Rickards’ Crypto Shocker

Posted On Jan 24, 2018 By Dave Gonigam

  • Still down on bitcoin, but not on second-gen blockchain
  • In search of a cryptocurrency that solves the “trust” issue
  • Treasury secretary trashes the dollar, sends gold soaring
  • An “incredibly bullish” sign for stocks, even at all-time highs
  • The weak housing number that signals a strong housing market
  • The 5 gives space to an unsatisfied reader

“No, I have not changed my opinion on bitcoin,” said Jim Rickards.

Last week, Jim created a bit of a stir with his readership — OK, it was a fecal storm — when he expressed full-throated enthusiasm for “a very special cryptocurrency that’s trading under 70 cents.”

[Heads up if you subscribe to a Rickards publication: Some of what you’ll see in today’s 5 covers old ground. But not all of it, because I spent a little time picking Jim’s brain last week. That said, if you’re determined to tune out, scroll down to 01:55 on today’s 5 Min. clock…]

To be sure, Jim remains the foremost bitcoin skeptic out there. His long-term price target — $200, down from this morning’s $11,316.

Jim’s “Debate of the Decade” showdown with fellow Agora Financial contributor and “crypto-millionaire” James Altucher is still set for tomorrow night at James’ comedy club, Stand Up NY.

On Monday, Jim was in Vancouver going toe-to-toe with another well-known crypto evangelist. If Jim didn’t change any minds, he nonetheless earned the esteem of the bitcoin faithful…

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Nonetheless, it’s true: In the same way that “Mikey” took to Life cereal in that classic commercial, Jim’s finally found a cryptocurrency he can get behind. “He likes it!”

We won’t spend a lot of time rehashing Jim’s case against bitcoin — except to reinforce a critical distinction. 

As he said here in December, Jim sees immense potential in what we call second-generation blockchain technology — the formal name is “distributed ledger technology,” or DLT.

Jim believes bitcoin and its first-gen blockchain is hampered by the fact it’s a “permissionless” system — open to anyone. If you have the computing power and know-how (and access to cheap electricity), you can do the “proof of work” needed to mine new bitcoins into existence.

“In contrast, a permissioned system is open only to approved counterparties,” Jim explained. And that’s what DLT is all about. “The DLT ecosystem is still distributed, fast and cheap, but not anyone can play. You need to be admitted to the ecosystem, something like joining a club…

“In effect, the new DLT systems offer the best of both worlds. You combine the efficiencies of blockchain transactions with the efficiencies of trusted counterparties. The result is an ecosystem of digital payments and smart contracts without the clunky proof-of-work.”

So what’s the problem anyway with the permissionless system of the bitcoin blockchain, as envisioned by its still-anonymous creator “Satoshi Nakamoto”?

“The record is clear,” Jim explained to me last week, “that he/she/it was disgusted with banks and bank bailouts and wanted to invent a form of money in which users did not have to trust anyone.”

But here’s the rub: “On the bitcoin blockchain today, you have to ‘trust’ 51% of the mining power. If 51% of the miners wrote a block that stole all the bitcoin in the world, directed it to themselves and ‘validated’ it, then they would own all the bitcoin and you would have no recourse.

“Nakamoto supposed this would never happen because of the immense processing power needed to have 51% of the mining. His intellectual failure was not to consider noneconomic state actors, or to consider that the costs would eventually be so high that the mining power would become highly concentrated for the same reason that J.D. Rockefeller controlled oil or Jeff Bezos controls online retail.

“The economies of scale are huge. What if Russia decided to devote $100 billion in hardware and electricity consumption to build 51% of the mining capacity? They could do it and destroy $300 billion of Western ‘wealth’ in the blink of an eye. Much cheaper than building a fleet of aircraft carriers.”

It all comes back to trust, Jim says, and a single question: “How do you validate the blockchain?”

“You can never escape the trust issue (although Nakamoto tried), but some forms of validation are better than others. Some forms of validation allow for fast, cheap and easy processing that competes with Visa and MasterCard but still avoids the centralization that Nakamoto disliked.”

Which brings us back to the 70-cent crypto that Jim likes. Of all the competitors out there, he believes it’s found the ultimate solution to the trust issue. “This is the first cryptocurrency I’ve ever put my personal reputation on the line for.”

We realize you might have a little trouble wrapping your mind around Jim’s rationale here. So he’s sending you an email later today explaining how, at long last, a cryptocurrency has come along that he thinks is worthy of your precious investment capital. (Short story: It checks all five boxes on a rigorous list of criteria.)

Keep an eye out for the email: The subject line will be “URGENT Crypto Conference Call.”

To the markets… where the dollar is dreck and gold is its highest since Labor Day.

The U.S. dollar index — described here in detail on Monday — has broken below the 90 level, down to 89.3. That’s its lowest since the dollar was in the midst of an epic climb during the latter half of 2014.

Dollar weakness usually translates to gold strength: Thus the Midas metal has broken above $1,350, equaling its level of early September. Next target, $1,375 — that was the level reached in the summer 2016 market tumult after the “Brexit” vote in Great Britain.

The proximate event for the dollar drop is a talk by Treasury Secretary Steve Mnuchin at the World Economic Forum — the global power elite’s annual shindig in Davos, Switzerland.

For the last quarter century, U.S. Treasury secretaries have given lip service to a “strong dollar,” even as they sotto voce preferred a weak dollar to promote U.S. exports. Mnuchin himself told The Wall Street Journal shortly after taking office last year that a strong dollar is a “good thing.”

Yeah, forget all that: “Obviously a weaker dollar is good for us as it relates to trade and opportunities,” Mnuchin told reporters in Davos. Short term, the value of the dollar is “not a concern of ours at all.”

And the long run? Mnuchin channeled Alfred E. Neuman: “Longer term, the strength of the dollar is a reflection of the strength of the U.S. economy and the fact that it is and will continue to be the primary currency in terms of the reserve currency.”

Neuman and Mnuchin

Which is true… up until the moment it ceases to be true. Heh…

The weak-dollar talk is having little impact on the major U.S. stock indexes. The Dow is up slightly as we write at 26,271. But the Nasdaq is pulling back, having perhaps gone up too far too fast yesterday and the day before.

But what’s caught the attention of our Alan Knuckman in the Chicago trading pits is how the “partial government shutdown” had zero market impact.

“Stocks have continued to make highs every session so far since the shutdown ended,” he points out. “In other words, there was no investor ‘flight to safety’ out of stocks and into bonds (and gold) ahead of the shutdown. That’s incredibly bullish for stocks going forward.”

With a weaker dollar, crude is inching its way closer to $65, a barrel of West Texas Intermediate fetching $64.85.

The big economic number of the day is misleadingly anemic.

Existing home sales fell 3.6% from November to December, according to the National Association of Realtors — an even weaker reading than the “expert consensus” was looking for.

But as we’ve said for at least the last year, numbers like those are not a reflection of low demand. Instead, it’s low supply.

“The reason home sales aren’t expanding is simply because there aren’t enough homes to meet demand,” says income maven Zach Scheidt. “Even though builders have backlogs of orders, they simply can’t build homes fast enough to keep up with all of the buyers… For home builders who have plenty of land in inventory — and who operate in attractive areas of the country — the strong real estate market has led to much bigger profits.”

It’s also good news for home prices — assuming you don’t live in a high-tax, high-cost-of-living state where the new tax law is likely to make homeownership less attractive.

“It’s an odd move on objective terms,” a reader writes about the Trump administration’s tariffs on solar panels, “but makes more sense when you consider how anti-renewable energy this administration is.”

The 5: Yeah, that possibility occurred to us too. But in the end, we still think the deciding factor was a chance to score cheap political points by “saving jobs,” and damn the larger number of jobs likely to be lost.

Bush the Younger did the same thing in 2002 with steel tariffs. It was a crass political calculation aimed at saving shaky GOP House seats in Ohio, Pennsylvania and West Virginia. Researchers at the Institute for International Economics found the tariffs saved 3,500 steel jobs… and destroyed as many as 43,000 other jobs in industries that relied on cheap imported steel.

“I’m sure I’m not the only one who was baited into some of your services with a reasonable fee and the promise of being able to start investing with a small amount of money,” writes a frustrated reader. “But the problem is that every time there is the latest and greatest gotta-have investment advice, it comes with cost of $1,950–5,000.

“So I jumped into the ‘penny pot flashes’ because they were supposed to be penny stocks, which would allow someone with limited finances to start out being able to get more bang for their buck and to start building some reasonable money to invest.

“Of all of the newest have-to-have services, I felt that being in front of the pot stocks was the best route for me, so I sent my $2,000 for a two-year subscription. I haven’t got squat from this subscription, and out of all of the ideas being shoved down our throats, I hear almost nothing to help me get started with this subscription, and surely not the great deal that was promised.”

The reader goes on to complain about other services from other publishers, which of course we have no control over, so we’ll spare you that part.

“To sum it all up, I feel like I flushed $2,000 down the toilet right into Ray Blanco’s bank account, and will have to stay with all of the subscriptions I’ve paid for, hoping to catch some crumbs with my net, until I can put enough together to build a retirement nest egg.

“I am a medically retired firefighter/EMT and my goal is to get my wife out of the job she is doing and has done for the past 30 years, but I have to say you aren’t making it easy, and I’m sure this email will serve no purpose other than to allow me to vent.”

The 5: About the “squat” you haven’t “got”: If in fact you’re not getting your alerts from Penny Pot Profits, that’s a serious problem. You’ve been missing out on major gains — the open portfolio is up an average 194% and the oldest of those positions is barely four months old. For goodness’ sake, get in touch with our customer care team so they can figure out what’s wrong and do something to make it up to you.

Now, a refresher about how we do business. It never hurts to revisit this question, seeing as our readership is growing at breakneck speed.

I’m guessing we came to your attention in late 2016 or early 2017 with the “Secret $50 marijuana stock blueprint” that we used to advertise Ray’s entry-level newsletter, Technology Profits Confidential. Most of our entry-level publications feature longer-term “buy and hold” recommendations with a fairly low risk profile.

Penny Pot Profits is a premium service that, as you know, comes with a premium price. Services like these offer recommendations that are higher-risk, higher-reward. The aim is for much bigger gains in a shorter time frame. We charge the premium price to 1) prevent less-qualified readers from piling into higher-risk investments and 2) prevent too many people from piling in to a thinly traded stock and artificially driving up the share price.

Bottom line: It does us no good just to have customers. It’s happy customers we want.

“Great report,” a reader writes in a brief email we reproduce verbatim. “Thanks, the news now makes sense.”

The 5: Oh no, not another wave of highly nonspecific emails of praise.

Well, it might become another running gag like the people who say, “I like The 5, but…” and that old chestnut “I dare you to print this!”

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

P.S. Confidential to the “very devout fan” who cannot at this time afford the subscription cost for one of our high-end services: If you’re in a “low-income bracket on retirement living from payday to payday,” you have no business subscribing to a high-end service. Stick with the $49-a-year publications for now. The idea is that the recommendations in those newsletters will in time deliver enough profits so you can step up to one of the premium advisories.


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