It's called Gold Oriented Investing, and covers my thoughts on investing, politics and good living.
Anyone interested in reading the book can get a free copy by emailing me at fredrik_nygaard@hotmail.com.
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Friday, January 26, 2018
Gold Oriented Investing
My latest book is now available on Amazon and Kindle.
It's called Gold Oriented Investing, and covers my thoughts on investing, politics and good living.
Anyone interested in reading the book can get a free copy by emailing me at fredrik_nygaard@hotmail.com.
It's called Gold Oriented Investing, and covers my thoughts on investing, politics and good living.
Anyone interested in reading the book can get a free copy by emailing me at fredrik_nygaard@hotmail.com.
Tuesday, January 23, 2018
How not to Play the Shutdown
So the shutdown of the US government is over and none of the things I thought might happen happened.
This is why I'm not trading the markets. Making bets based on news and price action is a loosing game.
The sad thing is that many think they can do these things, and most of them end up loosing a lot of money in the process.
In the end, only long term trends matter. It is for instance a near certainty that interest rates will go up over the next decade or so. Gold will be up relative to stocks, bonds and real estate. And fiat currencies will loose a lot of purchasing power.
What happens over the next few days, on the other hand, is impossible to predict.
This is why I'm not trading the markets. Making bets based on news and price action is a loosing game.
The sad thing is that many think they can do these things, and most of them end up loosing a lot of money in the process.
In the end, only long term trends matter. It is for instance a near certainty that interest rates will go up over the next decade or so. Gold will be up relative to stocks, bonds and real estate. And fiat currencies will loose a lot of purchasing power.
What happens over the next few days, on the other hand, is impossible to predict.
Sunday, January 21, 2018
Intrinsic Value
The concept of intrinsic value is generally frowned upon by economics. Value is entirely subjective, they will say, or they will say that value is whatever the going price is.
However, there is something about the concept of value that tells us that it cannot be price, nor entirely subjective. It must be something more. Furthermore, there must be some way to determine the fair value of things.
How are we to make investment decisions if fair value is whatever is currently paid, or merely what we happen to feel? Such metrics are completely useless to us as investors.
Luckily, there are good reasons to resurrect the concept of intrinsic value, and hence our ability to determine what something is worth based solely on objective qualities.
Warren Buffett summarized it as follows:
Price is what you pay. Value is what you get.
In this little quote, there is a lot of wisdom. First of all, price and value are separate things. The market does not determine value. It determines price.
Secondly, value is what you get. It has to do with utility. Also, it is related to scarcity.
If something is both useful and scarce, it is valuable. If something is either useless or widely available, it is not valuable.
To illustrate, we can take the following examples:
Imagine a store selling three products. These are bottles of fresh air, fresh four-leaf clovers, and gold rings.
It is immediately clear to us that the gold rings are the most valuable, despite being less vital to life than air, and more common than fresh four-leaf clovers.
The fact that air is widely available makes a bottle of fresh air worthless, and the fact that fresh four-leaf clovers have limited durability and utility make them too worthless, at least form an investment perspective.
Gold rings, on the other hand, have durability, utility as jewelry, and they are scarce. The fact that jewelry is universally appreciated by everybody in the world, no matter how rich or poor, adds to the value of gold.
Furthermore, there are several other features of gold that make it particularly valuable.
Gold is not only scarce, but its above ground quantity is very predictable. It takes enormous resources to mine gold. The above ground quantity of it goes up by predictable amount every year. There will not suddenly be a glut of gold in the world.
The fact that gold is never truly consumed, but always recycled, makes gold possession eternal. Gold does not wither or tarnish. It stays as fresh as the day it was mined for all eternity.
Some would say that the fact that gold never is consumed is a bad thing for its value. But all it takes to dismiss this is to ask someone what they would rather own. Something that withers and tarnishes over time, or something that lasts for ever. Let's say that silver came in two flavors, one eternal and one that tarnished, which would most people want to own if all other qualities are identical?
Even if non-tarnishing silver was vastly more common than tarnishing silver, the non-tarnishing type would be most coveted.
This helps to explains why gold is more valuable than silver, despite the relative abundance of above ground gold to silver.
All together, we can compile a long list of valuable qualities attributed to gold. These qualities can be expressed entirely in terms of utility. We do not have to put a price on any of them to realize that gold is valuable.
This is the intrinsic value of gold. We can all agree on their existence. We may not agree on the proper price for gold, but its intrinsic value cannot be denied.
From this, we can compare gold to other products and services. We can thereby determine a relative hierarchy of value. No two persons will come up with identical lists, so subjectivity is definitely a part of the valuation process. However, we cannot deny that certain things have more utility, and are scarcer than other things.
Very few people will value a bottle of air or a four-leaf clover above a gold ring.
The reason for this is that all things have intrinsic value that we can all agree on, at least in general terms.
However, there is something about the concept of value that tells us that it cannot be price, nor entirely subjective. It must be something more. Furthermore, there must be some way to determine the fair value of things.
How are we to make investment decisions if fair value is whatever is currently paid, or merely what we happen to feel? Such metrics are completely useless to us as investors.
Luckily, there are good reasons to resurrect the concept of intrinsic value, and hence our ability to determine what something is worth based solely on objective qualities.
Warren Buffett summarized it as follows:
Price is what you pay. Value is what you get.
In this little quote, there is a lot of wisdom. First of all, price and value are separate things. The market does not determine value. It determines price.
Secondly, value is what you get. It has to do with utility. Also, it is related to scarcity.
If something is both useful and scarce, it is valuable. If something is either useless or widely available, it is not valuable.
To illustrate, we can take the following examples:
Imagine a store selling three products. These are bottles of fresh air, fresh four-leaf clovers, and gold rings.
It is immediately clear to us that the gold rings are the most valuable, despite being less vital to life than air, and more common than fresh four-leaf clovers.
The fact that air is widely available makes a bottle of fresh air worthless, and the fact that fresh four-leaf clovers have limited durability and utility make them too worthless, at least form an investment perspective.
Gold rings, on the other hand, have durability, utility as jewelry, and they are scarce. The fact that jewelry is universally appreciated by everybody in the world, no matter how rich or poor, adds to the value of gold.
Furthermore, there are several other features of gold that make it particularly valuable.
Gold is not only scarce, but its above ground quantity is very predictable. It takes enormous resources to mine gold. The above ground quantity of it goes up by predictable amount every year. There will not suddenly be a glut of gold in the world.
The fact that gold is never truly consumed, but always recycled, makes gold possession eternal. Gold does not wither or tarnish. It stays as fresh as the day it was mined for all eternity.
Some would say that the fact that gold never is consumed is a bad thing for its value. But all it takes to dismiss this is to ask someone what they would rather own. Something that withers and tarnishes over time, or something that lasts for ever. Let's say that silver came in two flavors, one eternal and one that tarnished, which would most people want to own if all other qualities are identical?
Even if non-tarnishing silver was vastly more common than tarnishing silver, the non-tarnishing type would be most coveted.
This helps to explains why gold is more valuable than silver, despite the relative abundance of above ground gold to silver.
All together, we can compile a long list of valuable qualities attributed to gold. These qualities can be expressed entirely in terms of utility. We do not have to put a price on any of them to realize that gold is valuable.
This is the intrinsic value of gold. We can all agree on their existence. We may not agree on the proper price for gold, but its intrinsic value cannot be denied.
From this, we can compare gold to other products and services. We can thereby determine a relative hierarchy of value. No two persons will come up with identical lists, so subjectivity is definitely a part of the valuation process. However, we cannot deny that certain things have more utility, and are scarcer than other things.
Very few people will value a bottle of air or a four-leaf clover above a gold ring.
The reason for this is that all things have intrinsic value that we can all agree on, at least in general terms.
The Future of Bitcoin Futures
Ever since the introduction of Bitcoin futures, the price of Bitcoin has gone down, despite the fact that the futures do not settle in Bitcoin.
In theory, Bitcoin should act with complete disregard to the futures, since there is no way to influence the price of Bitcoin directly with futures.
However, this overlooks an important point.
The cost of a Bitcoin transaction is much higher than the price of a futures transaction. It follows from this that if an investor is solely interested in exposure to Bitcoin, buying futures rather then the real thing makes more sense.
The rational for owning Bitcoin has now been reduced to its value as a payment vehicle. For those purely interested in price action, futures are the natural choice.
This means that the introduction of futures has moved speculators away from buying Bitcoin in much the same way paper gold has moved speculators away from physical gold.
With fewer speculators choosing to buy Bitcoin, the balance has been tipped. As a result, a lot of upwards pressure on the price of Bitcoin has been removed. Speculators seeking to exit their positions find that fewer people are ready to buy. Buyers are increasingly found in the futures market where they provide no upward pressure on the underlying asset.
Having already estimated Bitcoin's value as a payment vehicle to be close to zero, we can only assume that Bitcoin has reached the end of its bull run, and is now headed lower. Short positions in Bitcoin futures are therefore the best bets for Bitcoin speculators.
By contrast, there is a real speculative side to owning physical gold. It is a bet against the paper gold market. The assumption is that paper gold will break, with the price of physical gold going up as a result.
No such scenario can be imagined for Bitcoin because Bitcoin futures do not settle in the underlying asset. There can never be a run on Bitcoin from holders of Bitcoin futures. Holders of paper gold on the other hand, may one day want to get their physical gold. Should they do so in sufficient numbers, the paper market for gold will break. There is nowhere near enough physical gold held by the Bullion banks to satisfy all holders of paper gold.
In theory, Bitcoin should act with complete disregard to the futures, since there is no way to influence the price of Bitcoin directly with futures.
However, this overlooks an important point.
The cost of a Bitcoin transaction is much higher than the price of a futures transaction. It follows from this that if an investor is solely interested in exposure to Bitcoin, buying futures rather then the real thing makes more sense.
The rational for owning Bitcoin has now been reduced to its value as a payment vehicle. For those purely interested in price action, futures are the natural choice.
This means that the introduction of futures has moved speculators away from buying Bitcoin in much the same way paper gold has moved speculators away from physical gold.
With fewer speculators choosing to buy Bitcoin, the balance has been tipped. As a result, a lot of upwards pressure on the price of Bitcoin has been removed. Speculators seeking to exit their positions find that fewer people are ready to buy. Buyers are increasingly found in the futures market where they provide no upward pressure on the underlying asset.
Having already estimated Bitcoin's value as a payment vehicle to be close to zero, we can only assume that Bitcoin has reached the end of its bull run, and is now headed lower. Short positions in Bitcoin futures are therefore the best bets for Bitcoin speculators.
By contrast, there is a real speculative side to owning physical gold. It is a bet against the paper gold market. The assumption is that paper gold will break, with the price of physical gold going up as a result.
No such scenario can be imagined for Bitcoin because Bitcoin futures do not settle in the underlying asset. There can never be a run on Bitcoin from holders of Bitcoin futures. Holders of paper gold on the other hand, may one day want to get their physical gold. Should they do so in sufficient numbers, the paper market for gold will break. There is nowhere near enough physical gold held by the Bullion banks to satisfy all holders of paper gold.
How to Play the Shutdown
The US government is supposedly shutting down. A bunch of bureaucrats are having to take a few days off. This isn't going to be the end of the world, of course, but punters like to present it this way.
The dollar will likely fall as a consequence of this. Interest rates will spike further, and stock markets will tank.
With almost all markets in bubble territory, this may be the trigger for a downward correction.
If so, the incumbents in Washington will have the perfect excuse. They can point to the opposition and blame them for whatever happens in the markets during the shutdown.
If the incumbents have any sense at all, they should make the most of this opportunity. They should use language designed to create fear in the markets. If they manage to trigger a fall, they should do their utmost to prolong the government shutdown.
This way, they may be able to blame the entire mess on the opposition, just in time for the mid-term ellections.
The dollar will likely fall as a consequence of this. Interest rates will spike further, and stock markets will tank.
With almost all markets in bubble territory, this may be the trigger for a downward correction.
If so, the incumbents in Washington will have the perfect excuse. They can point to the opposition and blame them for whatever happens in the markets during the shutdown.
If the incumbents have any sense at all, they should make the most of this opportunity. They should use language designed to create fear in the markets. If they manage to trigger a fall, they should do their utmost to prolong the government shutdown.
This way, they may be able to blame the entire mess on the opposition, just in time for the mid-term ellections.
Friday, January 5, 2018
The Value of the US Dollar
Like all fiat currencies, the US dollar derives its value from the fact that people will go to jail without it. Taxes in the US are payable in dollars. If taxes are not paid, people go to jail.
However, this is not in itself enough to make the dollar valuable. Products and services must be available for those holding this currency. This too is true for all fiat currencies. Unless something is produced inside the political borders of a currency, the currency has no value.
What is unique about the US dollar, is that it is widely used outside the US. This means that the dollar derives it value, not only from the production of products and services in the US, but also from many products produced outside the US. In particular, the production of oil. Oil prices are set in US dollars.
Being a world reserve currency, the US dollar has more value than it otherwise would have had. Also, the US dollar derives its value in part from the US bond market.
Excess dollars are invested in US bonds. This pushes the price of bonds up. This in turn, attracts other investors who want to get in on the lucrative trade. They need US dollars to get in, which pushes up the price of dollars.
This has produced a virtuous cycle that has lasted since 1981. US bond prices go up due to international demand, which in turn attracts more investors and more demand. The result has been falling interest rates and a steady increase in debt.
However, there's a limit to how low interest rates can go, and we seem to have reached that limit. Furthermore, an increasing amount of international trade is now bypassing the dollar.
Buying US bonds at current prices, using US dollars that are more likely to go down in value than up, makes very little sense.
The result of this is that the virtuous cycle described above is about to reverse. US bond prices are about to go down. Demand for these bonds will fall, and the dollar will fall too. Interest rates will rise as a consequence. However, the higher interest rates will not attract investors to the dollar. As long as the medium to long term perspective is one in which bond prices are likely to fall, demand for dollars and bonds will remain weak.
Only a sharp shock in which interest rates are pushed aggressively higher will stop the decline in the dollar. This was done in 1981 to stop the dollar from falling. However, a repeat of that exercise seems unlikely today. There's too much debt in the system.
If interest rates go beyond 5%, the annual interest on the national debt goes to 1 trillion dollars. If interest rates go to 20%, as may be needed to prevent a complete meltdown in the dollar, interest payments go to 4 trillion.
There are in other words only two ways out of the mess. The US government will have to default on its debt, or it must allow the dollar to devalue radically against all other currencies.
However, this is not in itself enough to make the dollar valuable. Products and services must be available for those holding this currency. This too is true for all fiat currencies. Unless something is produced inside the political borders of a currency, the currency has no value.
What is unique about the US dollar, is that it is widely used outside the US. This means that the dollar derives it value, not only from the production of products and services in the US, but also from many products produced outside the US. In particular, the production of oil. Oil prices are set in US dollars.
Being a world reserve currency, the US dollar has more value than it otherwise would have had. Also, the US dollar derives its value in part from the US bond market.
Excess dollars are invested in US bonds. This pushes the price of bonds up. This in turn, attracts other investors who want to get in on the lucrative trade. They need US dollars to get in, which pushes up the price of dollars.
This has produced a virtuous cycle that has lasted since 1981. US bond prices go up due to international demand, which in turn attracts more investors and more demand. The result has been falling interest rates and a steady increase in debt.
However, there's a limit to how low interest rates can go, and we seem to have reached that limit. Furthermore, an increasing amount of international trade is now bypassing the dollar.
Buying US bonds at current prices, using US dollars that are more likely to go down in value than up, makes very little sense.
The result of this is that the virtuous cycle described above is about to reverse. US bond prices are about to go down. Demand for these bonds will fall, and the dollar will fall too. Interest rates will rise as a consequence. However, the higher interest rates will not attract investors to the dollar. As long as the medium to long term perspective is one in which bond prices are likely to fall, demand for dollars and bonds will remain weak.
Only a sharp shock in which interest rates are pushed aggressively higher will stop the decline in the dollar. This was done in 1981 to stop the dollar from falling. However, a repeat of that exercise seems unlikely today. There's too much debt in the system.
If interest rates go beyond 5%, the annual interest on the national debt goes to 1 trillion dollars. If interest rates go to 20%, as may be needed to prevent a complete meltdown in the dollar, interest payments go to 4 trillion.
There are in other words only two ways out of the mess. The US government will have to default on its debt, or it must allow the dollar to devalue radically against all other currencies.
Thursday, January 4, 2018
Dollar, Bonds and Gold
In the years running up to 1981 gold had a fantastic run, outperforming all other assets. The dollar was in free fall and so were bonds.
However, from 1981 to 2001 bonds outperformed gold by a long shot. Interest rates which had peaked in 1981 were steadily falling. This moved the price of bonds up, making them more attractive than gold.
But by 2001, interest rates had come so far down that many started to question how much further down they could go. Furthermore, the first of this century's three financial bubbles burst that year.
Fear of default in the bond market drove people to gold again. From 2001 to 2011, gold had another fantastic run. However, bonds did not fall during this period. Contrary to what many had feared, interest rates continued down, and bond prices continued to rise.
The bursting of the second financial bubble of this century contributed to the continued down trend in interest rates. When the crisis hit in 2008, central banks came together to push interest rates lower, thereby inflating the price of bonds.
However, by 2011 central banks started to talk about their plans to unwind their activities, and the mere mention of this made gold prices head for a decline. The more central banks talked about normalization, the more confident people got about the dollar and the future of the economy. Things were going to be fine, so why hold gold?
Yet, bond prices continued to fall, despite all the talk of normalization. Central banks continued their active participation in financial markets. They talked about normalization while doing the opposite.
It was not until 2015 that we got the first rate hike from the FED. It was a puny little increase. It did not impress anyone, and fear started to return to the market. Gold went up in response.
It was starting to dawn on people that rate hikes would not be sufficient to make the dollar stronger. It would, however, be sufficient to send bond prices lower. With bonds no longer a sure winner against gold, gold prices started a cautious ascent.
For every rate hike since, gold prices have reacted by going up. The vision of lower bond prices and a stalling economy is becoming more and more vivid. However, every time central banks talk of raising rates while doing nothing, gold prices fall. The old knee jerk reaction to tough talk is still there.
When the FED rose interest rates in December of 2017, gold went up. When the FED talked about raising rates further and faster in January 2018, gold went down.
But the truth remains that rising rates will be bad first and foremost for bonds. Only when interest rates are so high that they are likely to be going down over the long term will gold be affected negatively. This is the lesson from the run up in gold prices and interest rates that lead to the peak in 1981.
With interest rates so low that they can only go up over the foreseeable future, gold will do well.
Bonds are heading for a decline, and gold is headed for a rise. The only question is at what speed this will happen. Will it be long and drawn out, or quick and brutal? Only time will tell.
However, from 1981 to 2001 bonds outperformed gold by a long shot. Interest rates which had peaked in 1981 were steadily falling. This moved the price of bonds up, making them more attractive than gold.
But by 2001, interest rates had come so far down that many started to question how much further down they could go. Furthermore, the first of this century's three financial bubbles burst that year.
Fear of default in the bond market drove people to gold again. From 2001 to 2011, gold had another fantastic run. However, bonds did not fall during this period. Contrary to what many had feared, interest rates continued down, and bond prices continued to rise.
The bursting of the second financial bubble of this century contributed to the continued down trend in interest rates. When the crisis hit in 2008, central banks came together to push interest rates lower, thereby inflating the price of bonds.
However, by 2011 central banks started to talk about their plans to unwind their activities, and the mere mention of this made gold prices head for a decline. The more central banks talked about normalization, the more confident people got about the dollar and the future of the economy. Things were going to be fine, so why hold gold?
Yet, bond prices continued to fall, despite all the talk of normalization. Central banks continued their active participation in financial markets. They talked about normalization while doing the opposite.
It was not until 2015 that we got the first rate hike from the FED. It was a puny little increase. It did not impress anyone, and fear started to return to the market. Gold went up in response.
It was starting to dawn on people that rate hikes would not be sufficient to make the dollar stronger. It would, however, be sufficient to send bond prices lower. With bonds no longer a sure winner against gold, gold prices started a cautious ascent.
For every rate hike since, gold prices have reacted by going up. The vision of lower bond prices and a stalling economy is becoming more and more vivid. However, every time central banks talk of raising rates while doing nothing, gold prices fall. The old knee jerk reaction to tough talk is still there.
When the FED rose interest rates in December of 2017, gold went up. When the FED talked about raising rates further and faster in January 2018, gold went down.
But the truth remains that rising rates will be bad first and foremost for bonds. Only when interest rates are so high that they are likely to be going down over the long term will gold be affected negatively. This is the lesson from the run up in gold prices and interest rates that lead to the peak in 1981.
With interest rates so low that they can only go up over the foreseeable future, gold will do well.
Bonds are heading for a decline, and gold is headed for a rise. The only question is at what speed this will happen. Will it be long and drawn out, or quick and brutal? Only time will tell.
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