Longboat Kiwanis Club hosts financial expert to discuss Bitcoin

An expert on one of the world’s suddenly hot, but still mystifying, investments is the scheduled luncheon speaker at the Kiwanis Club of Longboat Key’s Jan. 18 meeting at Portofino Restaurant at the Longboat Key Club.

David Kotok, chairman and chief investment officer of Sarasota based Cumberland Advisors, will discuss Bitcoin, Blockchain and other financial topics at his 11:45 a.m. presentation.

Read full article at YourObserver.com




Bitcoin price WARNING: HILARIOUS moment investor compares cryptocurrency to CHOCOLATE COIN

BITCOIN is as tangible as a chocolate coin a top investor has warned in a hilarious quip about the cryptocurrency.



Appearing on Bloomberg, Mr Kotok offered the hosts a “New Year’s gift” – a chocolate coin shaped like a bitcoin.

Handing out the sweet treat, he said: “I brought proof that bitcoin can be tangible, here’s a New Year’s gift for each of you.”

The delighted presenters asked if the gift was chocolate.

Mr Kotok said that the chocolate version of the cryptocurrency had more value than the real thing.

He said: “That is a chocolate covered bitcoin, that is the most tangible value you will see in bitcoin.”

See original article here: https://www.express.co.uk/finance




Fed, Bonds & Interest Rates

Ben White had this to say about Fed appointments last week in his Politico “Morning Money” column:

“FED TALK – Look for the vice chair nomination to come fairly soon. Mohamed El-Erian remains in the mix but could also be a candidate for the New York Fed. John Taylor sounds like a no-go for vice chair. The White House is looking for a hard-core economist for the vice chair slot, given that with Jay Powell, Randy Quarles, and Michelle Bowman for the community banker slot, Brainard would be the only remaining economist.

“The White House could also look to fill all the remaining slots after Chair Yellen leaves, bringing the Fed board up to its full seven and giving President Trump a massive imprint on the make-up of the nation’s central bank.” (https://www.politico.com/newsletters/morning-money/2017/11/22/murkowski-looks-like-a-yes-on-taxes-030978)

My colleague Bob Eisenbeis has just written on this subject. Bob’s distinguished career has included serving at the Fed under five different chairmen. Here is the link to his recent missive: http://www.cumber.com/chair-yellen-resigns/.

What do we know?

A year from now the central bank of the United States – the lender of last resort to the US banking system and therefore to the world – will be a very different assemblage of folks than we have been accustomed to. Ten years of QE 1-2-3 and near-ZIRP are over.

What else do we know?

The last ten years of financial tailwinds are giving way to headwinds. Note that one may sail forward against a headwind by tacking back and forth. The process is slow and requires hard work. That is different from the ease of movement experienced with a tailwind.

The US federal deficit ran high for the last ten years, and aggregate US debt under three presidents has increased by nearly $11 trillion in a decade. Meanwhile, the interest expense line item in the federal budget has been flat as interest rates remained low and US debt service was refinanced at low rates. That tailwind is over.

The tax reform bill will raise the authorization to borrow and to add $1.5 trillion to the deficit. This is incremental to existing deficit projections which are already rising.  The total interest bill will be rising. The total debt-to-GDP ratio is headed for 100% with the tax reform bill addition, a level that reminds us of the end of World War II.

In its early stages, trouble in financial markets appears in places where credit and lending issues can be seen and measured. That is where to look for warnings. A partial list of such places follows, along with some stellar observations by Chris Whalen.

Chris has penned an essay on the Fed and on a bright yellow flag. He asks, “Q. Besides stocks, what asset class has benefitted the most from the radical monetary policies of the Federal Open Market Committee? A: Multifamily real estate. And what asset class most worries federal bank regulators today? Same answer.”

See https://t.co/4XvERiw8du for the discussion. We thank Chris for permission to share this with our readers. To subscribe to Chris’s The Institutional Risk Analyst, please email your request to info@rcwhalen.com.

There are other places to worry about credit risk, too. Credit card delinquencies have started to rise. High Yield spreads are very low by historical standards but are recently starting to widen.  Private equity financing of commercial real estate shows trouble spots. Note that twice as many retail spaces closed as opened in the last report period. Note empty mall and highway retail space. Note the secondary effects of these changes on employment and on city, county, and school board tax receipts.

Finally, we have the credit risk around the hot topic of Bitcoin, with its wild price fluctuations. New buyers of crypto and crypto derivatives emerge every day. Some are leveraging; thus credit risk is added to speculative risk.

Even outgoing Fed Chair Janet Yellen admits that too much QE for too long with a ZIRP can lead to difficulty.

We are in the post-Thanksgiving to New Year’s period, which is traditionally upbeat. We encourage you to enjoy the season – but when you ring the bell, we advise you not to drop it on your foot.

Our Cumberland US stock market ETF portfolios are now overweight the smaller and mid-cap area. Our overweight of Tech has been reduced.

Our bond accounts emphasize higher-quality credit, and we are not chasing the high-yield space.

We expect a tax reform bill to pass both houses of Congress and to be signed into law. Political leaders are desperate to produce it, so they will do anything to make a deal and get an “aye” vote.

Next year portends rising volatility and massive political swings of sentiment as we run up to the midterm elections.

Current polling suggests that the Democrats may capture the House majority and thus chair all House committees. An impeachment bill is likely if they prevail.

2018 promises to be an interesting year.

David R. Kotok
Chairman and Chief Investment Officer
Email | Bio


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Wealth Managers Are Being Inundated With Calls About Bitcoin

At 74, Cumberland Advisors’ David Kotok has guided wealthy clients through a long career’s worth of bubbles and crashes. Now he’s being inundated with questions about the latest soaring asset to confound investors — bitcoin.

“Clients bring up bitcoin all the time,” said Kotok. “They think it’s cool. It has the newness, which is attractive to some people, though others would say newness is a risk they don’t want to take.”

Read full article here: https://www.bloomberg.com




More on Bitcoin

Following up on our recent commentary, and with permission, we continue to quote the excellent work of Nick Colas and Jessica Rabe of DataTrek Research. We encourage readers to give their newly launched service a try. Their website is http://datatrekresearch.com/.

In this segment, Nick focuses on the question “Are cryptocurrencies an asset class?”

“Over my 30+ year career on Wall Street, I have seen scores of investments touted as an ‘Asset Class’. A few examples: US farm land, rare cars and watches, equity market volatility, livestock, high-end real estate, diamonds/rare gems, Asian and other antiques, and expensive artwork. Typically, such chatter picks up after a strong run-up in prices and feels like the smart money looking for an exit rather than a legitimate opportunity.

“For the fiduciary-minded investor, ‘Asset class’ has a very specific and important connotation/meaning. To reach that level of recognition, the assets in question should:

“• Be comprised of investments that have common fundamental characteristics and robust regulatory/legal structure

“• Be large enough in aggregate size to allow institutional liquidity, although this can vary depending on the investment (US equities vs. real estate, for example)

“• Provide non-correlated returns to other asset classes because of their unique fundamentals, so as to provide the benefit of diversification to asset owners

There is a lot of excellent academic work out there which analyzes investments through the lens of ‘Asset Class’, going all the way back to the 1980s (Gary Brinson et al are the most cited). Over the years, most institutional investors have adopted this work, making it a cornerstone of their investment process. The need for higher returns drives allocations to equities, for example. More conservative portfolios own more bonds. Cash, real estate, currencies, and commodities round out the menu. A place for everything, and everything in its place…

“Do cryptocurrencies like bitcoin meet the definition of an ‘Asset class’ for investors that care about that designation? At the moment, the answer has to be ‘No’. A few reasons why:

“• They are too small. The combined market cap of all crypto currencies is just under $200 billion. Compare that to just a slice of the fixed income asset class – US sovereign debt – with $14+ trillion outstanding. Or US stocks at $20+ trillion.

“• Cryptocurrencies do not yet have as robust a regulatory framework around them as stocks, bond, currencies or other traditional asset classes. Some prominent financial markets professionals even think that governments may eventually ban them. No one talks that way about stocks and bonds.

“• Cryptocurrency exchanges and wallet operators around the world operate with varying levels of know-your-customer and anti-money laundering laws. There is no absolute assurance, for example, that a bitcoin you just purchase online didn’t have a member of the North Korean military or Iranian Revolutionary Guards ultimately on the other side of the trade.

“• An asset class needs some level of homogeneity among its constituent investments. GM and Facebook are wildly different companies, but the equity of each represents the same type of claim on residual corporate cash flows. Bitcoin and Ethereum – the two largest cryptocurrencies by market cap – are not the same in terms of structure or purpose. In fact, they aren’t even close.

“• There is not enough history to assess the price relationship between cryptocurrencies to other asset classes. Investors responsible to asset owners need a track record of prices to determine its ability to deliver diversification. There is no shortcut for this requirement.”

We stand by our concern that the mathematically derived crypto has no store of value mechanism since it can be replicated infinitely. The proof is found in the increase in ICO numbers which suggests there is no limit to creation and hence price discovery is a function of speculation and momentum.

Meanwhile, Kerry Smith, a retired Stanford law graduate and serious student of the electricity grid, emailed an observation about how crypto is a large consumer of electricity. He notes that risk.

We contrast it with a gold linked token which can use block chain successfully but is not subject to the electricity constraint. We shall see if gold tokens catch on. The turmoil in the Middle East may be the catalyst.

David R. Kotok
Chairman and Chief Investment Officer
Email | Bio


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Kotok On Bitcoin, Gold & Trump’s Approval Ratings




Bitcoin, Gold & President’s Approval Ratings

Readers have seen us previously comment on the developing Bitcoin-crypto phenomenon. And our clients know that we are not investing in crypto today but are watching this carefully. Our clients also know we have a position in a gold-miner ETF. Our email from clients, media, and readers has the Bitcoin versus gold argument and the evolution of crypto at the top of the topic list. There is a lot of buzz.

The buzz is not surprising when a new financial element appears whose price fluctuations can be $1000 in a week. Interest in Bitcoin and crypto in general is expanding at an exponential rate, and the range of opinions for crypto can fill a chasm. At one extreme is the “tulip mania” assessment of crypto. We discussed it last month. See: http://www.cumber.com/tulip-fever/. On the other extreme are forecasts that crypto will replace gold as a reserve and that the ultimate Bitcoin token price level may reach $50,000. We are highly skeptical but realize that our skepticism may be a product of age and experience. Maybe we are guilty of a Luddite mentality.

We are also watching the development of the gold-backed-crypto alternative. We think that is a significant direction that blockchain transactions will take. We wrote about that recently. See http://www.cumber.com/bitcoin-gold-money/.

A perceptive reader asked about the relationship between President Trump’s activities and the gold price. This question was posed in the context of the developing global crypto-gold nexus that we are seeing with the introduction of the Sharia-approved, gold-backed cryptocurrency. The reader struck a chord.

So, we set about examining the relationship of presidential approval ratings and the gold price. There is no history regarding a correlation between presidential approval ratings and the cryptocurrencies, since the only data points are very recent and were mostly established in the Trump administration era, which is only one year old. There is no way to know if the rise in crypto attention originates in a worldwide reaction to the dwindling approval of Donald Trump as a world leader. We can debate this question as a political matter from all points of view, but we cannot find any historical evidence on which to base a solid conclusion. Crypto is just too new.

We can find some solid evidence when we examine the gold price.

Readers are reminded that gold was priced at $20 an ounce a century ago. The “double eagle” was the largest-denomination gold coin. In the Depression era the US government altered that price and restricted the ability of our citizens to own gold. See https://en.wikipedia.org/wiki/Executive_Order_6102.

Under the Bretton Woods (https://en.wikipedia.org/wiki/Bretton_Woods_system) fixed-currency regime, established in 1944, the United States, under President Franklin Delano Roosevelt, agreed to a fixed exchange rate of $35 per ounce of gold, and we settled international transactions with intergovernmental gold exchanges at that price. This agreement defined the operational structure until 1971, when President Richard Nixon closed the “gold window” and reneged on the previous US pledge. The US raised the official price to $42, but that meant nothing, as transactions ceased. See https://en.wikipedia.org/wiki/Nixon_shock.

As Nixon’s presidency deteriorated, the gold price on world markets tripled. Thus the Nixon era is the first case study that can be examined in response to the question posed by our reader. The second case study involves President Bush the younger. Bush Jr. also faced a period of deteriorating approval that correlated with a noticeable gold price change.

These are the only two case studies that have some statistical basis; they are a very limited data set.

We have boiled this exercise down into three slides with help of Cumberland’s Tom Patterson. The link to the three slides, in PDF form, is http://www.cumber.com/pdf/GoldApprovalWebsite.pdf.

The first slide shows all the presidential approval ratings from Richard Nixon to present. Note how most presidencies start off with higher approval ratings, which decline with time under most circumstances. Also note how Donald Trump’s starting point is lower than others, and note how his decline has been persistent. The persistence of decline is not unusual in history, but the rapidity of Trump’s decline is an outlier in history. Trump’s starting point is lower than for the other cases in this study. Of the nine presidents in the study, and at this point in time in his presidency, Trump is clearly the least approved. Note that the rate of change of deterioration is intense.

Readers may also note that the reasons for approval declines are not listed – we are going strictly on the numbers. The reasons may be the subject of discussion and debate, but for the purpose of this analysis, we ignored them. Whether it was Jimmy Carter and Iran’s detention of Americans or Donald Trump’s nasty tweets and belligerent behavior, the causal nature of approval decline was ignored. It isn’t why approval declined that matters; it’s the decline itself. The approval numbers are sourced from the American Presidency Project and Gallup data. The gold price data is from Bloomberg.

Chart two shows the Nixon shock and the change in the gold price at that time. The depiction of gold prices is scaled vertically so that readers can see the rates of change in the gold price as opposed to its absolute level. Thus a gold price move of $80 to $160 has the same visual impact and spacing in the chart as a price change from $160 to $320. The horizontal axis is approval ratings over time, falling from left to right.

In chart two we observe that the approval rating of Richard Nixon worked its way down below 40% and then accelerated downward as the Watergate scandal unfolded. Concomitantly, the gold price doubled. After Nixon resigned, gold traded at a range-bound level throughout the Ford and Carter administrations and until the very end of the Carter period, when the gold price rise became pronounced and accelerated.

The third chart shows the approval ratings of Reagan, Bush Sr., and Clinton. Gold was again broadly range-bound while presidential approvals fluctuated above the 40% threshold. Only when Bush Jr. became unpopular did we see his falling approval coincide with a steeply rising gold price. Why this happened is a subject for political speculation, but the statistical events are clearly observable in the data.

Under Obama and Trump, gold has again been range-bound and approval ratings have fluctuated in the same 40%+ levels as in previous range-bound periods. But now President Trump’s approval level is falling below the threshold that has previously marked a significant gold price rise. That trend raises the specter of another upward price shift in gold. However, this time there is a cryptocurrency alternative to gold that didn’t exist in the other two case study periods.

So, we don’t know how much of the gradually rising uptrend in the gold price that has occurred in the last two years is related to presidential approval ratings for Obama and Trump. And we don’t know how much the cryptocurrency price increases originate from crypto substituting for gold. Maybe it is some of each.

We do know that there are movements in some official gold transactions. We have seen transactions reported by Turkey. (See http://www.barrons.com/articles/gold-a-loser-despite-turkeys-mysterious-demand-1509736352.) And we have seen official sales by Venezuela, which is desperate for liquidity. We are also watching China increase its gold reserve holdings. We know that the collective central banks of the world have increased their assets to about $22 trillion USD equivalent; and even though the Fed is now starting to shrink its balance sheet, combined central bank asset growth is running at about $300 billion per month. (Sources: Bloomberg and hat tips to Dennis Gartman, Mark Grant, and Ed Yardeni.) We know that those reserve additions are mostly in fiat currency asset denominations, very little in gold, and not in crypto at all.

Let’s segue to the crypto-gold debate.

With permission, we are extensively quoting Nick Colas and Jessica Rabe from their newsletter. We know their excellent work from previous affiliations and are delighted to see them venture into this newly launched service. Readers are encouraged to give it a try. Their website is http://datatrekresearch.com/.

Regarding Bitcoin and gold they wrote:

“Physical gold is the world’s oldest store of value; bitcoin is a baby-faced newcomer. But the two have many common features, such as limited supply, efficiency/portability, and privacy. Bitcoin has a long way to go (about 5,000 years) before it can match gold’s success, of course. Gold has a different but equally important challenge – maintaining its relevance in an ever-more digital world.

“That’s what makes the whole bitcoin vs gold debate so interesting. A long-time incumbent and a new kid on the block, competing for attention. It’s not quite the Rumble in the Jungle, but close enough.

“We looked at Google Trends, which counts the number of searches for key words, to see the relative interest in “buy gold” and “buy bitcoin” to see which asset is more popular around the world. Google searches should be a reliable indicator of purchase intent, or at least interest.

“Here’s what we found:

“• On a worldwide basis, “Buy bitcoin” is a more popular search than “buy gold”. The crossover happened in mid-May of this year. As of today, bitcoin Google query volume is 17% higher than that for gold on a global basis.

“• Google Trends also allows you to zero in on what countries search more for bitcoin than gold. Over the last 90 days, for example, bitcoin beats gold across all of Europe and Russia. Even gold producing countries like South Africa and Canada show more bitcoin searches than for gold.

“• Based on Google searches, the United States is undecided on the bitcoin-gold debate. Search volumes are similar over the last 90 days. They do, however, show regional biases. Bitcoin wins in New York, Illinois, and California, for example. Gold still holds the lead pretty much everywhere else.

“The upshot of this analysis: in just a few short years bitcoin has caught up with gold in terms of global interest. Does that mean it has the staying power of gold? Of course not. It needs about 4,995 years to get there.

“Our perspective on this debate: both bitcoin and gold serve a similar purpose, namely to provide investors with a liquid asset outside the global banking system. If that’s your thing, there’s no need to choose one over the other.”

Many thanks to our brilliant reader who triggered today’s discussion with a sharply perceptive question. And many thanks to Nick and Jessica for permission to quote their research work. Please note that they will be present at the GIC discussion of crypto on January 12 in California. For details see the GIC website at www.interdependence.org. You will find the date listed under coming events. Registration is about to open. The meeting will feature Boston Fed president Eric Rosengren. A special conversation with Harry Markowitz is also planned, along with the discussion of crypto.

Only time will reveal the answer to our reader’s question about Trump’s approval rating and the gold price. If Trump’s approval deteriorates further below 40% and if gold rises in price, the history we documented with the Nixon and Bush Jr. eras will be repeated and validated. As for the effect on gold of crypto substitution, that remains impossible to determine today.

At Cumberland, we do not hold any Bitcoin or other crypto positions for our clients. We do have clients who are speculating in cryptocurrencies on their own. They have told us they are doing it. We wish them well.

We continue to maintain a small position in the gold-mining ETF in our US-based ETF portfolios. And we continue to hold some cash reserve in the US portfolios. We are not fully invested.

Of course, any of those decisions and strategies may change at any time.

David R. Kotok
Chairman and Chief Investment Officer
Email | Bio


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Bitcoin, Gold & Money

We start with a quote by Donald Trump, courtesy of CNN, May 16, 2016: “This is the United States government. First of all, you never have to default because you print the money, I hate to tell you, OK?”

We juxtapose that quote with Francesco Bianchi and Leonardo Melosi’s excellent research paper published by the Federal Reserve Bank of Chicago (working Paper 2017-19). We recommend readers thoughtfully review this paper, which is entitled “The Dire Effects of the Lack of Monetary and Fiscal Coordination.” You can access it here: https://www.chicagofed.org/publications/working-papers/2017/wp2017-19.

Now for a topical anecdote. The following story struck me, since I had just seen the movie Tulip Fever and written a review of it (available here: http://www.cumber.com/tulip-fever/). It seems a young Dutch family has decided to sell virtually everything they own and to plow the proceeds into Bitcoin. They have moved out of their house. They are making a brave but 100% speculative bet on this cryptocurrency. Here’s their story: https://www.cnbc.com/2017/10/17/this-family-bet-it-all-on-bitcoin.html.

Why? The behavior seems bizarre to me.

There are many dimensions in the debate about the relative merits and demerits of cryptocurrencies, fiat currencies, and gold, so today’s commentary may seem a disjointed missive. And it is. No consistent path has yet been determined for the rapidly growing crypto asset class. (I use the term asset class very loosely, since crypto is really still a very new and speculative phenomenon that has not yet gained the respect accorded a traditional asset). Gold, money, and financial instruments such as bonds or stocks denominated in money are generally accepted assets, but crypto is still the subject of intense head scratching.

Let’s get to some bullets.

Of the three asset classes we are considering, the easiest to comment on is fiat currency. There are over 100 in the world. They are available in paper form and can also be transferred electronically in most cases. They are the products of governments. Their transfer usually occurs through some form of government-monitored or -supervised system. They range from the largest, the US dollar – still the world’s reserve currency – to the local paper money of minor countries. The degree of governance varies widely. Venezuela, which has domestic hyperinflation, forces its citizens to use its debased currency and persecutes them when they resort to transactions in the dollar and other harder currencies via an underground system. This is a desperate situation that has been repeated many times in many countries over the past century.

At the other end of the spectrum, we find fiat money being managed by means of hard-money central bank policies that focus on the “classic store of value” function of money. Switzerland’s policy, for example, has been decades in the making: The Swiss have had one of the hardest currencies in the world, although it has ultimately succumbed to pressures from the huge and ongoing monetary experiment of its contiguous neighbors who use the euro. The Swiss National Bank was overwhelmed by the size and direction of monetary policy administered by the European Central Bank (ECB). Serious historians of monetary history will long recall how Switzerland once imposed a negative interest rate of 5% per year on Swiss franc deposits in order to discourage inflows into the “Swissie.” The world was seeking a store of value and didn’t trust the dollar at that time.

Cryptocurrencies have both passionate supporters and vehement detractors, though it is now possible to facilitate transfers between crypto and fiat currencies. Some folks think of crypto as an alternative to credit cards but with a payment mechanism that uses the new blockchain technology. Crypto detractors argue that governments will not go on allowing parties to bypass the fiat currency systems they have created. Here is a full discourse on that subject by Harvard professor Ken Rogoff: https://www.project-syndicate.org/commentary/bitcoin-long-term-price-collapse-by-kenneth-rogoff-2017-10. Rogoff raises important questions:

“What happens from here will depend a lot on how governments react. Will they tolerate anonymous payment systems that facilitate tax evasion and crime? Will they create digital currencies of their own? Another key question is how successfully Bitcoin’s numerous “alt-coin” competitors can penetrate the market.”

Evidence from China is that governments are starting to seriously resist crypto, as Rogoff suggests.

But not all governments are resisting.

In the Middle East, gold-backed crypto tokens are emerging, and they are sponsored by a government. TabbFORUM reports (10/20/2017) that “In the Sharia-compliant OneGram, each crypto token is backed by one gram of gold held in a vault in the Dubai Airport Free Zone. A similar scenario takes place when trading ZenGold, while GoldMint, which is based on a private blockchain, issues tokens backed by physical gold or ETFs as per the prevailing price of gold.”

Gold-backed crypto is very new, and we shall quickly see whether it catches on. Adding a gold backing counters the argument that cryptocurrencies have no tangible value. Gold can relieve and replace mathematically driven systems that attempt to create scarcity value, as in the present crypto mining operations.

We think there is potential for gold-backed crypto. For a full discussion, see “Where Bullion Meets Blockchain”: http://www.lbma.org.uk/assets/alchemist/Alchemist_87/Alch87Coghill.pdf.

Fundstrat’s Tom Lee, a supporter of crypto, has created five indices. One of those baskets contains 300 cryptocurrencies. Lee says, “The indices are designed to accurately reflect the comparative price performance of Bitcoin and other crypto-currencies.” Lee favors the “larger-cap crypto-currencies from a tactical positioning perspective.”

And now the explosion in crypto has taken on a new coloration with the launch of a fund of funds. See this Bloomberg story for details:  https://www.bloomberg.com/news/articles/2017-10-24/crypto-fund-of-funds-emerges-as-digital-coin-sector-explodes.

So far there is no index of gold-backed cryptocurrencies. Tom Lee is the crypto pioneer but not with gold backed included.  They are probably too new and too small. We shall see if that changes. We shall see if ETFs follow those indices.

We note that the world’s gold supply is finite. The central banks of the world hold about 18% of the entire world’s gold. They count it as part of their reserves. The government of China has been a constant buyer of gold and is now the sixth largest governmental gold holder in the world. The largest is the US, followed by Germany, the IMF, Italy, and France. Add Russia (right behind China) and Switzerland and you have just named the holders of about two thirds of the worlds’ officially held gold reserves.

From what we can see, no central bank uses a cryptocurrency as a reserve at this time. Tom Lee believes that they will start doing so once the total crypto asset class exceeds $500 billion in value.

So where do all the emerging developments in crypto leave us today?

Crypto is rapidly expanding. Other than for the new gold-backed entrants, the value of cryptocurrencies is unknown and highly volatile. Meanwhile, the gold price has been slowly rising for the last couple of years, and its volatility is usually tied to a weakening or strengthening US dollar movement in the foreign exchange markets.

Evolution is fascinating to watch, and we are seeing it. We do have a small position in the gold miner ETF in our US dollar-based portfolios.

David R. Kotok
Chairman and Chief Investment Officer
Email | Bio


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Tulip Fever

Three levels are apparent in the wonderfully crafted movie Tulip Fever, in which the impeccably cast Judi Dench is both abbess (mother superior) and tulip-speculating vault keeper. The film is a cinematic lesson about trading momentum and human emotions overtaking investment reasoning.

But there is also a lesson in Dutch history, with a marvelous depiction of early 17th-century Amsterdam and only by surmise and projections Amsterdam’s upstart cousin Nieuw Amsterdam, otherwise known as New York. Bottom line: NYC really was and still is a Dutch town.

The movie peeks at the roots of New York during its pre-English years. The attempt at historical accuracy is affirmed in this viewer’s eyes even though there are a couple of dates which conflict by a year or two with records.

Incidentally, Beverly Swerling’s compelling historical novels are a perfect companion to the film. We must give five stars to both Tulip Fever and to City of Dreams: A Novel of Early Manhattan, the first in Swerling’s series. (We subsequently read all the rest.)

A second level in the film concerns art. Please Realize that Tulip Fever is set in Rembrandt’s era, and please observe the paintings closely. So obviously metaphorical is the play on Vermeer and Girl with a Pearl Earring. The movie uses this metaphor brilliantly. (And I have seen that classic work when it was on exhibit.) The movie makes use of other classic artistic themes, too, including portraiture and the mixing of color. How lovely to see an art lesson woven among the story’s other threads.

The tulip craze and collapse is more than just a chapter in Charles Mackay’s famous classic Extraordinary Popular Delusions and the Madness of Crowds. BTW that book is a must read and a classic to be assigned to any and every serious investor.

In the movie, we see tulip prices rising and observe how the extension of credit influenced the path to a peak and then collapse. We see early auction pits in operation in taverns, with high and low intrigue. This all takes place three and a half centuries before Michael Lewis came along. Hmm – some things may never change. My speculation is that Jesse Livermore would love this movie and Ben Graham would want a refund of the ticket price. Warren B, Graham’s disciple, might have an opinion. Is there a view from the Oracle of Omaha?

This third level fascinates those of us who populate and puzzle over the markets. What does this tulip story say about Fama or Samuelson and about efficient markets and price discovery? Is Professor Andrew Lo correct as he leads us down the path of critical thinking with his new book Adaptive Markets? Doesn’t the movie affirm Daniel Kahneman’s lessons in his seminal work Thinking, Fast and Slow?

For us, the movie was entertaining and rewarding. We got our money’s worth. We disagree with the critics who gave it a pan. But what do they know? They’re only out of teenage hood in the last ten years and only know one direction of markets and economics.

If you want a lesson in trading certificates, see Tulip Fever. For a pleasant art history course, see Tulip Fever. And for suspenseful entertainment that ends with a smile, see Tulip Fever.

P.S. Was there a tulip named Bitcoin?

David R. Kotok
Chairman and Chief Investment Officer
Email | Bio


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Cryptocurrency

For an in-depth discussion of blockchain and cryptocurrencies see the June 2017 white paper published by the World Economic Forum: “Realizing the Potential of Blockchain: A Multistakeholder Approach to the Stewardship of Blockchain and Cryptocurrencies” (www3.weforum.org/docs/WEF_Realizing_Potential_Blockchain.pdf).

Bitcoin, Ethereum, Monero, Litecoin, Stratis, and many other strange names now collectively make up an asset class of about $100 billion. Bitcoin is about half of the total.

Wild price gyrations have characterized this speculative asset class with more than a hundred players. Its short history has spawned extraordinary future price forecasts in the new theater of cryptocurrency. I’ve read one forecast arguing that a bitcoin could bring between $12,000 and $55,000 within five years. Readers may follow these price gyrations at coinmarketcap.com/currencies.

In the very beginning, cryptocurrency was viewed as a way to make payments under the radar screen of government regulation and supervision. That is changing. Slowly an expanding number of legitimate businesses accept cryptocurrency as a payment method. They usually immediately convert bitcoins or other currency into the ordinary fiat money in use.

The near immediacy of a blockchain transfer facilitates transactions. Often there is a service fee similar to the charge for using a traditional credit or debit card.

So what started out as a mechanism for secretive transactions that could not be traced easily has now transitioned into broader usage.

But what about those wild price gyrations? Should we consider Bitcoin and its growing list of competing cryptocurrencies money? We think the answer is no.

We can think of a given cryptocurrency as a way to transfer money using a methodology that bypasses the traditional banking system payments we are accustomed to. Cryptocurrency transfer is a version of an electronic debit card. So it does permit the classic function of money as a medium of exchange.

But money is also a store of value. At least that is true of a currency with low or no inflation. And money is used to measure and account. Thus we have price references denominated in dollars or euro or yen. Bitcoin has not yet attained the ubiquity needed to meet those tests.

Will it do so? Here is where the debate intensifies. And the entry of speculators, whether long or short, and now an ETF, add to this fascinating evolution.

Some references are in order. Tom Lee at FUNDSTRAT estimates the total asset sizes of many categories. US Treasury obligations total slightly under $13 trillion. US stocks are the largest, at $22 trillion. Worldwide gold is third, at $7.5 trillion. Investment-grade bonds are about $7 trillion, and munis represent slightly under $4 trillion.

So Bitcoin and all the other cryptocurrencies combined barely meet the threshold of anything other than a speculation for an investor. For now, at Cumberland, we do not hold any cryptocurrency in any managed account, and we do not hold any ETF that represents a cryptocurrency.

We hope that answers reader’s questions that we have received over the last several months since Bitcoin tripled in price and then plunged and since some government intervention (by China) in cryptocurrency altered the landscape. We do not expect any major central bank to hold a cryptocurrency as a reserve for a long time, if ever.

We thank readers for some very thoughtful points raised during the last year. Cryptocurrency and blockchain evolution is fascinating. To that we agree.


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Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.