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9/2/2017 – Bitcoin, the world’s largest and most popular cryptocurrency, has recently dominated the news cycle. Numerous articles comment on how much money you would’ve made if you invested only a year ago (739%). In fact, I first heard about Bitcoin in late 2013 when its price was around $130/BTC. $1,000 invested then would be worth $36,863 today. Shoulda, woulda, coulda…

For those that do not know, Bitcoin is a virtual currency that is math-based digital assets in which transactions can be performed cryptographically without the need for a central issuing authority. This has major implications. To learn the basics of Bitcoin, the best way to begin is to watch the official introductory video.

Full disclosure – I am not an expert on cryptocurrencies, but these two NYU professors are and they offer a great primer on cryptocurrencies here. Additionally, Bitcoin is not the only cryptocurrency out there. Other major currencies include Ethereum, Ripple, Litecoin, NEM, etc. For the purposes of this short post, I mention only Bitcoin as it is the largest and most widely-adopted cryptocurrency by a large margin.

IS BITCOIN CURRENTLY A BUBBLE?

Probably. Though, it was also a bubble in 2011, 2013, and 2014. So yes, it is likely a bubble. But that doesn’t mean it will disappear after the bubble pops, perhaps even declining by 50%-80%. For a bit of perspective, if Bitcoin were to fall 80% from its current levels ($4,792), it will still be worth $958. It is not unusual for something this young, especially an innovative technology, to experience wild volatile swings. It is still trying to find its place in this industry and speculators have have gotten in on this trade. But they can just as easily exit this trade when things go south.

So, what are the long-term implications of cryptocurrencies like Bitcoin? I think it is too early to tell. It is reckless to take a firm stance either way. But one cannot simply state that Bitcoin is a fad and that it is akin to the Snuggie blanket or the Furby doll. Bitcoin is too big and too important for it to disappear over the short-term. It has survived far too many pitfalls, such as the Mt. Gox bankruptcy disaster and the U.S government shutting down Silk Road. Bitcoin has, without a doubt, shown staying power.

THE ATTRACTION OF BITCOIN

Most Bitcoin enthusiasts prefer it over a fiat currency because it is decentralized and it offers anonymity. Their goal is for Bitcoin to become the currency of choice, beating out the U.S. Dollar, the Euro, the Yen, and others. This is a massive goal that governments will likely oppose, or at least attempt to control. No government will leave a major currency completely unobstructed.

On one hand, I can’t imagine living in the U.S., purchasing goods with anything but the Almighty Dollar, especially if that is a crypto-currency. On the other hand, the U.S. Dollar is simply a note issued by the Federal Reserve and its intrinsic value is established as a money by regulation. In other words, the U.S. Dollar is not back by anything except by the full faith and credit of the U.S. government. This allows the Federal Reserve to “print as much or as little money as it deems appropriate. There are powerful advantages to such an unconstrained system. Above all, the Fed is free to respond to actual or threatened recessions by pumping in money.” (Paul Krugman)

However, gold bugs often say that history has proven time and time again that all fiat currencies (which the US Dollar falls under this category) fail over time. However, this is not entirely true. The gold standard has failed over time, simply because “it prevents the central bank from fighting recessions by outsourcing monetary policy decisions to how much gold we have — which, in turn, depends on our trade balance and on how much of the shiny rock we can dig up.” (TheAtlantic).

HOLD ON TO YOUR HATS

So, what does the future hold for Bitcoin? As the currency continues to move higher up the adoption curve, it will likely face higher levels of government pressure, not just here in the U.S., but globally. And how governments respond to Bitcoin will ultimately define its future. Though, the biggest hurdle I see with Bitcoin is the inability for any regulating body to print as much or as little of the currency during times of economic strain. The freedom for a government to do this was the primary reason why the U.S. abandoned the gold standard in 1933 and cut the link between the dollar and gold in1971. This has absolutely helped keep the value of inflation more stable. Check out a great article that I stumbled across, aptly named “Why the Gold Standard Is the World’s Worst Economic Idea, in 2 Charts” makes a great point regarding price stability.

In light of these facts, I would imagine that any government operating a fiat currency system will have a difficult time giving up this type of control. So, as Mick Jagger has kindly displayed, hold on to your hats.

 

Ryan Hughes
Bull Oak Capital
Bull Oak Newsletter
9/2/2017


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While the information presented herein is believed to be accurate, Bull Oak Capital LLC (Bull Oak) makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in the document. Bull Oak is under no obligation to notify you of any errors discovered later or of any subsequent changes in opinions. Nothing herein should be construed as a recommendation to buy or sell any of these securities. It should not be assumed that any of the securities, transactions, or holdings discussed will prove to be profitable in the future or that investment recommendations or decisions Bull Oak makes in the future will be profitable or will equal the investment performance of the securities discussed herein. Bull Oak or its employees may have an economic interest in securities mentioned herein.





5/13/2017 – What looks to be the single largest economic-development project in history, the Chinese-led Belt and Road Initiative will be officially unveiled in Beijing tomorrow at the Belt and Road Summit (Sunday, May 14th). The two-day summit will be hosted by Chinese President Xi Jinping and will feature over 65 participating countries, 29 heads of state, and a mind-boggling $1.4 Trillion investment proposal. This event will undoubtedly mark the beginning of a long-term project that will, in my opinion, change the global economic landscape to China’s favor.

The project hopes to “create the world’s largest platform for economic cooperation, including policy coordination, trade and financing collaboration, and social and cultural cooperation.” (McKinsey) Of course, China’s financial institutions, the Asian Infrastructure Investment Bank and the Silk Road Fund will lead the charge in financing these endeavors.

To help comprehend the scale of this project, China’s Belt and Road Initiative is 11 times larger than the U.S. Marshall Plan, which rebuilt Europe after World War II. Though, of course, if you were to visit any major American news site today to learn more about this event, you wouldn’t find it.

CNN Homepage

What Is The Belt And Road Initiative?

According to the official Chinese Action Plan, the Belt and Road Initiative (BRI) “help(s) promote the economic prosperity of the countries along the Belt and Road and regional economic cooperation, strengthen exchanges and mutual learning between different civilizations, and promote world peace and development.” In other words, China is attempting to rebuild the historic Silk Road in an attempt to foster higher economic expansion in a slow-growth global economy and to further China’s influence in global affairs.

The BRI will consist of two primary elements, the land-based “Silk Road Economic Belt” and the oceangoing “Maritime Silk Road.” The Silk Road Economic Belt includes countries located on the original Silk Road though Europe, the Middle East, West Asia, and Central Asia. The Maritime Silk Road is designed to include countries located in Southeast Asia, Oceania and North Africa.

Why the Belt and Road Initiative?

The Belt and Road Initiative was developed to help China transform from an export-driven and government-led economy to a more consumer-led economy. China, the 2nd largest economy in the world, is currently experiencing an economy that is led by falling exports and sluggish economic growth. Over the past two decades, China’s government has invested heavily on its industries becoming the global destination for manufacturing. While this has thrusted the country to global prominence, it has also created a major problem of overcapacity. BRI is China’s answer to this problem.

Bueller? Bueller?

Since Belt and Road was originally mentioned in 2013, the U.S. has pulled a Bueller by not responding to this move. This project by China, if executed properly, is one that will shift geopolitical power away from the U.S. to China. While the U.S. has stepping away from Asia and becoming more isolated, China has been making a move to become more accessible with greater influence in the region.

For months, the U.S. had no plans to attend this forum, which, of course, led to the Chinese media making a big deal of it. However, on Thursday, President Trump announced that the U.S. would send a delegation (a low-ranking one) to the event.

What concerns me is the long-term effects of this project. The sheer size and scope of BRI is one that will take decades to develop. This is the type of investment that tends to benefit future generations. China’s policy-makers tend to be inter-generational thinkers and the Belt and Road Initiative is certainly a long-term investment. This contrasts sharply with U.S. policies, which have lately been too short-sighted and is not as effective over the long-term. Nonetheless, a major project like this will certainly open a number of investment strategies to those that are well-positioned.

 

Ryan Hughes
Bull Oak Capital
Bull Oak Newsletter
5/13/2017


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While the information presented herein is believed to be accurate, Bull Oak Capital LLC (Bull Oak) makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in the document. Bull Oak is under no obligation to notify you of any errors discovered later or of any subsequent changes in opinions. Nothing herein should be construed as a recommendation to buy or sell any of these securities. It should not be assumed that any of the securities, transactions, or holdings discussed will prove to be profitable in the future or that investment recommendations or decisions Bull Oak makes in the future will be profitable or will equal the investment performance of the securities discussed herein. Bull Oak or its employees may have an economic interest in securities mentioned herein.





4/2/2017 – If you find that your investment strategy is pinned on the hope that Congress will somehow pass economic-boosting legislation in a timely manner, you may want to reconsider your thought process. There is worry that Republicans will begin to distance themselves from President Trump amid his falling approval rating and after they failed to repeal and replace the Affordable Care Act. If Republicans begin to distance themselves, I believe there is little chance that any of President Trump’s proposed economic policies will get passed. Of course, this will undoubtedly not be good for the equity markets. Therefore, the question we should all be asking ourselves is, “after reaching new market highs, where do we go from here?”

To help frame this question, it helps to understand how we got here. The current bull market is one for the ages. We are currently experiencing the 2nd longest bull market in history: 2,946 days.

When this bull market began, very few, if any, would’ve guessed that this rally would’ve been so strong or so long. Though, this can also be said about many market rallies throughout history. Bull markets typically begin when optimism is scarce and they frequently end when optimism is abundant.

This particular bull market is unique as it has been characterized by extreme central bank intervention. This intervention has created a massive wealth effect by boosting asset prices around the globe. While the Federal Reserve has ceased its asset purchase program on October 31, 2014, there is still plenty of liquidity still being added into the markets. And make no mistake, a lot of this capital is continuing to find its way to U.S. assets.

After the Fed ceased its asset purchase program on October 31, 2014, the market struggled to maintain its momentum. During the two-year period between November 1, 2014 to October 31, 2016, the market moved sideways with high levels of volatility. Market returns was dampened by falling corporate earnings, Chinese growth concerns, and falling industrial production.

S&P 500 – 11/1/2014 to 10/31/16

Of course, in November 2016 President Trump shocked the world by winning the U.S. election. Between November 9, 2016 (the day after the U.S. Presidential election) and March 31, 2017 the S&P 500 rallied 9.22%. Coincidentally, Consumer Confidence has also rallied to near historic highs.

So, where do we go from here? There is a deepening divide within the investment community on what will drive the markets higher. Some believe that corporate earnings will continue to recover. Others believe that President Trump and the Republican-led Congress would be able to reform the tax code, repatriate foreign-held corporate cash, rebuild America’s failing infrastructure, and create other economic-boosting projects.

However, there is growing concern that President Trump and the Republican-led Congress will be unable to pass these measures. The failure to repeal and replace the Affordable Care Act has caused some to doubt that few if any of Trump’s fiscal policies will be passed in a timely manner. Merely hoping that they will pass, in my opinion, can be an ill-fated investment strategy. Though, if the major central banks continue to provide an accommodative policy and if capital continues to flow to the U.S., we may continue to see equity prices pushed higher.

I believe that the equity markets will always have an upward bias so as long as there are educated individuals, fair laws, and access to capital. As such, I am convinced that the equity markets will continue to outperform over the longterm. That being said, equity markets often appreciate much faster than the underlying economy does. Furthermore, central bank intervention is certainly continuing to skew the markets. This “rich asset price” party will not continue forever. Volatility is near all-time lows and tail-risk is likely extraordinarily high. If there was ever a time to hedge some risk, now is probably the time to do so.

Ryan Hughes
Bull Oak Capital
Bull Oak Newsletter
4/2/2017


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While the information presented herein is believed to be accurate, Bull Oak Capital LLC (Bull Oak) makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in the document. Bull Oak is under no obligation to notify you of any errors discovered later or of any subsequent changes in opinions. Nothing herein should be construed as a recommendation to buy or sell any of these securities. It should not be assumed that any of the securities, transactions, or holdings discussed will prove to be profitable in the future or that investment recommendations or decisions Bull Oak makes in the future will be profitable or will equal the investment performance of the securities discussed herein. Bull Oak or its employees may have an economic interest in securities mentioned herein.