When to sell the rising global souffle

More evidence of the rising central bank inspired global asset bubble today with the Twitter IPO launching for the moon and Bitcoin making its previous peaks look like adolescent pimples. On Twitter, the IPO went nuts. From Bloomie:

The shares rose as high as $50.09 and were trading at $45.49 at 12 p.m. in New York. The company sold 70 million shares at $26 in its initial public offering yesterday, raising $1.82 billion.

The microblogging service picked a price that valued it higher than rival Facebook Inc. (FB) and still drew more interest than anticipated. The San Francisco-based company, which is unprofitable and has one-fifth as many users as Facebook, is benefiting from investors’ thirst for companies that will grow quickly in expanding markets like mobile advertising.

“The company did everything to secure the most cash for itself while leaving some money for the IPO buyers,” said Josef Schuster, the founder of IPOX Schuster LLC, a Chicago-based manager of about $1.9 billion. “You need a pop at the opening to leave a good taste with everyone. They did a pretty good job managing the whole situation.”

At its opening price of $45.10, Twitter is valued at $24.6 billion, or 22 times estimated 2014 sales of $1.14 billion, according toanalyst projections compiled by Bloomberg. That compares with 11.6 times that Facebook was trading at yesterday andLinkedIn Corp. (LNKD)’s 12.2 times sales.

..The company received orders for about 30 times as many shares as it offered at the $26 IPO price, a person familiar with the matter said. About 8 million of the shares, or 11 percent of the total in the IPO, were allocated to retail investors, the person said, asking not to be named because the information is private. A typical retail allocation is 10 percent to 15 percent.

The Bloomberg IPO Index says it all. From Zero Hedge:


The same is apparent at home. From BS:

If the mooted listings for the rest of the year proceed, 2013 could be the best year for floats in Australia since 2007…

According to James Katzman, a managing director in Goldman Sachs’ US investment banking division, private equity is charging for the exits.

“Why do private equity funds, who have tonnes and tonnes of money to invest, sit on $16 billion of funds and not spend a lot of it?” Katzman asks.

Meanwhile, if the digital currency Bitcoin is any guide to the value of fiat currencies worldwide then we’re on the road to Hell. As the ECB cut rates to record lows, Bitcoin also went nuts. Of Two Minds is discussing it as a new reserve currency:


The idea is intriguing on a number of levels. In terms of retaining value though thick and thin, the ultimate reserve currency cannot be printed (and thus devalued) with abandon by a government. Gold and silver have served as the ultimate reserve currency, as precious metals can be traded for commodities and services, provide collateral for debt and serve as reliable stores of value.

While many observers believe gold is still the only reliable reserve currency (or if you prefer, the only reliable backing for government-issued paper money), it’s a worthy thought experiment to ask if a digital currency could also act as a reserve currency.

Since there is no real-world commodity backing the digital currency, its value must be based on scarcity and its ubiquity as money. The two ideas are self-reinforcing: there must be demand for the digital money to create scarcity, and the source of demand is the digital currency’s acceptance as money that can be used to buy commodities, goods, services and (the ultimate test) gold.

It follows that the first step in a non-state issued digital currency becoming a reserve currency is that it isn’t created in quantities that dwarf demand. If the digital currency is issued with abandon, it cannot be scarce enough to gain any value. If I own one quatloo (our hypothetical digital currency) and a trillion new quatloos are issued tomorrow, the value of my one quatloo will decline to near-zero.

The second step is its widespread acceptance globally as money, i.e. a store of value and something which can be traded for goods and services.

There is a bit of a built-in conflict in these two requirements. To be useful in the $60 trillion global economy, the quatloo must be issued in size: there must be enough of it around to grease transactions large and small in all sorts of markets. Using the U.S. dollar as a guide (since the USD is the primary reserve currency), we can estimate that a minimum of $1 trillion in quatloos would be needed to become a practical global currency.

With respect, Bitcoin faces a far bigger constraint on its use than supply and demand. Fiat currencies are not ultimately in use because they are backed by commodities, though their value will to some extent reflect such underpinnings. They have power for one reason only and that’s the state’s monopoly on violence. Threaten state power and this baby will be gone before dinner. To describe the challenge facing Bitcoin as regulatory risk really does not cover it.

I see the rise of Bitcoin, rather, as a near perfect signal of the mad dash for anything, anywhere that has value above the zero cost of capital engineered by central banks all over.

If that’s true, then when do we sell this great and global souffle? Courtesy of FTAlphaville, BofAML asks that very question:

We note that nobody seems to ask about commodities and few seem to ask about China, the old leadership. And, nobody seems to talk about the “Tails” of inflation and deflation. We believe contrarians should at least consider hedges.

There is a performance chasing aspect to this. Also in our inbox is the Nacubo-Commonfund study of US endowments for the 2013 fiscal year (which tracks the academic, not the Roman calender).

Preliminary FY2013 returns broken out by asset class are:
· Domestic equities: 20.5 percent
· Fixed income: 2.4 percent
· International equities: 14.4 percent
· Alternative strategies: 8.6 percent
· Short-term securities/cash/other: 1.0 percent

Commodities and managed futures returned -6.0 per cent, the year’s only investment strategy to report a negative return.

Commodities matter because, well, they’re about real growth and sadly:

…Until a virtuous cycle emerges that starts with stronger housing activity and flows to stronger bank lending and stronger small business hiring, we believe growth in the US, Japan, and Europe will struggle to expand at a pace that does not require central bank liquidity injections and zero interest rates.

…Following a summer rally that has seen almost $7.5 trillion added to global market cap, our composite Bull & Bear Index, our favored cross-asset measure of investor sentiment, is now close to a cautionary sell signal. The Index is currently at 7.2, up from 1.8 in July. A breach of 8.0 has historically preceded a 5-8% correction for MSCI AC world over the next 1-2 months.

There you go.

Houses and Holes
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  1. migtronixMEMBER

    Don’t know about the soufflé but I had short EUR positions all winter and spring and today earned everything back and then some! GBP looking at you next!

    As for btc I’m not selling yet but to me it’s more to do with the fact that no manipulation vehicle exists! Can’t naked short or FX swap btc so manipulators (I mean just what on earth are they doing to keep Ag under 30USD) can’t manupulate

  2. David, BTC are definitely an interesting subject and once again showing bubble like tenancies at the moment, particularly in this era of financial repression.

    However, I think it is still too early to return a verdict on BTC as to whether or not it is just a passing fad or not. I doubt whether it will ever threaten the USDs function as a reserve currency, but a lot of criticism levelled at BTC comes from critics who are safely ensconced in countries with relatively stable currencies (relatively) and Govts that are again, relatively benign.

    The real value of BTC is in countries that have neither of these things – countries like Venezuala, Argentina, most of Africa, Kenya, etc. Twenty or even ten years ago, BTC as a currency simply wouldn’t have been feasible for use in many of these places, however the development of extensive mobile telecommunication networks in even 3rd world countries has totally changed that as a proposition. It has the potential to liberate many of these countries netizens from their despot leaders, and the financial repression that they push onto their citizens.

    Interestingly the busiest exchanges today are those in China, a country with excellent telecommunications infrastructure, and a long history of financial repression.

    Once the BTC genie is out of the bag it is very hard to put back in. The biggest threat is the second threat, the current instability as it is going through its current period of inflation, and the volatility that is so readily observable. But even this is declining. In percentage terms when the last BTC bubble ended in April at 266, the resulting fall in % terms was still smaller than the one prior to that, when it ran from less than $1 to $34. The theory is that as the BTC economy expands the volatility will gradually decline.

    The final point is that there is already effectively 1 trillion BTC on issue. As a digital currency, it is virtually infinitesimally divisable, with 100,000,000 Satoshis per BTC. So there is still massive scope for the BTC economy to accommodate further widespread usage.

    But to put the current excitment in BTC in perspective, the total market cap of BTC is just over 3bn – compare that to Facebook at over $100b…. arguably one or the other is seriously overvalued.

    • migtronixMEMBER

      Thanks DC, wholeheartedly agree wit that sentiment.

      I would say one other thing about btc that you didn’t and that is its appeal to traders! I know a lot of traders back in London/Frankfurt that started trading btc in the last year not for the money (they can make that on FX) but for the love of trading, of trading in a real, fair, free, unmanipulated market! Crazy I know.
      They get joy from finding arbitrages and inefficiencies just like they used to do when they started their careers 20+ years ago…

      • Leaving aside the currency implications of Bitcoin, I think it’s (or some other similar digital currency) going to be an incredibly useful method of payment for the web.

        Very low (if not zero) transaction costs, no worries about credit card scams, virtually no minimum transaction amount, no credit card payment gateways.

        It’s very exciting for an Internet and ecommerce nerd like myself (setting aside the fact that I work for a massive multinational financial institution who wouldn’t touch Bitcoin with a 10,000,000 foot pole.)

      • LOL – likewise AB. I work in the heart of one of Aust’s large financial institutions and as an April fools joke we considered putting in a new product application to trade BTC, just to see how many heads we could have caused to explode in market risk. In the end a more sensible member of the team pointed out potential reputational risk from such an action, if it ever made it to the papers, so the joke was shelved.

        The international money carriage aspects of BTC are almost as interesting as the transactional aspects of the currency itself.

      • The international money carriage aspects of BTC are almost as interesting as the transactional aspects of the currency itself.

        Absolutely, if it wasn’t so damn volatile/speculative and a bit more mainstream then I’d definitely be interested in using it to carry money around..

    • Ronin8317MEMBER

      The problem behind Bitcoin is not technology. Currently the exchanges is not regulated, so they are being manipulated by those running it. While there is money to be made, it is not a suitable currency for world trade under the current regime.

      • “Currently the exchanges is not regulated, so they are being manipulated by those running it.’

        Care to explain that a bit more – I’m genuinely interested.

    • Those are fair points but btc may play a marginal role in the developing world, the reality is that airtime on mobile networks acts as transactional currency for real commodities like cooking oil, power etc. Trading mobile airtime on mobile networks is how people make virtual currencies function in conjunction with their own fiat currency which they use to buy the mobile contracts and acquire handsets, not btc.

  3. “The San Francisco-based company, which is unprofitable and has one-fifth as many users as Facebook, is benefiting from investors’ thirst for companies that will grow quickly in expanding markets like mobile advertising.”

    Ha! The “next big thing” for greater fools in full display.

  4. Bitcoin is a faux fiat currency. So it is less than fiat. It is not even made of paper. I just don’t trust it.

    And the best time to sell?
    Always while the going is good.

    And the going is still good. 😉

  5. I would have thought that the main reason Bitcoin will remain marginal is that before long someone like Mastercard will get in on the action and announce a new currency – perhaps called the Mcard.

    The total on issue will never exceed 1 Trillion.

    Find a way to get them into circulation may be a problem but they have a fantastic world wide wired system to do it.

    Perhaps they could issue them like frequent flying points for transaction in existing fiat currencies and thus be able to fund and open the first Mcard currency online shopfront and currency exchange.

    Once all 1 Trillion are in circulation no more get issued. Steady deflation should be the order of the day.

  6. “I see the rise of Bitcoin, rather, as a near perfect signal of the mad dash for anything, anywhere that has value above the zero cost of capital engineered by central banks all over.”
    Absolutely spot on!!!!!!

    I don’t know much about Bitcoin so i can’t comment. However this statement in the article is a really good summary of where we are at. The Bitcoin situation is where gold and Silver would be at without manipulation by CB’s and their ability to print whatever dollars are necessary to cover losses incurred by those appointed to hold the price down.

    The USD reserve currency role may be shorter lived than we now see. Evderyday it seems to erode just a little more A few pebbles slip and another shovelful is thrown on top. The whole mountain is unstable.

  7. “Until a virtuous cycle emerges that starts with stronger housing activity and flows to stronger bank lending and stronger small business hiring, we believe growth in the US, Japan, and Europe will struggle to expand at a pace that does not require central bank liquidity injections and zero interest rates.” FT Alaphaville

    If ever you want a demonstration that these blokes just don’t have a clue this is it. The implication is that if they get their virtuous circle going the CB won’t have to print. HOw do they think we arrived at this situation in the first place? Second all three economies are verty different. However this sort of ‘virtuous’ READ ‘evil’ circuit in either the US or Australia results in more and more debt, bigger and bigger CAD, more ownership of our children’s heritage by people outside our nation and more and more enslavement of our children.
    For much of Europe the same result occurs. For Japan it looks like it would be a desirable econom ic result but will not happen because of the fundamnetal demographic issue.

  8. Until a virtuous cycle emerges that starts with stronger housing activity and flows to stronger bank lending and stronger small business hiring, we believe growth in the US, Japan, and Europe will struggle to expand . . .

    I know I’m under the Curse of Cassandra by pointing this out yet again, but this is why the elites in all developed countries are pushing for massively increased immigration.

    It was all explained here.

    As a result of information technology, computerisation, robotics and globalisation, real incomes for most people in developed countries have begun to stagnate. It has hit first and hardest at the lower end of the developed-world income spectrum, but it is creeping steadily to the right.

    The only people immune from it are the top one percent, the elite who – for one reason or another – can exercise market power. (They can be seen on the far right hand side of the chart that explains the world.)

    This is not a temporary phenomenon. It is a secular change in the world as we have known it, and as our parents and grandparents knew it. For most people in the developed world, the steady growth in real incomes that began with the Industrial Revolution is coming to an end . . . if it has not already ended.

    For some years governments have tried to paper over the problem with asset-price bubbles driven by easy money. But that tactic has run its course.

    Which brings us to the nub of the problem:

    If per capita incomes of the majority of people are not rising, then the elite cannot make more money for themselves by selling to their existing domestic markets.

    Some of the elite can export. But many cannot. Their businesses may be essentially domestic. Or they may be so wedded to government support from their political Mates that they simply can’t survive in the outside world.

    It doesn’t take a genius to work out where this is leading.

    If you can’t sell more to your existing market because their per capita income has stalled, and if you can’t keep pumping up asset bubbles, and if you can’t sell overseas, then there is only one variable left to play with:

    increasing the number of “capitas” in the domestic market.

    That is what really lay behind Rupert Murdoch’s speech last week. It is what lies behind The Economist’s campaign for a massively increased immigration into developed countries worldwide.

    Of course, they don’t say that outright. As always, they wrap up their ruthless self-interest in the rhetoric of public good.

    But that is really what lies behind it.

    This is a policy with externalities (far more so in places like Britain which is already overcrowded) but the Elite won’t incur the external costs of overcrowding.

    They will retreat into their villas and their mansions and their country retreats. Not for them the human zoo of high density living.

    They will enjoy their private cars, speeding down the tolled dedicated high-speed lanes of the highways (a proposal which is under active consideration in many countries). Not for them the torment of perpetual traffic jams or the crush of inadequate public transport.

    Their children will sail through their private schools and into the increasingly expensive universities to take the best jobs reserved for them in the next generation. Not for them the struggle to compete.

    There will be empty talk of improving infrastructure and services and giving “everybody an equal opportunity”. But it will translate into action only insofar as it can be made to turn a profit for the lucky few.

    The Industrial Revolution brought an unprecedented change to the world. For the first time in human history it gave the subjects some bargaining power. They needed to be trained to operate the machinery of the industrial world, and having been trained they were valued by their rulers.

    That was an historically anomalous situation that gave rise to idiosyncratic notions of human equality.

    That era has ended.

    We are now reverting to the historical norm.

    • migtronixMEMBER

      Very well said Stephen but I would add that there is one other characteristic of this secular shift — those with technical knowledge will do even better than the 1% elite because those with real tech know how are even fewer than 1% and yet the 1% desperately need the skills…

      Everything with a chip can be hacked

      • You need the double-threat of technical know-how and a willingness to exploit it. In my experience there are plenty of people with a lot of technical understanding and nous but are either too honest to use it, or too naive to realise when they themselves are being used.

    • Best comment of the year so far. Absolutely spot on. As someone living in China I can tell you, people in the west have no idea what is coming down the track and how the world has already changed in the past generation. Our elites have sold us out, which is all they ever do. Unfortunately in the case of Australia our elites are too stupid to be able to retain control of country when the shit hits the proverbial fan.