Soldiers want their generals to be lucky. As capable and knowledgeable as generals may be, they still need luck to win. And citizens want their central banks to be lucky, because central bankers often fail even if they are capable and knowledgeable.
The Federal Reserve has been very, very lucky. Unrest in Ukraine, territorial disputes in East Asia, the usual morass in the Middle East, and now nationalist parties winning European elections, have all combined to push U.S. Treasury yields down even as the Fed steadily withdraws its quantitative easing. Financial markets mavens who confidently predicted that this would be the year of rising interest rates and falling stock prices have had to substitute excuses and explanations for predictions.
Some still persist in forecasting rising rates and falling stocks. Perhaps they will be proven correct. But if you're betting your money on these predictions, remember that you're, at least in part, betting on the Fed's luck running out. A bet on bad luck is still a bet on luck. If you wouldn't play the lottery or patronize a casino, why bet on (or against) the central bank's luck? The smart thing to do is stay diversified, and be patient. (See http://blogger.uncleleosden.com/2014/05/why-you-should-invest-like-smart-money.html.) The tortoise tends to be a better investor than the hare.
Thursday, May 29, 2014
Friday, May 16, 2014
Why You Should Invest Like the Smart Money
One characteristic of the investing strategies of the wealthy is to diversify. Stocks, bonds, money markets, real estate, alternative investments, collectibles, precious metals, jewelry, and so on are frequently found in the portfolios of the high net worth crowd. Diversifying is a way to win no matter what's going on with asset values, and the wealthy want to stay wealthy.
The 99% should do no different, and recent market activity illustrates why. Bond values have improbably risen in recent weeks, while stocks are stuck in a trading range right about where they started the year. Gold and silver went up earlier this year, but have slid back. Real estate ended 2013 with a roaring comeback, but now seems to have stalled out in many markets. International markets have delinked, with Asian markets generally falling over the past six months, while European markets have moved up slightly (Ukraine crisis notwithstanding). It would not have been easy to predict this mix of events. Indeed, it's rare to find financial analysts who predict much of anything right. Few predicted the 2007-08 financial crisis. Few predicted the 30% jump in stocks in 2013. Few predicted that bonds would rise this year.
The investing patterns of the smart money reveal that the smart move is to diversify. Don't look for a quick buck. You'll probably get a quick loss. Don't look to hit a home run with a single investment. The financial press may glamorize the few who manage to do that, but generally pays little attention to the many who fail. Don't try to predict the unpredictable. There are rare situations, like 2008-09, when all asset classes seem to be falling in value. That's what can happen when vast amounts of debt and other leverage enter the financial system in one-sided bets dependent on rising asset values. When that debt begins to lose value, the assets it was used to buy are at serious risk. But more typical is what we have today--a lot of uncertainty, but some of the uncertainty is about the upside and some about the downside. Most of the time, diversification is the best way to play your cards.
And if you're still unhappy about your net worth, save more. Whether the markets are doing well or badly, adding to your pool of capital will pay off in the long run.
The 99% should do no different, and recent market activity illustrates why. Bond values have improbably risen in recent weeks, while stocks are stuck in a trading range right about where they started the year. Gold and silver went up earlier this year, but have slid back. Real estate ended 2013 with a roaring comeback, but now seems to have stalled out in many markets. International markets have delinked, with Asian markets generally falling over the past six months, while European markets have moved up slightly (Ukraine crisis notwithstanding). It would not have been easy to predict this mix of events. Indeed, it's rare to find financial analysts who predict much of anything right. Few predicted the 2007-08 financial crisis. Few predicted the 30% jump in stocks in 2013. Few predicted that bonds would rise this year.
The investing patterns of the smart money reveal that the smart move is to diversify. Don't look for a quick buck. You'll probably get a quick loss. Don't look to hit a home run with a single investment. The financial press may glamorize the few who manage to do that, but generally pays little attention to the many who fail. Don't try to predict the unpredictable. There are rare situations, like 2008-09, when all asset classes seem to be falling in value. That's what can happen when vast amounts of debt and other leverage enter the financial system in one-sided bets dependent on rising asset values. When that debt begins to lose value, the assets it was used to buy are at serious risk. But more typical is what we have today--a lot of uncertainty, but some of the uncertainty is about the upside and some about the downside. Most of the time, diversification is the best way to play your cards.
And if you're still unhappy about your net worth, save more. Whether the markets are doing well or badly, adding to your pool of capital will pay off in the long run.
Tuesday, May 6, 2014
Fed Guidance in a Fog
The terrain is getting foggier and foggier for the Federal Reserve. Most recently, GDP barely grew (at an annual rate of 0.1% for the first quarter of 2014). But nonfarm employment grew by 288,000 jobs in April, a pretty good pace. And the unemployment rate dropped to 6.3%. Not that many Fed Open Market Committee meetings ago, an unemployment level of 6.3% would have been below the point where the Fed's guidance dictated a rise in short term interest rates. But rising rates would make the stock market pout and sulk. So the Fed has backed away from firm benchmarks for monetary policy and is electrically sliding its way toward a strictly "data-based" policy. What does that mean? Apparently, it means whatever the Fed thinks the data indicates it should do in order to promote full employment. But if the data is becoming less clear, then what?
For more than a decade, the Fed has worked to provide greater transparency. That's perceived to be a good thing because it tells the financial markets what to expect. Presumably, investors will make wiser decisions if they better understand the lay of the land. But transparency also encourages risk-taking. If you know what the central bank will do, you can layer on more speculative bets because one factor that might blow you up now seems predictable. This perhaps unintended consequence of transparency tends to lock the Fed into its guidance, and limit its options, because if you do something other than what you say, all the hedge funds, big banks and other speculators might get hosed. And then the specter of a systemic tummy ache would loom.
With the data getting murkier as the economy recovery sputters along, the Fed has become less transparent. Most likely, this isn't accidental, as the Open Market Committee no doubt can see that the data is telling them less and less, and benchmarks don't mean what they used to mean. The gamblers in the stock markets can't be happy, as the odds have become harder to calculate. Fed policy now depends on the data, and recent data resembles a pushmi-pullyu.
The Fed still hums the low interest rate melody even though it doesn't sing the lyrics any more. That's a pretty good pacifier for the stock market, at least for now. But with foreign affairs descending into the mosh pit (who wants to bet Vlad the Invader won't strike again?), and the economic recovery constantly shifting back and forth between first and second gears, the data--and consequently the Fed's guidance--will probably get foggier.
For more than a decade, the Fed has worked to provide greater transparency. That's perceived to be a good thing because it tells the financial markets what to expect. Presumably, investors will make wiser decisions if they better understand the lay of the land. But transparency also encourages risk-taking. If you know what the central bank will do, you can layer on more speculative bets because one factor that might blow you up now seems predictable. This perhaps unintended consequence of transparency tends to lock the Fed into its guidance, and limit its options, because if you do something other than what you say, all the hedge funds, big banks and other speculators might get hosed. And then the specter of a systemic tummy ache would loom.
With the data getting murkier as the economy recovery sputters along, the Fed has become less transparent. Most likely, this isn't accidental, as the Open Market Committee no doubt can see that the data is telling them less and less, and benchmarks don't mean what they used to mean. The gamblers in the stock markets can't be happy, as the odds have become harder to calculate. Fed policy now depends on the data, and recent data resembles a pushmi-pullyu.
The Fed still hums the low interest rate melody even though it doesn't sing the lyrics any more. That's a pretty good pacifier for the stock market, at least for now. But with foreign affairs descending into the mosh pit (who wants to bet Vlad the Invader won't strike again?), and the economic recovery constantly shifting back and forth between first and second gears, the data--and consequently the Fed's guidance--will probably get foggier.
Thursday, April 17, 2014
The Shrinking Deficit: a Plus for the Market
The federal deficit is projected by the Congressional Budget Office to be just under $500 billion this fiscal year (the year ending Sept. 30, 2014). (See http://www.cnbc.com/id/101581648.) That's a lot of money, but only one-third the deficit of five years ago. In other words, the deficit is lower by a trillion dollars, compared to half a decade ago. That's a whopping huge drop, which leaves this year's deficit at 2.8% of GDP, below its historical norm of 3%.
When deficits fall, the government competes less in the credit markets against private sector borrowers. This makes it easier for private interests to secure investment capital, a key predicate to economic growth.
Stocks tend to rise during periods of falling federal deficits. The late 1940s and the 1950s are one example. The 1990s are another. The fact that stocks have risen steadily from their 2009 lows indicates that we are in another period of falling deficits and rising stocks.
The future direction of the deficit is unclear. The CBO predicts that it will fall a bit more next year and then begin to rise. However, five years ago CBO didn't come close to predicting the deficit reduction we now have. The weird, dysfunctional cognitive dissonance that is today's federal governance somehow managed to produce this beneficial result. Who knows whether it might stumble its way to more good outcomes. If the deficit stays moderate (near 3%), the markets will probably benefit. While there are many other factors fueling volatility today, the federal deficit, improbably, isn't one of them.
When deficits fall, the government competes less in the credit markets against private sector borrowers. This makes it easier for private interests to secure investment capital, a key predicate to economic growth.
Stocks tend to rise during periods of falling federal deficits. The late 1940s and the 1950s are one example. The 1990s are another. The fact that stocks have risen steadily from their 2009 lows indicates that we are in another period of falling deficits and rising stocks.
The future direction of the deficit is unclear. The CBO predicts that it will fall a bit more next year and then begin to rise. However, five years ago CBO didn't come close to predicting the deficit reduction we now have. The weird, dysfunctional cognitive dissonance that is today's federal governance somehow managed to produce this beneficial result. Who knows whether it might stumble its way to more good outcomes. If the deficit stays moderate (near 3%), the markets will probably benefit. While there are many other factors fueling volatility today, the federal deficit, improbably, isn't one of them.
Thursday, April 10, 2014
When the Market Will Go Down Next
With the stock market having more than doubled since its 2009 low, the question on the table--just about every investor's table--is when will the market turn down? Recent trading days give us a likely answer.
For the past three trading days, the market dropped sharply as momentum stocks had bad momentum days. Today, the market rallied briskly when the Federal Reserve released notes of its most recent open market committee meeting, indicating that central bank accommodation is alive and well. Sweeter words could not have fallen on the market's ears, and stocks rejoiced.
As long as the market has confidence in central banks, there won't be a major downturn. If the market senses that central banks are losing control, watch out. Corporate earnings matter for individual stocks. But central banking is the key to the overall direction of the market.
For the past three trading days, the market dropped sharply as momentum stocks had bad momentum days. Today, the market rallied briskly when the Federal Reserve released notes of its most recent open market committee meeting, indicating that central bank accommodation is alive and well. Sweeter words could not have fallen on the market's ears, and stocks rejoiced.
As long as the market has confidence in central banks, there won't be a major downturn. If the market senses that central banks are losing control, watch out. Corporate earnings matter for individual stocks. But central banking is the key to the overall direction of the market.
Monday, March 24, 2014
The Limits of Globalization
Russia's seizure of Crimea reminds us that globalization isn't all it's cracked up to be. The fall of the Soviet Union led to self-satisfied proclamations in the West about the triumph of capitalism and history ending in a glowing halo of liberal democracies. Economic globalization would supposedly lead to worldwide reallocation of capital and resources to ever more efficient applications, with the result that economic tides would rise everywhere and prosperity would simmer in every pot. Nations and peoples worldwide would become increasingly interdependent and interlinked, making mutual tolerance in everyone's pecuniary interest. Pots would melt around the world, diversity would be embraced, and preschoolers everywhere would learn the lyrics of Kumbaya.
Russia is interlinked with the rest of the world today: economically in the energy markets and the financial markets, and securitywise with America and Western Europe in terms of dealing with Islamic radicals. But none of that made a difference when Ukraine moved toward closer links with the West. The centuries old Russian imperial imperative--that the Eurasian heartland be controlled from Moscow--howled. Russia endeavored to maintain strategic geographic advantage by snatching control of Crimea's ports and naval bases, securing military and trade access to warm water. Political machinations inside Ukraine have increased, in an effort to impede its Westward shift. Russian troops in large numbers coincidentally gather for exercises within spitting distance of Ukraine's borders. The economic sanctions imposed and threatened by the West have had no discernible impact on Russian policy.
Globalization was an illusion fancied by people who fancied themselves elites. This fancy illusion could be maintained as long as one cultivated ignorance of history. But globalization is nothing new. Europe in 1913 had extensive cross-border economic and financial relationships. The European elites of the day were multilingual, cosmopolitan and cultured. Somehow, none of that prevented the ignition of World War I over . . . well, nothing. The most ridiculous war ever fought, World War I resulted in 20 million dead and peace terms imposed on Germany that were so harsh they practically guaranteed another war. And that war--the Second World War--would require only 21 years before exploding in a frenzy of land grabs disturbing similar to what Vladimir Putin is doing now. Whatever economic, financial, cultural and other ties are fostered by globalization, they don't trump the tribalism that characterizes almost all peoples in Europe, Asia and Africa.
Tribalism is difficult for Americans to grasp. Having built a remarkably successful, diverse nation, Americans struggle with the idea that narrow concepts of group, based on cultural and historical ties, could somehow be so important as to justify conquering and killing. Surrounded by the enormous economic benefits of the Melting Pot, Americans don't understand why other peoples can't embrace tolerance when tolerance will allow them bigger shopping sprees at the mall. But history tells us that you have to understand and deal with other peoples' irrationalities. War, after all, is essentially always irrational. But there are plenty of wars, all the time. A smart foreign policy incorporates the need to consider and address other peoples' motivations, whatever they may be.
Economic sanctions have a role in America's and Europe's response to Russia. But it would be a mistake to think they will be enough. The sheer exertion of power will also have a place. This doesn't mean triggers need to be pulled. Strengthening NATO would get through to Putin, whose attention you get only if you exert power. A pragmatic alliance with China should be sought (recall that Russia and China fought brief shooting wars in 1929, 1934, 1937 and 1969, so the Chinese have no illusions about Russian intentions). The Japanese, who fought two wars with Russia in the 20th Century, should get a fist bump and more. Unavoidably, America's Cold War coalition will have to be rebuilt. And that's okay. What's not okay is to believe that reason, plus maybe a few trade deals, will bring Putin around.
Russia is interlinked with the rest of the world today: economically in the energy markets and the financial markets, and securitywise with America and Western Europe in terms of dealing with Islamic radicals. But none of that made a difference when Ukraine moved toward closer links with the West. The centuries old Russian imperial imperative--that the Eurasian heartland be controlled from Moscow--howled. Russia endeavored to maintain strategic geographic advantage by snatching control of Crimea's ports and naval bases, securing military and trade access to warm water. Political machinations inside Ukraine have increased, in an effort to impede its Westward shift. Russian troops in large numbers coincidentally gather for exercises within spitting distance of Ukraine's borders. The economic sanctions imposed and threatened by the West have had no discernible impact on Russian policy.
Globalization was an illusion fancied by people who fancied themselves elites. This fancy illusion could be maintained as long as one cultivated ignorance of history. But globalization is nothing new. Europe in 1913 had extensive cross-border economic and financial relationships. The European elites of the day were multilingual, cosmopolitan and cultured. Somehow, none of that prevented the ignition of World War I over . . . well, nothing. The most ridiculous war ever fought, World War I resulted in 20 million dead and peace terms imposed on Germany that were so harsh they practically guaranteed another war. And that war--the Second World War--would require only 21 years before exploding in a frenzy of land grabs disturbing similar to what Vladimir Putin is doing now. Whatever economic, financial, cultural and other ties are fostered by globalization, they don't trump the tribalism that characterizes almost all peoples in Europe, Asia and Africa.
Tribalism is difficult for Americans to grasp. Having built a remarkably successful, diverse nation, Americans struggle with the idea that narrow concepts of group, based on cultural and historical ties, could somehow be so important as to justify conquering and killing. Surrounded by the enormous economic benefits of the Melting Pot, Americans don't understand why other peoples can't embrace tolerance when tolerance will allow them bigger shopping sprees at the mall. But history tells us that you have to understand and deal with other peoples' irrationalities. War, after all, is essentially always irrational. But there are plenty of wars, all the time. A smart foreign policy incorporates the need to consider and address other peoples' motivations, whatever they may be.
Economic sanctions have a role in America's and Europe's response to Russia. But it would be a mistake to think they will be enough. The sheer exertion of power will also have a place. This doesn't mean triggers need to be pulled. Strengthening NATO would get through to Putin, whose attention you get only if you exert power. A pragmatic alliance with China should be sought (recall that Russia and China fought brief shooting wars in 1929, 1934, 1937 and 1969, so the Chinese have no illusions about Russian intentions). The Japanese, who fought two wars with Russia in the 20th Century, should get a fist bump and more. Unavoidably, America's Cold War coalition will have to be rebuilt. And that's okay. What's not okay is to believe that reason, plus maybe a few trade deals, will bring Putin around.
Sunday, March 16, 2014
How Putin Makes America Look Good
Not long ago, America was having a lot of bad hair days in foreign affairs. The war in Iraq ended without stirring speeches or victory parades. The war in Afghanistan is winding down, but won't have a prettier conclusion. America led from behind in Libya and messed up in Benghazi. Then, America led from even farther behind in Syria and, not surprisingly, got an aviary flip from the Assad regime when President Obama objected to the use of poisonous gas. To avoid being totally blown off by a two-bit tin pot dictator, the Obama Administration had to work with Vladimir Putin's autocracy for a face-saving compromise that still isn't near full implementation. America's grand strategy of pivoting toward Asia has floundered as extremism of numerous varieties keeps provoking eruptions in the Middle East and Europe.
Now comes Vladimir Putin--let's call him Vlad the Invader--who puts the shine on the United States. Using the most transparently farcical of pretexts, Putin seized Crimea from Ukraine. Okay, so there was a referendum in Crimea as to whether or not to "validate" the Russian land grab. But with thousands of Russian troops "guarding" the polls to ensure "integrity" to the voting process, we knew how the vote would turn out before the polls opened. There is nothing America can do to prevent Russia's annexation of Crimea, just as there was nothing America could do to stop Putin's 2008 land kleptomania in Georgia.
But America can and will react. The EU will talk a lot--and then talk some more. It will issue a few condemnations and maybe even an excoriation. But sanctions? Well, let's talk some more.
America's sanctions will be primarily economic. And Russia will respond in kind. America's economic interests will suffer. But Russia's economic interests will suffer more. Not necessarily in terms measured by dollars (or rubles), but in terms of relative pain. Russia has a much smaller and weaker economy than America. And Russia's economy is growing slower, with continued prospects for slow growth. Crimea requires significant subsidies, which will further drain Russia's resources, along with the added cost of all the military "exercises" the Russian Army is staging with walking distance of the Ukrainian border. From a strategic standpoint, Russia's nuclear arsenal is a match for America's. But Russia's economic arsenal is far weaker. And Russia's energy customers and trade partners will look elsewhere for supplies and opportunities, not wanting to give leverage to a bully with a powerful military.
The Cold War was primarily an economic struggle. America and the Soviet Union engaged in a 50-year competition to build to the most advanced and powerful military. Arsenals cost money, and America's vastly greater wealth left the Soviet Union moribund, unable to deliver prosperity or even anything approaching a First World standard of living for its citizens.
As America and Russia swap sanctions, it is important to keep in mind that, realistically, the goal isn't to force Russia out of Crimea. That won't happen. The goal is to turn the crisis into an opportunity to make America once again the world's shining beacon of freedom and democracy. America's sanctions, although likely to be ineffectual in terms of sending Russian troops back to the barracks, will contrast sharply with the EU's decrepitude, and the near silence from the Asia. As an ironic consequence, America's influence around the world, and especially in the periphery of Russia's borders with many former members of the Soviet Union and former Soviet satellite states, will likely grow. After all, no one likes a bully. The bottom line is Putin has made America stronger.
The outcome of the looming war of sanctions is difficult to predict with precision. But the advantage lies with America and its great economic strength. Germany and Japan won the early rounds of World War II. The Soviet Union won most of the early rounds of the Cold War. But we know how those stories ended. Even if Putin will be able to feel like a studly fellow for a while, time isn't on his side. Keep the faith.
Now comes Vladimir Putin--let's call him Vlad the Invader--who puts the shine on the United States. Using the most transparently farcical of pretexts, Putin seized Crimea from Ukraine. Okay, so there was a referendum in Crimea as to whether or not to "validate" the Russian land grab. But with thousands of Russian troops "guarding" the polls to ensure "integrity" to the voting process, we knew how the vote would turn out before the polls opened. There is nothing America can do to prevent Russia's annexation of Crimea, just as there was nothing America could do to stop Putin's 2008 land kleptomania in Georgia.
But America can and will react. The EU will talk a lot--and then talk some more. It will issue a few condemnations and maybe even an excoriation. But sanctions? Well, let's talk some more.
America's sanctions will be primarily economic. And Russia will respond in kind. America's economic interests will suffer. But Russia's economic interests will suffer more. Not necessarily in terms measured by dollars (or rubles), but in terms of relative pain. Russia has a much smaller and weaker economy than America. And Russia's economy is growing slower, with continued prospects for slow growth. Crimea requires significant subsidies, which will further drain Russia's resources, along with the added cost of all the military "exercises" the Russian Army is staging with walking distance of the Ukrainian border. From a strategic standpoint, Russia's nuclear arsenal is a match for America's. But Russia's economic arsenal is far weaker. And Russia's energy customers and trade partners will look elsewhere for supplies and opportunities, not wanting to give leverage to a bully with a powerful military.
The Cold War was primarily an economic struggle. America and the Soviet Union engaged in a 50-year competition to build to the most advanced and powerful military. Arsenals cost money, and America's vastly greater wealth left the Soviet Union moribund, unable to deliver prosperity or even anything approaching a First World standard of living for its citizens.
As America and Russia swap sanctions, it is important to keep in mind that, realistically, the goal isn't to force Russia out of Crimea. That won't happen. The goal is to turn the crisis into an opportunity to make America once again the world's shining beacon of freedom and democracy. America's sanctions, although likely to be ineffectual in terms of sending Russian troops back to the barracks, will contrast sharply with the EU's decrepitude, and the near silence from the Asia. As an ironic consequence, America's influence around the world, and especially in the periphery of Russia's borders with many former members of the Soviet Union and former Soviet satellite states, will likely grow. After all, no one likes a bully. The bottom line is Putin has made America stronger.
The outcome of the looming war of sanctions is difficult to predict with precision. But the advantage lies with America and its great economic strength. Germany and Japan won the early rounds of World War II. The Soviet Union won most of the early rounds of the Cold War. But we know how those stories ended. Even if Putin will be able to feel like a studly fellow for a while, time isn't on his side. Keep the faith.
Monday, March 3, 2014
Why Regulate Bitcoin?
Okay, so Mt. Gox, once the largest Bitcoin exchange, has belly flopped and lots of people have lost lots of Bitcoins (apparently hundreds of millions of dollars worth). Mt. Gox is in bankruptcy, but unsecured creditors like its erstwhile customers usually get the back of a hand in bankruptcy proceedings. Last year, Bitcoin was celebrated for its independence from any national authority and the anonymity it supposedly provides. This year, the losses from Mt. Gox have many crying for regulation. Is that a good idea?
First, Bitcoin would have to change fundamentally for regulation to work. Anonymity would have to go. Regulators need to safeguard the market from thieves, manipulators, and all variety of fraudsters and other crooks. That necessarily means they need to know who is behind transactions--potentially any transaction. It is axiomatic among financial regulators that, in order to uncover shenanigans in the market, one follows the money. And you have to be able to find out who is behind transactions in order to follow the money. So, if you really want regulation, say goodbye to the anonymity of Bitcoin.
But an even more important question for the nation(s) that might consider regulating Bitcoin is why would regulation serve the public interest? Bitcoin is economically trivial. If all Bitcoins disappeared tomorrow, the world economy and all major national economies wouldn't even hiccup. Setting up an effective regulatory regime would require not just one nation, but the participation of all economically significant nations because Bitcoin can be bought or sold worldwide. The costs of establishing regulatory agencies, hiring personnel, buying equipment, leasing office space, and funding investigative and regulatory processes would, by all appearances, greatly outweigh the societal benefit.
Another risk of regulating Bitcoin is that doing so would legitimize it. Once a government begins to regulate a financial contract, it makes that contract more attractive to mainstream financial markets players. That would mean the major banks, hedge funds and other big players would start trading all manner of Bitcoin contracts. A derivatives market in Bitcoins would pop up, and with it all kinds of headaches about risk management, settlement and clearance, and so on. All for something the world doesn't need.
And sooner or later, some form of governmentally sponsored deposit insurance would probably be sought by Bitcoin enthusiasts. If the big banks and hedge funds add their lobbying power, such insurance might make it through Congress. But deposit insurance could easily, directly or indirectly, end up putting taxpayers on the line to cover Bitcoin losses like those suffered by Mt. Gox customers. Which would be just peachy--another taxpayer funded bailout in the making.
The bottom line: don't regulate Bitcoin. There's nothing in it for national governments or taxpayers. We don't need more financial risk for regulators, central banks and taxpayers to worry about. If Bitcoin is truly worth anything, it will survive in the market. And if it doesn't, good riddance.
First, Bitcoin would have to change fundamentally for regulation to work. Anonymity would have to go. Regulators need to safeguard the market from thieves, manipulators, and all variety of fraudsters and other crooks. That necessarily means they need to know who is behind transactions--potentially any transaction. It is axiomatic among financial regulators that, in order to uncover shenanigans in the market, one follows the money. And you have to be able to find out who is behind transactions in order to follow the money. So, if you really want regulation, say goodbye to the anonymity of Bitcoin.
But an even more important question for the nation(s) that might consider regulating Bitcoin is why would regulation serve the public interest? Bitcoin is economically trivial. If all Bitcoins disappeared tomorrow, the world economy and all major national economies wouldn't even hiccup. Setting up an effective regulatory regime would require not just one nation, but the participation of all economically significant nations because Bitcoin can be bought or sold worldwide. The costs of establishing regulatory agencies, hiring personnel, buying equipment, leasing office space, and funding investigative and regulatory processes would, by all appearances, greatly outweigh the societal benefit.
Another risk of regulating Bitcoin is that doing so would legitimize it. Once a government begins to regulate a financial contract, it makes that contract more attractive to mainstream financial markets players. That would mean the major banks, hedge funds and other big players would start trading all manner of Bitcoin contracts. A derivatives market in Bitcoins would pop up, and with it all kinds of headaches about risk management, settlement and clearance, and so on. All for something the world doesn't need.
And sooner or later, some form of governmentally sponsored deposit insurance would probably be sought by Bitcoin enthusiasts. If the big banks and hedge funds add their lobbying power, such insurance might make it through Congress. But deposit insurance could easily, directly or indirectly, end up putting taxpayers on the line to cover Bitcoin losses like those suffered by Mt. Gox customers. Which would be just peachy--another taxpayer funded bailout in the making.
The bottom line: don't regulate Bitcoin. There's nothing in it for national governments or taxpayers. We don't need more financial risk for regulators, central banks and taxpayers to worry about. If Bitcoin is truly worth anything, it will survive in the market. And if it doesn't, good riddance.
Sunday, February 23, 2014
The WhatsApp Deal: Did Zuckerberg Just Blink?
WhatsApp is the antithesis of Facebook. It doesn't collect personal information. Messages aren't stored in WhatsApp's servers. There are no ads on WhatsApp. As a messaging service, there's nothing on WhatsApp for strangers (or parents) to find via search engines. It offers the one thing that's almost impossible to obtain on the Internet: privacy. No wonder it's growing by a million users a day, many of them in the young adult cohort coveted by commercial websites.
It's unclear what Mark Zuckerberg hopes to achieve by having Facebook buy WhatsApp. If he engrafts WhatsApp onto Facebook, or makes it semi-clone of Facebook (i.e., has it run ads), it will surely lose much of the privacy it offers. Facebook's business model, after all, is to vacuum up as much personal information as possible in order to cram advertising into users' faces. But that could drain away much of WhatsApp's attractiveness to its current user base, and they could easily flee to any of a number of competitors offering private communications.
If Zuckerberg keeps WhatsApp independent, he'll have to find some way of generating revenue--a shipload of it, since Facebook is paying $19 billion for WhatsApp and the only justification for such a Brobdingnagian price would be freight cars full of revenue. But you can't charge users much for instant messaging services (the phone companies tried that with text messaging and users are moving away from them). So there is a big question about what kind of rabbit Zuckerberg will pull out of the hat as a business strategy for WhatsApp.
One thing that seems apparent is that he's blinked. Zuckerberg evidently has come to realize that Facebook isn't going to be the platform for all users all the time. He's jumping onto one of the new, hot things on the Internet. Diversifying Facebook's corporate profile may be a prudent move. But the company now has two conflicting business models under its corporate roof, and it will have to sort out how to handle these conflicts. History does not suggest success is assured by any means. Microsoft entered various lines of business that were potential threats to its basic MS-DOS/Windows business--search engines, portals, mobile software, etc. It didn't managed them very well, because boosting a newer technology could mean undermining its cash cow. Newer, nimbler competitors, unburdened by these conflicts, ran circles around Microsoft. Facebook is one of them. But now it has taken in-house a conflict between the old (yes, Facebook is getting old) and the new on the Internet. How Facebook handles that conflict could dictate the future arc of its growth.
It's unclear what Mark Zuckerberg hopes to achieve by having Facebook buy WhatsApp. If he engrafts WhatsApp onto Facebook, or makes it semi-clone of Facebook (i.e., has it run ads), it will surely lose much of the privacy it offers. Facebook's business model, after all, is to vacuum up as much personal information as possible in order to cram advertising into users' faces. But that could drain away much of WhatsApp's attractiveness to its current user base, and they could easily flee to any of a number of competitors offering private communications.
If Zuckerberg keeps WhatsApp independent, he'll have to find some way of generating revenue--a shipload of it, since Facebook is paying $19 billion for WhatsApp and the only justification for such a Brobdingnagian price would be freight cars full of revenue. But you can't charge users much for instant messaging services (the phone companies tried that with text messaging and users are moving away from them). So there is a big question about what kind of rabbit Zuckerberg will pull out of the hat as a business strategy for WhatsApp.
One thing that seems apparent is that he's blinked. Zuckerberg evidently has come to realize that Facebook isn't going to be the platform for all users all the time. He's jumping onto one of the new, hot things on the Internet. Diversifying Facebook's corporate profile may be a prudent move. But the company now has two conflicting business models under its corporate roof, and it will have to sort out how to handle these conflicts. History does not suggest success is assured by any means. Microsoft entered various lines of business that were potential threats to its basic MS-DOS/Windows business--search engines, portals, mobile software, etc. It didn't managed them very well, because boosting a newer technology could mean undermining its cash cow. Newer, nimbler competitors, unburdened by these conflicts, ran circles around Microsoft. Facebook is one of them. But now it has taken in-house a conflict between the old (yes, Facebook is getting old) and the new on the Internet. How Facebook handles that conflict could dictate the future arc of its growth.
Wednesday, February 12, 2014
More Badness in the Bigness of Banks
The problems presented by gargantuan banks aren't limited to just too big to fail. In recent months, we have seen government investigations and enforcement actions dealing with price fixing by big banks in interest rates (LIBOR), foreign currencies, oil and other commodities. Cartels and oligopolies are antithetical to free enterprise. To make things worse, the things that were the subject of the conspiracies--benchmark interest rates, petroleum, and the value of the medium of payment in various countries--affect the prices of numerous contracts, investments, products and other things. Thus, the impact of the price rigging ripples through national and international economies, with the result that a lot of things aren't accurately priced.
The size of the mega banks allows them to dominate these markets. The small number of players involved makes collusion easy. It's hard to rig markets with dozens or hundreds of competitors. But a few big dogs readily find it more profitable to stack the deck in their favor and reap monopolistic returns than compete with lower prices.
Collusion deprives consumers, investors and others of the benefits of competition and efficient markets. The oligopolists are richer by their financial hooliganism. The rest of us are poorer. When banks are too big to fail, governments--and ultimately taxpayers--prop them up. It would appear that the big banks return the favor by rigging prices. It's getting harder and harder to see the societal benefits of really big banks.
The size of the mega banks allows them to dominate these markets. The small number of players involved makes collusion easy. It's hard to rig markets with dozens or hundreds of competitors. But a few big dogs readily find it more profitable to stack the deck in their favor and reap monopolistic returns than compete with lower prices.
Collusion deprives consumers, investors and others of the benefits of competition and efficient markets. The oligopolists are richer by their financial hooliganism. The rest of us are poorer. When banks are too big to fail, governments--and ultimately taxpayers--prop them up. It would appear that the big banks return the favor by rigging prices. It's getting harder and harder to see the societal benefits of really big banks.
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