As the profound shock that the fiat financial system is no more sinks in be prepared for hard asset scarcity.
At Forecast Services Limited here in New Zealand we are doing all we can to fast-track new Self-Managed Investments (SMIs) before Bitcoin Enhanced reaches its 4 million hard cap. But even with crude oil, natural gas and coffee SMIs in the pipeline this is nothing like enough. We call upon hedge funds and algorithmic traders to create new SMIs to help meet what is likely to be crushing demand. I have termed this return to hard assets Robust Finance (RF).
The End of Fiat Finance
On Friday 10th April the Federal Reserve effectively nationalised the US bond market. Full details are here. In the words of Bob Rodriguez, the only fund manager in the United States to win the Morningstar Manager of the Year award for both an equity and a fixed income fund:
When everything is essentially socialized as to risk, a return vs risk evaluation is essentially meaningless since the risk side of the equation has been truncated.
Adding more context he says:
With the events of the past three weeks, the perversion and conversion to a dystopian capital market and economic system is virtually complete.
As for me, with the Fed's announcement of unlimited QE and its “will buy or support almost anything,” along with the pending passage of a $2-2.5 trillion stimulus package, this is the end of the capital markets as we have known them.
We have now entered unlimited QE and MMT where there is no escape.
The same message is conveyed by Garfield Reynolds via Bloomberg:
This is about more than just the failure of earnings estimates to keep up with the virus impact - investors need to disregard projections that an end to the crisis will restore the pre-outbreak status quo.
Decades of pushing government out of business are being reversed in mere weeks, with policy makers telling companies where, how and if they should operate - whether they can pay dividends, buy back stock or fire employees.
In other words, governments are almost fully taking over free markets, with the profit principle dethroned as the key business driver.
This changes the rules of the game for investors.
In short, the fiat markets are no more.
Waking Up to Scarcity
Once it dawns upon the majority of investors that the party is over their first course of action will be to take advantage of central bank largesse and exit fiat assets while they can.
Next, as they are unlikely to want to sit in fiat cash they will look for assets where in the first instance they will not lose everything, and at best be able to continue the capitalist desire for sound risk adjusted returns. But as they look they realise that after all they have been through to preserve capital they are about to face the biggest challenge of all.
Not Enough Hard Assets
Hard assets are assets with intrinsic value where that value is not dependent upon the fiat system. The blunt truth is that there are not enough to go around.
The list is short:
Precious metals – physically held
Property, residential, commercial and agricultural – owned outright
Equities with strong cash flow and little/no debt
Non-collateralised digital assets such as Bitcoin, Monero, Ethereum.
Visual Capitalist provides a good representation of the problem. Scroll down to see just how tiny the market value of hard assets is compared to all the world’s money and markets.
Staying with the 2017 Visual Capitalist data except for the digital currencies, the problem can be presented in this table.
Changes over 2018 and 2019 would have only increased the total of soft/fiat based assets over hard assets. I have excluded equities whose debt burden does not shackle them to the fiat system because at this time it is too early to say what percentage of companies they represent. I have also gone with the low end estimate of derivatives; the high end estimate is $1.2 quad-trillion.
The result is that out of the world’s $1,147 trillion in assets, just 20% are hard.
As soon as we appreciate what this number means, that potentially 4 in 5 investors will be unable to secure the future of their portfolios, the stage is set for the next panic.
Signs of the scramble are already apparent in the disconnect between the physical and paper gold, the former trading at a significant premium, if any can be found at all. Expect to see more of the of the same in days to come.
New Hard Assets Wanted
Anticipating the desire of prudent investors to exit fiat into hard assets over the last two years I developed a digital hedge fund structure called Self-Managed Investments (SMIs). As non-collateralised assets whose ownership is held on a blockchain, SMIs have zero exposure to the fiat system. At the same time due to no-fees they offer better return potential than the 2 + 20 structure of the traditional, fiat ensconced hedge-fund.
By design, SMIs must be illiquid at inception. Any underlying assets would implicate them in a chain of dependencies that would nullify their intrinsic value. If investors want to experience the greatest capital efficiency, similar to investing in an early venture capital round, they need to also think like a VC and nurture the SMI to liquidity. Alternatively they can wait until sufficient liquidity appears. The problem with this approach in today’s environment is that limited supply may shut them out altogether.
How to build SMIs is outlined in a series of articles on Medium. The approach best suites long/short algorithmic trading strategies but can be adapted to many purposes. With SMIs hedge funds can package their existing expertise to meet demand in a hard-asset-scarce world.
What We Are Doing Now
There is one SMI already running. The algorithm of a long/short Bitcoin strategy called Bitcoin Enhanced has delivered 36% p.a. over the last two years. At this time of writing the asset is still in its illiquid phase meaning that tokens are heavily discounted to provide investors with the greatest potential upside for least capital outlay. We are unsure how long before all tokens are sold.
For investors unfamiliar with digital currencies, Bitcoin Enhanced tokens are available on the Waves Exchange. We chose this exchange because it is decentralised meaning that the chances of the exchange being hacked are close to nil. The XBE token trades against the stable coin Tether as the XBE / USDT pair. Investors wishing to participate need to first on-board into the digital world from an exchange such as Coinbase that accepts fiat transactions. Once Tether has been purchased it can be transferred to a Waves Exchange account in a matter of minutes. Companies such as Copper offer custodial services for those who do not want to hold the tokens themselves.
Needless to say, like any investment Bitcoin Enhanced tokens carry risks. Please do your due diligence.
Forecast Services Limited appreciates that Bitcoin Enhanced tokens represent a drop in the ocean compared for the need for hard assets. We are willing to help any firm wishing to establish SMIs of their own as far as our resources allow. As I mentioned, we are also working hard to prepare new SMIs for launch and will advise when they are ready. You can stay in touch here.
Not Enough Lifeboats on the Titanic
Perhaps one way to characterise the unprecedented situation we find ourselves in today is to imagine we are passengers on the Titanic. A long time ago the Titanic hit ice. It may have been when the US left the gold standard in 1971. It may have been during the rise of derivatives in the 1990s. In any case during that time the bulkheads of the ship have been filling with expanded money supply and debt. We on deck may have had some sense that something was going on but the band was still playing and the smell of fresh lacquer was still in the air. It was only when the weight of money supply and debt finally split the ship in two that most of us made a scramble for the lifeboats… only to find that what few there were had already gone.