Financial Renegade Plots His Next Big Move

Posted On Dec 14, 2017 By Dave Gonigam

  • He cashed in big on the housing bubble: Now he’s eyeing crypto
  • Another outlandish bitcoin forecast: $361k
  • Has gold put in another year-end bottom?
  • Janet Yellen: See no debt, hear no debt, speak no debt
  • Could the tax bill tank bitcoin (before a 2018 recovery)?
  • Readers request Rickards rate-hike clarity, we oblige

He was a renegade more than a decade ago, calling BS on the housing bubble. And he’s a renegade now, going all-in on cryptocurrency.

On Monday, John Burbank notified investors in his Passport Capital hedge fund that he’s shutting down his primary operation and shifting toward crypto.

Around here we have a fondness for people who didn’t buy into the housing hype; we published our own research in December of 2004 with the playfully facetious headline “The Total Destruction of the U.S. Housing Market.”

Burbank made a huge bet against subprime mortgages in 2006. The following year, his main fund generated a 220% return. Forbes estimates he banked $370 million personally.

Alas, “his predictions have mostly failed to pan out since,” says The Wall Street Journal. “Passport bet big on gold mining companies in 2014, but prices dropped thereafter, and slashed its overall exposure to rising stocks in early 2015, missing out on some of the subsequent rally.”

Investors say the fund registered a double-digit loss last year and it’s down again this year. At $900 million, assets under management are now a fraction of their $5 billion peak.

In his letter to investors, Burbank hinted at “a new area in the coming months which we will communicate about when ready.”

The Journal says that area is crypto. Bloomberg says he’s already investing in crypto himself. Which makes sense in light of what else he suggested in his letter: “Technological progress and its nonlinear enhancement or deflation of the biggest industries and markets in the world is my choice for what will have mattered most five years from now. I want to capture these extraordinary outcomes in new ways appropriate to the current era.”

Mr. Burbank has a handful of fellow pioneers in the money management world: Bitcoin is “the ultimate value investment,” in the estimation of Murray Stahl.

Stahl manages $5.5 billion through his firm Horizon Kinetics. And he’s an evangelist for bitcoin. He likes it because there’s a 21 million limit on the number of bitcoins that can ever be made — built-in protection against inflation.

“If your money is being debased,” he explains to Barron’s, “what good is buying a bond that yields 2%? Let’s say it has very high creditworthiness. You are going to get paid, but inflation is at least 2% and then you’ve got to pay taxes. It is a guaranteed negative real rate of return.”

Like Mr. Burbank, Mr. Stahl’s enthusiasm might be borne of disappointment with more conventional asset classes: His firm’s flagship mutual fund, Virtus Horizon Wealth Masters (VWMAX), has underperformed the S&P 500 since 2015.

Then again, there’s no arguing with his crypto performance: Barron’s reports he plunked down $7 million on bitcoin two years ago. At this morning’s price of $16,437, that position is worth $173 million.

Asked how high bitcoin could go, Stahl tells Barron’s: “I’ve got a value, but it is so preposterous I wouldn’t tell anybody.”

He suggests bitcoin’s market cap might ultimately equal the value of all the fiat currency in the world. According to the folks at Visual Capitalist, the total value of all the coins and bank notes globally is $7.6 trillion. Divide that by 21 million bitcoins and you’re looking at a bitcoin price of about $361,000.

Heh… That’s not even half of Agora Financial contributor James Altucher’s estimate — $1 million per bitcoin by the end of 2020. “There’s 15 million millionaires around the world,” he told CNBC at the end of last month. “All their financial advisers are going to say, ‘Hey, buy a bitcoin. You need some exposure.’”

[Ed. note: James has also said a few things about bitcoin that he’s not shared with a national TV audience. These mind-bending remarks are limited to Agora Financial readers like you. If you haven’t seen them yet, you really owe it to yourself to check them out.]

The major U.S. stock indexes are going nowhere today. The S&P 500 is ruler-flat, while the Dow and the Nasdaq are slightly in the green.

The big economic number of the day is retail sales — up 0.8% in November, says the Commerce Department. That’s way more than expected, and October’s figures were revised upward. We’re definitely in the boom phase of the boom-bust cycle.

Trader chatter includes Disney acquiring a major chunk of 21st Century Fox — primarily the movie studio — for $52.4 billion in stock. Fox will retain the Fox broadcast network, Fox News Channel and the FS1 sports network.

From the “We Are So Screwed Department,” we have the Janet Yellen farewell tour.

The Federal Reserve wrapped up its December meeting yesterday afternoon. To no one’s surprise, it raised the benchmark fed funds rate another quarter percentage point, the third increase this year.

What was a mild surprise were the Fed’s projections for how many times it would raise the rate during 2018. Many Fed watchers figured on four, given the relative health of the economy and the likelihood of inflation heating up. Instead, the Fed stuck with its previous outlook of three.

Worth noting: This mildly “dovish” stance by the Fed instantly knocked the stuffing out of the dollar… and pushed gold back above $1,250.

If the last two years are any guide, gold just put in a meaningful bottom…

Another Year-End Bounce?

Around the time of the December 2015 Fed meeting, gold touched the $1,050 level — a 50% “retracement” from its $1,900 high in September 2011 — and proceeded to bounce hard. Last year at this time also marked a bottom, but at a higher level of around $1,125.

If the pattern holds, the new bottom came Monday at $1,237. Checking our screens this morning, we’re already up $20 from that level.

But what truly floored us from yesterday’s Fed proceedings was this remark during Yellen’s final press conference as chairwoman: “At the moment the U.S. economy is performing well. The growth that we’re seeing, it’s not based on, for example, an unsustainable buildup of debt.”

Oy… The national debt now totals $20.493 trillion. The national debt has exceeded 100% of America’s annual economic output for the last five years — a level at which any additional debt produces less growth, not more.

Corporate debt hit new highs last year, and we’re sure by the time this year is in the books, it will set another record.

Debt is choking individual Americans too: The credit reporting agency TransUnion said yesterday that auto loan delinquencies are up 18.7% from this time in 2013. Meanwhile, the Education Department reported Tuesday that a staggering 22% of student loan borrowers who are supposed to be making monthly payments are in default — that is, they’re at least 12 months in arrears.

Because Yellen’s designated replacement Jerome Powell is widely regarded as a male Republican version of Yellen — he’s voted with her at literally every Fed meeting these last four years — we’re sure he’s equally deluded about the “sustainability” of America’s debt buildup.

As long as we have debt on the brain, here’s an update on the tax bill in Washington.

Supposedly, Republican leaders in Congress have finished hammering out the considerable differences between the House and Senate versions of the legislation. We know a few salient details; as usual we won’t hash over them here, because you can read about that anywhere.

What strikes us is how much we still don’t know — basic stuff like how many brackets there are and at what income levels they’ll kick in. Apparently, lawmakers will have to pass the bill so we can find out what’s in it.

Among the many things we don’t know is the state of the so-called “first in, first out,” or FIFO, rule. If this rule is enacted, you’d be limited in how you could sell a portion of a stock holding; you’d have to sell the shares you bought earliest (presumably at a profit) instead of the shares you bought more recently; no more booking a loss with those newer shares and generating some tax savings.

Assuming FIFO is included and it kicks in next year… and assuming it also applies to cryptocurrency holdings… there could be a hell of a lot of year-end bitcoin selling, followed by a nice opportunity to “buy the dip” in January. Stay tuned…

“I’m sure people will bash Jim Rickards for his rate increase quasi-projection (I think last report was 55%),” a reader writes…

“But I have not come to bury our financial Caesar; rather I would like to hear him deconstruct what happened and why.

“We should all have down Yogi Berra’s ‘It’s tough to make predictions, especially about the future,’ and outside of Ichiro Suzuki, no one bats a thousand. So rather than quibble, I would like to learn. Can Jim be our NFL color analyst, or perhaps our Quincy, M.E. forensic pathology person, on this issue? Would be a great service for us constant learners!”

“It seems too many things I expect to happen end up in the reverse direction,” writes another reader along the same lines.

“For example, electrons on a monitor are now worth $16,000–18,000, depending upon which hour you look, while gold (really, any precious metal), which truly has a quantity limit and with commercial and personal uses and a looong history of deemed value, is not worth anywhere near that much. How many bitcoin electrons does it take to equal one ounce of gold? Not only are things in reverse, but I don’t understand the forward gear!

“Jim Rickards, obviously a very smart and connected man, against the mainstream predicted that interest rates would not be raised and the surprise would cause the gold price to go up. Rates do go up (you should acknowledge his mistake as you’ve touted his correct predictions) and gold rises — over $10 yesterday. I think Jim knows his stuff but he clearly got this one wrong. Any explanatory help would be appreciated. At this point I will believe just about anything.

“Oh, and what he said about enjoying The 5.”

The 5: To be clear, we chronicled Jim’s change of heart while it was happening.

He said the “tell” would be the core PCE number on Nov. 30 — the Fed’s preferred measure of inflation. The morning the number came out, he said here in The 5, “On balance, the number is probably just enough (barely) to justify a rate hike. I’ve raised my probability of a December rate hike from 30% to 55%.”

Those odds grew further once the Senate tax bill passed and a partial government shutdown was averted, if only for a couple of weeks.

“I don’t spend much time dwelling on particular ‘right’ or ‘wrong’ forecasts,” Jim says. “It’s more important to focus on the quality of the forecast models. The goal is to produce correct forecasts as consistently as possible over a long period of time despite the occasional miss.”

As long as one reader brought up the baseball analogy, Jim adds, “Babe Ruth had a lifetime batting average of .342 and a lifetime slugging percentage of .690. Both statistics are among the best in the history of baseball, but they left plenty of room for strikeouts (Ruth had 1,330 strikeouts in his storied career). Our models produce consistently accurate forecasts, but strikeouts are part of the game.”

Finally, a quick bitcoin joke submitted by a dear reader: “Saw this one on David Spade’s Instagram feed a few days back.

“A young boy told his father that all he wanted for his birthday was one bitcoin.

“‘$14,275!’ exclaims the father. ‘$12,351 is a lot of money. What do you need $17,846 for?’”

The 5: Wait a minute… There’s been a David Spade sighting?

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

P.S. We forgot one other gem from Janet Yellen’s swan song yesterday: She called bitcoin a “highly speculative asset” that’s “not a stable store of value.”

In contrast to the U.S. dollar, of course — which the Fed is determined to devalue by one-third over the next 20 years. That’s the ultimate effect of the Fed’s 2% annual inflation target. Does that sound like “a stable store of value” to you?

No wonder people are piling into bitcoin; as we’ve been saying for a few days now, it’s a way they can repudiate everything politicians and central bankers are doing to their money and their investments.

But what’s next for bitcoin after an epic year in which it’s appreciated 16-fold?

Don’t make another move with your money for 2018 until you look at this.


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