase, on a valuation of around $100bn – or around 160 of those 2010 pizzas. Unlike most of the firms being launched at the moment it does actually make money. Lots of it. So pricing it on a multiple of 33x forward earnings seems (almost) reasonable from a Wall Street that regularly appears to make up valuations as it goes along. Equally, following the old Dictum that the best way to make money from a Gold Rush is to invest in the guys that sell picks and shovels, this might not be a bad strategy, although the embedded assumption that the volumes can grow rapidly while simultaneously preserving the high margin associated with relatively low volumes is very questionable (and is a standard flaw in most growth stock valuations). It does however highlight the serious question of ‘how to play bitcoin as a traditional investor’? To date, we have used the Grayscale Bitcoin Trust (GBTC) as a proxy, but here we note that the Trust has recently moved from a premium to a discount to NAV – thus while it has been rising this year, it has ‘underperformed’ Bitcoin itself quite noticeably.

One of the things we have observed is that rather than just buying the ETF, actual Bitcoin appears to have replaced Gold as the ‘alternative’ asset in a number of portfolios. Gold bugs have argued for years that inflation (as most agree is coming down the line) is good for gold, but unlike, say, Copper, Oil or other commodities, it hasn’t really responded to the shift in inflation sentiment over the last six months. Although to be fair, the gold bugs also say that it does well in times of deflation, so they can’t really have it both ways – much as they try. If Gold is sold on fear – of deflation or inflation then perhaps Bitcoin seems more of a solution?

Four years ago, Bitcoin and Gold were at parity. It quickly went (and stayed) to around 0.2. Currently it is around 0.03.

Having said that, while Gold along with everything else, including Pizza, has collapsed versus Bitcoin, against the $ and indeed other commodities it has bounced in the last few weeks and is ‘flirting’ with its medium term overhead resistance from a technical viewpoint. It is still an important part of the ‘macro-verse’ and heavily traded so, whether it breaks above, or retests the previous lows will be attracting a lot of trader attention over the next couple of weeks.

Gold; Short Squeeze, bitcoin hedge or buying the Inflation narrative?

This could of course be connected with ongoing concern over the $ because of the clear switch to an expansionary fiscal policy in the US, not just the anticipated inflation (although that is ultimately the mechanism for a debasement of the currency) but the perceived debasement of fiat currencies generally. This narrative, which certainly drives the Crypto fans, may be spilling into the rest of the investment universe who are buying gold as they are not quite yet ‘ready’ for crypto.

It’s all gone a bit Huarong

Another factor that may be supporting Gold is that the geo-politics is currently heating up on two fronts as the Biden/Harris reboot of the Obama foreign policy against Russia and Iran combines with the new anti China imperative. Ukraine looks a clear hot spot as the Ukraine Government moves troops to its eastern borders and Russia counters and is accused of expansionism by a US still desperate to scupper the Nordstream 2 gas pipeline and drive a wedge between Russia and Europe. Simultaneously the US are making noises over Taiwan and also trying to stop the Chinese Quantum computing industry with more sanctions on government and military backed businesses. Naturally anyone mentioning on Twitter or Facebook (both started with significant funding from the US Military and Intelligence services) that the US does exactly the same – if not more – is then blocked.

More generally, China seems to be continuing to emulate the trust busting, anti Crony Capitalist, patent stealing/ignoring, industrial powerhouse swagger of the early 20th century US, as it sought to seize hegemony from the British Empire. Meanwhile the US looks like a combination of the fading British Empire with a dose of late 20th century Chinese totalitarianism mixed in for good measure. What looks like an imminent collapse of distressed debt manager Huarong this week is symptomatic of how China is moving in a very different direction to the west at the moment. As the US pumps trillions into ‘Covid relief’ with questionable results (the only certainty seems to be inflation somewhere), China is cutting back and clamping down. As western politicians scramble to bail out failing firms (and particularly their creditors), China appears, with Huarong at least, to be letting non systemic businesses go to the wall. As western drug companies indulge in vaccine wars with the cheaper versions from J&J and Astra Zeneca being criticised for potential one in a million risks while the experimental MRNA drugs from Pfizer and others talk of hiking up prices, China insists on its own, free, version being available and offers it to other countries.

As well as allowing Huarong to fail rather than bailing it out with tax payers’ money, this week the Chinese hit Alibaba with a multi billion $ fine, but more importantly told Jack Ma, as well as his (non related) namesake Pony Ma of Tencent and the rest of the tech sector, that the ‘price out your competitors and then exploit your monopoly’ tactic they were thinking of importing from the west was a non starter. This at a time when the US was proposing raising Corporation taxes worldwide – as opposed to on their own Tech titans. For investors this means the Chinese tech companies can still make good cash flow, but not super-normal profits. Nor can they embed themselves into the system so far as to be ‘unsackable’, which means of course that western companies in similar areas now look to have zero chance of making it in China. Still it could have been worse for Jack Ma, the former Chairman of Huarong was charged with bribery. And executed.

Finally in a week of Crypto, Gold and China, we note that China and Crypto Currencies were two of the 5C’s we discussed last year and thus it was interesting that they combined this week with the next phase in the launch of the Digital Yuan. One intriguing aspect of this was the suggestion that the ‘currency’ would have an expiry date, rather like airmiles, so ‘use it or lose it’, which would also mean that the Digi-Yuan could not really be used as a source of saving (thus not a real store of value and thus according to the definition not really a currency.) It would also limit its ability to be used as collateral for leverage, something the Chinese may not have a problem with but not be helpful for the financialised world of Wall Street ‘rentiers’. More importantly it is a clear step in the process of breaking down the dominance of the $ in third party transactions. The more the US seeks to ‘weaponise’ the US$ and its banking system as part of its foreign policy agenda, the more the Chinese, Russians, Iranians and their own trading partners will start to use an alternative if it is available. If that alternative is safe, low cost and immune from external sanction then it will be embraced rapidly. Blockchain is a key technology, but Bitcoin or other Cryptos are not designed to handle the trillions of $ in daily transactions that currently go through $ markets, there is simply not the speed available. However, if they start to replace the underlying trade transactions with Digital Yuan (for example) then the inverted pyramid of derivative transactions that sit on top of that collapses. Just as attempts to prevent China getting access to the very fastest computer chips actually means they will become self sufficient in the lower end – and thus collapse the demand for western producers at anything but the very top end – so attempts to restrict access to the dollar markets derived from the underlying trade flow markets risks losing control of the underlying trade finance business in the same way that the DM drove the $ out of European Trade finance in the 1970s. Perhaps that is why the trade weighted $ has turned weaker again?

China increasingly dominates world trade. If they start trading in Digital Yuan it undermines the $

Source Visual Capitalist
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