As Nassim Taleb would say though, that doesn’t necessarily mean he has skill or insight. He could just have been lucky. Most people lost money in that market; it would be almost impossible if nobody had the opposite positions and made large amounts of money.

I’m also not saying Paulson doesn’t have skills or insight.

But I am saying that there is no reason to listen to hedge fund managers as a guide to the economy.

Paulson’s hedge funds are in total down significantly this year.  He got it right and now he got it wrong.

Some stories about gold today and recently:

• Krugman theorises on how the high gold price might be a result of a very low real yield and a particular “choke point” for the future gold price at some distant future point. It seems theoretically interesting, but I’m not quite ready to use this as a working theory.
• Gold now available via ATM in China (but also in Europe and the US)
• Gold down almost 16% from it’s $1,920 intra-day high a few days ago, including a $100 free-fall reflecting the relatively low liquidity of gold markets.

Now I don’t spend much time on gold as an investment, but these stories are certainly interesting.

I’ll leave you with one thought (for the OMG! Inflation! of my readers).  If the gold price is a measure of “real prices” in the economy, but prices of actual goods and services are more or less unchanged in dollar terms, this means the price of these items in gold terms has plummeted massively. Do you really think that a scenario where all prices are half of what they were two years ago is workable? What should have to wages? What needs to happen to wages? What will likely actually happen to wages? Does any part of this scenario seem like a Good Thing?

Andrew Canter (of Future Growth) makes some strong statements about the “phone and dealer” approach to the South African bond market. When one of the arguments against Andrew’s preferred centralised, electronic order book is “we like the information we get from deal flow” I have to say I agree with Andrew.

and part 2 (which also includes some discussion of Covered Bonds with the clear links to Basel and indirect links to Solvency II and SAM)

Anything that makes it easier to determine an objective market price for valuation purposes, provides more information and transparency on an equal basis rather than advantaging a few select players sounds good.

The arguments that Primary Dealers are only viable through the information they gain from deal flow is a typical example of unfortunate cross subsidies between different, barely related economic activities which almost invariably drives inefficiencies.

Given the debate around recognising illiquidity premiums for IFRS and Solvency II / SAM purposes, a more liquid, more transparent market in bonds, particularly corporate and quasi-government bonds, would be immensely useful and would surely decrease illiquidity premiums and thus decrease the cost of raising debt financing for corporates.

In other news, despite assurances to the contrary, I wouldn’t want to hold Greek-stamped Euros.

This isn’t the only problem with bitcoins, but it is a natural result of not having a central bank / government behind the currency saying “we are committing to this currency and requiring it to be accepted as legal tender”.

There are too many other reasons why bitcoins are an irrelevant distraction from genuine monetary policy issues. There may be value from an anonymity perspective. Unless you’re a genuine privacy freak or a drug-dealer, these are not in your top 100 priorities.

I’m also not sure whether it makes the depreciation better or worse that it manifested on the biggest bitcoin exchange, but not others. So much for credibility of a “currency” when it’s so difficult to even determine its value.

If you’re looking for a dissenting opinion, there are plenty.  A suggestion though: When reading these stories, consider whether the writer has any credibility to know what they’re talking about when it comes to economics, finance or monetary policy.  Please send me a link to any article that actually comments on whether or not the rate at which bitcoins can grow long-term is the correct rate to support economic growth.  It’s not even that I need the bitcoin supporters to agree with my view, but it’s depressing that they haven’t even considered the issue from an economic perspective other than “inflation bad”.  Then again, the head of the ECB has similar short-sighted views about the dangers of inflation at the expense of everything else in the economy.

It would also be useful if, when considering the ability of governments to tax in a theoretical (and by the way, not gonna happen) bitcoin or cryptocurrency future, there is absolutely no appreciation for regressive versus progressive tax systems.

In fact, they are already irrelevant today. This is what happens when open source supporters, crypto experts and privacy nuts think an understanding of C++ and maths equates to knowledge of economics and monetary systems. Oh, and add in an unhealthy dose of paranoia and persecution complexes.

The technology and theory is interesting – bitcoins are effectively a peer-to-peer currency with various controls around their creation, existence, trading and (lack of) tracking.

From a monetary system perspective they are irrelevant. To show the extent of the problem, just read this nonsense article “explaining” why Bitcoins will always have value. The article includes how the “Federal Reserve rescued the dollar in 2008″. I must have missed that. Anytime supporters of a particular idea have completely incoherent arguments for it, that’s a pretty good sign there are no coherent arguments for it.

The author also states as a fact that a South African mobile operator is integrating Bitcoin support.

Prediction: None of MTN, Cell C or Vodacom will ever officially support Bitcoin.

I can’t begin to explain how many different ways this is a bad idea.  Good news is several people already have. Much of the hype about Bitcoins and other cryptocurrencies stems from a lack of appreciation for the devastating impact of deflation, misunderstanding of what the money supply really is and the role of the Federal Reserve in this crisis and the Great Depression.

Now I just need to find a way to short Bitcoins.

Elsewhere, alternative investment managers espouse the virtues of commodities as an asset class that generates “alpha” returns (i.e. returns not related to the overall direction of markets). The thing is, it’s hard to have it both ways.  The link between unexpected/expected inflation and equity prices in the short- and long-run is complicated.  High inflation grows earnings in nominal terms, which should grow equity prices in nominal terms. High inflation often leads to higher interest rates and a reduction in money supply through decisions by central banks to put a break on inflation. These higher interest rates stifle the economy and can lead to decreases in earnings, which will give rise to lower share prices ceteris paribus. Built-in inflation expectations where monetary policy is fairly predictable will probably give rise to high nominal equity market returns (but probably not high real returns as inflation has a frictional cost on the economy which often surpasses any gains from real wage declines.)

So if commodity inflation was linked to core price inflation, we would expect a much stronger link between commodities and equities. (Yes, there are a million more points to consider here and not all support this hypothesis.) (Also, obviously as an input into broad measures such as consumer price inflation commodity prices increase that measure, but the point is there is limited knock-on effect on other prices, so core inflation which typically excludes volatile energy and food prices is hardly moved. It’s core inflation that is a strongly autoregressive time series.)

But better than all that, the smarter, better education (and certainly more focussed) people at the Chicago Fed had put together a pretty compelling research paper on commodity prices and inflation (pdf). Check it out.

Commodity prices rise and the world screams hyperinflation. Of course they’re wrong.