Bitcoin, Blockchain, And Bank Of America

Authored by Chris Whalen via The Institutional Risk Analyst,

During our travels over the past two weeks, we tried to keep up with the financial press, particularly the growing sense of unease felt by many observers with the relentless rise of valuations for equities and other asset classes engineered by the Fed and major central banks.  Suffice to say the number of queries we receive about bank stocks being overvalued has soared.

Last week saw some real gems from the world of crypto currencies.  Bitcoin and the enabling technology known as “blockchain” are just the latest shiny objects to fascinate the less cautious members of the investing public.  The folks at Grant’s Interest Rate Observer flagged this precious headline from Bloomberg News:

“This Company Added the Word ‘Blockchain’ to Its Name ...and Saw Its Shares Surge 394%”

The world of “investing” in blockchain schemes has always given us a feeling of amazement, but tempered with a tinge of chagrin for those credulous souls caught up in this web of intellectual fraud.  Sure blockchain has some interesting attributes, but other than enabling the bitcoin phenomenon, it has limited uses that make commercial sense.  Blockchain rather blatantly violates the Three Laws of technology investing – cheaper, better, faster – but nobody seems to care.

Even more amusing than blockchain, however, is the fact that some of the sponsors of various “initial coin offerings” of nouvelle crypto currencies have taken the position that the ICO is an act of charity and that the investment received is a “non-refundable donation” rather than a distribution of a stake or equity in the issuer.

While ICOs seem to be clearly at odds with the anti-fraud provisions of the Securities Act of 1934, so far the Securities and Exchange Commission and Department of Justice have been unwilling to put an end to the marketing of these schemes in the US.  The SEC rightly describes crypto currencies as “tokens” that may be considered securities under US law, yet the widespread public confusion over these get rich quick schemes has overwhelmed the government’s willingness to call out this activity.

One reason why so-called crypto currencies have gained such a following is that there is no real money to be found anywhere in the world.  In the US, the legal tender laws of the 1860s forced members of the public to accept paper money – greenbacks – “for all debts, public and private,” this to help finance the Civil War.  When Franklin Delano Roosevelt confiscated gold held by the public in the 1930s, paper money ceased to be a store of value directly convertible into gold or silver by individuals. 

Today what people refer to as “money” operates as a means of exchange and a unit of account, but the dollar ceased to be a store of value decades ago.  An item purchased for $20 in 1913 when the Federal Reserve System was created would cost nearly $500 today, a cumulative rate of inflation of 2,400%. So much for central bank independence. At least the Treasury notes that circulated in the US prior to the Civil War paid interest.  Today’s greenbacks issued by the Federal Reserve System are just memorials to dead presidents.

More recently, central bankers have decided to confiscate private wealth represented by even fiat paper money via such means as negative interest rates and market intervention disguised by misleading labels like “quantitative easing.”  As we’ve discussed before, negative interest rates imply the global confiscation of private financial assets for the benefit of debtors, especially public sector debtors.

Of note, in his last blog post, John Taylor examines a thesis advanced by Allan Meltzer that QE was a policy of competitive devaluation. The US moved first, and others followed, as one of our colleagues noted last week.  But the only thing that has resulted is a vast flow of capital back into the US economy.  With almost $10 trillion in negative yielding bonds globally, dollar assets have become a refuge from global confiscation by the European Central Bank and Bank of Japan.

Mark Twain alleged that “there is no distinctly native American criminal class except Congress,” but we wonder what would he say about the bureaucrats at the Federal Reserve Board, ECB or the BOJ?  Indeed, when you survey the world of investing, it is hard to get annoyed with the starry-eyed followers of bitcoin. Call bitcoin virtual tulips. The crypto adherents at least have decided to reject the authoritarian world of fiat paper currencies issued by insolvent governments and instead embrace an alternative standard.

Professor Larry White wrote in a blog post entitled “Blockchain + Gold”: “The Bitcoin system has the great virtue of securely sending value directly from stranger to stranger. It is open to anyone, anywhere in the world. The sender does not need to trust the recipient, nor any bank or other institution, to accurately record the transfer.”

And what can you say about those individuals who lack the courage to take a flutter in bitcoin, but comfort themselves by talking about the “benefits” of the inefficient blockchain tech behind it?  Bitcoin holders at least have the possibility of gain, but “investors” in blockchain are literally shoveling money into the furnace.  Several years on and many billions of dollars later, we still have yet to see one example of a blockchain outside of the bitcoin instance that makes any economic sense.

Meanwhile, we would be remiss if we did not note the ten-year anniversary of the shotgun wedding of Merrill Lynch and Bank of America (NYSE:BAC).  We got several queries about the anniversary of this combination last week.  One investment manager confessed during a private session in an office on Park Avenue that BAC was his best performing position, but then asked nervously if a 50% run up in less than a year is “cause for concern.”

We referred to the excellent piece by Chris Cole of Artemis Capital, who notes that the “investment ecosystem has effectively self-organized into one giant short volatility trade like a snake eating its own tail, nourishing itself from its own destruction.”  Cole goes on to note that in addition to central banks buying $20 trillion in public and private assets, public companies have repurchased almost $4 trillion in stock – this by issuing debt.

“Like a snake eating its own tail, the equity market cannot rely on share buybacks indefinitely to nourish the illusion of growth,” notes Cole.  Ditto.

Of course big bank stocks are “overvalued” in terms of earnings or revenues, but do such measures really matter in a world without value?  When you have global central banks gunning all asset prices in a desperate effort to avoid a sovereign debt default starting in Japan and then Europe, pedestrian metrics like price/earnings ratios and net-present value have little relevance.

Remember, the reason that the Fed slammed Merrill Lynch into BAC a decade ago was in a desperate effort to preserve the US Treasury’s access to the bond market. In those dark days of 2008, primary dealers were collapsing left and right.  Dealers operated by Washington Mutual, Bear, Stearns & Co, Countrywide and Wachovia all evaporated in a matter of days.

When all's said and done, the Federal Reserve Board cares not about inflation or employment or the safety and soundness of banks and the financial system.  The paramount concern of the Fed is to preserve the ability of the US Treasury to issue more debt and thereby keep the great game going awhile longer.

The growing pile of public debt in the US is why price stability will never be part of the mix -- unless and until the Treasury is forced to live within its means.  This is also why dollar-alternatives like bitcoin, imperfect and even fraudulent as they may be, will continue to capture the attention of those seeking to escape the economic tyranny of fiat paper money.


Ramesees marysimmons Mon, 10/30/2017 - 15:42 Permalink

I don't understand why some ZH commenters are so anti Bitcoin. It's the answer to all the bullshit that ZH commenters are supposed to hate - profligate government spending, welfare queens, punitive taxation, social engineering, profiteering banksters - Bitcoin obviates all of that. We should be very pro Bitcoin. I mean, even if it fails, something like it will take its place - it's technology that we plebs can use to level the playing field with the rent-seeking cronyists.

In reply to by marysimmons

LawsofPhysics Ramesees Mon, 10/30/2017 - 16:07 Permalink

Sure, sure, but who's cryptocurrency should be used?  Maybe someday, a small group of people who founded a cryptocurrency will be given the unique monopoly to be "the" cryptocurrency that you are forced to pay taxes with.Guess what numbnuts?  That is no different than where you are now. Cryptocurrencies can be created at will, no different than fiat. The ability to move money around directly from peer to peer anywhere in the world (so long as you have power and internet) is great, but simply buying it to get rich hoping that other "greater fools" buy it is moronic. Cryptocurrencies can also be hacked, like everything else out here in the digital world. Again, it's a useful hedge and tool for moving money around the world, that's it."Full Faith and Credit"same as it ever was!!!!

In reply to by Ramesees

11b40 libertyanyday Mon, 10/30/2017 - 18:04 Permalink

Declare it as counterfit?  WTF  Counterfit what?  1's & 0's?  You see, the problem they have is, it isn't theirs, and if some guy in Manila is willing to take them for a boatload of mangos, the transaction takes place between the 2 parties over the Internet - no one else involved.  No banks, no credit cards, wire transfers, checks, no institutions.Call it counterfit if you want to, or call it whipped cream.  Same difference.Governments trying to bottle up tech has never worked for long.  The longer they wait to make a run against these crypto currencies, the harder it will be for them, as evermore people become invested, including big money players.And now, this:… 

In reply to by libertyanyday

TheEndIsNear 11b40 Mon, 10/30/2017 - 22:27 Permalink

11b40 said: "the transaction takes place between the 2 parties over the Internet - no one else involved. No banks, no credit cards, wire transfers, checks, no institutions."

Oh really? What then are these third parties that enter transactions into the blockchain and charge transaction fees?

In reply to by 11b40

Consuelo Ramesees Mon, 10/30/2017 - 16:32 Permalink

+1 Not so sure if it's an 'anti-Bitcoin' phenomenon as much as it is knowing (from past history), the excitement and the (over?) confidence in something which is rising exponentially.   We all want the same thing - Liberty, privacy, anonymity - in other words, the basic tenets of Freedom.   If that can be re-captured with Bitcoin, more power to it.    Caution however, is never a bad attribute.

In reply to by Ramesees

Kaiser Sousa Mon, 10/30/2017 - 15:24 Permalink

"Today’s greenbacks issued by the Federal Reserve System are just memorials to dead presidents." all u mother fuckers out there collecting digital illusions of wealth and REAL MONEY keep talking shit about those STILL accumulating the ONLY 2 forms of REAL MONEY...paper price dont mean shit priced in currency's THAT R WORTHLESS!DEATH TO THE MONEYCHANGERS.

BennyBoy Mon, 10/30/2017 - 15:28 Permalink

 "The paramount concern of the Fed is to preserve the ability of the US Treasury to issue more debt and thereby keep the great game going awhile longer."Payoff the debt and there would hardly be any money anywhere.Debt=money in the FED system.No payoff of debt will happen, rollover, yes.Its a great system if you like bubbles and explosions.

TheReplacement BennyBoy Mon, 10/30/2017 - 16:58 Permalink

It is worse than that.  You only consider debt to be that created by the Fed/Treasury dance.  Do not forget all of the other banks loaning out non-existent funds because of fractional reserve....  There is not enough "money" to pay off the debt and there really never was with this system.  That is the real key to understanding how things are going to unfold.  The debt simply can never be paid off, ever.

In reply to by BennyBoy

LawsofPhysics Mon, 10/30/2017 - 15:31 Permalink

hundreds of trillions of paper/digital promises...Crypto, digital, or paper, it really doesn't fucking matter, eventually these claims will start seeking out real assets.LOL!!Good luck!"Full Faith and Credit"

LawsofPhysics Seasmoke Mon, 10/30/2017 - 15:51 Permalink

Don't be such a fool.  A glass of water is an asset to a starving and dehydrated man. Control of resources and productive capacity is the real wealth. Want to eat well? Want to live well? Pay me motherfucker. But YES, gold remains a "tier on asset" at all central banks around the world! The "fiat du jour" is irrelevant!

In reply to by Seasmoke

GreatUncle Mon, 10/30/2017 - 15:37 Permalink

Growing public debt while the banks are able to create money out of thin air when lending.All part of the keynes inflation game, if the banks had not been allowed leverage they would have ceased a long time ago.Probably get slated but hey-ho the current system is going nowhere so ...CB's create the total money and hand an equal share to each citizen so they can do whatever they want with it and not to be held in a bank (cash) so you deposit it with the bank you trust ... likely not one of them. No more taxes neither ... you only pay for services you need.Repeated annually the banks would be gone in a generation and all the worthless shit nobody wants.

Bunga Bunga Mon, 10/30/2017 - 15:41 Permalink

Several years on and many billions of dollars later, we still have yet to see one example of a blockchain outside of the bitcoin instance that makes any economic sense.Simply because a private, trusted, permissioned Blockchain has no advantage over a database. Then we could stick with middlemen and the middlemen can stick with databases.The key is a trustless and permissionless system, because it gives most economic freedom and makes things more efficient. That's why users will only chose these and not private or government "Blockchains".The genius thing of blockchain is, that it is a free technology with it's own business model that can't be monopolized like a software or hardware product.

Xavier Doe OpenThePodBayDoorHAL Mon, 10/30/2017 - 22:57 Permalink

No.Write your own wallet software.  Build your own mining hardware.  Review the source code of any software you decide to run, whether cgiminer or otherwise. If you DIY you don't necessarily have to trust any of those players. Nor will the authorities take you into custody for min[t]ing your own coins.Go try to mint your own *dollars*, on the other hand... and it's quite possible the Secret Service will be knocking on your door :-) Having said all that, if it was me I'd have said "decentralized trust" not "trustless", as in, "...based on decentralized trust. Instead of a trusted central authority, in bitcoin, trust is achieved as an emergent property from the interactions of different participants in the bitcoin system..." [Mastering Bitcoin]

In reply to by OpenThePodBayDoorHAL

abgary1 Mon, 10/30/2017 - 15:45 Permalink

Blockchain technology represents privacy and security.If only it could be applied to the internet, telecom networks and all of the banking system to protect us from the government and tech giants.Our privacy and freedom needs to be protected.

affirmed_78 Mon, 10/30/2017 - 15:52 Permalink

The middleman is finally being eliminated.  Finally.  And governments around the world will soon be in peril trying to raise tax revenues in a bitcoin economy.

koan Mon, 10/30/2017 - 15:55 Permalink

Lets get something straight, fiat currency is not economic tyranny, it was the poor management and allowing Jews into the banking system that created the tyranny.

So to recap, money is not the root of all evil humans are, and fiat currency is fine when properly managed and backed by a finite resource.

kochevnik koan Mon, 10/30/2017 - 19:59 Permalink

I think fiat works when issued by people to themselves.  When fiat issued by private bankers with repayment in real labor, it is slavery.  Canadian national debt was zero even with many social programs, until 1980 when they 'borrowed' from Jew bankers and debt grows like parabola

In reply to by koan