Tuesday, July 02, 2013

The 4.30 at Aintree? Well it's an Asset Class 'innit.

Team Macro Man could not help but notice the Winkelvii are launching a Bitcoin ETF. Now, some of TMM are known for nasty, nasty put downs and angry letters to the editor type behavior so we will try to keep this brief - 

ARE YOU MAD?????????

Someone on one of Team Macro Man's chats recently described this ETF as a Rorschach test of what people think of digital currencies. That is utterly wrong: it's an IQ test. Bitcoin is anonymous, untaxed (for now) and quite liquid in and of its own right despite all the complexities of a cryptocurrency. A bitcoin ETF is taxed, has fees, may or may not be liquid at all. So, this is really a test: do you want to facilitate the exit of the Winkelvii from an investment at inflated levels which they will soon be taxed upon or do you want to sit this hand out? 

Excellent. You and TMM can wait for this deal to fail miserably and you can back bid the Winkelvii at much lower levels which they will almost certainly hit since they are US citizens and unlikely to have any means to avoid being taxed upon bitcoins when the IRS comes knocking.

This brings TMM to the psychology of anchoring and herd mentality. Suppose we told you there was this thing bitcoin and we issued a research report all about it. Maybe you buy it, maybe you don't. But if we issued a research report and showed your real money asset allocation competitors gave it a 1% weight, TMM are pretty sure you would at the very minimum think twice about it. This gets down to the way to sell something bizzare and new - call it an asset class. Just as Bonds become "investment grade " when they move up to BBB, so it appears any thing with a price that moves, however spivvy, becomes investable if it can be promoted from "Betting on a horse"  to "Asset class".  

TMM have noticed this as a growing theme having also just received an invitation to a conference inviting them to learn about "Volatility as an Asset class". Now we know that volatility funds are prolific but does that actually make volatility an asset class? 

The key features of something that can be seen as an "asset class" is that its cashflows and the drivers thereof, are somehow independent or unrelated to other existing asset classes. TMM think that if it looks and quacks like a duck then it's probably a duck and not something entirely new. To that end new asset classes such as MLPs and the like are just underlying assets with slightly different taxation for certain entities - a big pipe is a big pipe at the end of the day.

Now this of course does not apply to assets without cashflow such as bitcoin and gold and you are free to define new asset classes however you please IF THEY TRADE THAT WAY. But herein lies the problem with true speculative assets - their ability to diversify and behave like something new and different is driven by positioning.  If it's crowded it probably won't work unless the money keeps coming in. So TMM think that as the general USD squeeze continues and the pain spreads, it's worth getting back to valuation 101 and asking oneself simple questions like: can this company pay me back? Will this company grow? Does this country have the asset base or the ability to tax to pay me back and where are the factor pressures that drive inflation?

TMM know this doesn't provide much counsel on gold but perhaps our readers should move on from Wink-evil's latest "asset class" (ahhm), much like everyone else. 

That is once they have signed up for our conference (at an early bird discount rate of $1,999 per day) launching TMM as an asset class.


amplitudeinthehouse said...

I could , but what's the point, they know everything...that's why it's taken over ten years!

abee crombie said...

Interesting thoughts TMM. I for one am very pleased to be living in an age where you can get exposure to cheap 'beta' fairly easily with the likes of ETFs, closed end funds and a multitude of equities which are not businesses selling traditional goods and services. Of course there are some bad ones out there (VXX chart over 3 years, or the Double ETFs)

As for companies and cashflows = real value. While I do agree it provides anchoring, if you have spent time playing around with growth stocks or most individual equities you should know that current or even near term cashflows/dividends make up very little of the value/market cap. Equities are a long term interest and most of the value is in the 'terminal value', ala DCF terminology. Discount rates and expectations of growth are the main drivers. So to me equities are just as anchored as gold most of the time (aside from those companies with very high dividend yields and stable businesses, which are few an far between). I'm not trying to make an argument for Gold but I'm just saying that equities, like every other long lived asset, depend on someone else buying them from you to profit. If overnight GOOG is delisted and it trades privately at a 3x multiple, even if you were able to buy it at that discounted price, do you really think the company is going to stop capital spending and divert all of its cashflows to investors, will you be able to make a solid cash return without selling at somepoint? You can only make money if someone else is willing to pay. Thats the nature of the game and always will be.

Maybe thats why IG bonds have tended to be a better investment over time.

Leftback said...

When people are so skeptical that they start to really question whether any equities at all have "real value" as investments or are just punting vehicles, you have reached a low point in investor confidence.

Now we just need the speculative crap to be brutally crushed over the next 12 months, leaving real cash flow positive dividend-paying businesses around the world still standing, in order to reveal what value investing is all about.

Right now there are two markets. The real stuff, which is in many cases quite cheap, and the mickey mouse market, which is unbelievable in every way.

Leftback said...

Retracement capped by the 50dma at 1625ish, all fairly predictable for the chartists in us.

A lot of US based punters are going to say, "F*** this noise. I am not going to get caught with my pants down over the holiday. I want to be able to come in with a hangover on Friday without getting rear-ended".

Positions are going to be reduced this week well ahead of the Friday jobs number, and it looks like they have already started ahead of the ADP number this time. With equity markets closing at 1pm tomorrow, today may end up being the most significant session of the week. Jobs week is joining FOMC days as the best time to do nothing at all.

Leftback said...

The market that really matters most this week isn't the equity market, it's the bond market, stupid. Equities have their own issues coming along, however, in the form of the Q2 earnings season beginning next week.

We favour the general thesis that earnings in Europe will be a bit better than expected, while earnings in the US will be a bit disappointing. Think of it as the principle of mean reversion in action, if you like.....

Leftback said...

DX carving out a right shoulder here at around 83.50 to complete a possible H&S formation. With the BoJ on jawboning hold for now, the future of Bucky rests with the ECB. We think they sit on their hands and EURUSD will be firmer in the weeks ahead, as US data softens.

Target for a lower USD is 82.60 (50 dma) and then 81.50 (200 dma).

Nico G said...

Leftback right now European equities are showing no sign of repricing i would not play European equities vs. US anytime this year. Am still short Europeans and enjoying every week of it

Anonymous said...

C Says
Nice to know something's don't change. You can always depend upon Europe to ride to the rescue when you need a crisis. I do hope the Fed has got them at the top of their xmas card list ,because they are the guy's that keep on giving when it comes to lending a helping hand to US yields.