Market Musings Blog

Decoding Cryptocurrency

Posted on 12.13.21 by Cascade in Investment

You can hardly turn around these days without hearing about Bitcoin, Ethereum, NFTs and that dog that’s been made into a digital currency. After about a year of reading and attending virtual webinars, we finally have some understanding of Bitcoin and its brethren. We want to emphasize ‘some’ understanding. We are not computer scientists nor facile with, say, blockchain, so no doubt certain readers will be able to run circles around us in this regard. This piece is more for the casually curious.

Here are the basics, with many of these questions gleaned directly from what clients have asked us:

  • Can you actually hold a Bitcoin, ie does it have a physical representation? No. Bitcoin and other digital currencies exist only digitally. This is not too different from, say, a credit card payment. Actual currency may never change hands when you make a credit card payment. Instead, all the transfers – from you to an intermediary to your seller and to his bank account – happen in the form of digital entries.
  • Why does Bitcoin have value? Isn’t it just a bubble ready to pop? Value is conferred by people who make judgments, which applies to any currency. Bitcoin offers intangible attributes that ordinary currency does not such as anonymity, easy and fast passage across borders, universal recognition, and the fact that institutional trust is unnecessary for its use. We in the US do not think about this latter item but if you lived in Caracas, you would. Bitcoin production in particular (but not the universe of cryptocurrencies) is limited so if demand rises, so must the price. In the future Bitcoin may be necessary to make some applications function, which is true of Ethereum now. Recent history, however, implies that cryptocurrencies are the ultimate risk asset, rising with the stock market, and falling when it declines. If Bitcoin ever deviates from that relationship, it will mark a sea change in the ‘valuation’ of this elusive asset.
  • Isn’t Bitcoin just for criminals? No. The estimate of criminal activity conducted in Bitcoin is low. In reality, far more crime is geared towards acquiring and using the world’s reserve currency, namely the US dollar.
  • How can Bitcoin be a ‘currency’ if it is so volatile? The word ‘currency’ is a misnomer, or if you don’t accept it as a misnomer, then you need to think about currency a different way. Today, a gallon of gasoline averages $3.78 in Oregon. Last year at this time, the Oregon average for a gallon of gas was $2.67. The dollar has dropped in value in a short period, versus gas, by 42%. We do not think of the dollar as volatile in this way, but it is. It buys more or less of various items over short time frames routinely. Bitcoin is just another ‘thing’ priced in US dollars that fluctuates in value. Every day the value of the yen, the lira, the Euro, changes against the dollar. Granted, Bitcoin changes a lot more in short time frames, but whether this volatility lasts or not is to be determined.
  • What is blockchain? Blockchain is a secure, immutable, programmable digital ledger. Affirmation of an addition to a blockchain is decentralized and anonymous, time-stamped and irreversible. All participants in the blockchain must unanimously agree to a transaction. Participants are paid for ratification in cryptocurrency or fees. One ‘use case’ for blockchain is to record the title to a house; another could be your ownership of Bitcoin. Interestingly, Bitcoin can be fractionated into very tiny slices. Blockchain allows that; so you can imagine that fractional interests in assets become much easier to achieve in a blockchain environment. No legal contracts, no docusign!
  • What is an NFT? NFT stands for non fungible token, and it is a digital representation of something. It can be a moment (TopShot is selling NFTs of great moments in basketball history), a static piece of art, a magazine cover, or it can provide access to an event. “Non fungible” refers to the fact that it is not exchangeable for anything else, ie it is unique. NFTs are sold largely in Ethereum. If you own an NFT, no one else can also own it. Others can look at it, copy it (sometimes) but only you can own it.
  • What will happen if governments ban Bitcoin? Banning Bitcoin would be tough. It can exist in a completely private wallet – not on the internet – that you can trade with someone else privately. Ownership is represented by very long public and private keys, which are currently impossible to hack in a human lifetime. Some governments have banned various aspects of cryptocurrency – like the trading it, but not ownership of it, transactions for goods but not trading it – but it does tend to pop up in other countries that have not banned it, simply moving around the world to more hospitable jurisdictions. If you think the world’s countries can all get on the same page to ban cryptocurrency, then stay away from cryptocurrency!
  • How can Bitcoin or blockchain be used? We gave an example above, using blockchain to record the title to a home. Bitcoin and Ethereum are used today in payment systems like Flexa, Coinbase Commerce, Bitpay and others. So if a retailer uses one of those payment systems, you can send your Bitcoin or ether to, for instance, pay your AT&T bill (via Bitpay).
  • How do you store Bitcoin? Bitcoin and other cryptocurrencies can be stored in a myriad of ways. We already mentioned a private wallet. A wallet can be a hardware wallet, like a flash drive with your keys recorded on it stored in your safe; or a software wallet, which resides on your computer hard drive (better keep track of that computer). You can also use an exchange like Coinbase which keeps your keys for you. Exchanges have been hacked in the past so beware this option. Casa offers the equivalent of a private bank/Fort Knox for Bitcoin holdings, complete with concierge service.
  • Should Bitcoin be in my portfolio? Other than indicating that you should only use money that you can afford to lose to participate in the digital currency wave, we are not currently making any recommendations pro or con regarding adding Bitcoin to client portfolios. At this point we can only act as a resource to research the topic and tell you what we know.

This overview barely scratches the surface of a complicated topic. We’ll be continually learning as these markets develop, so check back if you want to know more.

Covid and the Economy, Mid 2021

Posted on 08.19.21 by Cascade in Investment

While Covid cases are picking up, and the Delta virus is changing the calculus around how efficacious vaccines are, the economy continues to slowly improve. Data shows that previous spikes in cases have resulted in less and less economic disruption as time wears on, a testament to the human ability to adjust. That said, problems could still crop up in specific areas, including travel and entertainment (including restaurants) industries, and if school closures become common again, we’ll see suppressed employment numbers.

More pertinent to the Fall/Winter economy in the US may be the fiscal and monetary support that we’ve enjoyed as a result of the pandemic. Many programs are ending, and some are experiencing court challenges. These impacts on top of higher inflation could put the skids on what has been a brisk recovery thus far. A glance at the bond market shows a heavy bet on a slowdown later this year, and we’re going to take that prognosis to heart. Our expectation is a tougher stock market will take hold for a few months, so fasten your seat belts.

When and How to Talk to Your Advisor About Changing Your Investment Objective

Posted on 06.24.21 by Michelle Rand in Investment, Personal Finance

Every once in a while, life throws a curve ball. You’ve set up your investment portfolio in partnership with your advisor, and suddenly, it doesn’t seem like it works for you any longer. Maybe the value is declining even when the market goes up, or maybe it’s behaving well from year to year but giving you fits from month to month. Maybe you received an inheritance, or you lost a job.

These can all be reasons to change your investment mix. Here are several other perfectly legitimate reasons to make a change:

  1. You decide to help support family members
  2. You have inherited money and want to pass along more to your own heirs
  3. The market tanks and you lose sleep
  4. The market rises a lot and you’ve reached your monetary goals, so you can afford to give up return and make your portfolio less risky
  5. You go back to work

On the other hand, here are some reasons that are usually not sufficient to prompt a change in asset mix or holdings, given historical data:

  1. Political trends
  2. Tax law changes
  3. Lawsuits at a company that you own stock in

Reasons for changing your portfolio generally fall into two categories: either the return burden on your portfolio increases or declines (ie, if you want to support family, that may require more return; but if you inherit funds, each dollar can work a little less hard) – or, the way you FEEL about your circumstances changes.

Investment managers prefer to keep portfolios positioned as consistently as possible. Making large changes frequently is a good way to damage your return. Missing one large upward move in stocks can permanently impair your lifestyle, forcing you to save more and sacrifice more. It’s one thing if you are prepared for that sacrifice and understand its implications. It’s another thing if you incur the damage, then decide you can’t stand the consequences and want another shift. That’s a sign that either you or your advisor hasn’t done the work to establish your goals and the path to achieving them.

Approach your advisor with the reasons you want a shift. Understand that your advisor is always working to translate your circumstances into a risk/return profile that will fit you, so when you say, “This market drives me nuts, I can’t sleep!”, he is thinking “less risk” or if you say “I just received an inheritance and I think I want to keep some of it in cash” he is thinking “maybe the remaining portfolio can be more risky?”

Once you decide on a change, try to stick to the resulting portfolio for a few years – let it work for your new goals. If the market moves against you – seeming to invalidate your new direction – remember the reasons you shifted in the first place. Are those things still true? If so, stand your ground and don’t be afraid to ask for assurance from your advisor. That’s what he’s there for.

 

 

ESG Part II: Why it’s So Hard

Posted on 04.21.21 by Michelle Rand in Investment, Personal Finance

Finally, with Covid fading, and the markets settling, we can return to our ESG series. The last installment in this series was over a year ago, when we introduced the topic and mentioned that we would be looking at specific companies to help define the topic and discuss ESG philosophies. The long time frame between that last post and this one has allowed the market for ESG products to develop further. We have also seen new regulations both in the US and abroad that affect the space, and more data is available regarding performance of such strategies. We will touch on all these items as this series continues.

But today we are going to focus on plant based “meatless meat” company Impossible Foods. Impossible is not public (yet) but its business model is proving very competitive against a company that is public – Beyond Meat (ticker BYND). A major difference between the two is the use of genetically modified ingredients over at Impossible. Beyond Meat eschews such behavior, and is GMO-free. However, taste tests almost consistently reveal that Impossible burgers taste more like meat due to a genetically modified yeast molecule. Scientists working at Impossible tell us that GMO is the wave of the future, and that we cannot reasonably feed the new few billions of people that will be born in the coming years without completely wrecking our environment through the misuse of land.

We have a few clients who are opposed to investing in companies that promote GMO in any way. But what if, when Impossible Foods comes public finally, it becomes apparent that the market much prefers that company’s products to those of Beyond Meat? Then we are looking at an eroding value for BYND and an increasing value for the sinner, Impossible. This is an example of the complexity that investors will navigate while pursuing their individual versions of ESG: is GMO an acceptable tradeoff when considering the “E” portion of ESG?

In fact, this tradeoff is a reminder of a complaint that has surfaced more consistently among ESG practitioners, and that is: there are no standards that define ESG. The concept is up for interpretation. In a clear violation of what I, at least, believe to be a reasonable ESG claim, I read a missive from a mining company claiming that since its product aids the production of electric vehicles, its stock therefore scores well on ESG criteria. However you want to look at it, mining is environmentally destructive, no matter what the product is. We can claim to like lithium better than coal, but the extraction of either one is bad for the environment.

Next up in our series we will explore this last topic further: what companies want you to believe about their ESG credentials, versus what is actually true.

And Now, Let’s Hear from the Bond Market

Posted on 02.28.21 by Michelle Rand in Investment

Last week’s market action was dominated by a sharp increase in interest rates, particularly in the five year, ten year, and thirty year Treasury maturities. Underlying the action was an unusual circumstance in the short term money markets – the difference between the yield on the two year Treasury and a key bank rate shrank to as low as it has been since the depths of the pandemic panic last spring. This time the declining spread is driven by a distaste for the massive amount of debt that the US is pumping out -not a disruption in liquidity. In other words, because the markets need to absorb huge Treasury issuance as we cover costs for the pandemic and other needs, traders are saying ‘no way’ to all that debt. Instead, for the time being, they are parking assets in cash and short term bonds. In an ominous sign, the Treasury auctions last week did not go well, with tepid demand at best.

Too, the Fed has been planning to jettison cash off its balance sheet – an event that could cause short term rates in the US to go negative, particularly given the preference for investors to stay short right now. All that demand stands to drive yields down even more.

This is the first time since 2008 that we’ve felt that rates might continue rising for a time. Huge budget deficits might be coming home to roost, causing investors to demand more yield to finance our government. What remains to be seen is whether this trend has staying power. In the past, higher rates have caused the economy to slow, which then reins in activity and puts the brakes on the rising trend. This time, though, we intend to pump a lot of money into the economy, which could swamp the effect of higher rates for a while.

In the meantime, investors with income appetites should pay attention. We might have an opportunity to lock in higher yields shortly.