With a performance that is on track to 20-bag this year, there is little doubt it’s going to be a very Merry Christmas for Bitcoin enthusiasts, many of whom have made truly astonishing gains in 2017.
We’ve written in detail previously about why we think this fairytale won’t last, noting our concerns regarding the concentration of ownership in Bitcoin, the lack of governance on the exchanges through which Bitcoin is traded, not to mention slow transaction times and the incredible spreads that would make an airport currency exchange blush.
In short, whilst it’s done an unbeatable job as a speculative asset since its inception, Bitcoin is almost useless as a monetary asset.
“Give it time” say the cryptobulls who argue Bitcoin will become much better as a medium of exchange of unit of account, but only after the world goes through a period of hyperbitcoinization (an actual term used in the crypto community), with an astronomical price tag attached to each coin.
In essence, cryptocurrency bulls argue that Bitcoin will become useful once it has become valuable, rather than needing to be useful in order to be valuable.
Suffice to say, we are sceptical, though as we head into 2018, it’s worth pointing out that whilst Bitcoin is hogging all the headlines, it’s likely not the only bubble out there.
Whether it's the USD $11 trillion in negative yielding sovereign debt, the Japanese central bank owning 75% of all ETFs and over 45% of JGBs, the Swiss National Bank with a balance sheet in excess of 100% of GDP, Salvator Mundi going for $450 million, or Veolia, a BBB rated corporate raising EUR 500 million at a negative yield (the issue was four times oversubscribed) distortions and bubbles are everywhere, the unintended consequence of 10 years of monetary extremity that future historians will marvel at.
US Equities, which everyone is expecting to get another leg higher after tax cuts in the United States, are not immune, with the chart below showing the S&P500 median price to revenue chart since the mid 1980s.
Based on this metric (which in some ways we prefer as its not influenced by stock buybacks which boost the E in CAPE), stocks are now ay more expensive than they were in the dot-come bubble or immediately pre GFC
Another way to think about this is that whilst a pair of running shoes might cost you about the same as they did in 2009, investors in the company that sells those shoes are now paying three and half times more to own a piece of that sale than they were less than a decade ago.
Wall Street might call it a bull market, but that sounds like inflation to me.
Which leads us to Bullion.
Whilst it hasn’t been exciting, we think gold has had a good 2017, especially when you consider the headwinds. Indeed at the start of the year if you’d have said the Fed would raise rates multiple times, the stock market would continue to hit all time highs (with not even one negative calendar month return), that volatility would all but die, and that retail bar and coin demand would hit its lowest level in a decade in some markets, then most would assume the gold price would have fallen.
Instead gold is up close to 10% YTD, highlighting an underlying strength in the market that bodes well for the years ahead.
In 2018 – whilst we aren’t wildly bullish, we do see further upside, noting a number of potential catalysts, including a pick up inflation, continued weakness in the USD, a correction in risk assets, a collapse in Bitcoin, a more dovish Fed (relative to expectations), or even a US recession (a long shot and definitely not our base case, though the yield curve appears to be telling us something).
Note that we aren’t predicting that all of the above will happen next year, but with speculative positioning in gold at its lowest levels in five months, the market is well positioned if even a couple of the above catalysts comes to pass.
Bitcoin, Bubbles and Bullion report available in full below.