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Good news from COVID19

What’s the good news?

In a world where we have seen thousands of corporate collapses, closures or bankruptcies, hundreds of thousands dead to a virus which didn’t exist a year ago, hundreds of millions of job losses, terrifying race riots and social media having to fact check or censor the tweeted toddler tantrums of a major world leader, it can be hard to find the good news. Stock markets dropped swiftly in the first days of Covid19 outbreaks, quarantine, and lockdowns. Was this good news? Could we buy bargain stocks? It may be hard to tell if lower stocks were a bargain, especially as they did not stay low for long (but just wait for the second shoe to fall) ;) Central banks can print trillions of dollars in Economic Stimulus or Quantitative Easing, a strategy which is supposed to bring economic security to the ordinary people, and prevent bank runs and cash shortages. Unfortunately, the QE strategy, like trickle-down economics, does not seem to obey the laws of gravity. When central banks and governments use freshly printed fiat currency to purchase stocks and bonds, they keep the stability for the wealthy elites, and there is almost zero benefit for the workers. Interest rates on cash (the investment de jour for most of the working class) have plummeted to near zero, below zero, or essentially negative in many countries. If you had $100 000 invested in cash during the period from the early 1970’s to the early 2000’s, you would have averaged 5% return each year. Nowadays that return may be 0.1% or less, and if you factor in inflation, your cash is going backwards quickly. Stocks and bonds may be propped up for now, but we believe this to be very temporary. Asset prices have been driven by earnings for centuries, and whenever price outstrips earnings, a crash will soon follow. For those who have been long-term subscribers, you will know that we predicted a stock market crash back in September 2019, due to the high debt levels and low earnings of most stocks. Time has shown that we were sadly correct. But every cloud has a silver lining; it just depends where you look.

Crisis? What crisis?

In mid-2019, long before there was a viral pandemic, long before there were millions out of work, we already witnessed hundreds of retailers downsizing or closing their doors. Back then, struggling retailers blamed “the Amazon effect” and an increase in online shopping, as if this were an unexpected shock to them. Online retail has been growing steadily since the mid- to late-1990’s. The earnings of Amazon, eBay, Ali Baba and other online retail hubs had been steadily increasing, leading to the incredible rise in their stock prices. Traditional retailers had been losing money for decades. Some adapted, some tried to hang in there, and some ignored the writing on the wall. As we found with the dinosaurs and the horse and buggy market, one must adapt to the new environment, or perish. The death of the dinosaurs created a better environment for small mammals to grow and flourish. Less buggies on the roads made for better and faster motorised vehicles. The death of one thing is always good for another; a rotting log gives nourishment to new seedlings, and we see the “circle of life” in investment markets just as we see it in nature. Even as the Covid19 crisis unfolded and millions lost their jobs, the top 25 billionaires dramatically increased their wealth in just sixty days. The unprecedented printing of fiat currency by central banks lead to an increase in the price of physical gold by around 50%, and a rise of up to 70% in gold mining stocks. Anyone holding scarce commodities such as gold, silver or bitcoin would have seen their wealth increase, as banks increased fiat supply and devalued paper dollars. There is always a boom on, somewhere.

Dollars down, crypto climbs

There are a multitude of reasons why crypto climbs in value as central banks print more fiat currency. Among the most obvious are increasing calls for anonymity, speed of transactions (particularly international transfers) and a store of value which may be less prone to the erosion caused by inflation. Bitcoin, the grandfather of cryptocurrency, was created after the 2008 Global Financial Crisis (GFC1), as a deliberately scarce commodity which could not be created, manipulated or tampered with, unlike paper dollars. The vision of Satoshi Nakamoto was to create a type of “digital gold”: a form of money which held its value over time, was not able to be printed at will, and one which could be easily transported or transferred. As with any new technology, it was first used by an inner circle of devotees and has taken several years to gain wider adoption. We are only in the first decade of crypto, and mainstream adoption is still a while away, but we are getting there. On the Boston Trading Co Facebook page last month, we reported that there have been some notable backflips by those who previously disparaged cryptocurrency. (Short article reprinted below; feel free to like the page and join the conversation to get early alerts).

Hypocrisy or "backflips" can be an early warning system for wise investors

Jamie Dimon, the billionaire chairman and CEO of JP Morgan publicly called crypto a “fraud” and labelled people who bought them “stupid”. He said that he would fire any traders who buy Bitcoin… Yet at the same time, he was helping his own clients trade Bitcoin. Two years later, JP Morgan launched its own cryptocurrency. Warren Buffet, billionaire investment guru, called Bitcoin “rat poison”. But Buffett's company (Berkshire Hathaway NYSE: BRK.A) is Bank of America’s largest shareholder. And Bank of America holds 82 cryptocurrency patents - more than any other company on earth. Do you think Buffett knows that? BOA is the second largest bank in the USA & plans to use crypto for interbank transfers because crypto transfers are cheaper, quicker and more effective than traditional means. Warren Buffet & BRK.A own 10% of Wells Fargo bank, the 4th largest bank in USA. Wells Fargo banned customer transactions involving cryptocurrencies. However, Wells Fargo plans to release its own cryptocurrency in 2020. Citigroup is the 3rd largest bank in the USA, and banned customers from using credit cards to purchase cryptocurrencies. However, Citigroup will now offer crypto custody solutions to its institutional, big money clients. Goldman Sachs CEO, David Solomon, stated the bank is seriously investigating cryptocurrencies and may even launch its own crypto in the near future. Morgan Stanley released a report stating that “cryptocurrencies are now an institutional asset class”. November 29th, 2019, Germany passed a law allowing German banks to create crypto products, offer crypto trading and store crypto for their clients. Two weeks after Germany passed the law, Dutch bank ING (with 1 trillion in assets) stated they will allow their clients to store their crypto with the bank. Japan, South Korea, Malaysia and Singapore have released guidelines on digital assets. China has launched a Central Bank Digital Currency which is already in use. The Bank of International Settlements (the central bank to central banks), recently surveyed 66 Central Banks and 80% of them are working on a Central Bank Digital Currency. Every single one of the worlds’ 10 largest public companies is exploring cryptocurrency technology. Walmart is launching its own “stablecoin”. Facebook will launch “Libra” (as soon as it legally can). Apple, Microsoft, American Express, Samsung, Oracle, Disney, Intel, Google, Mitsubishi, IBM, MetLife, Prudential, Siemens, Morgan Stanley, Nestle, Pfizer, Anheuser Busch, Mercedes Benz, Toyota, Berkshire Hathaway, Dell, Ford, Goldman Sach are all adopting blockchain or other crypto technology. Bank of New York Mellon, Deutsche Bank, UBS, Credit Suisse Corp, ING, Santander, Barclays, and HSBC Holdings are all working on a crypto project; together. ICE, the company that owns the New York Stock Exchange, as well as another 27 exchanges around the world, have launched the BAAKT exchange, providing crypto access to institutional players. BAAKT launched the first-ever regulated Bitcoin options contract in December 2019. Nasdaq is considering launching its own crypto futures product. The Chicago Mercantile Exchange plans to launch Bitcoin options later this year. If crypto is a "fraud" or "rat poison", then it has already attracted hundreds of billions of dollars in investment from the wealthiest people on earth, and countless billions more are being spent on research and development by global mega-corporations. If crypto goes down, it could likely take down a quarter to half of the world's wealthiest companies. Can you imagine a world without Facebook, Apple, Samsung, Amex, Google, or Disney? It seems impossible that they would fail. They are just a fraction of the hundreds of billion- and trillion-dollar companies working in the crypto space. Your choice: believe the bad gossip, or follow the smart money.

Breaking Good

In more recent breaking news, Visa, the mega-billion-dollar company who famously pulled out of the Facebook Libra cryptocurrency partnership, has plans for digital currency. Visa has filed a patent for the creation of what it calls “digital fiat currency” which will be hosted (at least partially) on the open-source Ethereum blockchain [point 0135 in the patent]. Under United States Patent Application: 0200151682 Visa will create digital dollars, as well as pounds, yen and euros, and has a system for “removing physical dollars from supply”. This will hopefully control inflation to a degree, as for each new digital dollar created, Visa will destroy a physical dollar. The serial number of each dollar destroyed will be reportedly held on the blockchain, for full transparency. Also in the USA, Congress considered the idea of a digital dollar when debating the CARES Act, the third COVID-19 relief package. Although the digital dollar was not included in the final le