Inflation talk

I am a great admirer of George Soros’s reflexivity theory. I don’t claim to fully understand it. Part of it is about our inability to fully understand anything, so this is covered by the theory. But the bit of it that I cling to is that how we think about the world influences how the world is. In investing, as long as everyone believes that a stock price will rise, and is willing to act on that belief, the price will rise, whatever its P/E ratio is. At some level this is just Benjamin Graham’s observation that the stock market functions like a voting machine. I think that Soros’s theory is deeper than that interesting, but uncontentious observation but I don’t understand it will enough to explain why.

Anyway, Jim Bianco’s guest post on inflation is an example of this. If people believe inflation is coming, it will. Again, this is probably a rehash of rational expectations theory, or Ricardian equivalence, or plan common sense. But it is convincing to me (you will not be surprised to read).

GBTC

Kuppy has been promoting $GBTC (Grayscale Bitcoin Trust Company) for a while now, but has only just produced this post on why it’s such a great asset. Even though I wrote the paragraph above having not read Kuppy’s post, he too talks about Soros’s reflexivity hypothesis. Nobody can have failed to notice the rise of Bitcoin lately, and I think that Kuppy gets close to the explanation. Eventually, there will be benchmarks, and the buy side will simply have to own this crappy stuff, because … the passive crowd want to own it, without having any idea of how it works and why it even has any value (it doesn’t, but that doesn’t matter).

Kuppy’s post goes into some (but incomplete) detail on how to exploit the arbitrage between GBTC and bitcoin itself. The fact is that you can buy GBTC at net asset value for cash (or bitcoin) but if you can bear to wait six months, you get to sell something worth 26% more. This arb. can be done if you are US resident, but is tricky for foreigners like me.

I think the main takeaway is that people see the price of bitcoin going up, don’t trust themselves not to lose the key to their wallet, and don’t want to run their own blockchain wallet,

One thing that Kuppy and the FT agree on is that this is all reminiscent of a Ponzi scheme. Here.

Another inequality chart

Wrap

Today was a pretty wild day. Trump has (in effect) conceded, and Biden is busily filling his cabinet with Wall Street nominees. Janet Yellen is appointed as Treasury Secretary, which will ensure that securities will continue to be pumped higher and higher. Mnuchin has petulantly refused to continue guaranteeing some of the SPVs which allow the Fed to support corporate bonds and similar private securities, but this is at best a short term interruption as (surely) Yellen will re-activate them. Krugman has described Mnuchin’s action as an act of economic vandalism, but Krugman has never seen any political action that would lead to more debt that he doesn’t like.

Today was risk on steroids. There wasn’t an equity market on the planet that didn’t shoot up. Unloved sectors like energy and real estate were strongly bid up. $X (US Steel) went up by 23.5%. This is really a crazy market. Meanwhile in currencies, Turkish Lira is getting hammered again, even against the dollar, which was sinking (DX down 0.37%), but particularly against the Euro. Gold and gold miners crashed, as it’s a risk off asset. Thirty year Treasuries were down 0.45%, with the yield curve (predictably) steepening. Amazingly, Sept 22 Eurodollar futures options cheapened. The world is indeed convinced that under Yellen and Powell rates are going to zero or lower.