Jackson Hole Summit & Blockfolio Acquired for $150 Million #6
Market Meditations | August 26, 2020
This is the edition of Market Meditations I am most proud of to date. Today’s edition is centered on the Jackson Hole summit and the implications it has on the crypto and global…
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Today’s edition is centered on the Jackson Hole summit and the implications it has on the crypto and global markets. We also share some broader economic lessons, study and learn, you only need to understand the concepts once and then you can apply them for life.
I also am delighted to give readers early access to the second episode of the Market Meditations podcast. A fantastic episode that you can find out more about later.
Finally, today’s self-improvement segment is special. Let’s explore creativity and innovation together.
Capitalism and Modern Monetary Policy
Hedging Against Inflation and Digital Gold
One Big Trade
Ftx Acquires Blockfolio for $150 Million in Bid to Expand Retail Footprint
Aave Takes Number One Slot in Total Value Locked
IRS Sends Letters About Crypto Taxes Once Again
The Dow Makes Its Biggest Swap in Years; What to Make of the Move
Vanguard Is Leaving Hong Kong and Japan
Telegram Drops Lawsuit Over ‘Gram’ Trademark but Must Cover Legal Fees
Conquering your Trading Demons and Learning to Trade Multiple Strategies
How Failure Drives Innovation
Capitalism And Modern Monetary Policy
Big headlines in the news this week as the S&P 500, a stock market index that measures the performance of 500 large companies listed on stock exchanges in the US, made new all-time highs after the ~35% crash in March earlier this year. Markets are forward-looking and aren’t always a good representation of the actual economy, but we all know that many industries have not fully recovered from the Coronavirus induced damage around the world.
The Federal Reserve and other central banks around the world have had a disproportionately large impact on the stock market’s recovery since March. To mitigate the damage to the economy, the Federal Reserve stepped in early and decisively, stipulating that they would ‘do whatever it takes’ to get the US economy back on its feet. What this means is that they flooded the financial system with liquidity by lowering interest rates to near zero and buying enormous amounts of U.S treasury’s, also known as money printing.
With trillions of dollars of stimulus since March, the stock market has essentially been artificially inflated due to efforts by the Federal Reserve and the $3 trillion worth of stimulus checks by the US government. The problem lies in the fact that one can’t just print money out of thin air without setting off negative consequences in the future. By increasing the supply of dollars in the financial system, the Fed essentially devalues its own currency. A problem which economists call inflation.
Inflation isn’t a problem per se and can even be positive when kept around ~2%. The problem is the unprecedented amount of money injected into the financial system in the last few months. Inflation is currently still under control, but many investors have started to look for protection against continuous monetary stimulus by the FED and other central banks. On top of that, one of the main events this week is a speech that will be delivered by Fed chairman Powell, where he is expected to signal tolerance for higher inflation. This would essentially mean that the FED is planning to continue its monetary stimulus with the risk of further devaluing the US dollar.
Hedging Against Inflation and Digital Gold
Following the big monetary experiment being currently run by central banks, investors have been looking to protect themselves against potential inflation in the coming years. Gold, being the most known and time-tested store of value, saw a strong run this year and managed to break towards new all-time highs earlier this month. Gold is scarce and has a limited and predictable supply. Nobody can create gold out of thin air, although humanity has been trying for the last 2000 years. This is in contrast to our current fiat currencies, which are not backed by anything and central banks have been using their ability to create money out of thin air at an accelerating pace.
The idea of scarcity is also what makes Bitcoin valuable. Bitcoin is often called digital gold because it shares many of the characteristics of gold and could potentially be better in some areas. It is the only asset on earth with a provable and fixed maximum supply. 21 million bitcoin is the maximum amount that will ever exist and nobody will be able to create more. Investors have been waking up to this idea of digital scarcity and with a now successful 10-year track record, institutions have increasingly started to look at bitcoin as a potential asset to diversify their portfolios with. One of the most important developments this year was a paper published by former macro trader and hedge fund manager Paul-Tudor Jones, naming bitcoin as ‘the fastest horse’ in the inflation hedges category. Recognition by such a well-respected veteran took career risk away for a lot of institutions and the numbers have confirmed that.
One Big Trade
Jerome Powell’s speech, titled “’Monetary Policy Framework Review”, at the Jackson Hole Economic Policy Symposium tomorrow could signal an important shift in the Fed’s monetary policy. It is rumored that the Fed doesn’t think of inflation as a big risk for now and will let inflation run higher if it overshoots its current target. This would mean that the Fed will remain accommodative and is planning to continue to stimulate the economy for the foreseeable future, at the risk of further devaluing the US dollar.
“The major impact for crypto out of this symposium would be a change in monetary policy and further depreciation of the dollar, which could propel bitcoin higher,” said Matthew Dibb, co-founder of Stack.
This would be an incredibly bullish signal for the stock market and inflation hedges like gold and Bitcoin, which have been profiting immensely from the Fed’s policy since March. The policy change would allow the speculative bubble that the Fed created to continue for the foreseeable future and potentially be responsible for another multi-year bull market in risk assets like the stock market. One thing is certain, Ray Dalio was right when he said that “Cash is trash” in a macro climate where central banks print unprecedented amounts of money. The US dollar vs other asset classes, which side are you? We look forward to updating you on Friday!
Ftx Acquires Blockfolio for $150 Million in Bid to Expand Retail Footprint. Crypto derivatives exchange FTX announced they have acquired the crypto price tracking app Blockfolio for $150 million, which makes it one of the largest acquisitions in the space this year. FTX is known for its quick innovation and expansion and with this acquisition, FTX hopes to expand its footprint in the retail market. We all know how powerful data has become and having an idea of what an average crypto investor holds in one’s portfolio is a powerful position to be in. The app currently has around 6 million users with approximately 150 million impressions per month. Read more.
Aave Takes Number One Slot in Total Value Locked. Decentralized lending and borrowing protocol Aave has taken the number one spot in total value locked (TVL), overtaking rival MakerDAO. Earlier this week, news came out that Aave’s U.K. business entity received an Electronic Money Institution, which will further help onboard new users into DeFi. Aave’s innovation has been strongly reflected in the LEND token price this year, seeing a +25000% (250x!) increase since the bottom in August last year. Read more.
IRS Sends Letters About Crypto Taxes Once Again. The urge to find and trade on non-KYC exchanges is still popular amongst crypto traders, especially now that regulatory pressure has been steadily increasing. Now that the crypto market has been very generous after the market-wide sell-off in March, many traders will likely end up having to report capital gains on their profits. According to Coindesk, the IRS has been sending out ‘soft letters’ en masse, meant to warn crypto holders to fix wrongly reported tax filings before the IRS escalates to a full audit. Crypto taxes are complex and it doesn’t look like there will be clear guidance anytime soon. Don’t forget about the horror stories from 2018, where some investors were due enormous amounts of capital gains after their portfolio had already dropped +50%. Remind yourself of this while we’re still in a bull market and don’t trap yourself in a situation by ignoring this issue until it’s too late.Read more
The Dow Makes Its Biggest Swap in Years; What to Make of the Move. S&P Dow Jones Indices announced that the 30-stock average would be adding Salesforce, Amgen and Honeywell in place of Exxon Mobil, Pfizer and Raytheon Technologies, one of its biggest shake ups in years. According to a senior index analyst of product management at S&P Dow Jones Indices, the company’s decision was wrapped up in Apple’s 4 for 1 stock split, which significantly reduced the Dow’s exposure to the technology sector. Some responses to the changes: ‘I think Exxon out of the Dow is a historic day and it really tells you and it punctuates what’s happened to the energy sector’, the 124-year-old index is ‘scrambling … to be more representative of where the market is’ and ‘We’ve had three, four historical changes in the Dow, but this is a massive amount, especially when you added Apple, which re-weights it significantly. So, we expect to see a lot of action on it, a lot of buying and selling and definitely we’ll have a lot of performers out there showing the new and old makeups of that. Again, technology still is going down from 27.6[%] … to 23.1, which is a significant change, and health care also picks up from 14.2 to 18.6. So, there’s a lot of variance in there compared to what the prior Dow makeup was’. Read more.
Vanguard Is Leaving Hong Kong and Japan. The firm plans to end onshore presence in the regions and wants to prioritise individuals in faster-growing areas. It runs at least 6 ETFs on the Hong Kong exchange. A number of employees will be made redundant. Vanguard, which has been targeting China for growth, said the move doesn’t suggest it’s not bullish on Hong Kong. The US fund giant, with about $6 trillion in assets, said the Hong Kong business is targeted at institutional clients, and not the retail investors that are the firm’s primary focus. Read more.
Telegram Drops Lawsuit Over ‘Gram’ Trademark but Must Cover Legal Fees. Some will recall Telegram’s plans to fund the launch of a blockchain network through the sale of GRAM tokens in late-December 2017. Despite Lanath submitting an application for the GRAM trademark by 2018, Telegram took legal action against the firm in May 2018 after raising $1.7 billion through a 3 month offering of GRAM tokens. Lanath went on to file counterclaims in June 2018, asserting that it has priority over the trademark. The Florida-based Lanath had formed in June 2017 and claimed to have already planned to issue a cryptocurrency called GRAM before Telegram. In recent news, Telegram has voluntarily dropped its lawsuit. Telegram will still have to pay reasonable attorney fees to Lanath for defending the lawsuit since 2018. The judge dismissed the suit without prejudice, meaning Telegram can make claims over the GRAM trademark in the future (this despite Lanath’s request for dismissal with prejudice). Read more.
Conquer Your Trading Demons and Learn to Trade Multiple Strategies
Jack is a pensive and deliberate person, he’s a “jack” of all trades and gives us a fascinating podcast. As always Market Meditations readers get early access, you can listen here.
Jack shares how he uses surfing to mirror his own consciousness, In a very similar way to which advanced practitioners of meditation train their minds. He battles manic depression and gives us insight into how to combat these mental states. Naturally, he’s used these same strategies to conqueror his trading demons.
Jack’s gained a huge twitter following thanks to his accurate calls over the last year. After learning a bit more about him we dive into his trading philosophy and strategies, discuss humans vs AI, the fabric of reality and more! I was thoroughly impressed throughout and will definitely have Jack on again in the future.
How Failure Drives Innovation
People think of creativity as a mystical process. The idea is that creative insights emerge from the ether, through pure contemplation. This model conceives of innovation as something that happens to people, normally geniuses. But this could not be more wrong. Creativity is something that has to be worked at, and it has specific characteristics. Unless we understand how it happens, we will not improve our creativity, as a society or as a world – James Dyson
A chapter of Matthew Syeds’ Black Box Thinking is dedicated to James Dyson and his passion with regards to how our societal perceptions of creativity are misconstrued. In short, most people regard the process as ‘mystical’ and view the path to innovation/ creativity/ success with rose-tinted glasses. Increasingly, seemingly ‘overnight’ success stories in social media reinforce that image.
Dyson did not experience a ‘eureka’ moment. As many other innovators do, he began with a problem/frustration. Specifically in Dyson’s case, working in a small farmhouse in the west of England, he was extremely frustrated by how quickly his cleaner lost suction. This triggered the idea to make a bagless vacuum cleaner. This problem was in Dyson’s mind for the next 3 years while he was studying to become a qualified engineer. It was only one day that he went to pick up wood from a merchant that he noticed a cyclone travelling along the roof. He recognised that the cyclone had properties that could solve the problem he had identified. With that, he had his idea to replicate what he had seen in a vacuum cleaner. This idea would go on to make Dyson a personal fortune in excess of $6 billion.
The important aspect of the story is that the creative process started with a problem. What you might even call a failure, in existing technology. And as such, creativity is in many respects a response rather than some independent lightbolt moment. By way of another example, relativity was a response to the failure of Newtonian mechanics to make accurate predictions when objects were moving at fast speeds.
We tend to focus on the epiphany and leave out the ‘problem process’. For instance, we focus on when Newton was hit by the apple or Archimedes was taking a bath. I suppose it is more appealing to think of such a smooth and simple process but the reality is a long and difficult journey of grappling with a problem or difficulty. Without a problem, failure, flaw or frustration, innovation has nothing to latch on to. It loses its pivot. As Dyson puts it: ‘ creativity should be thought of as a dialogue. You have to have a problem before you can have the game-changing riposte’.
And of course, there is never even a concrete ‘end’ to this process. Dyson is still developing the vacuum cleaner. At the time the book was written, Dyson was on his 5,127th prototype. Rather than waiting for his eureka moment, Dyson had identified a problem and worked and continues to work around addressing it. The problem did not repel him; it enticed him and led to a journey which he continues to enjoy, even after his monumental successes.