As you say, Gold is non productive and is merely maintaining purchasing power. You also say that as it has outperformed the SP500 from 1970, the SP500 returns have come from dollar devaluation. Has it occurred to you how ridiculous it is to infer that there has been zero value created by the SP500 in the last 65 years? Clearly there has been no value created by Gold. So what gives? Is there a reason perhaps that you have picked the year 1970 and does this reason relate to the fact that for the previous 45 years the Gold price was controlled, and do these facts then destroy your arguments? I think we can agree that the SP500 has created vast real world value over the last 65 years. Also there is no capital tied up in Bitcoin at all aside from the physical assets for the maintenance of the system. Every dollar that has been used to purchase Bitcoin now exists in the hands of the seller and is within the system for use. You are conflating the perceived value of Bitcoin as capital that could be used elsewhere. But there is no value. It's just a number, all the money is just transacted in and out. It does not sit 'in' Bitcoin. Bitcoin has not consumed any dollars.
I didn't say that the S&P500 had created no value, I simply said that much of the return has been due to a fall in the purchasing power of the dollar and demonstrated that by removing the dollar from the equation.
I couldn't have used gold as a measure when it was pegged to the dollar, so it has to be measured from 1970 when the peg was removed. You could run the same math against another asset. But which one? Oil doesn't work because it is manipulated by OPEC. What else is liquid enough? Real estate? Perhaps, but it's the most leveraged asset which introduces distortions into the data.
But you miss my point. I wasn't saying that equity invesring is bad. To the contrary, look at my concluding sentence. I was demonstrating that as the dollar devalues the S&P500 benefits, which was relevant to the article because I go on to speak about the US debt crisis which is devaluing the dollar. It shapes the way we need to think about what the future holds for our investments.
As an aside, are you familiar with the Bessembinder study? You'll enjoy that. He found that only 4% of listed companies are responsible for all wealth creation in the stock market - most underperform treasury bills and many destroy value. Here's a link: https://rockandturner.substack.com/p/the-4-of-companies-worth-holding
As for Bitcoin, are you familiar with the story of the South Sea bubble and how it ruined Isaac Newton? It's a case study worth looking at. People start making a little, then they get greedy and come back for more. They believe they've found a way to get rich quickly - some form of alchemy to create wealth out of nothing. So they 'invest' again and again, in increasing volumes. Each time they crystallize a gain, confirmation bias kicks in. It becomes addictive. They come back for more. The money they made last time is pumped back in, augmented with new capital earned elsewhere. The Ponzi style nature of the thing inflates prices as more capital flows in to the system. How else does Bitcoin go from less than $1 to $100,000 in 15 years? So crypto is consuming more and more capital as the cult inflates it's price.
Thank you for your reply. You're absolutely right: one cannot rely on gold's price while it was pegged to the dollar, and similarly, using gold's price from the very moment it was unpegged merely captures the drastic correction that occurred immediately afterward. This approach does not withstand rigorous critical evaluation. In fact, it is challenging to utilize any asset's performance metrics under these conditions—even widely used indicators like the CPI offer limited utility as ex fiat currency we live in a very deflationary world as everything becomes more and more efficient. Thus even without OPEC oil is hopeless as it is easier and cheaper to extract over time in real terms. Yes thanks I am familiar with Bessembinders work.
I am also familiar with Newton and the South Sea bubble, bitcoin is a joke but you are missing my point, no capital is tied up or absorbed. Newtons money did not go into funding South Sea voyages - he simply bought stock from someone else and then they had his money.
There are no capital flows into bitcoin, there are buyers and sellers. Let's use a simple example to demonstrate. If someone swaps their car for a bitcoin, the car does not go into bitcoin, it goes to the seller. Same as dollars. the dollars go to the seller. You are getting confused with the market value of bitcoin which is just an illusion, it has not 'taken up' capital, any money that has gone in has just gone to the seller. This is different to a company that is raising capital to buy machinery for example. Bitcoin can go from $1 to $1,000,000 in ten seconds, you just need one transaction. If nobody sells for less than 1 million and then there is one sale at 1 million, then bitcoin becomes worth I million.
We seem to be agreeing, but each with a slightly nuanced perspective.
What I am saying is that capital markets exist to enable those with productive uses of capital to raise the money that they need through capital markets (via debt and equity securities). Now it would be impossible to raise money through either of those markets if those debt or equity securities were not transferable. Why would anyone provide capital that they could never get back? So the transferability of securities becomes critical. You are correct that if I buy shares from you in the secondary market that no money flows directly to the business - it is simply a cash for asset swap between you and me - but without that being possible, you would never have provided capital to the business in the first place. Through the transfer, the capital being used by the company is now my capital and I have beneficial rights that flow from my shareholding (hence the legal term 'equity'). Plus, the existence of this liquidity and trading makes it possible for companies to raise new debt or equity capital for investment purposes, and so the system goes on. This is capitalism at work. There is an economic and societal benefit. Companies are growing, jobs are being created, technology is advancing, infrastructure is being built, etc.
Now imagine that instead of buying your shares, I decide to buy Bitcoin. Now there is a hit to the liquidity of capital markets because money is being diverted elsewhere. Where is it flowing? Perhaps into the pockets of a drug cartel, perhaps it is a ransomware gang of hackers cashing in their ransom, perhaps it is the Russian administration avoiding the sanctions that the world has imposed on him to end the Ukrainian war. Perhaps its just to some guy sitting in his bedroom in El Salvador who has subscribed to the Bitcoin cult. Either way, there is absolutely no societal or economic benefit. In fact, I would go further and say that its detriment to both society and the economy.
Yeah all understood and agreed. Hard to quantify really, if instead of buying equity you buy my bitcoin, maybe I use the proceeds to buy shares, I don't know. But yes it will play with the liquidity of financial markets in detrimental ways. I just fear that people think that the 4 trillion of total crypto market cap is at the expense of investment in capital markets, i.e. that 4 trillion could be invested in productive enterprise, but it is all just a joke. The 4 Trillion does not in fact exist!
Thanks James - I enjoyed the article. You summed up my thoughts on Bitcoin better than anything I've read. Regarding the S&P comparison to gold, I think if you factor in reinvested dividends the outcome changes quite significantly. Assuming a 2% annual dividend reinvested over the 55 years the S&P index might be around 17,000. Anyway, thanks again.
Dividends make a difference, but not enough to negate the point I made in this post.
We assume that companies create wealth by reinvesting in growth and point to the expansion of the index as evidence of this. But since US companies are valued in dollars, much of the gain we see is actually a devaluation of the purchasing power of the dollar rather than an increase in the value of the businesses in the index.
The reason for pointing this out at the beginning of the article was that I went on to speak about the high possibility that dollar based inflation would increase in the years ahead due to the US debt crisis. Most market commentators assume that the equity market boom of the last 15 years, caused by cheap and easy money supply, is over and that higher rates will ultimately cause a bust. I offered a contrarian view that a significant devaluation of the dollar, which now looks almost inevitable, may well drive the index significantly higher.
It is worth considering.
Interestingly, it is this anticipated devaluation of the dollar that is driving many people into gold and, dare I say it, Bitcoin.
Cash is no longer king!
Stores of wealth are all important. Each of us needs to determine which assets are the best stores and generators of wealth. I hope this article helps you to reach an informed decision.
This article seems to align with my sentiments https://open.substack.com/pub/renesellmann/p/free-everything-you-thought-was-safe?utm_source=share&utm_medium=android&r=1owuoe
It's well worth a read. When many thinkers seem to be calling out the same thing, it certainly adds weight to the argument.
On the ethics of crypto investing, you are likely to find this interesting:
https://substack.com/profile/102309710-james-emanuel/note/c-124772371
As you say, Gold is non productive and is merely maintaining purchasing power. You also say that as it has outperformed the SP500 from 1970, the SP500 returns have come from dollar devaluation. Has it occurred to you how ridiculous it is to infer that there has been zero value created by the SP500 in the last 65 years? Clearly there has been no value created by Gold. So what gives? Is there a reason perhaps that you have picked the year 1970 and does this reason relate to the fact that for the previous 45 years the Gold price was controlled, and do these facts then destroy your arguments? I think we can agree that the SP500 has created vast real world value over the last 65 years. Also there is no capital tied up in Bitcoin at all aside from the physical assets for the maintenance of the system. Every dollar that has been used to purchase Bitcoin now exists in the hands of the seller and is within the system for use. You are conflating the perceived value of Bitcoin as capital that could be used elsewhere. But there is no value. It's just a number, all the money is just transacted in and out. It does not sit 'in' Bitcoin. Bitcoin has not consumed any dollars.
Thank you for your reply.
I didn't say that the S&P500 had created no value, I simply said that much of the return has been due to a fall in the purchasing power of the dollar and demonstrated that by removing the dollar from the equation.
I couldn't have used gold as a measure when it was pegged to the dollar, so it has to be measured from 1970 when the peg was removed. You could run the same math against another asset. But which one? Oil doesn't work because it is manipulated by OPEC. What else is liquid enough? Real estate? Perhaps, but it's the most leveraged asset which introduces distortions into the data.
But you miss my point. I wasn't saying that equity invesring is bad. To the contrary, look at my concluding sentence. I was demonstrating that as the dollar devalues the S&P500 benefits, which was relevant to the article because I go on to speak about the US debt crisis which is devaluing the dollar. It shapes the way we need to think about what the future holds for our investments.
As an aside, are you familiar with the Bessembinder study? You'll enjoy that. He found that only 4% of listed companies are responsible for all wealth creation in the stock market - most underperform treasury bills and many destroy value. Here's a link: https://rockandturner.substack.com/p/the-4-of-companies-worth-holding
As for Bitcoin, are you familiar with the story of the South Sea bubble and how it ruined Isaac Newton? It's a case study worth looking at. People start making a little, then they get greedy and come back for more. They believe they've found a way to get rich quickly - some form of alchemy to create wealth out of nothing. So they 'invest' again and again, in increasing volumes. Each time they crystallize a gain, confirmation bias kicks in. It becomes addictive. They come back for more. The money they made last time is pumped back in, augmented with new capital earned elsewhere. The Ponzi style nature of the thing inflates prices as more capital flows in to the system. How else does Bitcoin go from less than $1 to $100,000 in 15 years? So crypto is consuming more and more capital as the cult inflates it's price.
Thank you for your reply. You're absolutely right: one cannot rely on gold's price while it was pegged to the dollar, and similarly, using gold's price from the very moment it was unpegged merely captures the drastic correction that occurred immediately afterward. This approach does not withstand rigorous critical evaluation. In fact, it is challenging to utilize any asset's performance metrics under these conditions—even widely used indicators like the CPI offer limited utility as ex fiat currency we live in a very deflationary world as everything becomes more and more efficient. Thus even without OPEC oil is hopeless as it is easier and cheaper to extract over time in real terms. Yes thanks I am familiar with Bessembinders work.
I am also familiar with Newton and the South Sea bubble, bitcoin is a joke but you are missing my point, no capital is tied up or absorbed. Newtons money did not go into funding South Sea voyages - he simply bought stock from someone else and then they had his money.
There are no capital flows into bitcoin, there are buyers and sellers. Let's use a simple example to demonstrate. If someone swaps their car for a bitcoin, the car does not go into bitcoin, it goes to the seller. Same as dollars. the dollars go to the seller. You are getting confused with the market value of bitcoin which is just an illusion, it has not 'taken up' capital, any money that has gone in has just gone to the seller. This is different to a company that is raising capital to buy machinery for example. Bitcoin can go from $1 to $1,000,000 in ten seconds, you just need one transaction. If nobody sells for less than 1 million and then there is one sale at 1 million, then bitcoin becomes worth I million.
I understand what you are saying.
You are essentially describing a zero sum game.
We seem to be agreeing, but each with a slightly nuanced perspective.
What I am saying is that capital markets exist to enable those with productive uses of capital to raise the money that they need through capital markets (via debt and equity securities). Now it would be impossible to raise money through either of those markets if those debt or equity securities were not transferable. Why would anyone provide capital that they could never get back? So the transferability of securities becomes critical. You are correct that if I buy shares from you in the secondary market that no money flows directly to the business - it is simply a cash for asset swap between you and me - but without that being possible, you would never have provided capital to the business in the first place. Through the transfer, the capital being used by the company is now my capital and I have beneficial rights that flow from my shareholding (hence the legal term 'equity'). Plus, the existence of this liquidity and trading makes it possible for companies to raise new debt or equity capital for investment purposes, and so the system goes on. This is capitalism at work. There is an economic and societal benefit. Companies are growing, jobs are being created, technology is advancing, infrastructure is being built, etc.
Now imagine that instead of buying your shares, I decide to buy Bitcoin. Now there is a hit to the liquidity of capital markets because money is being diverted elsewhere. Where is it flowing? Perhaps into the pockets of a drug cartel, perhaps it is a ransomware gang of hackers cashing in their ransom, perhaps it is the Russian administration avoiding the sanctions that the world has imposed on him to end the Ukrainian war. Perhaps its just to some guy sitting in his bedroom in El Salvador who has subscribed to the Bitcoin cult. Either way, there is absolutely no societal or economic benefit. In fact, I would go further and say that its detriment to both society and the economy.
I hope that this helps.
Yeah all understood and agreed. Hard to quantify really, if instead of buying equity you buy my bitcoin, maybe I use the proceeds to buy shares, I don't know. But yes it will play with the liquidity of financial markets in detrimental ways. I just fear that people think that the 4 trillion of total crypto market cap is at the expense of investment in capital markets, i.e. that 4 trillion could be invested in productive enterprise, but it is all just a joke. The 4 Trillion does not in fact exist!
Thanks James - I enjoyed the article. You summed up my thoughts on Bitcoin better than anything I've read. Regarding the S&P comparison to gold, I think if you factor in reinvested dividends the outcome changes quite significantly. Assuming a 2% annual dividend reinvested over the 55 years the S&P index might be around 17,000. Anyway, thanks again.
Dividends make a difference, but not enough to negate the point I made in this post.
We assume that companies create wealth by reinvesting in growth and point to the expansion of the index as evidence of this. But since US companies are valued in dollars, much of the gain we see is actually a devaluation of the purchasing power of the dollar rather than an increase in the value of the businesses in the index.
The reason for pointing this out at the beginning of the article was that I went on to speak about the high possibility that dollar based inflation would increase in the years ahead due to the US debt crisis. Most market commentators assume that the equity market boom of the last 15 years, caused by cheap and easy money supply, is over and that higher rates will ultimately cause a bust. I offered a contrarian view that a significant devaluation of the dollar, which now looks almost inevitable, may well drive the index significantly higher.
It is worth considering.
Interestingly, it is this anticipated devaluation of the dollar that is driving many people into gold and, dare I say it, Bitcoin.
Cash is no longer king!
Stores of wealth are all important. Each of us needs to determine which assets are the best stores and generators of wealth. I hope this article helps you to reach an informed decision.