The impact of Bitcoin and negative bond yields

As we approach the end of 2016 the natural tendency is to look ahead to 2017. We will soon find ourselves afflicted by a litany of forecasts for the year ahead. I say afflicted because this has been an “annus horribilis” for establishment forecasters but those that I am in touch with seem to have learned little if anything at all. Accordingly the theme “same as it ever was” seems set to turn into a “road to nowhere” for them. However we will take a different tack as the holiday break has thrown up a couple of disturbing signals in the world monetary system.

Bitcoin surges

When I signed off before Christmas I ended with this.

The average price of Bitcoin across all exchanges is 910.16 USD

As you can take the boy out of the city but it is much harder to take the city out of the boy I had noted that it had been further on the move this week and now I note this.

Bid: $972.27 Ask: $972.28

So there has been a push higher and of course we are reminded of two things. The first is simply a factor of the way that we count in base ten meaning that the threshold of US $1000 is on the near horizon and the second is the Bitcoin surge of a bit more than a couple of years ago.

Actually for some I note that threshold city has already arrived. From BTC Manager.

Bitcoin has surpassed its all-time high in two major currencies, the Euro and the British Pound……With the largest weekly volume in almost 12 months, bitcoin looks to continue to soar against the Euro. With a break of the all-time high at €872.90, there are no previous fractal levels to gauge where the market will take us next. However, the best bet is through the use of simple psychology. Buyers will look to cash out once the price has hit a psychological resistance, a big, round number where profits will be locked in and buying interest starts to fade.

So it is interesting to note first that standard analysis ” it might go up or it might go down” applies as much to newer markets as it does to older ones! As ever the possibility it might stay the same is ignored though. But those of you who use the Euro as a currency have seen a considerable devaluation against Bitcoin in recent times which means those of us who use the UK Pound £ have had a particularly poor 2016 against it.

On the Coinfloor exchange, BTC-GBP was at £479.00 week ending June 26, 2016, following our open letter to Britons. Fast forward to the close of 2016, BTC-GBP is looking to break above the £800 mark and is taking aim at the psychological £1000 level. With a break above the all-time high, there is no precedent and £1000 could be a conservative estimate for the long-term, but we will see some exhaustion from bulls at this level.

Looking at the chart a past colleague of mine would be very upset if I did not point out that it looks very much like what he called a “bowl” formation. This means that it needs to continue to accelerate or otherwise it will then be like one of those cartoon characters which run over a cliff edge by mistake. Or to bring things up to date like the Toshiba share price this week as it has now eroded nearly all the gains of 2016.

There is another perspective we can find and StockTwits helps us out with this.

 Some care is needed with the word never as Botcoin was invented on the 31st of October 2008 and is thus a child of the credit crunch era. But the current situation does give us food for thought as the immediate knee-jerk response that it is replacing gold in some fashion does have issues. Let me point out the one which occurs to me which is that discoveries on other planets and moons apart the supply of gold is fixed whereas Bitcoin and especially cryptocurrencies in general is not. ( Just to add that the latter remains true but @BambouClub has pointed out that Bitcoin is limited to 21 million units).

Also those of you who like me watched the BBC 4 documentary on Fleetwood Mac last night which of course featured the “Gold Dust Woman” Stevie Nicks will wonder about any impact on music and this is before the backing vocals she did for John Stewart?

There’s people out there turning music into gold

Somehow I don’t see “Bitcoin Dust Woman” quite cutting it do you?

Why is this happening?

If you follow the advice of go west young (wo)man then you have a long journey as the real pressure is to be found in the East. Let us first take a stop over in India where the Demonetisation debacle continues.  From LiveMint.

Mumbai: Demonetisation has boosted the digital platforms for payment, which has helped the National Payments Corporation’s (NPC) RuPay card usage at merchant terminals soar seven times since 8 November, taking the daily volumes to over 2.1 million.

As we look at the ongoing issue it is not hard to see the motivation for people wanting to escape the Indian monetary system entirely and thus moving towards currencies like Bitcoin. As I pointed out on November 11th.

We can expect the traditional Indian love of gold to be boosted by this and maybe also non-government electronic money like Bitcoin.

Although of course many were left out.

It has made it harder to buy vegetables and rice, and hire rickshaws. And, for hundreds of millions of Indians who work in the informal economy, it has brought commerce to a halt. If there is a well-laid plan to mitigate the impact of this surprise crackdown on “black money”, it has yet to reach rural parts, where few Indians have bank accounts or credit cards.

Here is a link to the details of Demonetisation.

https://notayesmanseconomics.wordpress.com/2016/11/11/the-war-on-cash-continues/

China

There have been signs of creaking from the Chinese monetary system as estimates of the actual outflow of funds from China seem to be around double the official one. Oops! If we move to this morning there are other signals to be found. From the Wall Street Journal.

The yuan dropped 7% against the dollar this year…….

Unlike other emerging markets that have mostly free-floating currencies such as Russia and Brazil, China hasn’t had a chance to find its bottom. Chinese investors, therefore, act as if more depreciation is coming, sending money overseas.

The People’s Bank of China is increasingly replacing deposits and indeed finance in the banking system in a move that has not gone so well for us western capitalist imperialists. But the fundamental point here is that with such a large flow of funds ongoing we see two clear effects. The first is the rise in the Bitcoin price as it would take only a minor proportion of the move to put it in a boom and the second is that the world financial system looks unstable one more time.

Negative Interest-Rates in the UK

One of the forecasts for 2017 will no doubt be for higher bond yields. After all it has to be right one year! But more seriously if we just look at the UK something else is in play and it covers a few areas. It started with this before Christmas. From Bloomberg on December 16th.

The U.K. Treasury sold one-month bills at an average negative yield for the first time ever on Friday, with investors bidding for more than seven times the amount on offer,

That got worse just before Christmas and today a former respondent on here Shireblogger who now contacts me on Twitter pointed out this.

UK gilts just hit a record low 2 year yield at 3.3 bps. ( @bondvigilantes )

What we find ourselves observing is a safe haven problem of sorts as @NelderMead points out.

a year end desperation for collateral. QE creates the priv deposits & takes away the collateral to back ’em

Another “side effect” of the “Sledgehammer” of Andy Haldane and Mark Carney. Are they available for comment and I do not mean a diversion onto green issues?

Comment

So there you have it. After all the central planning and “reform” what we see are yet more signs of stress in the financial system. So much for certainty about 2017 as we expect inflation yet again in the use of the words “unexpected” and “surprise”.

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I will be on after the 1 o’clock news today with quite a bit to discuss I think.

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15 thoughts on “The impact of Bitcoin and negative bond yields

  1. Great blog as always, Shaun. I look forward to your radio broadcast.
    You and your readers may be interested in knowing that the last major Canadian economic data release for 2016 showed a surprise 0.3% decline in the month of October, partly due to a 2% fall in manufacturing output, the second worst decline since the 2008-09 recession. Real GDP per capita (based on the working age population) is still 0.8% below its December 2014 level, the peak month before the 2015H1 contraction.
    Bloomberg News noted in their report that: “The GDP numbers add to recent indicators showing low interest rates and a program of federal government stimulus are so far failing to spur a recovery. Inflation slowed to a 1.2 per cent pace in November from a year earlier… a softer reading than economists forecast, with one measure of core inflation slowing to the lowest level since 1996.” That would be the CPI-common measure that was first published on December 22, as one of three new core measures replacing CPIX. Except for the exclusion of changes in indirect taxes, it would seem to be the same as the common component of CPI measure that the BoC was strongly promoting in the year or more leading up to the 2016 renewal of the inflation-control agreement, so much so it was surprising that it was introduced as only one of three replacement measures, and not as the one core measure to rule them all.
    Anyway, it is certainly the cuckoo in the nest among all the Bank’s core measures. Although all the Bank’s core measures weakened in November 2016, CPI-common was the lowest of all at 1.3%, its lowest reading since July 1996. CPIX was at 1.5% (April 2014), CPI-trim at 1.6% (June 2015) and CPI-median (November 2015), the month in brackets in each case being the earliest previous month when the inflation rate for the series was the same or lower. CPI-common is so low partly because it is implicitly weighted strongly towards mortgage interest, which decreased by 0.5% in November and weakly towards motor vehicle prices, whose 3.0% annual increase in November made it the largest contributor to the annual inflation rate. The very low CPI-common inflation rate is not so much a symptom of the weak Canadian economy as the weak minds of Finance Minister Morneau and Governor Poloz. How can they possibly justify replacing CPIX with such a transparently dysfunctional inflation measure?
    Happy new year to you, your mom and all the readers of your blog, Shaun. Believing in better for 2017.

    • Hi Andrew and thanks and happy new year to your family as well.

      Thanks for the Canadian GDP data. It fairly neatly confirmed one of the worries I have about monthly GDP data in that quarterly data would have shown a rise and reversing the September and October numbers would have shown a rise as well. Of course if this is a change for the worse then a much quicker signal is given! Is there a reason they do not show the annual number in the daily report?

      Looking at the monthly totals since October 2011 shows a reasonably nice upwards curve for Canada. Okay just under 9% is not stellar growth but it does cover the commodity price dip.

      Perhaps you are more like us in the UK than assumed as it was the retail sector that stopped the GDP numbers being weaker still….

      • That’s a good question about the annual estimates, Shaun. The original chain Fisher volume estimates with a 1997 base, did have an annual matrix (Table 379-0029), published through 2006. The new chain Fisher volume estimates, with a 2007 base, only have monthly estimates published for them. If you take the simple average of the monthly estimates (since they are seasonally adjusted at annual rates, you take the average and the sum) you will get the official annual estimates just the same. This is, of course, absurd. Chain Fisher estimates aren’t additive over industries or over commodities so they should not be be additive over months either, but this is the way the chain Fisher estimates were implemented. If it had been properly done, the annual estimates would not be the averages of the monthly estimates, which would have necessitated annual tables for all years and bases.

  2. I note that the figures were a “surprise.”
    Perhaps if they went bank to basics then
    they would now that One and One is Two!

    JRH

  3. Hi Shaun Bitcoin still seems to have too many parallels with the Tulip mania for my liking.
    Likewise why are Gilts being over subscribed when they are yielding zilch?
    At the risk of sounding like a broken record the thing that matters most is Global debt and US National debt is now a touch bellow $20T .
    To help put this into perspective if $1m is represented on a line by 1mm then $20T would be 20km down the road or 1m seconds is 12 days ago ,1 billion seconds ago would be 1985 ,1trillion seconds ago would be around 30000BC 20 Trillion seconds ago would be around 580000BC.
    This must be very close to unsustainable.
    Unsurprisingly Global debt is still growing at an alarming rate and a record $6.6T additional debt has been issued in 2016 beating the previous record set in 2006.
    The powers that be are belting out Queen’s The Show Must Go On while the ejnlightened are responding with AC DC’ Were on the Highway to Hell.

    • Hi PrivateFraser

      Thanks for the numbers which provide variety on the current trend of describing how much Carlos Tevez will receive in wages for playing football in China per hour, per minute and even per second! As to the songs well I guess the Highway To Hell is also the Road To Nowhere.

  4. “The impact of Bitcoin and negative bond yields” – end of year speculation, nothing more, this phenomena will no longer exist by end of March as inflation starts to get a real grip.

      • The bond thing is simply a move to bid up the bond price which of course results in a falling rate before the speculators dump the recently purchased bonds. It matters not whether the profit is in the rate or the price, what matters is the profit, wherever it is to the speculators. I believe you’re looking for trends where none exist Shaun.

        On bitcoin I think the bowl is near implosion, lets see what the next 13 weeks bring although the implosion could occur in the first week of January. Lack of faith in “normal” currencies causing the 15 month bull run falls far wide of the mark.

        You’d do better thinking about the ongoing attack on cash by the establishment and organised crime searching for a new currency to use alongside bitcoin speculators diving in and out of the market for a quick buck. It’s a very volatile currency, check it out – http://www.coindesk.com/price/.

        Happy New year to you and Mum.

  5. Hi Shaun…

    perhaps you’ll do an article by popular demand? Or if not, maybe by one perplexed guys’ suggestion? (aka pleading)… I have tried to learn as much about BTC online as I can…but alas, I just don’t “get” BTC! where is the value? why do people want it? other than other people will accept it for payment? or maybe that IS enough? i understand the appeal of avoiding Big Brother in BTC’s use…but is that reason enough to qualify as a long term money option? It seems to me to be a large, and dicey experiment on a concept where is no “there there.” Maybe I’m just too old? THAT would explain why I’d accept gold in payment, but not BTC, I suppose. But I know gold will be worth at least something whenever I need it for trade, and I’m not convinced in that regard for BTC.
    HELP!!

    • It’s a currency out with the remit of the Establishment and therefore cannot be debased (so far) as the companies whom have issued it are adamant that no more electronic bitcoin will be produced. Thus far they have maintained their promise. People who use it have faith in it’s value because of this.

      If you believe QE will eventually debase all fiat currency then your alternatives are gold, silver, platinum, titanium or bitcoin. The one thing all these “commodities” share is that they are in finite supply (unless one of the bitcoin issuers eventually decides to issue more bitcoin) and so their value is considered “guaranteed”, at least whilst ever there is a consensus that these commodities possess intrinsic value. .

      Personally I have no use for gold other than the small amounts that are used for industrial applications but many do prize it.

      The other group who like to use it as a store of value are as I say above to Shaun, organised crime, as Governments cannot see who possesses it and they will be happy to use it as a long term currency between themselves in the black economy.

      The thing about any currency/money is that it must be fungible, i.e. “a good or asset’s interchangeability with other individual goods or assets of the same type” – http://www.investopedia.com/terms/f/fungibility.asp.

      Effectively, a group of market participants must ascribe the same value to to one unit of that currency and have faith in it, then they can trade with it. It matters not if the “currency” is fiat money, gold or tulips as longas a majority of market participants have the same value of one unit of that currency, so there’s no reason why in the future people may begin using acorns as currency if enough people value the humble acorn highly enough and they are assured that the number of acorns canot be easily increased.

      You have entered into an ongoing argument amongst economists about what “money” actually is.

  6. You are spot on with your article. Gold is the only Real money as it keeps it value while fiat currencies all over the world is collapsing and Bitcoin is becoming the money system of the future. Good luck with your ventures. Cheers

  7. Reblogged this on Free Market Invest and commented:
    What an insightful take on the current state of affairs. Several interesting metrics tie this conclusion into a larger debate on how ready bitcoin is for a SEC approved ETF. Things are getting heated up as we approach March and expect to hear the next round of updates concerning the purposed $COIN ETF.

  8. man, wish I ever had bought a few hundred , few , 000, 000 dollars cost of bitcoins for instance a year inside the. seems too late at once. Although, had I gone with Mt. Gox I have gone screwed your own my cash flow. Maybe just as carefully.. Hope I won’t be worrying a year or two or a great deal more down the highway that My husband and i still will likely have gotten back into Bitcoins now

    bitcoin mining pool best payout

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