‘Religious’ financial assets
Posted by John T. Reed on
I need a summary article on the assets that are religions. They are gold, bitcoin, and Amazon stock. I use the word religion here to describe fervently held beliefs that are based on faith, not on facts or logic. I hasten to add that in both the more common use of the word religion (centered on a supreme being) and this use, the adherents to the religion swear that they DO have facts and logic.
I have a detailed article about why gold is a lousy hedge against inflation: https://www.johntreed.com/blogs/john-t-reed-s-hyperinflation-deflation-blog/60940227-disadvantages-of-gold-as-an-inflation-hedge
Bitcoin
Do I have an article on bitcoin? I have a bunch, but you really don’t need an article. I see nothing wrong with going to Wells Fargo, for example, and having them send money to Westpac Australia via bitcoin—as long a Wells and Westpac guarantee the transaction and you start out with USD here and end up with AUD there.
I think it’s nuts to use bitcoin to move money without such a trusted guarantor. And it’s hypernuts to use bitcoin as a store of value, i.e., to put money in bitcoin and leave it there.
No basis for trust
Why? There is no basis for trusting whatever it is bitcoin owners are trusting. With any asset, you can and should list the discrete risk that it faces. In my book Best Practices for the Intelligent Real Estate Investor, I have a chapter on risk management where I list the 14 risks of investing in real estate where you hold the deed.
If you buy real estate through, say, real estate investment trusts, you pick up a few new risks, like exchange risk and fidelity risk (broker steals your money) ,and you lose a few (like being sued personally by a tenant of the REIT).
No trustworthy bitcoin partners
Once you identify the risks of the asset in question, you must manage each. For example, I recommend that you use one of the three biggest title companies to handle your escrow. Escrow companies sometimes steal your money. So you manage that risk by using the most trustworthy companies.
But no such exists in bitcoin. Bitcoin has obvious risks like hacking, forgetting your password, your password suddenly not working for some reason, having a criminal learn your password, etc. And how do you manage these risk? No one knows.
Amazon stock
With Amazon stock, the risks are obvious. It has a price/earnings ratio of 265. Average is 13. Apple is 18. But the buyers simply choose not to credit them. I have a number of articles about Amazon at my web site. Just type that word in the search box on the upper right of any of my web pages.
No price to high; always a buy
The common denominator among these three assets is their true believers believe there is not price to high to pay for them. They cannot name a price at which you ought to sell. They sort of think all prices for the asset in question are bargain prices.
I pushed one gold bug to say what price was too high for gold. He finally grudgingly said $1,800. The highest price gold ever hit adjusted for inflation was about $850 ($2,697 September 2017 dollars) on January 21, 1980. As you can see from the 100-year adjusted-for-inflation graph below, that was not typical of the last century. and $1,800 was roughly the highest price ever other than January 1980.
For my book How To Protect Your Life Savings from Hyperinflation & Depression, I calculated the average adjusted for inflation gold price since 1968. It was about $645. I say it’s overpriced when it is above that and under priced when it’s below that. But I do not advocate buying or holding it for reason in the article I linked to above. We have some because my wife inherited it from her brother and kept it for sentimental reasons.
And it you look at the 100-year chart, you can see that there were times when $645 in 2017 dollars was too high for a long time. But at least it was not like if you bought in January 1980. Those guys have NEVER seen the price rise back to what they paid—37 years. Ouch!
Regression toward the mean
That is based on the statistical phenomenon called regression toward the mean. Mean is the fancy academic word for average. That means over the long term, things tend to spend the most time around the average value and the least time at the peaks and valleys. The religious true believers in gold, bitcoin, and Amazon stock believe not only in regression to the peak—a phenomenon never observed in the universe—they believe in what goes up must go up more, forever. Insanity.
Martian home buyers
Sometimes, people in real estate start believing that about real estate. Which causes me to ask, who is going to pay those prices? Where are the people who can qualify for such astronomical mortgages? On Mars?
But with gold, bitcoin, and Amazon stock, there is no connection to practical reality like qualifying for a mortgage so the true believers see no reason the prices cannot climb forever.
Price/earnings ratio
The price/earnings ratio could be such a reality connection, but the true believers reject any metric that reveals that the emperor asset is wearing no clothes. A reader said Amazon is a “permanent start-up” because of its never-ending expansion. It actually started in 1994, 23 years ago.
The phrase “permanent start-up” is a contradiction in terms. This is well known in the mutual fund business. Small, new funds often grow really fast. But then money pours into the fund and the bigger the fund, the harder it is to find places to put the money to continue that rate of growth.
If you get really big, you ARE the mean
The same difficulty of finding expansion opportunities that match their target growth rate faces Amazon. The bigger Amazon or anyone else grows, the harder it is to sustain that growth rate. In other words, a fast-expanding company will tend to see its growth rate regress to the mean for the simple reason that if you take over the whole world, you ARE the mean.
Old enough to know better
I am 71 years old. I have trouble believing it, but that’s the fact. Lately, many debaters put me down for that. Actually, it is a plus when taking about things like this article. I remember the late 1990s when dot-com stock prices hit ridiculous highs. We were told P/E ratios no longer mattered. If you are a start-up—a magic word—you need not only no earnings, you need no sales.
‘Start-up’ means never having to make a profit
The tag line in the movies Love Story was “Love means never having to say you’re sorry.” Since the 1990s, Being a start-up means never having to say you’re sorry for not making a profit. All you need are some Harvard college dropouts, an office dog, a foosball machine, and your little gaggle of twenty-somethings in a loft are worth hundreds of millions of dollars. It’s a start-up. No need to say anymore.
In the 1970s, when I was an MBA student at Harvard Business School, conglomerates with their purported synergy were fading. They had been all the rage in the 1960s. There is a pretty good article about all that at http://www.nytimes.com/2006/04/07/your-money/conglomerates-when-synergies-collide.html. It was written in 2006 after all the fad had died out so it is clear-headed. Amazon is just another conglomerate claiming synergy, although it’s now called “leveraging.”
It’s fun being 71 and watching the full-of-themselves young people making fools of themselves repeating the embarrassing financial history they could not be bothered to study. He who refuses to study history, is likely to become history. My book on Hyperinflation has a historical timeline of hyperinflation that goes back to 4,000 BC.
If you suspect some asset pusher is actually a financial religious cult member, ask them the sell and bargain prices for the asset in question. If you get a sputtering, stammering answer rather than a number, hold onto your wallet and leave the room.
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If you hear the phrase “This time it’s different” explaining why the asset is exempt from the laws of economics and finance and gravity, run. In the book by that title, the authors said those words have preceded more loss of money than the words “Your money or your life.”
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