Pony Tail

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Bond Vigilante

The Chris Joye fan club were out in force again this week after he “brilliantly showed” how it's an everyday occurrence to get 5-6% on your cash. I brilliantly googled it and the first thing that came up was 5.6%.

The fan club appeared to be suggesting why take the risk of being a landlord and earning 5% yield when you could simply invest in a bond fund. Indeed, Mr Joye’s fund has been having nothing short of a spectacular year, after his fees, returning 5.15% into your pocket. Over the course of a decade he has outperformed cash by 1.3% every single year! It’s nothing short of remarkable and no wonder he has tenancy at the Financial Review and is talked about in every corner of Australia from Double Bay to Rose Bay.

It’s another example of a peculiarly Australian disease of bias towards all things Australian. Most local investors are massively overweight Australian stocks and always have been, missing out on the mega-gains of US firms in the last decade. They are equally massively overweight Australian bonds because nothing really ever goes wrong here and they are deemed safe and as well as being continuously shilled in the Aussie financial press. 

The concentration of risk in Australia seems absolutely huge and while I am uber-critical of Mr Joye because of his bond myopia, I don’t disagree with everything he says. Most notably, if anything happens to housing in Australia, it will take the banks with it and therefore the ASX, which given the concentration of Australian superannuation in both property and Australian stocks will be very bad. Very, very bad. 

So a portfolio of property, an ASX ETF and some high quality Australian bonds; which is nearly every super fund in the country and will one day be a lesson in concentration risk. Just because it has a different name, doesn’t mean it's a different thing. 

I raise it because the same group of investors have a hysterical aversion to bitcoin, which despite being highly volatile, has some features which we believe fit well for Australian investors. Firstly, it is not correlated with anything Australian. Secondly it is a high technology play (which is not very Australian) and thirdly its performance speaks for itself. 

Noise

Lots more ETF noise in the week. To shortly summarise: BlackRock resubmitted their application in response to SEC feedback last Friday. The two main areas of interest were the ticker (which is IBTC) and that BlackRock aims to seed ‘Creation Baskets’ throughout October. All of this is square bracketed so can change but would mean that BlackRock is quite possibly out there buying bitcoin now. It does not take much capital to seed an ETF but you can imagine the price impact of BlackRock calling an OTC desk and buying Bitcoin because “our ETF might get approved”.

Next up there were further developments in the SEC v Grayscale case.

The court has now formally ruled that the SEC should go back and re-review the Grayscale spot ETF application from years ago having earlier decided that the SEC did not have sufficient basis to decline it. To me, this is likely to be less relevant because there are two streams of ETF applications running; original ones that were wrongly declined and the subject of court action and the newer ones which are progressing and will likely be approved. 

The court process will move more slowly than the new application process so the decision, while no doubt having an effect on the SEC’s current view of live applications, isn't going to accelerate things.

Once again, I reiterate our view that the ETFs will be approved; there will be disappointment about the amount of cash they take initially and then over time the consistent flow against consistently lower supply will have its inevitable effect. 

Don’t get too excited basically, but you could legitimately put an extra sugar in your coffee or something like that.

Helpful reminder 

I find this visual reminder of the relative scale of the different asset classes helpful. I don’t have an expectation that the first two will be usurped by digital assets but I see no reason why the class would not be the equivalent of the precious metals group. 

The question for asset allocators over the next few years is which of these columns is going to show relative strength versus the others.

The window of opportunity is now. There is a very large group of people (whom we cover next) who cannot quite compute that something digital could have the sort of value that bitcoin does. The reality is that the digital real estate equivalent of Manhattan Island is for sale at the moment. 

An extraordinary chart

I found this one amazing. 65+ is now the largest spending cohort in America. 

In a ‘healthy’ society that group is nearly always one of 35-44 or 45-54; because generally they have children of younger or older ages which drives spending upward. Perhaps the most depressing is the spending capability of the under 34’s which is starting to dwindle and sits neatly with the narrative that Gen Z has been dispossessed.

I don’t share that view though. The power, influence and control will always sit with those that make up the workforce. Imagine a scenario where there are 99 retirees and 1 member of the working population, let's call that person 18 year old Bob. 

Bob has no money and no assets, he laments his situation as deeply unfair “those dreadful boomers he says; they took all the homes and they have all the 6.5% yielding bonds”.

However, Bob would be precisely wrong because whatever he chooses to do is going to be fabulously valuable. Let’s say Bob stops sulking and launches a mowing business. Lot’s of old people need Bob’s mower, the demand is huge. They will pay literally anything but Bob, having got over his earlier sulk, has decided that the $300 he has been offered to mow lawns is fine but through an obvious use of economic self interest has decided he wants it paid in a commodity that the older cohort doesn’t have much of. So he says, “pay me in bitcoin”.

To begin with it’s no big deal. One customer pays him in bitcoin, word gets around “Bob will mow your lawn for only 0.00002 bitcoin”. Everyone sells a few bonds, because it’s no big deal and they start buying bitcoin. The rest is inevitable, Bob is the only worker in the population of 100 and soon, because of his asset choice, he is the richest man in the world.

A relatively small working population is a very dangerous thing, if they demand payment in something larger cohorts do not have (whatever they choose) the wealth transfer will be both devastating and immediate. 

This crazy story is totally ridiculous and serves only to illustrate that if you are invested in the same asset as your own cohort and not the asset of the people in work you might get left holding the thing nobody wants … which I assure you will be the thing everyone likes so much at the moment … bonds.

Euro-Trash

The digital Euro took a giant leap forward this week when the ECB board approved the move to the “preparation phase”. The decision to launch will come later; this particular decision was a decision about whether we might make a future decision. They have decided, emphatically, that they would like to decide later. The report itself contains very little around the technical details of how all this would work, presumably because that would open the ECB to criticism.

There is some unintentional honesty in Lagarde’s update too. That the Euro is key to European Unity. Yes. Without it Germany would be a totally dominant economy and the periphery would be much less well off without their money. How long Germany will tolerate that is anyone’s guess. Suffice to say though that as their economy starts to struggle they will be much less excited about another Greek bailout. 

The whole thing is a political project to bring Europe together and prevent war. A very strong case for its success could be made, except that even without it from 1945-1999 there were no new wars in the Euro area. Yet, the very likely cause of a massive fall out in Europe in the next decades will be the Euro.

So it worked in exactly the same way that me not growing a ponytail has prevented a nuclear war. 100% correlation. 

Finally thanks to the reader who pointed out we did not provide the quarterly Euro v Bitcoin update. I suspect they are 30x long the Euro or a spy for the ECB. Anyway, here it is. 

Credit it where it’s due then. The Euro has held on well in difficult times losing only 6% to the USD since 2020. I’m genuinely amazed given I think it's going straight to 80 cents. Bitcoin is up 185% overall but in the quarter itself it was outperformed by the Euro. There, I said it. “the Euro outperformed bitcoin over the September quarter”.

Now I’ve said it twice. Stop complaining and get ready to buy your Spanish villa in 2025.

Further information

Read our bitcoin news wrap-up on Livewire: When money doesn't work, people stop working

Our September 2023 report to investors can be found here.

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