Slaying monsters

All the world's a stage

I was reminded of this when I saw Vice President Kamala Harris in a highly choreographed video celebrating World Space Day. Harris Chairs the National Space Council despite only knowing that "space is up there somewhere". On first glance the video was truly awful, so I stopped watching. It was later revealed that all the kids who had been chosen "for their interest in space" were in fact child actors. So, I watched it again and it was even more awful.

Health warning: Do Not Watch

The story gets even better though because it turns out that the production company that made the video is known as "Sinking Ship Entertainment". Perhaps not entirely space appropriate.Anyway, no big deal. They used actors and so what? The President himself is basically an actor, he just reads from a teleprompter and sometimes he gets it right and sometimes he doesn't. The last President, Trump, absolutely was an actor. He appeared in Sex and the City and was the host of The Apprentice for many years before running. So much of politics is pretend, simply a mirage to make people think a certain thing in a certain way. Those same political actors control money like that too. It can be summoned up whenever needed, in any amounts. It is entirely pretend and for as long as everyone pretends along, then everything is fine. I'm not really suggesting Kamala Harris is an actor, I'm sure she participated in the video on good advice and the whole thing is basically well intentioned but it just illustrates the larger point. I'm also certain that all the dollars that emerged in recent months are also well intentioned. What else could they do?The best discussion I have seen on this unknowing manipulation of information (and money and prices are just information) is Noam Chomsky's interview with the BBC's Political editor Andrew Marr. He concludes with this line to Marr, which addresses the media more generally:

"I'm not saying you don't believe what you are doing and what you are saying; I'm saying, if you believed something different, you wouldn't be sat there."

Here it is, a short video of that interview much more worthy of your time. Incidentally, Chomsky doesn't get invited to do interviews anymore. He thinks the wrong thoughts.

In the future

As possible ETF excitement builds it might be worth visiting the idea that the US selects futures as the basis of its bitcoin ETF rather than bitcoin itself.Rather than us all nod and pretend we know what futures are, let's lay it out.

• Futures are contracts that promise to buy or sell a something at an agreed price at a future date.

• Often, they have specified dates around quarter ends

• The exact contract details of the CME bitcoin futures can be found here

They can be very useful in helping price discovery since it is much easier to short a product using futures than borrowing and selling it. This is particularly true of digital assets, since going short without futures requires borrowing the asset (and getting the private keys) meaning you assume complete control and can ride off into the sunset with them. A Bitcoin ETF itself though is unlikely to be that efficient, here's why:

An US Bitcoin ETF is likely to experience huge demand. An enormous market will be created on the other side of the trade, those people who say "yes, I will sell the bitcoin to you on the specified date in the future". It will work roughly like this:

• ETF Futures launches

• Huge demand for futures created. December bitcoin futures trade at premium to spot price

• Hedge funds buy spot bitcoin and sell the futures; creating the other side of the market that the ETF can buy

• Hedge fund collects the difference

Now clearly, the action of the hedge funds in selling the future will naturally suppress the price and bring it towards the spot level but there will be a large and permanent arbitrage in between. Some think the likely cost annually will be 10%, I think competition might take that lower but it will still be unnecessarily high.This then begs the question why? Why would the SEC approve a more inefficient product? The answer is likely that futures are well understood in financial markets and bitcoin is not. So, for Wall Street, if all they have to do is deal with a piece of paper saying "Futures" on it, that's a whole lot easier than dealing with digital assets. There is also an argument that the futures market could be used to suppress the advance of bitcoin's price, as has allegedly happened over the years in the gold market. The argument goes that banks naked short sell gold (meaning selling gold they do not have). This depresses the price of gold, the buyers of those short-sold contracts don't actually want to take delivery of the gold because it is costly to hold and transport, so the banks have no fear being asked to deliver the yellow stuff. So, short sellers can always bully buyers unless they are a major bullion dealer that can deal with the physical asset. I don't think this applies to bitcoin, simply because storing and holding it costs next to nothing. If you short bitcoin, you better be able to deliver. If it is to be futures, I predict some epic short squeezes near expiry over the next few years. It won't be efficient but it might be great fun.

Bloomberg to the rescue

An article that's worth a read from Bloomberg's Opinion section. We need more inflation because it will make people's mortgages cheaper because their wages will go up. The default assumption appears to be if we let inflation run, wages will follow. That absolutely is not happening and it has not happened since 2008 and earlier. The returns to labour continue to fall with the rise of mechanisation and automation. If you have no skill, you are struggling from the off. Of the many things revealed through this pandemic, one was that you can pretty much work from anywhere in skilled or semi-skilled white collar roles. What's more, if it is IT related there are likely millions of people who can help you around the world for a fraction of the cost you used to pay. That is causing wages to fall. The policy Bloomberg suggests will absolutely destroy people who do not have wage bargaining power. The whole article reads like the White House has been on the phone saying, "Hey Mike, we could use a favour". I'm sure that's not how it works though.......

Treats in store

One month from now Taproot will activate on the bitcoin network and absolutely nothing will happen as a result. We have discussed the change before, it modifies the cryptographic signature in bitcoin transactions making them very much smaller and allows for potentially enormous smart contracts to be compressed into a single signature.It is technical. Nobody (like you reading this) is really that interested. Yet it is likely to be the biggest step forward in bitcoin yet, it will also take a long time to manifest itself in useful applications. Just like the lightning network has taken five years from inception to meaningful adoption, the same goes for Taproot.The activation date looks like being 16 November 2021 or very close to it. It will not be in the news and it will not be on the Bloomberg screen but if anything is going to rewire the world's financial markets, it is going to be Taproot. I'll remind you of this in 2025.

Euro-Trash

No. I do not make this stuff up.

The ECB published the results of it strategy review this week and led with a cartoon of a blonde lady apparently slaying the dual monsters of inflation and deflation. The terrified population are cheering her on below, which is wonderful to see. Who could it be? This lady, who slays monsters and flies on the wings of the European flag.Here are the "findings":

That took a whole year! Not only that but the whole body of research focussed on about 30% of spending. It ignored housing and financial assets. So, inflation was low, unless you actually want to live somewhere or in some way save for an improved future.It is mind boggling how ridiculous this stuff is. The research is about as helpful as an umbrella while you're swimming. It's basically saying that if you live under a railway bridge, inflation was low for you but mostly it was low because you didn't have a job (excess slack in the economy), so while things were cheap, you probably couldn't afford them anyway. Finally, we are asked: "do we want to know who contributed to this research?" Yes, we most certainly do.

All 33 of them enjoying 20.7% annual pension contributions, paid for by the bloke under the railway bridge busily enjoying his low inflation environment.