Happy Blow-off, Petro Crypto?

The insanity of the 1929 replay continues this morning with stocks set to open another 200 points higher by the Dow.  Even more astounding is that Bitcoin is now seemingly comfortable over 11,000 – and perhaps could go to $20,000 within a month (or three) at present rates.

Yes, indeed, the world is nuts, but that’s the nature of manias and we seem looked into a 1929-like blow-off based on lots of pressures, but not the least of which is the “free money” notion that backs up cryptocurrencies.

This morning we see another warning,  a move to back a cryptocurrency with a commodity, and Canada keeps edging toward digital money.  Each of these is a very big deal so let’s run through a few impact notes…

(Continues below)

 

The first item to ponder is this story: “Why Vanguard Legend Jack Bogle Says You Should ‘Avoid Bitcoin Like the Plague’.”  The rationale here is very simple, explains Bogle.  (Like us) he points out that there is no intrinsic rate of return.   He even says (as we’ve said) that the only way to make money on cryptos is to find someone who will pay more than you did for them.

The way crypto currencies work is simple:  Bitcoin, for example, claims there will never be more than 21-million created and today we’re past the 16.5-million mark.  But they don’t convert into anything.  But that may be about to change.

Enter the second major story on the “made-up money” front, a Reuters report:  Enter the ‘petro’: Venezuela to launch oil-backed cryptocurrency.

The quickie on this is that president Madura likes cryptos, and like us, sees that they need to be backed by something tangible.  So he proposes what sounds like a “stew” of oil, precious metals, and diamonds.

What he doesn’t address are the two obvious problems with such a scheme.

The first is that in order for such a crypto to work, you’d have to buy-in to the notion that Venezuela can actually stand for delivery in the event you wanted to convert a Petro for however much oil.  You see, Maduro isn’t talking about backing with barrels of light sweet crude in 42-gallon units which would be viable.  No, he’s talking about oil and gas reserves.

OK, problem number 1 is?  Do you trust the government of Venezuela (no) and do you want to weasel around U.S. sanctions (double no).

There IS however, a light at the end of the tunnel:  And it’s actually pretty graceful:  Since the problem is that promises are not “solid” – who do you trust, right? – what we need is a cryptocurrency that stands as a deliverable contract and is enforceable.

Now, you’d be talking about something of value and something that would overcome my objection (and presumably Jack Bogle’s) that there’s not internal rate of return.

Right now, we have just one critical aspect of a cryptocurrency.  They can’t be copied.  But the exchange rate – such as Maduro has floated as an idea – is not intrinsic to the currency.

IF there was an enforceable conversion to X units of something, then cryptos would actually begin to fulfill the notion of setting up a global system of “honest money” – something that could not be “watered-down” by the central governments.

Remember, in the longer-term, convertibility is NOT acceptable to governments.  Which is why the U.S. government allowed the big switcheroo years back, that allowed the (not really) Federal Reserve to pull in all of those actually meaningful Silver Certificates that were nominally exchangeable for a measure of silver at a Federal Reserve Bank.

Instead, today, all the money in your pocket is ONLY backed by the “full faith and credit” of the United States.  As we explained in this weekend’s Peoplenomics report, the National Debt of the U.S. is not the $20.5-trillion the press lies to us about.  It’s really more on the order of $61- trillion. Think unavoidable, unforgiven interest.

The reason is that government debt is associated with essentially irrevocable interest charges (hence, the additional $40-trillion owing) that no one talks about.

In reality, if you have a $20,000 loan balance outstanding on your car, you could legitimately claim that loan debt payoff is $20,000.  Maybe you win the Lottery or get an inheritance. Point is, there are circumstances where the principal could be paid off immediately.

Government is not so lucky.  There aren’t enough Powerball tickets in the galaxy to bail us on this one…

Paying off the U.S. Debt will therefore never happen.  $20.5 -trillion is roughly the total output of all the goods and services made in America in a year.

People are not going to work and starve for a year to pay off the Federal Debt.  Let’ alone three years.

And let’s not forget that agency (intergovernmental) debt carries a higher interest rate (around 7.8%) and correct me if I’m wrong, but I believe it can’t be paid without an interest penalty.

See, on the private side, if you pay off a house or car early, most consumer loans don’t provide for pre-payment penalties.  But in government?  The interest payments on intergovernmental debt are critical to keeping things like Social Security from blowing up.

Bottom line here is the U.S. is locked into the “making up money” (but only their money).  For now, they have ruled that cryptocurrencies are personal property which, when exchanged for anything else of value, are subject to income tax on what they decree to be a “taxable event.”

Since the U.S. can’t even remain faithful to its Depression-era promised of convertibility (don’t even start me on the Fort Knox discussion!) why would anyone trust a cryptocurrency?  Well, fact is convertibility to anything tangible and even without anyone standing for good delivery of a commodity, people think it’s a better bet than the U.S. government.

(Do remember, what’s obvious to you and me becomes obvious in government in 1 to 3 years and doesn’t become policy for 5 usually…)

Which means there is a YUGE opportunity for some government, somewhere, to make the commodity-backed, irrevocable cryptocurrency.  That will be the one to buy.

Will it be Canada?  There a lot of hype about how things MAY be headed that way.  Take this Bitcoin press release, for example:  Bitcoin Pushes Canada Toward State Crypto Coin.

EXCEPT, we would expect that Canadian politicians, being as weasel-like as any of our Fools on the Hill, will never remain faithful to any pledge of a fixed convertibility rate.

Instead, what they would do is tie the crypto to their currency – which just floats a new round of (digitally-facilitated) currency speculation.

Might I suggest that before you put a lot of money on this notion that you consider rehab, first?

UK pushing to include Bitcoin under money-laundering rules.  Wanna bet the do-nothing Congress will follow suit?

With the Tax Scam’s passage (a break now, screw you down the road a ways)  last week after the close, the Dow is set to pop nearly 250 points at the open this morning.  With Bitcoins at $11,300 when I checked, I’ve got $12,000 in sight before the week is out.

We’re in the classic Depression-era replay.  The Flappers of the Roaring Twenties are the LBGTQR(& whatevers) and the government has no option but to keep making-up money.  It’s a period of frenzy and madness and it won’t end till something comes in from left field and changes how people think.

In today’s Coping section, we surmise that North Korea is a pretty good candidate and that the January/February timeframe would be a good guess.

But it’s only that…or is it?

The Art of Selling at the Top

Here’s another fine indicator for you: Oil tycoon Pickens puts Texas ranch on market for $250 million.

It’s just the place if you need a 33,000 square foot lodge for when you have guests over and you don’t have room in the 12,000 square foot lake house.

(Call me for where to send the referral fee if you buy it!)

Meanwhile, Back On Earth

We now turn to the Monday Trump Bash-o-Matic: “Mueller aide fired for anti-Trump texts now facing review for role in Clinton email probe.”

Don’t hold your breath.  Get used to saying “President Pence” before this is all over.

Ah, the Media

Help me here…this headline isn’t making sense to me: Nobel Peace Prize Winner’s Son Says Missile May Be Chance for North Korea Talks.

So the son of a former South Korean president?  This is like quoting the Obama children…good grief!

OK, he’s older, but still…

Reminds me of my old newsroom motto:  We will find the New or Make It Up!

Useless Distractions

 

‘We Need Roy Moore.’ President Trump Endorses Moore Despite Sexual Misconduct Allegations

 

Why?  Is there a shortage of grab-ass in DC we missed?

And Among the Falling Stars…

Garrison Keillor’s Successor Addresses ‘Heartbreaking’ Allegations in First Broadcast Since Firing.

Forget all that:  I want to know if I can buy up the Powdermilk Biscuit Company, hook it up to social, and flip an IPO before this pant-load of nonsense stops….

How about we launch a new line of Powdermilk Gluten-free?  No?  How about Rainbow Biscuits for your politically-correct friends, then?

The mind boggles…the coffee’s gone.  Time to watch another dawn.  Burma-something…


Comments

Happy Blow-off, Petro Crypto? — 28 Comments

  1. Hi, George,

    So far, two methods for manufacturing diamonds exist: HPHT, growing diamonds under high pressure high temperature conditions and CVD, chemical vapor deposition, growing diamonds with diamond seed crystals in a vacuum. Diamonds made by the HPHT method contain certain types of inclusions, while diamonds made by the CVD method do not contain any, which is scary. DeBeers, now known as the DeBeers Group, has a history of purchasing companies that manufacture diamonds, as they bought GE’s diamond manufacturing company years ago.

  2. Hi, George,

    If I may explain, DeBeers had controlled around 85 to 90 percent of the world diamond market. That control has recently diminished to approximately 65 to 70 percent due to the discovery of Canadian diamonds by independent miners and to several African nations going solo. DeBeers has really no influence on the colored stone market, as that is not under one single authority but under an ever-changing regional control by independent miners.

    The colored gem market is truly fragmented. One example involves the former authority over tanzanite mining and production in Tanzania. They had to literally battle tribal factions in the mines that challenged their authority over the gem production. Eventually, that authority conceded and left Tanzania for the gem fields in Madagascar, allowing several tribal fractions to assume control. Recently, the the son of the President of Tanzania jailed many of the country’s tanzanite dealers in order to assume control over the tanzanite gem business.

    Another example is what transpired in Kenya some years ago. The recognized authority of the tsavorite mining concession was nearly overtaken by local tribes that challenged that authority by murdering their CEO.

    When new gem deposits are discovered world wide, they are mostly mined by artisan miners. The deposits are often marketed without controls, which means that the price is low at first as too much material floods the market, as what happened to Nigerian tourmaline in the 1990’s. These small mines are often mined out in a couple of years. The price typically goes up as the gemstones become rare or even extinct. An good example of an extinct gemstone is benitoite. The one and only place in the world where this gemstone was mined, in San Benito County in California, is now closed. (Benitoite has a unique crystal structure, and this crystal structure was predicted by a Dutch mathematician in the 1880’s.) Another example of an extinct gem is Kashmir sapphire.

    • You might want to look into the past or is a retired colonel who discovered how to make diamonds and he got the backing from a bunch of friends and put up a bunch of these bins that replicated diamonds perfectly and Winnie took them to the experts they couldn’t find any difference except they were more perfect and soul this guy has got a an edge on the market of diamonds and so that’s why they don’t want him to operate because he makes some in his shop and not from a mine and there better wow believe it or not

  3. I understand that you dont care for Trump but you can rest assured that he isnt going anywhere at least by the likes of this crooked ass bunch investigating him; not to mention hes smarter than all of them dopes combined, and his popularity is growing by the day

  4. OPEC controls the “value” of petroleum; DeBeers controls the value of diamonds (and to a lesser extent the other precious gems.) Gold is the only static commodity. Its value hasn’t changed appreciably in thousands of years. That said, I’d no more depend on a communist dictatorship (with a history of nationalizing everything it can get its hands on) to produce gold on-demand in exchange for its cryptos, than I would [believe I could] exchange its (damn’ near worthless) paper for anything of value.

  5. New Bitcoin wave count:

    v of 3 up in progress.

    That decline from $8,000 to $5,300ish was Wave 2 down.

    I think you are right… I think we see $12,000 soon, maybe up to $14,000 or $15,000 to complete v of 3 up.

    Then 4 down with $8,000 needing to hold.

    THEN Wave 5 up with a top by late summer/fall 2018 paying homage to 1929 or 1987.

    I have the DJIA correcting soon, then making a high closer to 30,000 next year. Before a late fall crash.

    Could be like 1987 for BOTH stocks AND Bitcoin with possibly the DJIA AND Bitcoin hitting $30,000.

    da bear

    When the going gets odd, the odds get better!

  6. There’s significant tax liability for BTC and other “property” only if you make a significant gain. As I understand it, there’s no taxable event for buy and hold, and if you buy a BTC(or gold, silver, etc) at 11K and sell at 12K, you’re only liable for tax on 1K at your marginal income tax rate or 28%, whichever is lower. Please tell me if I’m wrong.

  7. Well, $1 and $2 bills cost 4.9 cents per note to make, while $5 cost 10.9 cents, $10 cost 10.3 cents, both $20 and $50 bills cost 10.5 cents, and $100 bills cost 12.3 cents. In other words, the more it’s worth, the more it costs to produce.Oct 9, 2015

  8. Diamond,Precious Metals and Oil will work for bubkiss when the power goes out. Sure you can run a gas generator for awhile. Really the only things that will matter in a power out for weeks/months scenario is Food,Shelter and Safety. You might be able to barter/trade some PMs or Gas for Food .. but very limited. Tobacco, Alcohol, Guns&Ammo Drugs. Once power restored the Bitcoin BlockChain will be recreated, we have copies of the Blockchain- how about that G – Real Live Transparancy! The Future is coming so fast I can almost hear the hiss..

    • My father told me a story of two boys his dad knew. They got their I heritable in Germany the one son seen the opportunity to have fun went out for the party of his life. The other brother invested in bonds and securities etc. Then the depression hit. The son that invested wisely ended up destitute the son that partied.. Beck there was a glass shortage and he had a basement in wine bottles.
      In Greece you could get a woman for the night for the price of a can of soup. In Bosnia a cigarette was priceless.
      Now look back in America’s past.. A cup of water three hundred gold. A pound of coffee a pound of gold. If your a smoker or a drinker what is a glass of beer or a cigarette a cup of coffee. In Argentina a cup of coffee and a sandwich is what a weeks wages a pound loaf of bread ten million in one country.
      Paper is nice but if its worthless what’s it good for if it isn’t quilted soft.
      Crypto if the electricity is off its just a number you watched vanish

    • European central bank was a lot smarter in spotting fake gold. Since they are on the metric system, they asked the issuing authority to direct “their” gold to a trusted refinery, where gold would be cast in 1 kilogram bars. An innocent request, but one that makes the issuer cautious, if not nervous!

  9. Gold is money and a commodity. Not an ancient relic as banks like us to believe. If so, why are they stocking up on it? Fiat is a promissory note that delivers a handful of feathers when the issuer cannot pay. Any promissory note separates the owner from its wealth. Possession is nine-tenths of the law, something we grew up with. Under this dictum, who has the advantage? The note holder, or the possessor of borrowed wealth? We are told holding gold does not produce a rate of return. It does! Fiat, with a rate of return gets devalued, gold does not. That is the rate of return. Fiat can be reprinted with new bills replacing old ones at a discounted rate. Gold can’t be reprinted. Food for thought.

  10. George, a ‘Tax Scam?’ Strongest words to date. Must say I agree. Also, there is much evidence that the 2008 Great Recession was triggered by deregulation (and regulatory non-enforcement) coupled with excessive national debt. Deja vu all over again?? Mike.

  11. George I have always maintained we need a good deflationary depression to reset our economic system. Last night read a very good paper by a prominent PHD Economists and he had very good reasons for what I have thought and gave some very good thoughts on the next several years why we will have one. Finally

    • “a good deflationary depression”

      A good deflationary depression would reset to at least 1944.

      What do we do with all the unproductive, unhealthy Baby Boomers who depend on pensions, Social Security and Medicare?

      Some will find port with their children but those who don’t need to be dealt with somehow. Gigantic tenement buildings with the bathrooms at the end of the hall…

      Is this what you see?

  12. What is the internal return in gold or diamonds? Same as Bitcoin? But, like gold, cryptos can be rented. Exchanges are being set up to do so. This allows assured funding, outside the banking system. As with bonds and other securities, there is risk.

      • If only Nuclear reactors worked when the power failed I would feel much safer. Lets face it: If there is an outage for any reason most everything (like commerce, water, food, and gas delivery) will stop. IF that outage lasts 3 or more months the Nuclear issues will outweigh everything else. Perhaps there are backup plans to save these we don’t know about?

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