Bitcoin’s Fear Of Missing Out Trade Grips the World! Blockchain Technology is the Future

My thoughts on bitcoin years ago…

The information age will provide alternatives not only to capital markets (e.g. P2P Lending and Crowd Funding) but to money as well.

Bitcoin or not, the incumbent political system’s sustained policies of debasement will only accelerate and intensify the search for currency alternatives premised on the burgeoning forces of “decentralization”.

ECB Says Bitcoin’s Origin is from the Austrian School November 13, 2012

I’d add that if bitcoin is a manifestation of declining trust on the US dollar standard or even fiat money, then bitcoin will flourish not only in Asia but around the world despite sustained harassment by governments.

Bitcoin’s Future is in Asia and More November 20, 2013

I would add that bitcoin’s evolution has also been a function, not only of as a cross between fiat money and commodity money, but also of the technology adaption lifecycle or technology diffusion via the S-curve.

Matthew Ridley: Bitcoin as Synthetic Money April 20, 2013

Sadly, as a non-IT geek, I had no confidence in opening bitcoin wallet for fear of being hacked. Thus I wasn’t able to participate in the current mania.

Nevertheless, opportunities abound.

The blockchain technology from which bitcoin operates from would most likely revolutionize many aspects of modern day commerce. As an example, through radical decentralization of the share markets, stock exchanges would be compelled to adapt or die. Share exchanges would be channeled through nodes via the Peer to Peer (P2P) platform which eliminates the need for settlement, depositories and transfer agents.

The first stock exchange to embrace the blockchain technology is the Australian Security Exchange.

The pioneer company to issue and have its shares traded on the bitcoin-blockchain platform is Online retailer Overstock.com.

The short of it, the blockchain technology, through its many potential applications, is the future. Bitcoin is a testament to this. And the blockchain technology will be fused with many other evolving technology breakthroughs as Artificial Intelligence, Machine Learning, Big Data, Quantum Computing, the Internet of Things, Mobile Business and Banking applications and many more.

In as much as the stock exchange would have to evolve, this applies to other appurtenant intermediaries. Yes, my role is about to go the ways of the dinosaur. So I would have to look for alternatives.

Now to the Bitcoin Mania…

The cryptocurrency (digital currency) Bitcoin (BTC) has taken the world by storm!

Bitcoin relentless upside streak has continually carved up astounding feats.

 

Last Friday, Bitcoin prices surged beyond $18,000 (close to $20,000 on the CoinBase exchange)

Bitcoin’s inexorable price surges have elevated its market capitalization to eclipse many of the world’s biggest companies. It briefly surpassed VISA. It has bested PepsiCo, Boeing and McDonald’s. South Korea’s bitcoin prices likewise momentarily exceeded JP Morgan.  

Bitcoin’s market cap has even advanced beyond the nominal GDPs of nations like Pakistan and Ireland!

At $18,000, bitcoin’s year-to-date returns have swelled stunningly to over 1,700%!

In local currency or the peso, one bitcoin is almost equivalent to a brand new sedan!

And many people have done amazing things to join the Bitcoin shindig.

One person has sold everything he owned (business and house) to speculate on Bitcoin. He and his family now reside in a campsite to await for the ‘ultimate cryptoboom’.

And because one IT specialist accidentally threw his hard drive away when Bitcoin prices had been inactive years ago, he has now been digging the landfill to recover his lost 7,500 bitcoins!

Hordes of people have been opening new bitcoin accounts (300K new accounts on November 22 to 26).  Last week, one of the largest bitcoin exchanges buckled from the sheer volume of new accounts which caused energy outages.

Some central banks have taken the bitcoin storm with trepidation. The Indonesian government intends to ban it.  The governments of India and China have warned against Bitcoin. However, if you can’t beat them then join them. 40% of central banks have reported plans of introducing digital currencies by 2019

Bitcoin is the epitome of the Fear Of Missing Out (FOMO) trade.

Fret Not. The FOMO trade is ubiquitous, or almost everywhere.

 

The FOMO trade in the stock market may not be in the same degree in the gains as BTC. Nevertheless, the slope of price actions has resonated.

The FTSE world index has been strikingly up by 19.44% in 2017 while the MSCI Asia Pacific (MXAP) has soared by 25.22%!

Most of the Asian bellwethers have enthralled by the FOMO trade.

 

Mongolia’s MSE and Vietnam’s VSN have been the present leaders. Their price actions have accelerated to boost 2017 returns to a whopping 85.6% and 41.41% respectively!

Many think that BTC has been the star of 2017.

In reality, nominal returns of Venezuela’s Caracas Stock Index have dwarfed Bitcoin’s.  The IBVC has zoomed by a staggering 3,975% this year which is more than twice BTC’s returns! But that’s because Venezuela has been suffering from hyperinflation (CPI of 1,369%)!

In the case of Venezuela, the government prints an avalanche of money, consequently, a run on the currency ensues accompanied by a panic safe-haven bid on stocks which makes it “soar”.

Needless to say, the global risk ON environment puts into the spotlight Bitcoin’s sterling performance.

Like stocks, some cheerleaders say that higher bitcoin prices will engender wealth for society.  Such hokum confuses asset inflation (money) with economic progress (wealth).

Asset inflation merely redistributes a claim on wealth from buyers to sellers. It does not generate societal prosperity. As the great Ludwig von Mises once wrote,

Economic progress in the narrower sense is the work of the savers, who accumulate capital, and of the entrepreneurs, who turn capital to new uses. 

 

While BTC’s transformational technology indeed has merits, the blowoff in the frenzied bidding of BTC’s prices doesn’t justify these.

DOF’s TRAIN Departs from the Station: The Upcoming Challenges of Spend, Spend and Spend

Entwined Events: TRAIN Passage, Revolutionary Government and Supreme Court Chief Justice’s Impeachment

Three critical political events occurred last week.

First, the Department of Finance’s Tax Reform for Acceleration and Inclusion (TRAIN), through Senate Bill 1592, was passed by the Senate. The Senate tax package included the reduction of income taxes for the lower income bracket, an increase in excise taxes for fuel and for select beverages, a 2-tiered tax scheme for automobile, specific VAT exemptions, doubling of documentary taxes, a 1,000% increase in coal excise tax and the doubling of excise taxes on the mining industry.

The tax reform program appears to have been popular, for instance, it was lauded by credit agency Moody’s last June.

The income tax reduction was hurriedly approved by the bicameral committee this weekend.

Generally speaking, with a watered down bill, the DOF will unlikely get what it wanted.

Second is the RevGov. RevGov is an abbreviation for Revolutionary Government. Supporters of the Philippine President made use of the November 30 Bonifacio Day holiday to rally in support of the establishment of a “revolutionary government” across the nation. Unfortunately, given the sparse crowds, President did not make an appearance to bolster this initiative. And as part of its promulgation, the House Speaker said he is open to the idea of abolishing the Congress.

Third was the ongoing impeachment case against the incumbent Supreme Court Chief Justice, an appointee of the previous leadership.  A Supreme Court Associate Justice made a controversial appearance at the House of Representatives to testify on the alleged 4 impeachable offenses by the Supreme Court Chief.

The evolution of these three events virtually highlights its relatedness.

The reduction of income taxes has been designed to increase the popularity of the President especially for the working class and labor groups.  A popular president would likely sway much of the public to support his Revolutionary Government initiative. A trial balloon was floated to test the RevGov’s acceptability during the Bonifacio day rallies.

And lastly, the ongoing impeachment case against the Supreme Court Chief Justice has likely been engineered to portray a corrupt and incorrigible system to reinforce the cause of the Revolutionary Government.

From a contingent point of view, should the Supreme Court Chief Justice be successfully ousted, this should cement the President’s hold on the three branches of the government. That said, the forging of Revolutionary Government would not be necessary. Instead, the likely path would be to push for a change in the 1987 constitution, extending his term as President.

That said, it would not be necessary to forge a Revolutionary Government once the three branches will be under his complete control. The likelihood is for a push for a change in the 1987 constitution which should extend his term as President. And it is unlikely that there ‘federalism’ (quasi-decentralization) would be an agenda under a revolutionary government (centralization)

Tax Cuts in the Face of Spend, Spend and Spend; October Deficit Financed by Debt

Since our beat is on the money, let us now focus on the coming tax reform.  The DOF’s initial intention had been to significantly reduce exemptions from the coverage of the Value Added Tax to expand the government’s tax base in exchange for the populist income tax reduction.

The reduction of income taxes and the lifting of the VAT threshold should be a wonderful thing. That’s because it leaves more money in the pockets of the people.

However because many of the exemptions will be retained (rents, social housing, BPOs and etc.), the DOF will most likely have serious collection problems.

Moreover, with manifold VAT exemptions in place, this will continue to serve as legal loopholes for the circumvention from paying taxes by the monied class.

That said, expect increases in the lapses from tax collections as administration efficiency falls

With the publication of the Bureau of Treasury’s October report, we should be worried.

First the good news. Government revenues (Tax and non-tax) in October soared by 17.42%. Revenues from three sectors registered vibrant growth, namely, BIR (+16.94%), Bureau of Customs (+28.62%) and Non-Tax revenues (+7.71%). The tax segment of the government revenues surged 18.5%, but was lower than September’s 24.1% (lower pane).

Next the bad news. Government expenditures in October rocketed by 28.18%.

Because October’s strong government revenues had been insufficient to offset the much stronger increase in spending, the government’s deficit expanded to Php 234.9 billion, up by 8.7%, from last year’s Php 216 billion. The 10-month deficit has now surpassed the last year’s level. And the current trajectory indicates that last year’s record annual deficit of Php 353.4 billion will mostly be surpassed with 2 months

The National Government must have financed October’s deficit through debt. Domestic debt grew by 7.6% to Php 27.6 billion from a year ago. Though external debt also increased by 6.21%, this was mostly due to the peso’s depreciation.

The BSP will reveal if it continued with its subsidies to the national government through its publication of the Depository Corporations Survey next week. The likelihood is that the BSP could have backtracked from using it, hence the rally of the peso.

The Rubber Meets the Road: “Spend, spend and spend” and the Realities of Economics and Finance

The establishment has been peddling that government spending represents an economic elixir. Had this been true, North Korea would be the most prosperous country in the world.

Popular wisdom has little idea that government’s spending competes for resources and finances with the private sector, which it eventually crowds out. 

Moreover, much of such political spending mostly ends up being wasted or misallocated, increases society’s debt burden, benefits cronies, and special interest groups, causes economic distortions, promotes corruption, reduces the society’s standard of living through inflation and a weak currency, and heightens risks of a crisis from accrued imbalances.

If an 18.5% spike in tax revenue growth has failed to fill the revenue-spending gap, then what will?

An official was quoted saying, “the administration has not yet started the construction of its 75 flagship infrastructure projects”. Wow.  

Record fiscal deficit as appetizers! Wait ‘til the main course comes!

It has really been beyond “build, build and build”. The crux of the matter is about “spend, spend and spend”. The government will wantonly give away money through free-wheeling spending programs such as the Marawi’s rehabilitation, free college tuition, substantially increase ‘double’ the salaries of the police, modernize the AFP, modernize PUV and more.

Think of where all the funding for these spending binges will come from. How much more if the real economy slows?

If you haven’t noticed, 2017’s GDP has been MOSTLY about the government. Investments in durable goods and fixed capital, which includes public sector construction, continued to fall in the 3Q. (lower pane)

 

Yes, the headline numbers LOOKED GREAT. But even from the government’s own GDP statistics, investments have been falling sharply. Investments have dived in the face of record credit expansion!

 

I’m running out of time. So I’d have to cut this short.

The government’s spending will have to be financed either by debt or by the BSP’s monetization.

But there is such a thing as the costs of financing.

The longer end of the Republic of the Philippine bond curve rose substantially at the week’s close. The 10-year benchmark soared by 16.4 bps to 5.7% to another 5-year high. The 20-year benchmark surged by even more: 57.4 bps to 5.855%. Though the yield curve steepened, surging coupon yields have likely been signaling that the BSP will tighten.

IF so, then higher rates translate to the reduction of credit subsidies to the private sector and to the National Government. This means higher costs of financing for all these proposed “spend, spend and spend” projects.

Furthermore, once credit growth ebbs, the strength or the weakness of domestic demand will be revealed.

Lastly, should rising international coupon yields persists, as benchmarked by the 10-year US Treasury notes, then the cost of overseas funding will also rise.

It is here where the rubber will meet the road. “Spend, spend and spend” will come face to face with the realities of economics and finance.