Bitcoin to Become the Darling of Wall Street

Bitcoin to Become the Darling of Wall Street

Today’s Daily Reckoning flies north to China for a bird’s eye view of what’s happening. The signals are conflicted this morning.

Overnight, copper fell 4.2% — its worse drop in two years. But a peek at the paper shows that iron ore is still over US$72 a tonne.

This is millions in unexpected profits for the big Aussie miners, and a much bigger tax windfall for the government. Back in May, Treasurer Scott Morrison had a forecast of around US$55. Iron ore has stayed above this the whole time.

It’s no secret that BHP and Rio are cleaning up here too. Their higher grade iron ore is now favoured under Beijing’s pollution crackdown…

An Aussie stock to check out

This policy is showing up in all sorts of markets. We know the Chinese government is pushing electric cars, for one.

Earlier this week came news that the government wants to build a charging station for every single electric car in China by 2020. Apparently, ‘range anxiety’ is a roadblock to sales. That’s 4.8 million charging outlets and stations. The bill is US$19 billion for the lot.

Now there’s suggestions that Beijing’s crackdown on coal is leaving people cold as the winter chills begin to bite in northern China. The Financial Times reports gas is being rationed in parts of the country.

The central government wants to switch the country’s energy policy to cleaner burning natural gas.

The targets have been put down. Now it’s up to local governments to hit them.

That’s a problematic switch when you’ve relied on coal for so long. The transition won’t be smooth. But there might be opportunity here. One Aussie listed stock could be a possible play here: Sino Gas and Energy Holdings Ltd [ASX:SEH].

Sino has interests in gas fields reasonably near Beijing, and apparently some of the lowest production costs in China.

Let me stop here to say: Don’t go out and buy SEH after reading this article. I’m aware of the stock, but haven’t done any due diligence on it.

It’s an idea you might like to check out for some further study of your own. The Daily Reckoning is a free service; we’re not going to let you get away without doing some homework! We leave that attitude to the welfare bums and the politicians.

Of course, any mention of China can’t help avoid the question of its huge debt. The IMF has come out and said that this whole situation is slightly misunderstood. Apparently, China’s ‘zombie’ companies don’t represent as big a share of the economy as everyone thinks.

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A zombie company doesn’t make money, but is kept alive through state subsidies and special bank loans. In a free market, these businesses would got bust.

Competent people would then take over the viable assets or clients, and the rest of the parts would join the dead and perished businesses that history is littered with.

But there are no free markets, anywhere, and governments the world over support some industries more than others. In China, the state banks are used as policy tools. So, a zombie company might not make money but it can keep the local population employed.

The fact that those jobs are an exercise in uselessness burdens China’s economy with lower productivity more than it otherwise would have. But that doesn’t necessarily mean the whole economic shebang is going to collapse, as has been widely feared for many years.

If China can find a way to transition these workers and inputs to profitable sectors, the payoff for the wider economy would be quite big. It would certainly bring higher wages and more people into the consumer economy.

When the outlier comes into the industry fold

That sector is booming, no matter what the bears say. Alibaba’s last Single’s Day saw US$25 billion in sales in 24 hours. It takes Amazon two months to hit a figure like that.

You wouldn’t get that impression going off the Alibaba share price lately. It’s lost about 12% over the last two weeks. Admittedly, that’s after a great run this year.

This is where we become conflicted again. Is Alibaba’s share price forewarning us something about China’s economy, or is it a simple rotation from US fund managers out of tech names and into industrial stocks and elsewhere?

I don’t know the answer right now. I suspect it’s the latter more than the former. I hope so, because I actually own some stock in Alibaba.

Having said that, I feel a bit better about the dip, because my bitcoin has been going up at the same time. One is offsetting the other.

That’s part of the appeal of the cryptocurrency. It’s not correlated to other markets yet.

A colleague of mine recently explained the massive appeal of this factor to Wall Street.

Fund managers and the like want to park your money in a spread of assets and take a management fee. If one asset class goes bad, they also want to have you in one that might go up at the same time.

Imagine if gold went up 10% every time stocks went down 10%. That doesn’t happen, but you can see the appeal.

It means the volatility in your portfolio can come right down. That leaves Wall Street, or the asset management industry anywhere, free to keep sucking the fees out of your account for 40 years. They don’t care if you actually make money, or if it’s the optimal strategy. They just don’t want you spooked out of staying invested, or sitting on big losses.

The biggest problem for investors the world over is how synchronised everything has become. The academics and bores call this effect ‘correlation’.

Bitcoin, as yet, is not subject to this same dynamic, nor are the other cryptos. That gives Wall Street a green light to market cryptos as hedge in any US portfolio against chaos or drawdowns in the stock or bond markets. As you can see, it’s working with me right now.

The same sell can happen in any financial industry, in any country.

If you think bitcoin has gone crazy so far this year, the dynamic is there for it go up another level from this alone.

There’s no guarantees on anything here, but if Wall Street decides to pitch bitcoin and cryptos, those holding now stand to make an unprecedented bonanza. Even as a flier, it’s simply too good to ignore. Get on board here and strap yourself in for what could be the ride of a lifetime.


Callum Newman
Editor, The Daily Reckoning Australia