The Bitcoin Bubble and the Future of Currency - By Felix Salmon

Volatility is a serious problem, if you’re trying to put together a currency, rather than a vehicle for financial speculation. If the currency of a country ever fluctuated as much as bitcoins did, it would never be taken seriously as a medium of exchange: how are you meant to do business in a place where an item costing one unit of currency is worth $10 one day and $20 the next? Currencies need a modicum of stability; indeed, one of the main selling points of bitcoin was that it couldn’t be destabilized by government institutions. But that comes as scant comfort to people watching the value of a bitcoin behave like some kind of demented internet stock during the dot-com bubble.

In reality, then, bitcoin doesn’t really behave like a currency at all. In terms of its market value, it looks much more like a highly-volatile commodity. That’s by design: bitcoins were created to be the most fungible commodity the world had ever seen – to the point at which they would effectively erase the distinction between a commodity and a currency.

But is that a good idea?

Horizon Kinetics March 2013 Market Commentary

Continuing our series on predictive attributes for outperformance, this month we discuss scalability. Scalability refers to the potential for a company to increase its operations (and revenues) substantially, without incurring substantial marginal costs or requiring significant capital expenditures to support the revenue expansion.

Bill Gross – April 2013 Investment Outlook: A Man in the Mirror

Am I a great investor? No, not yet. To paraphrase Ernest Hemingway’s “Jake” in The Sun Also Rises, “wouldn’t it be pretty to think so?” But the thinking so and the reality are often miles apart. When looking in the mirror, the average human sees a six-plus or a seven reflection on a scale of one to ten. The big nose or weak chin is masked by brighter eyes or near picture perfect teeth. And when the public is consulted, the vocal compliments as opposed to the near silent/ whispered critiques are taken as a supermajority vote for good looks. So it is with investing, or any career that is exposed to the public eye. The brickbats come via the blogs and ambitious competitors, but the roses dominate one’s mental and even physical scrapbook. In addition to hope, it is how we survive day-to-day. We look at the man or woman in the mirror and see an image that is as distorted from reality as the one in a circus fun zone.

Chart of the Day: Margin Debt on the NYSE

Via Steve Keen: “How far can it go? Margin debt is still shy of its all-time high as a percentage of GDP, so there is certainly some headroom for further rises. But at the same time, the market is still in territory that was uncharted before the Loony Zeros (my “Roaring Twenties” candidate for how we should describe the last decade and a half) drove it higher than it has ever been before. Fragility, rather than sustainability is the message I would take from this data.”

Mutual Fund Observer: April 1, 2013 Commentary

Found via Abnormal Returns. One addition I'd add to the list in the commentary is the Martin Focused Value Fund (MFVRX), which I believe is a little over 90% cash right now.

For those interested in other managers who’ve followed Mr. Cinnamond’s prescription, I sorted through Morningstar’s database for a list of equity and hybrid managers who’ve chosen to hold substantial cash stakes now.  There’s a remarkable collection of first-rate folks, both long-time mutual fund managers and former hedge fund guys, who seem to have concluded that cash is their best option.

This list focuses on no-load, retail equity and hybrid funds, excluding those that hold cash as a primary investment strategy (some futures funds, for example, or hard currency funds).  These folks all hold over 25% cash as of their last portfolio report.  I’ve starred the funds for which there are Observer profiles.

Confluence Weekly Geopolitical Report

In this report, we will provide a brief history of Cyprus. This information will give the context for the background of the current crisis. We will examine the current crisis in more detail and discuss the impact on the Eurozone. As always, we will examine the potential effects on the financial and commodity markets from the Cyprus problem.

GR-NEAM Reflections: 04/01/2013 - Helium or Gravity? Valuing Common Stocks

As the U.S. stock market returned to its previous highs in recent weeks, a chorus of confidence predicted continuing gains. The historical evidence is not encouraging, since expectations are already incorporated into stock prices.

Japan’s Answer to Jeff Bezos Sets Sights on Amazon, America

When the World Wide Web first became a big deal in the mid-1990s, Hiroshi Mikitani was a 31-year-old executive with a Harvard Business School degree striding down the traditional Japanese path to success at one of the country’s biggest banks.

Then he quit.

As much as American entrepreneurs like to portray themselves as mavericks, the stricter bonds of loyalty that define Japanese corporate culture made Mikitani’s departure all the more radical. As was what he did next.

Mikitani launched e-commerce startup Rakuten in mid-1997, just before Amazon went public. But his vision of online shopping had little in common with the standard being set by Jeff Bezos.

From the start, Mikitani has shunned what he calls the “vending machine” model of e-commerce, the utilitarian, product-centered approach favored by Amazon. From the beginning, he has built Rakuten as a collection of individual digital shops branded and run by the merchants doing the selling. Mikitani believes shops foster a sense of human connectedness that makes shopping more fun.

It’s an instinct that’s paid off handsomely. Rakuten now handles more than one-quarter of all e-commerce business in Japan — more than twice as much as Amazon’s share in the country. Now in more than a dozen countries, the multi-billion–dollar company has expanded from shopping into a range of services, from travel to banking to e-readers (Rakuten owns Kobo). It could be the largest internet company you’ve never heard of.

But Mikitani’s planning to change that.

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Related book: Marketplace 3.0

Eric Topol on EconTalk

Eric Topol of the Scripps Research Institute and the author of The Creative Destruction of Medicine talks with EconTalk host Russ Roberts about the ideas in his book. Topics discussed include "evidence-based" medicine, the influence of the pharmaceutical industry, how medicine is currently conducted for the "average" patient, the potential of genomics to improve health care and the power of technology, generally, to transform medicine.

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Related previous post: Health at Google: Eric Topol

Related book: The Creative Destruction of Medicine: How the Digital Revolution Will Create Better Health Care

Hussman Weekly Market Comment: We Should Already Have Learned How This Will End

Overvalued, overbought, overbullish. When in history have we seen the Shiller P/E (S&P 500 divided by the 10-year average of inflation-adjusted earnings) above 23, the S&P 500 over 60% above its 4-year low and 10% above its 52-week average, with investment advisory bears below 20% for at least two weeks running? Three times: the April 2010 peak, the March-May 2011 peak – both followed by corrections approaching 20% – and today. Even if one ignores the historical evidence suggesting the potential for significant bear market losses over the next couple of years, speculators should be aware that present conditions have been hostile even in the context of the recent bull market advance.

I use the word “speculators” intentionally, as the historical evidence overwhelmingly indicates that there is little in the way of “investment” merit at present valuations. See Investment, Speculation, Valuation, and Tinker Bell for a review of the simplistic “forward earnings” measures universally touted by Wall Street here, compared with a range of distinct valuation approaches (including a far more effective use of forward earnings), all which reach nearly identical conclusions, and all which have a dramatically stronger relationship with subsequent market returns at every horizon. Our present estimate of prospective 10-year S&P 500 nominal total returns is now down to about 3.5% annually.

Andrew Smithers out of London provides yet another metric based on Tobin’s q (market value versus replacement cost). The chart below is on log scale, so you have to do a bit of math to translate to percentage over/undervaluation, for example, exp(0.42) = 1.52, or 52% overvaluation.

The chart is based on data through the end of 2012. Smithers notes “At that date the S&P 500 was at 1426 and US non-financials were overvalued by 44% according to q and quoted shares, including financials, were overvalued by 52% according to CAPE. With the S&P 500 at 1552 the overvaluation was 57% for non-financials and 65% for quoted shares.”