Category Archives: investment markets

21/12/17: Of Taxes and Whales: Bitcoin’s New Headaches


I have recently mused about the tax exposures implications of Bitcoin 'investments', and in particular, my suspicion that many today's BTC enthusiasts (retail investors speculating on BTC and other cryptos) are likely to be caught out with unexpected and un-covered tax liabilities arising from trading in currencies pairs that involve cryptos and regular currencies (e.g. BTCUSD pair). Normally, every trade in BTC that involves sale of BTC for USD is subject to capital gains tax. This is a nasty side effect of the BTC trading.

And here comes a new and a worse one: the GOP tax plan will make even trades between cryptos (e.g. BTCETH pair) subject to capital gains (https://www.bloomberg.com/news/articles/2017-12-21/tax-free-bitcoin-to-ether-trading-in-u-s-to-end-under-gop-plan). The GOP plan removal of the like-kind swap tax deferral provision for everything other than real property sweeps cryptos put of the deferral cover because back in 2014, the IRS designated cryptos as non-currency property-type assets, like gold.

In addition to catching many investors off-guard and leaving them facing potentially explosive tax bills, the new change induces more liquidity risk into the system: removal of the deferral imposes a de facto transaction tax on BTC and other cryptos. This is likely to reduce frequency of trading conducted by investors. Which, in turn, reduces liquidity of the BTC and other cryptos.

This tax change, in part, likely explain why the BTC and other cryptos concentration is falling: the whales, who used to control up to 40% of the entire BTC issuance to-date, are selling, and selling at speed (https://www.bloomberg.com/gadfly/articles/2017-12-21/bitcoin-whales-are-cutting-back).  Ordinarily, this would be a good thing (lower concentration risk, increased liquidity), but cryptos are not your ordinary assets. The problem with whales selling is that one of the key arguments in favor of cryptos is that crypto-enthusiasts and pioneers are market-makers who prefer mine-and-hold strategy. In other words, to-date, the argument has been that the whales simply will never sell their holdings before BTC issuance reaches its bound of 21 million units.

That reasoning is now going, like the proverbial hot air out of a punctured balloon:


16/10/15: IG Conference: Markets Outlook


My speaking points on the topic of the Markets Outlook for yesterday's IG conference:

Short themes:

Theme 1: Markets pricing in advanced economies: 
- EV/EBITDA ratios signal overvaluation; 
- EBITDA/Interest Expenses ratio is at below 2010 levels (below 14%) despite extremely cheap debt.

A handy Bloomberg chart:

- Global debt cycle has turned – sovereigns are not leveraging as fast or deleveraging, but corporates leveraged up. 
- Much of pricing today reflects migration from equity to debt
- In this environment – long only allocations are problematic.

Theme 2: Emerging markets, especially BRICS
- Idea of 3rd Wave – Goldman’s thesis – is based on two drivers: duration of the crisis (‘this can’t be going for so long…’) and firewalls (‘this can’t spill into the developed economies…’) both of which are 
- There are no fundamentals to support robust recovery view
- Again, allocations are highly problematic.

So short-term summary is poor when it comes to hard numbers:
- World economic growth for 2015-2017 forecast is down from 14.1% in 2012 to 10.9% today
- Euro area economy forecasts are flat: 5% in 2012 and 4.9% today, holding relatively steady compared to the rest of the world solely because Europe is now Japanified
- Advanced economies down from 8.1% to 6.6% - another miserably Japanese-styled performance compared to past averages
- Emerging and developing economies from 19.55 in 2012 to 14.0%.

On inflationary targets and rates: the only way we are going to get to the inflationary expectations consistent with monetary policy normalization, is by literally superficially jacking up prices through Government controlled sectors and/or via regulatory policies. Which is to say that any inflation above, say 1% or so in the Advanced Economies, today, will be consistent with stripping income out of the economy to prime up financials (in the short run) and public purse.


Longer themes:

As much as I love the good story of innovation and technological revolutions, I am afraid to say my fear is that we are heading for the twin secular stagnation scenario:

Supply side stagnation: 
- Technological returns (productivity growth and new value added) are tapering out
- Substitutability of labour is rising and with it, risks to economic systems
- Regionalisation of trade and production are gaining ground and markets fragmentation is going to play a disruptive havoc with our traditional market valuations
- So expect more volatility on flatter trend.

Demand side stagnation: 
- Demographics 
- Savings/investment imbalances, 
- Debt overhang – across both advanced economies and, increasingly also, emerging markets, so we have a Myth of Post Financial Crisis Deleveraging (via BAML)

Global Debt to GDP
2010-2015: 220 to 240%
2000-2010: 190 to 200%
1990-2010: 170 to 190%

Or a handy chart

- Wealth and income inequalities, including intergenerational effects
- Rebalancing of economic growth drivers (human capital focus pushes incomes gap wider and deeper, but also clashes with current taxation and political systems)

Key forward is to expect:
- Flatter growth trend and more volatility around that trend 
- Higher volatility / instability in higher moments 
- Financial imbalances accelerating and amplifying
- Financial imbalances / cycles leading real cycles (Excess Financial Elasticity hypothesis)
- Economic volatility spilling, increasingly, into political volatility (political economy). 

Key strategy points:
- Focus on lower debt levels on companies balance sheets
- Focus on companies actually paying attention to core basics, e.g. earnings, sales, profit margins, as opposed to subscription bases, user counts etc
- Focus on companies with strong regional reach (not only in product markets, but in logistics and production bases)
- Focus on companies with revenues linked to multi-annual contracts
- Go defensive, stay defensive in core allocation
- Go speculative with low leverage only and on a small share of total wealth
- Go speculative trades on uncertainty and long 5-10 percentile under-performers

10/10/15: What, When, If the $7 trillion SWFs Gorilla Moves?


Remember this bit about Central Banks' reserves taking a dip globally? And now consider this, about Sovereign Wealth Funds shrinking their income/assets. The alarmism is premature, as the article explain, since SWFs are (1) big, (2) likely to see return to inflows of funds once oil and broader commodities prices recover, and (3) longer-term investment vehicles with broad mandates. Which implies there is not so much panic looming from SWFs downsizing their holdings (selling assets).

But the key is in the second order effects: as long as oil prices remain low, SWFs are not going to be active buyers of assets in the near term (so demand base for assets is taking a knock down, currently being obscured by the Central Banks' demand in some areas - e.g. Euro area, and/or by leveraged plays and carry trades still available on foot of Central Banks (more limited) adventurism. Which means that any 'normalisation' in monetary policies today is likely to coincide with a period of subdued demand from the SWFs for assets. And that is pesky enough of a problem to worry anyone in the markets.

Beyond this concern, note two other problems arising from the current oil price slump:

  1. SWFs, having parked their buying for now, are becoming less predictable per strategy they might take when prices do recover (the longer the period of oil prices slump, the higher is uncertainty); and
  2. How the future balancing between liquidity risk and returns going to play across the SWFs strategy (again, the longer the period of low oil prices, the more likely exit from the oil price slump will entail SWFs pursuing less risk-loaded assets and opting for greater safety - a sort of precautionary savings motive for the SWFs).